20-F 1 pamform20f_2012.htm FORM 20-F 2012 pamform20f_2012.htm - Generated by SEC Publisher for SEC Filing  

                 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 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, 2012

 

Commission File Number: 001- 34429

PAMPA ENERGíA S.A.

(Exact name of registrant as specified in its charter)

Pampa Energy Inc.

(Translation of registrant’s name into English)

Argentina

(Jurisdiction of incorporation or organization)

Ortiz de Ocampo 3302, Building #4

C1425DSR, City of Buenos Aires

Argentina

(Address of principal executive offices)

Romina Benvenuti

Ortiz de Ocampo 3302, Building #4

C1425DSR, City of Buenos Aires

Argentina

Tel.: + 54 11 4809 9500 / Fax: + 54 11 4809 9555

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

 

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

Common Stock

American Depositary Shares, each representing

25 shares of common stock, par value Ps. 1.00 per share

New York Stock Exchange*

New York Stock Exchange

* 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:

None

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

1,314,310,895 shares of common stock, par value Ps. 1.00 per share

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

¨Yes 

xNo

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

¨Yes 

xNo

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. 

xYes  

¨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  

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes  

x No

 

  


 
 

 

TABLE OF CONTENTS

 

PART I
Item 1. Identity of Directors, Senior Management and Advisors 7
Item 2. Offer Statistics and Expected Timetable 7
Item 3. Key Information  7
  Selected Financial Data 7
  Exchange Rates 11
  Risk Factors 12
Item 4. Information on the Company 38
  History and Development of the Company  38
  Our Business 38
  The Argentine Electricity Sector 83
Item 4A. Unresolved Staff Comments 99
Item 5. Operating and Financial Review and Prospects 99
Item 6. Directors, Senior Management and Employees 175
Item 7. Major Shareholders and Related Party Transactions 188
Item 8. Financial Information 190
  Consolidated Financial Statements 190
  Legal Proceedings 190
  Dividends 195
Item 9. The Offer and Listing 196
  Trading History 196
  The Argentine Securities Market 198
Item 10. Additional Information 201
  Memorandum and Articles of Association 201
  Material Contracts 201
  Exchange Controls 201
  Taxation 203
  Dividends and Paying Agents 207
  Documents on Display 208
Item 11. Quantitative and Qualitative Disclosures about Market Risk 209
Item 12. Description of Securities Other than Equity Securities 212
  Description of American Depositary Shares 212
 
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies 214
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 214
Item 15. Controls and Procedures 214
Item 16A. Audit Committee Financial Expert 215
Item 16B. Code of Ethics 215
Item 16C. Principal Accountant Fees and Services 215
Item 16D. Exemptions from the Listing Standards for Audit Committees 216
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 216
Item 16F. Change in Registrant’s Certifying Accountant 217
Item 16G. Corporate Governance 217
Item 16 H. Mine Safety Disclosure 222
 
PART III
Item 17. Financial Statements 223
Item 18. Financial Statements 223
Item 19. Exhibits 223
  Index to Financial Statements  F1
 

 

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PRESENTATION OF INFORMATION

In this annual report, we use the terms “we,” “us,” “our,” the “registrant” and the “Company” to refer to Pampa Energía S.A.

Financial Information  

This annual report contains our audited consolidated financial statements as of December 31, 2012, December 31, 2011 and January 1, 2011, and for the years ended December 31, 2012 and 2011, and the notes thereto (the “Consolidated Financial Statements”).  The Consolidated Financial Statements have been audited by Price Waterhouse & Co. S.R.L., member firm of PricewaterhouseCoopers network, whose report is included in this annual report.

Our Consolidated Financial Statements are set forth in Item 18 beginning on page F-1 of this annual report. Our Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”) and have been approved by resolution of the Board of Directors’ meeting of the Company held on March 8, 2013.

Significant Acquisitions

We started acquiring our principal generation, transmission, distribution and other core assets in 2006. Before these acquisitions, we did not have any operations or engage in any activities, as our former business activities, which were limited to the ownership and operation of a cold storage warehouse building, were suspended in 2003. Accordingly, prior to the second half of 2006, we have had no relevant operating history, comparable financial statements or business track record that might constitute a basis for comparing or evaluating the performance of our operations or business prospects following our recent acquisitions.   

Our significant acquisitions include Electricidad Argentina S.A. (“EASA”) in September 2007, which owns a controlling stake in our distribution subsidiary, Empresa Distribuidora y Comercializadora Norte S.A. (“Edenor”); Corporación Independiente de Energía S.A. (“CIE”) in August 2007 (now known as Inversora Piedra Buena S.A. or “IPB”), which owns our subsidiary Central Piedra Buena S.A. (“Piedra Buena”) generation facilities; the assets comprising Central Térmica Loma de la Lata S.A. (“Loma de la Lata” or “CTLL”) in May 2007; Pampa Inversiones S.A. (“PISA”) in January 2007; a direct interest in Central Térmica Güemes S.A. (“Güemes”); a direct interest in Inversora Nihuiles S.A. (“Nihuiles”) and Inversora Diamante S.A. (“Diamante”) in October 2006, which in turn own our two hydroelectric generation plants Hidroeléctrica Nihuiles (“HINISA”) and Hidroeléctrica Diamante (“HIDISA”), respectively, a direct interest in Petrolera Pampa S.A. (“Petrolera Pampa”) in February 2009; and a co-controlling interest in Compañía Inversora en Transmisión Eléctrica Citelec S.A. (“Citelec”) in September 2006, which owns a controlling stake in Compañía de Transporte de Energía Eléctrica en Alta Tensión S.A. (“Transener”).

Recent Developments

Since 2011, Edenor has taken action to divest certain assets consisting of former subsidiaries of Empresa Distribuidora Eléctrica Regional S.A. (“EMDERSA”), a company engaged in the distribution of electricity in the Argentine provinces of San Luis, La Rioja and Salta, and AESEBA S.A. (“AESEBA”).

Spin-off Process – EMDERSA

 

In order to carry out the sale of certain of EMDERSA’s former subsidiaries, Edenor, the controlling company of EMDERSA, was required to cause EMDERSA to complete a partial spin-off process (the “Spin-off Process”), which resulted in the creation of three new investment companies, (i) EDESAL Holding S.A. (“EDESALH”), holder of 99.99% of the capital stock and votes of Empresa Distribuidora San Luis S.A. (“EDESAL”), (ii) EDESA Holding S.A. (“EDESAH”), holder of 90% of the capital stock and votes of Empresa Distribuidora de Electricidad de Salta S.A. (“EDESA”), and (iii) EGSSA Holding (“EGSSAH”), holder of 99.99% of EGGSA’s capital stock and votes. EMDERSA was to retain 99.99% of the capital stock and voting rights in EDELAR. On December 16, 2011, at EMDERSA’s Extraordinary General Shareholders’ Meeting, which was resumed on January 13, 2012 after a recess, the Spin-off Process was approved.

 

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The Spin-off Process has also been approved by the Comisión Nacional de Valores (the National Securities Commission, or “CNV”) and registered with the Regulatory Agency of Corporations (the “IGJ”), together with the registration of the three new companies. On November 8, 2012, the new companies were authorized by the National Securities Commission to go public, and they obtained admission to listing on the Bolsa de Comercio de Buenos Aires (the Buenos Aires Stock Exchange).

 

Companies’ sale agreements

 

Edenor’s Board of Directors approved at different times the offer letters received for the carrying out of the following transactions:

 

·         From Rovella Carranza S.A. (“Rovella”), for the acquisition of Edenor’s direct and indirect stake in EDESAL (the “EDESAL Sale”).

 

·         From Salta Inversiones Eléctricas S.A. (“SIESA”), for the acquisition of Edenor’s direct and indirect stake in EDESA (the “EDESA Sale”)

 

·         From the Company, for the acquisition of Edenor’s direct and indirect stake in EGSSA (the “EGSSA Acquisition”).

 

 

EDESAL Sale

 

On September 16, 2011, Edenor’s Board of Directors approved the offer for the acquisition of 78.44% of the capital stock and votes of EDESALH by Rovella for a total and final price of U.S.$ 26.7 million that was paid in two installments. The first of them, for U.S.$ 4.0 million, was paid three days after the acceptance of the offer, and the remaining balance was collected by Edenor on October 25, 2011.

 

Along with the payment of the balance in October 2011, EDESAL also repaid a financial loan granted by the Edenor to EDESAL for an amount of Ps. 37.5 million, plus interest accrued through the settlement date.

 

EDESA Sale

 

On April 23, 2012, Edenor’s Board of Directors accepted the offer made by Salta Inversiones Eléctricas S.A. (“SIESA”) to Edenor and its subsidiary EMDERSA Holding S.A. (“EMDERSAH”), for the acquisition of shares representing: (i) 78.44% of the capital stock and voting rights of EDESAH, holder of 90% of the capital stock and voting rights of EDESA, which in turn owns 99.99% of the capital stock and voting rights of Empresa de Sistemas Eléctricos Dispersos S.A. (ESED), 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 Argentine sovereign debt bonds (Boden 2012) for a value equivalent to Ps. 100.5 million. Such price was partially cancelled through the payment of Ps. 83.8 million, and the remainder will be cancelled in five annual and consecutive installments in U.S. dollars, with the first of them falling due on May 5, 2013, at an interest rate of LIBOR plus a 2% margin.

As a part of this transaction, EDESA also cancelled in full a loan held with Edenor for an amount of Ps. 131.3 million plus accrued interest, and the purchaser released EMDERSA from any and all liability resulting from the surety granted by the latter to EDESA in connection with a syndicated loan held by that company with multiple banking entities.

As collateral for the payment of the price of the EDESA Sale, SIESA granted a second lien share pledge over 23.53% of the shares of EDESA in favor of Edenor.

 

EGSSA Acquisition

 

On October 3, 2011, the Company sent to Edenor an offer to buy 78.57% of the shares and votes of EGSSAH together with 0.01% of EGSSA’s capital stock held by Edenor. On October 11, 2011, Edenor’s Board of Directors approved such offer.

 

The total and final agreed-upon price for this transaction amounts to U.S.$ 10.8 million, to be paid in two installments. The first of them, for an amount of U.S.$ 2.2 million was made on October 31, 2011 as partial payment of the price, and the remaining balance will have to be paid in October 2013. The latter amount will accrue interest at an annual rate of 9.75%, payable semi-annually.

 

 

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EDELAR Offer

 

An offer from Andes Energía Argentina S.A. (“Andes Energía”) was accepted by Edenor’s board of directors on September 16, 2011, pursuant to which a proposal was made for Andes Energía to acquire a purchase option for a price of U.S. $1.5 million to buy, if the Spin-off Process was completed within a term of two years, 78.44% of Edenor’s direct and indirect stake in EDELAR for U.S. $20.29 million, to be paid in two installments. The purchase option was paid for by the buyer on September 16, 2011. 

 

Subsequently, Edenor’s board of directors approved proposals from Andes Energía to extend the term during which the buyer could exercise the option, with Edenor retaining the right to freely sell or assign to any third party or cause the sale or assignment of some or all the shares that are the object of the transaction and/or the rights over such shares. In the event that a sale to a third party is made, Andes Energía option may not be exercised, there being no outstanding payment or any responsibility of any kind for Edenor or Andes Energía.

On December 31, 2012, the Andes Energía purchase option had expired. As of the date of this annual report, Edenor is currently negotiating with Andes Energía new terms and conditions. At the same time, Edenor has received other expressions of interests in connection with such assets from third parties, which are currently being analyzed, although no specific offers have yet been received.

Taking into consideration that Edenor still intends to sell these assets and that it has received other expressions of interests in connection therewith, such assets continue to be classified as assets available for sale.

AESEBA and EDEN Sale

On February 27, 2013, Edenor’s Board of Directors unanimously approved an offer sent by Servicios Eléctricos Norte BA S.L. (the “Buyer”) for (i) the acquisition of the shares representing 100% of the capital stock and voting rights of AESEBA, an electric utility company, which owns 90% of the outstanding capital stock of Empresa Distribuidora de Energía Norte S.A. (“EDEN”), an electricity distribution company holding the concession area in the north region of the Province of Buenos Aires; and (ii) the assignment of certain credits that EASA (the controlling company of Edenor) had with EDEN. The price offered by the Buyer has been paid through the assignment to Edenor of certain rights under a trust established for purposes of the transaction to receive debt securities of Edenor, in an amount equivalent, as of the date of the acceptance of the offer, to U.S.$85 million face value, which are to be cancelled by Edenor as such bonds are released to it in accordance with the terms and conditions of the trust. As part of the transaction, and in order to guarantee the obtention of funds necessary to acquire the Edenor bonds to be received by such company, U.S.$8.5 million of Argentine sovereign debt bonds multiplied by a certain factor was to be deposited into the trust on or before April 30, 2013.  As collateral for the portion of the price to be paid at that later date, the Buyer granted a pledge over 30% of the shares of AESEBA. On April 5, 2013 the transaction was settled in accordance with the terms described above.

 

Others

On January 27, 2011, we also acquired from AEI and through our subsidiary Pampa Inversiones S.A., all of the issued and outstanding capital stock of Inversiones Argentina I, a company incorporated in the Cayman Islands to which AEI had previously assigned all of its right, title and interest to U.S.$ 199.6 million nominal value of the floating rate notes due April 22, 2002, issued by Compañía de Inversiones de Energía S.A. (“CIESA”) on April 22, 1997 (the “CIESA Bonds”), other liabilities of CIESA arising from two derivatives transactions (together with the CIESA Bonds, the “CIESA Liabilities”) and the rights over certain lawsuits related to the CIESA Bonds. The CIESA Bonds have been in default since a missed principal repayment due on April 22, 2002. Pampa acquired the capital stock of Inversiones Argentina I for U.S.$ 136 million, while the assets of such company, including the CIESA Bonds and accrued and unpaid interest, had a total value of approximately U.S.$ 322 million. CIESA is the controlling company of Transportadora de Gas del Sur (“TGS”). TGS is a leading gas transportation company in Argentina. TGS is also one of the leading natural gas liquid producers and traders, and an important provider of midstream services, including business structuring, turnkey construction and operation and maintenance of facilities used for gas storage, conditioning and transportation. On April 8, 2011, we acquired, directly and indirectly, 100% of the capital stock of Enron Pipeline Company Argentina S.A. (now known as EPCA S.A. or “EPCA”), which owns 10% of the capital stock of CIESA, which in turn owns 55.3% of the share capital of TGS, for a total price of U.S.$ 29.0 million.

 

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In connection with the acquisition of the CIESA Bonds and the other assets related to CIESA described above, on April 28, 2011, the Company and its subsidiaries Inversiones Argentina I, Pampa Inversiones S.A. and EPCA entered into an agreement (the “Acta Acuerdo”) with Petrobras Energía S.A., Petrobras Hispano S.A., and CIESA, pursuant to which the parties thereto agreed to (i) continue negotiating to reach an agreement to re-implement the restructuring of the CIESA Liabilities, (ii) cause CIESA to vote in favor of a dividend payment by TGS in an amount of approximately U.S.$ 239 million (the “TGS Dividend”), which was declared by the shareholders’ meeting of TGS on April 29, 2011 and (iii) set up a trust (the “MSA Trust”) to hold CIESA’s pro rata portion of the TGS Dividend which, to the extent the restructuring of the CIESA Liabilities is completed, will be distributed as follows: (x) an amount equal to 4.3% of the TGS Dividend will be distributed to the Company (or its designee) and (y) the remainder, net of CIESA operating expenses for fiscal year 2011, will be distributed to the shareholders of CIESA following the restructuring of the CIESA Liabilities pro rata to their respective holding in CIESA. To the extent the restructuring of the CIESA Liabilities is not achieved as agreed by the parties to the Acta Acuerdo, the pro rata portion of the TGS Dividend held in trust shall be distributed to CIESA. 

On May 10, 2011, we entered into a Memorandum of Understanding (the “MOU”) with Inversiones Argentina I, Pampa Inversiones S.A., EPCA, Petrobras Energía S.A., Petrobras Hispano Argentina S.A. and CIESA, in which the parties to the MOU agreed: (i) to suspend (“standstill”) until May 10, 2012, the action captioned “Compañía de Inversiones de Energía S.A. v. AEI, AEI v. Compañía de Inversiones de Energía S.A., Petrobras Energía S.A., Petrobras Hispano Argentina S.A., Héctor Daniel Casal, Claudio Fontes Nunes and Rigoberto Mejía Aravena” (the “CIESA Action”), pending before the Supreme Court of the State of New York (Index No. 600245/09E), and to make best efforts to re-implement (x) the financial restructuring set forth in the Restructuring Agreement executed on September 1, 2005 among CIESA, Petrobras Energía S.A., Petrobras Hispano Argentina S.A., EPCA, ABN AMRO Bank N.V. Argentine branch (acting in its capacity as trustee) and the financial creditors of CIESA, as amended from time to time (the “Restructuring Agreement”), regarding the CIESA Bonds and (y) two derivatives transactions originally executed between CIESA and J. Aron & Company on August 3, 2000, and between CIESA and Morgan Guaranty Trust Company of New York on August 4, 2000, respectively. Following the execution of the MOU we have become a party to the Restructuring Agreement. The foregoing is subject to obtaining the necessary governmental approvals to (i) implement the Restructuring Agreement; and (ii) timely withdraw all the claims and actions relating to the CIESA Action.

As the Argentine antitrust approval required to implement the Restructuring Agreement had not been obtained and the parties did not agree to extend either the MOU that expired on May 11, 2012 or the CIESA Action, on July 13, 2012, the parties to the Restructuring Agreement, including the Company, entered into a Fifth Amendment to the Restructuring Agreement pursuant to which (i) in exchange for U.S.$ 46,033,917  principal amount of debt owed to Pampa Inversiones, CIESA irrevocably designated and appointed Pampa Inversiones as sole and exclusive beneficiary of the two hundred fifty five million, five hundred twenty seven thousand, four hundred seventy seven (255,527,477) CIESA shares and, accordingly, Pampa Inversiones became the sole “Beneficiario” and “Fideicomisario” under the MSA Trust; and (ii) CIESA assigned to Pampa Inversiones any rights it might otherwise retain for having been a “Beneficiario” and “Fideicomisario” under the MSA Trust to instruct the MSA trustee and to receive any proceeds of the Bienes Fideicomitidos. Also, all actions to be taken in case the governmental approvals are obtained were established under the above mentioned agreement.

Additionally, on July 13, 2012, Petrobras Argentina S.A., Petrobras Hispano Argentina S.A., the Company, Pampa Inversiones and Inversiones Argentina I entered into a Settlement Agreement (the “Settlement Agreement”) with the intention to terminate and extinguish to the fullest extent permitted by law the CIESA Action and to mutually release each other from all claims and actions in such CIESA Action. On October 25, 2012, the conditions to which the Settlement Agreement was subject were satisfied, thus terminating and extinguishing the CIESA Action.

Pursuant to the Settlement Agreement and as a condition thereto, the above mentioned parties totally cancelled all of CIESA’s debt due and outstanding since the year 2002. As compensation, PISA received from CIESA: (i) ownership of 34,133,200 ordinary Class B shares issued by TGS, representing 4.3% of the capital stock and voting rights in TGS; (ii) a payment of U.S.$ 86,997,232; and (iii) the appointment of PISA as beneficiary and trustee under the Trust Agreement dated August 29, 2005, pursuant to which The Royal Bank of Scotland, Argentine branch, holds in trust 40% of CIESA’s shares (the “Shares held in Trust”). Consequently, once the pending governmental approval has been obtained, the Shares held in Trust will be transferred to Pampa pursuant to the terms of the Restructuring Agreement executed by CIESA and its financial creditors, as amended.Pursuant to a Call Option Agreement (the “Call Option Agreement”) dated March 11, 2001,entered into by and among the Company, Inversiones Argentina II and GEB Corp. (parent company of Inversiones Argentina II), on such date, the Company purchased an option for U.S.$ 1.0 million, exercisable at any time during a period of 18 months thereafter, to acquire either (i) the rights over the lawsuit initiated by Ponderosa Assets L.P. and Enron Creditors Recovery Corp. (the “Arbitration”) against the Republic of Argentina before the International Centre for Settlement of Investment Disputes (the “ICSID”) of the World Bank (the “ICSID Claim”) for freezing and pesifing U.S. dollar-based gas transportation tariffs in violation of certain provisions of the bilateral investment treaty between the United States and Argentina (See “Item 3. Key Information -Risk Factors – Our Generation Business”) or, (ii) at the Company’s option, all of the issued and outstanding capital stock of Inversiones Argentina II.  On October 7, 2011 the Company exercised the option and, therefore, in consideration of the amount of U.S.$ 25 million acquired the rights over the ICSID Claim (and therefore not the capital stock of Inversiones Argentina II) to control, suspend and waive the Arbitration proceedings against the Republic of Argentina pursuant to the Call Option Agreement.

 

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On July 31, 2012, the ICSID Arbitration Court ordered, in accordance with the instructions timely given by the Company, the suspension of the arbitration proceeding brought by the Plaintiffs against the Republic of Argentina originally involving an amount in dispute which would currently amount to approximately U.S.$ 167 million.

Such suspension was requested pursuant to the commitment undertaken with the Argentine Antitrust Commission and the ENERGAS by CIESA, EPCA, Petrobras and the Company on August 29, 2011, in the filings submitted before both entities seeking the approval of CIESA’s Restructuring Agreement. In this respect, the corresponding governmental approvals have not yet been granted as of the date of this annual report.

In connection with the above mentioned claims, on November 20, 2012, Ponderosa Assets Holding I LLC and Ponderosa Assets Holding II LLC (two new subsidiaries of Pampa Inversiones specially created for this transaction) entered into an assignment agreement with Enron Creditors Recovery Corp., Citicorp North America, Inc., Atlantic Commercial Finance, Inc., Enron Global Power & Pipelines L.L.C., and Citibank N.A., pursuant to which (i) Enron Creditors Recovery Corp. transferred all of its right, title and interest in and to the general partnership interest in Ponderosa Assets LP to Ponderosa Assets Holding I LLC, and (ii) each of Citicorp North America, Inc., Atlantic Commercial Finance, Inc., Enron Global Power & Pipelines L.L.C. and any other relevant affiliate of Enron Creditors Recovery Corp. transferred all of its right, title and interest in and to the limited partnership interests in Ponderosa Assets LP to Ponderosa Assets Holding II LLC; therefore, Ponderosa Assets Holding I LLC and Ponderosa Assets Holding II LLC became the owners of Ponderosa Assets LP, which is the formal plaintiff under the ICSID Claim.

Furthermore, on December 30, 2011 the board directors of the Company, after entering into negotiations with Pampa Generación S.A., Inversora Ingentis S.A. and Powerco S.A. (“Powerco”) (in the case of Powerco the negotiations took place only in respect of the assets and liabilities related to its investment business) resolved that it would be beneficial for these companies if they were merged into a single company. The purpose of this merger is to optimize the resources of each of the companies by simplifying and consolidating their administrative and operational structure. On March 9, 2012, and in connection with the required procedures, the Company’s board of directors approved the special financial statements for merger purposes of the Company, the preliminary merger agreement executed among the Company, Pampa Generación S.A., Inversora Ingentis S.A. and Powerco, and the offering memorandum that describes the terms and conditions of the merger. On April 27, 2012, a shareholders meeting took place, where the merger as well as all of the documentation relating to it were approved. Finally, on July 13, 2012, the special financial statements for merger purposes were issued. On September 13, 2012, through Resolution No. 16,903, the CNV approved the corporate reorganization described above and referred the case to the IGJ for registration.  As of the date of this annual report, such IGJ approval is still pending.

Functional and Presentation Currency

The Company and its subsidiaries maintain their accounting records and prepare their financial statements in Argentine Pesos, which is their functional currency. Our subsidiary PISA, however, maintains its accounting records and prepares its financial statements in Uruguayan Pesos. Our Consolidated Financial Statements include the results of this subsidiary translated into Argentine Pesos. Assets and liabilities are translated at year-end exchange rates, and revenue and expense accounts at average exchange rates for the year. Certain financial information contained in this annual report has been presented in U.S. dollars .

Rounding

Certain figures included in this annual report (including percentage amounts) have been subject to rounding adjustments.  Accordingly, figures shown as totals may not sum.

 

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Exchange Rate  

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, we have converted certain amounts included in “Item 3.  Key Information” and elsewhere in this annual report from Pesos into U.S. Dollars using, for the information provided as of December 31, 2012, the seller exchange rate reported by the Banco de la Nación Argentina, or Banco Nación, as of December 31, 2012 of U.S. $1.00 = Ps. 4.9180, unless otherwise indicated.  These conversions should not be considered representations that any such amounts have been, could have been or could be converted into U.S. Dollars at that or at any other exchange rate.  The Federal Reserve Bank of New York does not report a noon buying rate for Pesos.  For more information regarding historical exchange rates, see “Item 3.  Key Information-Exchange Rates.”

FORWARD-LOOKING STATEMENTS

This annual report contains estimates and forward-looking statements, principally in “Item 3.  Key Information-Risk Factors,” “Item 4.  Information on the Company—Our Business” and “Item 5.  Operating and Financial Review and Prospects.”  Some of the matters discussed concerning our business operations and financial performance include estimates and forward-looking statements within the meaning of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Our estimates and forward-looking statements are mainly based on our current expectations and estimates on future events and trends that affect or may affect our businesses and results of operations.  Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us.

Our estimates and forward-looking statements may be influenced by the following factors, among others:

·         our ability to arrange financing under reasonable terms; 

·         the outcome and timing of the tariff renegotiation process of our regulated businesses and uncertainties relating to future government approvals to increase or otherwise adjust such tariffs;

·         changes in the laws and regulations applicable to energy and electricity and oil and gas sectors in Argentina;

·         government interventions, resulting in changes in the economy, taxes, tariffs or regulatory framework, or in the delay or withholding of governmental approvals;

·         general economic, social and political conditions in Argentina, and other regions where we or our subsidiaries operate, such as the rate of economic growth, fluctuations in exchange rates of the Peso or inflation;

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

·         competition in the electricity, public utility services and related industries;

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

·         deterioration in regional and national business and economic conditions in Argentina; and

·         other risks factors discussed under “Item 3.  Key Information—Risk Factors.”

 

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The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify estimates and forward-looking statements.  Estimates and forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or to renew any estimates and/or forward-looking statements because of new information, future events or other factors.  Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance.  Our future results may differ materially from those expressed in these estimates and forward-looking statements.  In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to, factors including, but not limited to, those mentioned above.

 

 

 

8

 

 


 
 

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

SELECTED FINANCIAL DATA

 

The following table presents our summary financial data for each of the years in the two-year period ended December 31, 2012. The selected consolidated income statement data and cash flow data for the years ended December 31, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2012, December 31 and January 1, 2011 have been prepared in accordance with IFRS as issued by the IASB and have been derived from our Consolidated Financial Statements included elsewhere in this annual report. Our audited consolidated financial statements as of December 31, 2011 and for the year then ended, which have been prepared for comparison purposes with our financial information as of December 31, 2012 and for the year then ended, are the first annual audited financial statements of the Company that are fully compliant with IFRS, as issued by the IASB. Our consolidated financial statements for periods before the year ended December 31, 2011 have only been prepared in accordance with accounting principles generally accepted in Argentina (“Argentine GAAP”). 

The mandatory adoption of IFRS for public companies in Argentina became effective for fiscal years beginning January 1, 2012  You should read the information below in conjunction with our Consolidated Financial Statements, including the notes thereto, as well as the sections “Presentation of Financial Information” and “Item 5. Operating and Financial Review and Prospects”. 

 

9

 

 


 
 

 

   

At December 31,

   

At January, 1

     

2012

   

2012

 

 

2011

   

2011

     

(U.S. Dollars) (1)

   

(Pesos)

 

 

(Pesos)

   

 

BALANCE SHEET DATA

                       

Non-current assets:

                       

Properties, plant and equipment

   U.S.$

1,229,870

   Ps.

6,023,903

   Ps.

5,847,072

   >Ps.

5,925,219

Intangible assets

   

369,235

 

 

1,808,511

 

 

1,791,802

   

977,741

Biological assets

   

403

 

 

1,976

 

 

1,936

   

-

Investments in joint ventures

   

39,264

 

 

192,316

 

 

222,220

   

239,223

Investments in associates

   

27,061

 

 

132,546

 

 

130,251

   

-

Financial assets at fair value through profit and loss

   

62,025

 

 

303,799

 

 

553,768

   

67

Deferred tax asset

   

17,871

 

 

87,532

 

 

116,574

   

49,289

Trade and other receivables

   

86,150

 

 

421,965

 

 

342,192

   

312,132

Inventories

   

-

 

 

-

 

 

-

   

639

Total non-current assets

   

1,831,880

 

 

8,972,548

 

 

9,005,815

   

7,504,310

Current assets:

                       

Inventories

   

21,096

 

 

103,330

 

 

60,422

   

29,573

Biological assets

   

101

 

 

497

 

 

99

   

-

Infrastructure under construction

   

17,245

 

 

84,466

 

 

45,504

   

-

Derivatives financial instruments

   

-

 

 

-

 

 

1,316

   

5,912

Financial assets at fair value through profit and loss

   

23,153

 

 

113,405

 

 

72,699

   

520,772

Financial assets at amortized cost

   

-

 

 

-

 

 

-

   

69,144

Trade and other receivables

   

314,729

 

 

1,541,543

 

 

1,373,557

   

1,048,428

Cash and cash equivalents

   

57,142

 

 

279,882

 

 

345,119

   

425,460

Total current assets

   

433,467

 

 

2,123,123

 

 

1,898,716

   

2,099,289

Assets classified as held for sale

   

48,019

 

 

235,197

 

 

1,183,952

   

120,564

Total assets

   

2,313,366

 

 

11,330,868

 

 

12,088,483

   

9,724,163

Shareholders´ equity

                       

Share capital

   

268,336

 

 

1,314,311

 

 

1,314,311

   

1,314,311

Additional paid-in capital

   

207,912

 

 

1,018,352

 

 

1,536,759

   

1,535,823

Reserve for directors’ options

   

51,124

 

 

250,406

 

 

241,460

   

232,515

Legal reserve

   

-

 

 

-

 

 

27,397

   

27,397

(Accumulated losses) Retained earnings

   

(157,574)

 

 

(771,797)

 

 

(667,906)

   

73,489

Other comprehensive income (loss)

   

(2,195)

 

 

(10,753)

 

 

(12,651)

   

(8,313)

Equity attributable to owners

   

367,603

 

 

1,800,519

 

 

2,439,370

   

3,175,222

Non-controlling interest

   

108,150

 

 

529,721

 

 

1,327,965

   

1,035,602

Total equity

   

475,753

 

 

2,330,240

 

 

3,767,335

   

4,210,824

Non-current liabilities:

                       

Trade and other payables

   

455,526

 

 

2,231,164

 

 

1,568,887

   

1,036,585

Borrowings

   

452,937

 

 

2,218,483

 

 

2,487,651

   

1,767,496

Deferred revenues

   

53,987

 

 

264,427

 

 

174,796

   

-

Salaries and social security payable

   

3,565

 

 

17,460

 

 

23,585

   

19,277

Defined benefit plans

   

24,684

 

 

120,903

 

 

103,634

   

74,235

Deferred tax liabilities

   

129,842

 

 

635,968

 

 

821,124

   

832,428

Taxes payable

   

9,555

 

 

46,802

 

 

45,676

   

46,664

Provisions

   

17,462

 

 

85,528

 

 

69,974

   

11,327

Total non-current liabilities

   

1,147,557

 

 

5,620,735

 

 

5,295,327

   

3,788,012

Current liabilities:

                       

Trade and other payables

   

344,622

 

 

1,687,959

 

 

1,082,963

   

663,304

Borrowings

   

161,478

 

 

790,917

 

 

893,801

   

634,764

Salaries and social security payable

   

91,440

 

 

447,871

 

 

324,900

   

201,190

Defined benefit plans

   

4,460

 

 

21,847

 

 

14,889

   

2,790

Taxes payable

   

53,860

 

 

263,804

 

 

196,282

   

158,049

Derivative financial instruments

   

-

 

 

-

 

 

-

   

7,253

Provisions

   

2,380

 

 

11,659

 

 

11,399

   

57,977

Total current liabilities

   

658,239

 

 

3,224,057

 

 

2,524,234

   

1,725,327

Liabilities associated with assets classified as held for sale

   

31,816

 

 

155,836

 

 

501,587

   

-

Total liabilities

   

1,837,613

 

 

9,000,628

 

 

8,321,148

   

5,513,339

Total liabilities and equity

   

2,313,366

 

 

11,330,868

 

 

12,088,483

   

9,724,163

 

(1)      Solely for the convenience of the reader, Peso amounts as of December 31, 2012 have been translated into U.S. Dollars at the average buy/sell rate for U.S. Dollars quoted by Banco Nación on December 31, 2012 of Ps. 4.898 to U.S. $1.00.  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.

(2)      Figures in thousands

 

 

10

 

 


 
 

 

   

   

At December 31,

     

2012

   

2012

 

 

2011

     

(U.S. Dollars) (1)(4)

   

(Pesos)(4)

   

(Pesos)(4)

                   

STATEMENT OF OPERATION DATA

                 

Sales

   U.S.$

 1,544,438

   Ps.

 7,564,658

   Ps.

 5,819,604

Cost of sales

   

(1,425,476)

 

 

(6,981,982)

 

 

(5,122,723)

Gross profit

   

118,962

 

 

582,676

 

 

696,881

Selling expenses

   

(100,340)

 

 

(491,467)

 

 

(330,941)

Administrative expenses

   

(105,173)

 

 

(515,138)

 

 

(411,576)

Other operating income

   

40,320

 

 

197,488

 

 

137,981

Other operating expenses

   

(30,557)

 

 

(149,667)

 

 

(81,101)

Loss of joint ventures

   

(6,333)

 

 

(31,020)

 

 

(14,605)

Share profit of associates

   

469

 

 

2,295

 

 

19,779

Impairment of property, plant and equipment

   

(22,108)

 

 

(108,284)

 

 

(557,669)

Impairment of intangible assets

   

-

 

 

-

 

 

(90,056)

Profit of acquisition of subsidiaries

   

-

 

 

-

 

 

505,936

Operating income (loss)

   

(104,761)

 

 

(513,117)

 

 

(125,371)

Financial results, net

   

(131,867)

 

 

(645,883)

 

 

(551,205)

Loss before income tax

   

(236,627)

 

 

(1,159,000)

 

 

(676,576)

Income tax

   

20,784

 

 

101,798

 

 

(37,381)

Discontinued operations

   

(4,567)

 

 

(22,368)

 

 

(105,974)

Loss for the year

   

(220,410)

 

 

(1,079,570)

 

 

(819,931)

Total loss of the year attributable to:

                 

Owners of the company

   

(132,645)

   

(649,694)

   

(741,395)

Non - controlling interest

   

(87,766)

   

(429,876)

   

(78,536)

Basic and diluted loss per share from continuing operations

 

(0.1000) 

   

(0.4898)

 

 

(0.5242)

Basic and diluted loss per share from discontinued operations

 

(0.0009) 

   

(0.0045)

 

 

(0.0399)

Dividends per share (2)

   

-

 

 

-

 

 

0.0138

Basic and diluted loss per ADS (3) from continuing operations

 

(0.0040) 

   

(0.0196)

 

 

(0.0210)

Basic and diluted loss per ADS (3) from discontinued operations

   

(0.0002) 

 

 

(0.0016)

Dividends per ADS (3)

   

-

 

 

-

 

 

0.0006

Weighted average number of shares outstanding

   

268,336

   

1,314,311

   

1,314,311

                   

CASH FLOW DATA

                 

Net cash flow provided by operating activities

   

U.S.$ 274,490

   

Ps. 1,344,454

   

Ps. 1,136,421

Net cash flow used in investing activities

   

(162,209) 

   

(794,500)

   

(1,715,216)

Net cash flow provided by (used in) financing activities

   

(141,314) 

   

(692,158)

   

395,295

Financial results generated by cash and cash equivalents

   

U.S.$ 15,714

   

Ps. 76,967

   

Ps. 103,156

 

 

(1)

Solely for the convenience of the reader, Peso amounts for the year ended December 31, 2012 have been translated into U.S. Dollars at the average buy/sell rate for U.S. Dollars quoted by Banco Nación on December 31, 2012 of Ps. 4.898 to U.S. $1.00. 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.

(2)

In the year 2010, we declared advance dividends of Ps. 18.1 million, an amount sufficient to cover the Argentine personal asset tax obligations of certain of our shareholders. In March 2011we paid those dividends and withheld the corresponding amount of personal asset tax from those shareholders who were subject to the personal asset tax. See “Item 8. Financial Information—Dividends” and “Item 10. Additional Information—Taxation.”

(3)

Each ADS represents 25 common shares.  

(4)

Figures in thousands.

 

 

11

 

 


 
 

 

EXCHANGE RATES

Exchange Rates

The following table sets forth the high, low, average and period-end exchange rates for the periods indicated, expressed in Pesos per U.S. Dollar and not adjusted for inflation.  There can be no assurance that the Peso will not depreciate or appreciate again in the future.  The Federal Reserve Bank of New York does not report a noon buying rate for Pesos.

___ __________________

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 average of the lowest and highest daily rates from April 1 through April 26, 2013.

In the future, any cash dividends we pay will be in Pesos, and exchange rate fluctuations affect the U.S. Dollar amounts received by holders of American Depositary Shares (“ADSs”), on conversion by us or by the depositary of cash dividends on the shares represented by such ADSs.  Fluctuations in the exchange rate between the Peso and the U.S. Dollar will affect the U.S. Dollar equivalent of the Peso price of our shares on the Buenos Aires Stock Exchange and, as a result, can also affect the market price of the ADSs.

 

 

12

 


 
 

RISK FACTORS  

Risks Related to Argentina

General

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 the service areas in which our subsidiaries operate or 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 services.  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 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 levels 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 to decline.

The Argentine economy remains fragile, 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 fragile, 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 levels that risk economic stability;

 

 

13

 


 
 

 

·         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;

·         the regulatory environment continues to be uncertain, as the Argentine Government has been implementing market regulations and other interventionist measures at the microeconomic level in lieu of policies addressing inflation at a macroeconomic level;

·         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.  This could, in turn, materially adversely affect our financial condition and results of operations, or cause the market value of our ADSs to decline.

As public finances became increasingly tight, the Argentine Government decided to revise its subsidy policies, particularly those related to energy, electricity and gas, water and public transportation. However, as economic growth has not reached the levels of previous years (on average, GDP grew close to 8.0% per year between 2003 and 2010) and inflation has continued to increase, the manner in which the Argentine Government has revised those policies has been affected. As ultimately implemented, the revised policies will not have an impact on companies’ revenues, but could affect the timing of the revision of the tariff process, and generate a strong negative impact on economic activity and an increase in prices, considering that they would be put into effect in a context of subpar growth, high inflation and capital flight.

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 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.

The impact of inflation in Argentina on the costs of our subsidiaries 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 10.9% in 2010, 9.5% in 2011 and 10.8% in 2012.  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 and could adversely affect our ability to finance the working capital needs of our businesses on favorable terms, and adversely affect our results of operations and cause the market value of our ADSs to decline.

 

14

 

 


 
 

 

The credibility of several Argentine economic indexes 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. These events have affected the credibility of the CPI published by INDEC, as well as other indexes. As a result of this uncertainty relating to the accuracy of INDEC indexes, the inflation rate of Argentina and the other rates calculated by INDEC could be higher than as indicated in official reports.

Beginning November 23, 2010, the Argentine government consulted 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 new national consumer price index.  Notwithstanding the foregoing, reports published by the IMF state that their staff also uses alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which have shown inflation rates considerably higher than those issued by the INDEC since 2007, and the IMF has called on Argentina to adopt remedial measures to address the quality of 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 has not been sufficient, and as a result, the IMF issued a declaration of censure against Argentina in connection with its 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.

Any required correction or restatement of the INDEC indexes could result in a significant further 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, which could, in turn, adversely affect our results of operations and financial condition and cause the market value of our ADSs 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 the 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

 

15

 


 
 

bonds.  The judgment has been appealed, and we cannot predict when or in what form a final appellate decision will be granted. 

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.  However, as of the date of this annual report, the Argentine Government has not yet cancelled such debt.  Indeed, negotiations in this respect remain stagnant.  If no agreement with the Paris Club creditor nations is reached, financing from multilateral financial institutions may be limited or not available, which could adversely affect economic growth in Argentina and Argentina’s public finances.

Certain groups of holders that did not participate in the 2005 restructuring have filed claims against Argentina and it is possible that new claims will be filed in the future.  In addition, foreign shareholders of several Argentine companies have filed claims before 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, the ICSID tribunals have issued several awards against Argentina.  Only the cases “CMS v. Argentina”, “Azurix v. Argentina” and “Vivendi v. Argentina” are currently final and unappealable, which decisions required that the Argentine Government pay U.S. $133.2 million, U.S. $165.2 million and U.S. $105 million, respectively.  As of the date of this annual report, Argentina has not yet paid the amounts referred to above.

On April 30, 2010, Argentina launched a new debt exchange 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 with legal action against Argentina for the recovery of debt, which could adversely affect Argentina’s access to the international capital markets.

Argentina’s past default and its failure to restructure completely 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. A recent 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 concerning Argentina’s default on its public indebtedness.  Such groups have over the years 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 shares to decline.

Significant 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 and significantly reduce real wages, jeopardize the stability of businesses whose success is dependent 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.  If the Argentine Peso devalues significantly, 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.

 

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On the other hand, a substantial increase in the value 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

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. 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. 2552/2012. 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.

 

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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, regulations were issued making 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 the enhancement of exchange controls began in late 2011, and upon the introduction of measures that have practically closed 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 10. Exchange 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. Such measures could limit our ability to access the international capital markets and impair our ability to make interest or principal payments abroad, and could also 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. This, 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.

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

In recent years a significant portion of the local demand for securities of Argentine companies came from the 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’ interests may differ from those of other investors, and consequently, those investors may understand that ANSES’ actions might have an adverse effect on such companies. As of the date of this annual report, ANSES owns shares representing 23.23% of the capital stock of the Company and also owns shares of the capital stock of our subsidiaries Edenor, Transener and Emdersa.

 

 

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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.  Argentina’s economy remains vulnerable to external shocks, including those related or similar to the global economic crisis that began in 2008 and the recent uncertainties surrounding European sovereign debt.   For example, the recent challenges faced by the European Union to stabilize certain of its member economies, such as Greece, Ireland, Italy, Portugal and Spain, have had international implications affecting the stability of global financial markets, which has hindered economies worldwide.  Should measures taken by the European Union be insufficient to restore confidence and stability to the financial markets, any recovery of the global economy, including the U.S. and European Union economies, could be hindered or reversed, which could negatively affect 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 a 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.

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.

 

Risks Relating to the Argentine Electricity and Oil and Gas Sectors

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

To address the Argentine economic crisis in 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 of 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 generated substantial price differences within the market.  The Argentine Government continues to intervene in this sector, including by 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.

 

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Furthermore, on November 15, 2011, the Secretaría de Energía (the Secretariat of Energy, or the “SE”) issued Note No. 8752, 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 No. 8752, certain provincial governments have initiated legal proceedings to challenge the jurisdiction of the Secretariat of Energy to issue Note No. 8752, particularly because of the potential chilling effect that this regulation may have on the ability of the provincial governments to increase electricity tariffs. 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 Secretariat of Energy issued Resolution No. 2016, which approved the seasonal WEM prices – subsidized and not subsidized − for the period of November 2012 through April 2013. The Subsidized WEM Seasonal Reference Price was established at Ps. 320 per MWh. Each local authority is to define the local prices to be included in the local distributor’s tariff. Also, on November 23, 2012, under Resolution No. 347/12, in accordance with the terms stated in clause 4.2 of the Contract Renegotiation Memorandum of Understanding duly signed with the UNIREN, the ENRE allowed the Company to begin applying a differential fixed amount for each of the different tariff categories, which will be shown as a separate item on users’ bills, with the exception of customers that are exempt from paying the tariff scheme of ENRE Resolution No. 628/08. Additionally, there was an instruction to create a special account where each distribution company must deposit the received amounts, which will be used exclusively for infrastructure and maintenance works in the facilities of their area, and administered by a trust. The amounts received by the company will be calculated based on the credits and debits corresponding to the ENRE’s analysis at the moment of the Full Tariff Review (“FTR”). However, such additional revenue is insufficient to make up the deficit attributable to the constant increase of operating costs and the expectations regarding salary or third-party costs increases for the year 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 Secretariat of Energy issued Resolution No. 95/13, which introduced a new scheme for the remuneration for the 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 (See “Item 4. Information on the Company—The Argentine Electricity Sector—SE Resolution No. 95/13—New price scheme and other modifications to the WEM”).

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 to decline.

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

Distribution and transmission tariffs include a regulated margin that is intended to cover the costs of distribution or transmission, as applicable, and provide an adequate return.  Generators, which mostly depend on the sales made to the spot market (the market set by supply and demand of energy available for immediate delivery), used to have stable prices and were able to reinvest their profits to become more efficient and achieve better margins.  Under Law No. 23,928 and Decree No. 529/91 (together, the “Convertibility Law”), which established a fixed exchange rate of one Peso per U.S. Dollar, distribution and transmission tariffs and electricity spot prices were calculated in U.S. Dollars and distribution and transmission margins were adjusted periodically to reflect variations in U.S. inflation indexes.  In January 2002, pursuant to the Public Emergency Law, which authorized the Argentine Government to renegotiate its public utility contracts, provisions requiring price adjustments based on foreign inflation indexes and all other indexation mechanisms in public utility services agreements between the Argentine Government or any provincial government and the providers of those services (including us) were revoked, and the tariffs for the provision of such services were frozen and converted from their original U.S. Dollar values to Argentine 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 revenues in real terms and an increase of costs in real terms, which could no longer be recovered through margin adjustments or market price-setting mechanisms.  This situation, in turn, led many public utility 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 certain companies in the electricity sector, including a limited increase in transmission and distribution margins, a temporary cost adjustment mechanism (which was not fully implemented) and the ability to apply certain additional charges, the principal electricity 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 the energy 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 our company by the economic crisis and in its aftermath.

 

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Electricity demand may be affected by tariff increases, which could lead electricity 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 at an estimated average of approximately 5.0% per annum from 2003 through 2012. This increase in electricity demand since 2003 reflects the relative low cost, in real terms, of electricity to consumers due to the freezing of margins 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 has not impacted our value-added for distribution, or “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.

If the demand for energy is increased suddenly, current levels of power generation and the difficulty in increasing the capacity of transmission and distribution companies in a short or medium term, could adversely affect the Company, which in turn could result in customer complaints and substantial fines imposed on such companies

In recent years, the increase in electricity demand was greater than the structural increase generation capacity and transmission and distribution of electricity, which led, sometimes, to power shortages and disruptions.  While current demand for electricity has decreased because of, among other things, a lower level of activity linked to the global economic crisis, a sustained increase in electricity demand could generate future shortages.

 

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Additionally, according to Argentine law, distribution companies are responsible before their customers for any interruption in the supply of electricity.  Consequently, customer can make their claims to the distribution companies.  Also, distribution companies can suffer fines and penalties for interruptions caused by power outages, unless the respective Argentine authorities determine that power outages are caused by force majeure events.  As of the date of this annual report, Argentine authorities have not ruled on the conditions under which outages may constitute a case of force majeure.  In the past, however, Argentine authorities have adopted a restrictive view of the concept of force majeure and have acknowledged its existence in limited circumstances, such as internal defects in the customer’s location or extraordinary weather events (such as severe storms, tornadoes or floods). We cannot assure that we will not experience a lack in the supply of energy that could adversely affect our business, financial condition and results of operations and cause the market value of our ADSs and shares to decline.

Oil and gas companies have recently been affected by certain measures taken by the Argentine Government and may be further affected by additional changes in their regulatory framework

Since December 2011, the Argentine Government has adopted a number of measures concerning repatriation of funds obtained as a result of exports of oil and gas and charges applicable to the production of liquid gas which have affected the business of oil and gas producers and manufacturers (See “Certain measures taken by the Argentine Government may adversely affect the Argentine economy and, as a result, our business and results of operations”). 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. Further changes in such regulations may increase the adverse effect of such measures on the business, revenues and operations of companies operating in the oil and gas sector, including companies in which we hold, or may hold in the future, equity interests, which may lead in turn to a material adverse effect on the market value of our ADSs.

Argentine oil and gas production concessions and exploration permits are subject to certain conditions and may not be renewed or could be revoked  

The Hydrocarbons Law N° 17,319, the “Hydrocarbons Law” provides for oil and gas concessions to remain in effect for 25 years as from the date of their award, and further provides for the concession term to be extended for up to 10 additional years, subject to terms and conditions approved by the grantor at the time of the extension. The authority to extend the terms of current and new permits, concessions and contracts has been vested with the government of the province in which the relevant area is located (and the Argentine Government in respect of offshore areas beyond 12 nautical miles).  In order to be eligible for the extension, any concessionaire and permit holder must have complied with its obligations under the Hydrocarbons Law and the terms of the particular concession or permit, including evidence of payment of taxes and royalties, the supply of the necessary technology, equipment and labor force and compliance with various environmental, investment and development obligations. Under the Hydrocarbons Law, non-compliance with these obligations and standards may also result in the imposition of fines and in the case of material breaches, following the expiration of applicable cure periods, the revocation of the concession or permit.  

The Argentine Government and a number of provincial governments have recently revoked certain of YPF S.A.’s (prior to its nationalization) and Petrobras Argentina S.A.’s concessions.  Petrolera Pampa has formed partnerships in projects with proved gas reserves to be developed by major oil and gas companies, such as Apache Energía Argentina S.R.L and Petrobras Argentina S.A. and is currently negotiating agreements that involve potential oil and gas production with Petrolera Pampa as operator. See “Item 4. Information on the Company—Our Business—Other Businesses—Petrolera Pampa—Petrolera Pampa’s Projects”. The termination or revocation of, or failure to obtain the extension of, a concession or permit under these projects could have a material adverse effect on Petrolera Pampa’s business and results of operations.

In April 2012, the Argentine Congress passed Law No. 26,741, expropriating 51% of the shares of YPF owned by the Spanish energy company, Repsol YPF. Under the terms of the law, out of the 51% of total shares to be expropriated, 51% of such shares will be held by the Argentine Government and the remaining 49% will be held by oil-producing Argentine Provinces.  Also, the law states that hydrocarbon activities (including, exploitation, industrialization, transportation and commercialization) in the territory of Argentina qualify as a “national public interest”.  The law, entitled “Hydrocarbon Sovereignty of Argentina”, provides that the primary objective is to achieve Argentina’s self-sufficiency in oil and gas supply.  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 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.

 

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Risks Relating to our Company

We operate a material portion of our business pursuant to public concessions granted by the Argentine Government, the revocation or termination of which would have a material adverse effect on our business

We conduct a significant part of our businesses pursuant to public concessions granted by the Argentine Government.  These concessions contain several requirements regarding the operation of those businesses and compliance with laws and regulations.  Compliance with our obligations under our concessions is typically secured by a pledge of our shares in the concessionaires in favor of the Argentine Government.  Accordingly, upon the occurrence of specified events of default under these concessions, the Argentine Government would be entitled to foreclose on its pledge of the concessionaire and sell our shares in that concessionaire to a third party.  Such sale would have a severe negative impact on our ability to operate a material portion of our business, and as a result, our results of operations would be materially adversely affected.  Finally, our concessions also generally provide for termination in the case of insolvency or bankruptcy of the concessionaire.  If any of our concessions are terminated or if the Argentine Government forecloses its pledge over the shares we own in any of our concessionaire companies, such companies could not continue to operate as a going concern, and in turn our consolidated results of operations would be materially adversely affected and the market value of our shares and ADSs could decline. 

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

The majority of the employees in the electricity sector are affiliated with labor unions.  As of December 31, 2012, approximately 76.45% of our employees were union members.  Although our relations with unions are currently stable, we cannot assure you that our operating subsidiaries will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and revenues.  In addition, our collective bargaining agreements generally expire after a one-year term.  We have completed salary negotiations for 2012, and due to inflationary pressures, we have reopened negotiations during the first months of 2013 in some of our subsidiaries.  We cannot assure you that we will be able to negotiate new collective bargaining 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.

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

We carry insurance policies that are consistent with industry standards in each of our different business segments.  See “Item 4.  Information on the Company—Our Business—Insurance.”  Although we believe our insurance coverage is commensurate with standards for the international electricity generation, transmission and distribution industry, no assurance can be given of the existence or sufficiency of risk coverage for any particular risk or loss.  For example, two of the towers used by Transener’s transmission lines located in the Province of Buenos Aires, were damaged in 2008 due to unknown causes, despite our having carried all related actions which were legally required.  These damages resulted in the interruption of electricity transmission service to customers in the greater Buenos Aires region and certain areas in other provinces for several hours, which could have caused losses that may not be covered by our insurance policies, the total amount of which has not yet been determined.  We cannot make any assurances that this kind of damage will not occur again in the future, which could eventually result in further losses or the imposition of sanctions on Transener by the regulatory authorities.  If an accident or other event occurs that is not covered by our current insurance policies in any of our business segments, 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 shares and ADSs. 

 

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We conduct a portion of our operations through joint ventures, and our failure to continue such joint ventures or resolve any material disagreements with our partners could have a material adverse effect on the success of these operations

We conduct a portion of our operations through joint ventures and as a result, the continuation of such joint ventures is vital to our continued success.  In the event that any of our partners were to decide to terminate its relationship with us in any of such joint ventures or sell its interest in such joint ventures, we may not be able to replace our partner or raise the necessary financing to purchase our partner’s interest.  For example, we own a co-controlling interest in Citelec, the holding company of Transener, our transmission company, where we were previously a party to significant agreements with our former partner, Petrobras Energía S.A. (Petrobras Energía), with respect to the management of Transener.  Electroingeniería S.A. (Electroingeniería), now Grupo Eling S.A. and Energía Argentina S.A. (Enarsa) subsequently acquired Petrobras Energía’s interest in Citelec’s capital stock.  While we were able to enter into similar agreements that we enjoyed with Petrobras Energía, any significant disagreement with our new partners could have a material adverse effect on the success of such joint venture, and thereby our business and results of operations.  In this particular case of Transener, we are not able to acquire our partners’ interests under applicable Argentine regulations.  See “Item 4.  Information on the Company—The Argentine Electricity Sector.”  As a result, the failure to continue some of our joint ventures or to resolve disagreements with our partners could adversely affect our ability to transact the business that is the subject of such joint venture, which would in turn negatively affect our financial condition and results of operations and the market value of our shares and ADSs.

The Company is not the operating partner in all of the joint ventures in which it participates, and actions undertaken by the operators in such joint ventures could have a material adverse effect on the success of these operations

The Company, through its applicable subsidiary, generally undertakes its activities in exploration and exploitation of hydrocarbons in a particular area by entering into an agreement with third parties to participate in a joint venture. Under the terms and conditions of these agreements, one of the parties thereto has the role of operator of the joint venture, and thus assumes responsibility for executing all activities undertaken by the joint venture. However, the Company does not always assume the role of operator and therefore, in such cases, is exposed to risks relating to the performance of and the measures taken by the operator to carry out the activities. In these cases, even if the Company seeks to ensure that the standards observed by the operator are similar to those that the Company would observe, the Company has no control, or has very limited control, over the actions ultimately under taken by the operator. Such actions could have a material adverse effect on the success of these joint ventures, and thus adversely affect our financial condition and results of operations and the market value of our shares and 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 primarily 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.  We have sought 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 at the relevant time by applicable Argentine Central Bank regulations, and by entering into currency forward contracts. However, pursuant to the new Argentine Central Bank regulations, we can no longer convert a portion of our excess cash denominated in Pesos into U.S. Dollars, and we therefore are not able to hedge this risk and thus have substantial exposure to the U.S. Dollar.  We cannot assure you whether the Argentine Government will maintain these exchange regulations, or will instead allow us to access the market to acquire U.S. Dollars in the manner we have done so in the past.  Although we may also seek to enter into further hedging transactions to cover all or a part of our exposure, since the implementation of the regulations described above 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 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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The Argentine Antitrust Commission could decide not to approve the implementation of the Restructuring Agreement

On July13, 2012, the parties to the Restructuring Agreement, including the Company, entered into a Fifth Amendment to the Restructuring Agreement pursuant to which they agreed on the terms and conditions upon which the restructuring will be consummated. If the restructuring is achieved through the Restructuring Agreement’s implementation, the Company and/or its subsidiaries (as financial creditor of CIESA) would obtain, on the one hand, direct and indirect ownership over 50% of CIESA’s equity, which in turn would control 51% of TGS, and on the other hand, a direct 4.3% stake in TGS. The implementation of the restructuring has already been approved by the Ente Nacional Regulador del Gas (the National Gas Regulating Body, or the “ENARGAS”), and has not expressly been approved by the Argentine Antitrust Commission (see “Presentation of Information – Recent Developments”).  We cannot assure you that the Argentine Antitrust Commission will expressly approve the Restructuring Agreement, and if it does not, it would adversely affect the financial position and results of operations of the Company.

 

First time adoption of IFRS

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 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.

We are involved in various legal proceedings which could result in unfavorable decisions and financial penalties for us

We are party to a number of legal proceedings, some of which have been pending for several years. We cannot be certain that these claims will be resolved in our favor, and responding to the demands of litigation may divert management’s time and attention and our financial resources. See “Item 8—Financial Information—Legal Proceedings.”

Risks Relating to our Generation Business 

There are electricity transmission constraints in Argentina that may prevent us from recovering the full marginal cost of our electricity, which could materially adversely affect the financial results of our generation business

During certain times of the year, more electricity is generated than can be transmitted.  Due to these electricity transmission constraints, many Argentine generators, including us, do not receive the full price of the system, but rather a lower local price.  We cannot make any assurance that required investments will be made to increase the capacity of the system.  As a result of lower electricity prices, our generation business may record lower operating profits than we anticipate, which could adversely affect our consolidated results of operations and financial condition and cause the market value of our ADSs to decline

We may be unable to collect amounts, or to collect them in a timely manner, due from CAMMESA and other customers in the electricity sector, which could have a material adverse effect on our financial condition and results of operations

Electricity generators, including our subsidiaries, are paid by Compañía Administradora del Mercado Mayorista Eléctrico S.A. (Electricity Market Administration Company, or CAMMESA), which collects revenue from other wholesale electricity market agents.  During 2012, a significant number of wholesale electricity market agents –mostly distributors, including Edenor and EDELAR - defaulted in the payment of amounts they owed to the wholesale electricity market or failed to pay in a timely manner, which adversely affected the ability of CAMMESA to meet its own payment obligations to generators or to pay them in a timely manner. This situation led to the creation of the Fondo Transitorio de Recomposición de Cobranzas”– SE Notes Nos. 7588/12, 8147/12 and 8476/12  (the “Transitory Recovery Fund”), by means of which the Secretariat of Energy instructed CAMMESA to collect the

 

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charges and interest accrued from distributors’ defaults and renegotiate the terms of the payment of the defaulted amounts).

Additionally, the stabilization fund created by the Secretariat of Energy to cover the difference between the spot price and the seasonal price of electricity recorded a permanent deficit.  This difference is due to the intervention of the Argentine Government and the measures adopted pursuant to the Public Emergency Law.  We cannot make any assurances that the difference between the spot price and the seasonal price will not increase in the future, that the Argentine Government will use funds from the National Treasury to meet the differences or that CAMMESA will be able to make payments to generators, both in respect of energy and capacity sold in the spot market. 

Furthermore, as a consequence of the suspension of the incorporation or renewal of contracts in the term market (See “Item 4. Information on the Company – The Argentine Electricity Sector - SE Resolution 95/13 – New price scheme and other modifications to the WEM”), the revenues of electricity generators will depend on the payments received from CAMMESA. The risk of non-payment will grow, as the “clients” of the generators will be reduced, in the long run, solely to CAMMESA. Additionally, due to the scheme implemented by SE Resolution No. 95/13, the margin collected from Large Users derived from contracts in WEM’s term market will be calculated based on the remuneration received from CAMMESA, which will impact the revenues of the generators.

The inability of generators, including certain of our subsidiaries, to collect their credits from CAMMESA or to collect them in a timely manner, may have a material adverse effect on the revenues of our generation subsidiaries and accordingly, on our results of operations and financial condition and the market value of our shares and ADSs.  

Our ability to generate electricity in our thermal generation plants depends on the availability of natural gas, and fluctuations in the supply or price of gas could materially adversely affect our results of operations

The supply or price of gas used in our generation businesses has been and may from time to time continue to be affected by, among other things, the availability of gas in Argentina, our ability to enter into contracts with local gas producers and gas transportation companies, the need to import a larger amount of gas at a higher price than the price applicable to domestic supply as a result of low domestic production, and gas redistribution mandated by the Secretariat of Energy, given the present shortage of supply.  Since 2009, the Secretariat of Energy has applied a procedure – see “Procedure for the Dispatch of Natural Gas for Power Generation” – by means of which generators assign in favor of CAMMESA the natural gas acquired from the producers. CAMMESA may assign those volumes to other generation plants.

Several of our generation facilities are equipped to run solely on gas and, in the event that gas becomes unavailable, these facilities will not be able to switch to other types of fuel in order to continue generating electricity.  If we are unable to purchase gas at prices that are favorable to us, if the supply of gas is reduced, if the procedure cited above is canceled or if CAMMESA does not provide gas to our facilities, our costs could increase or our ability to profitably operate our generation facilities could be impaired.  Moreover, some of our generation units are included in the “Energía Plus” program and/or have executed WEM Supply Agreements under SE Resolution No. 220/07, which requires the generator to assure the committed capacity with its own fuels through the execution of firm natural gas and transport contracts.  See “Electricity Prices – Energía Plus” and “WEM Supply Agreements under SE Resolution No. 220/07”.

Furthermore, upon the issuance of SE Resolution No. 95/13, CAMMESA was appointed to centralize the supply of fuels for the generation sector. As a result, generators will need to depend on the fuels that CAMMESA provides to them in obtaining the fuels necessary for their operation.

Such a disruption or an inability to acquire the necessary fuels for our generation business could, in turn, materially adversely affect our results of operations and financial condition and the market value of our ADSs.  

The failure to enforce  the 2008-2011 Agreement could materially adversely affect our results of operations

 

 

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The electricity capacity payment was fixed at Ps. 12 during the period between August 2002 and November 2010. In November 2010, the Secretariat of Energy and certain electricity generation companies executed an agreement for the management and operation of certain projects in order to achieve an increase in the availability of thermal electricity generation and the adjustment of the corresponding remuneration (the “Acuerdo para la Gestión y Operación de Proyectos, Aumento de disponibilidad de Generación Térmica y Adaptación de la Remuneración de la Generación 2008-2011”, hereinafter the “2008-2011 Agreement”).  Such agreement had the purpose, among others, of establishing the overall remuneration to be received by certain electricity generators integrated to the WEM as capacity payment and increasing the recognized costs of maintenance and other costs excluding fuel costs.

 

As set forth in the above mentioned agreement, the price to be paid to the generators part to such agreement in concept of electricity capacity was increased to an amount that ranged between Ps. 30 and Ps. 42 per MW (during the hours in which the capacity is remunerated), according to the electricity generation technology applied by each generator.

 

On January 24, 2012, the Secretariat of Energy sent to CAMMESA Note No.495, pursuant to which it instructed CAMMESA not to implement, until further instruction, the above referenced provisions of the agreement. In connection with the same document, CAMMESA stated that they were analyzing different alternatives to encourage and ensure the availability of electricity generation. This instruction was rejected by the Company’s affiliates, which are a party to the 2008-2011 Agreement. In turn, the Secretariat of Energy confirmed the instruction issued by Note No. 495 through its Note No. 1269 (issued on March 7, 2012). Given that such instructions issued by the Secretariat of Energy constitute a breach of the commitments undertaken by the Secretariat of Energy under the above mentioned agreement, the Company has filed administrative remedies in order to exhaust such remedies (the “Reclamo Administrativo Previo”) and proceed to a judicial review (See Item 8. “Financial Information - Legal Proceedings”).  The lack of fulfillment of the 2008-2011 Agreement has made it difficult for some of the generation companies to cover their operating costs and, even more problematically, their maintenance costs.  As of the date of this annual report, neither the 2008-2011 Agreement nor a new agreement or regime has been put in place to restore the remuneration of the electricity generation companies that covers their operating and maintenance costs in order to ensure the availability of their plants. We cannot assure you whether the Secretariat of Energy will comply with its obligations under the 2008-2011 Agreement or promote an amendment to it and, in such case, whether the new terms and conditions of the amendment would be favorable for the Company.  In both cases, the Company’s results of operations could be adversely affected.

 

Our ability to generate electricity using gas plus under the Gas Plus Program at Loma de la Lata and EGSSA depends on the recognition by CAMMESA of Gas Plus costs

Loma de la Lata and EGSSA have executed several natural gas provision agreements with producers whose production is included under the terms of the “Gas Plus” program (Secretariat of Energy Resolution No. 24/08).  Under such program, the producers are able to sell their production at a price higher than the reference price (market value).  By virtue of the agreements executed with the Secretariat of Energy, and the mechanism established in Note No. 7585/10 of the Secretariat of Energy (See Item 4. The Argentine Electricity Sector -Procedure for the Dispatch of Natural Gas for Power Generation), CAMMESA recognizes such costs to Loma de la Lata and EGSSA.  CAMMESA has to recognize the Gas Plus cost to Loma de la Lata and EGSSA in order for Loma de la Lata and EGSSA to be able to make the corresponding payments to their natural gas suppliers.  If CAMMESA does not recognize the Gas Plus cost or if such recognition is delayed, the ability of Loma de la Lata and/or EGSSA to pay the natural gas suppliers may be affected.  Consequently, in such a situation, Loma de la Lata and/or EGSSA would have to renegotiate the terms and conditions previously agreed with their natural gas suppliers and, in case an agreement is not reached, any of the parties may terminate the contracts under which they committed to supply natural gas. In this respect, during 2012, due to delay in collecting payments from CAMMESA, some renegotiation needed to be made with natural gas producers in order to fulfill Loma de la Lata’s and EGSSA’s obligations and to keep the agreements alive. As a consequence of this situation, Loma de la Lata and/or EGSSA might need to search for alternative suppliers of natural gas, and if they are unsuccessful in reaching new agreements with natural gas suppliers, their ability to generate electricity using gas plus recognized under the Gas Plus Program could be affected.

Additionally by means of the Notes Nos. 3456/12 and 4377/12, the Secretariat of Energy introduced several modifications to the terms and conditions for the provision of natural gas recognized under the Gas Plus Program for energy generation. See “Item 4. – Information on the Company - Natural Gas Supply under the Gas Plus Program”.

 

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We cannot assure you that the changes on the terms and conditions for the provision of natural gas under the Gas Plus Program would not have an adverse effect on the operation of our generation facilities and the revenues derived from such activity.

Penalties may be applied under Loma de la Lata’s and EGSSA’s WEM Supply Contracts under SE Resolution No. 220/07, which may adversely affect the revenues derived from such contracts

A breach of the availability commitments set forth in Loma de la Lata’s and EGSSA’s WEM Supply Contracts under SE Resolution No. 220/07 (See “WEM Supply Contracts under SE Resolution No. 220/07”) allows CAMMESA to apply penalties to the generator that may adversely impact in the revenues derived by the generator from such agreements, which in turn may adversely affect the generator’s results.

A judgment of the Court of the International Chamber of Commerce against Loma de la Lata could adversely affect Loma de la Lata’s operations

Loma de la Lata is involved in an arbitration proceeding before an arbitration tribunal constituted according to the rules of the International Chamber of Commerce in connection with the Construction Agreement and the Supply Agreement. In addition to the claim for integral damages recovery made by Loma de la Lata, the claim of the Project Counterparties is, among others, the refund of the sums received for the foreclosure of the guarantees issued by BBVA Banco Frances S.A. See “Item 8. Financial Information – Legal Proceedings – Legal Proceedings involving Loma de la Lata”. A judgment against Loma de la Lata by the Court of the International Chamber of Commerce could adversely affect the business, the results of operations and the financial position of Loma de la Lata.

Our ability to generate electricity at our hydroelectric generation plants may be negatively affected by poor hydrological conditions, which could, in turn affect our results of operations

Prevailing hydrological conditions could adversely affect the operations of our six hydroelectric generation plants owned by HINISA and HIDISA, in a number of ways, not all of which we can predict.  For example, hydrological conditions that result in a low supply of electricity in Argentina could cause, among other things, the implementation of broad electricity conservation programs, including mandatory reductions in electricity generation or consumption.  Hydrological conditions since 2006, the year in which our units recorded the greatest intake to date, have been poor.  In particular, in 2012, the water intake at Los Nihuiles and Diamante available for electricity generation was 56% and 61% lower, respectively, as compared to 2006.  A prolonged continuation of poor conditions could force the Argentine Government to focus its generation efforts on the use of other sources of electricity generation.  In the event of electricity shortages, the Argentine Government could mandate the implementation of broad electricity conservation programs, including mandatory reductions in electricity generation or consumption; the government could also mandate increased production from thermal plants that use fossil fuels as their generation sources and preserve the available water resources for future electricity generation.  Although such a shift in production could benefit our thermal generation plants, it would negatively affect our hydroelectric plants and any mandated reduction in electricity generation or consumption could reduce revenues in our generation business and lead to a decline in our consolidated results of operations, which may have a material adverse effect on our financial condition and the market value of our shares and ADSs.

Moreover, in a case where the water level of the dams of our hydroelectric facilities decreases to the minimums established in the applicable concessions contract, the local water authority (The Province of Mendoza Irrigation General Department) would gain the control of the amount of water that may be dispatched in order to assure the continuity of other water uses such as human consumption and irrigation.

Operational difficulties could limit our ability to generate electricity, which could adversely affect our results of operations

We may experience operational difficulties that could require us to temporarily suspend operations or otherwise affect our ability to generate electricity and, as a result, adversely impact our operating results.  These difficulties may affect our generation equipment, electromechanical components or, in general, any of our assets required for the supply of electricity.  We cannot make any assurances that events of such nature will not occur in the future.  While we maintain comprehensive insurance for each of our facilities, we cannot make any assurances that the amounts for which we are insured or the amounts that we may receive under such insurance policies would cover all of our losses.  If operational difficulties impede our generation of electricity, the disruption may lead to reduced revenues from our generation segment, which would have an adverse effect on our consolidated results of operations and may negatively affect the market value of our shares or ADSs.

 

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We would no longer own a controlling interest in HINISA, one of our principal generation assets, if the Province of Mendoza sells its participation in HINISA

Our subsidiary, Nihuiles, currently owns a 52.4% controlling stake in HINISA, a hydroelectric generation company in the Province of Mendoza, Argentina, and the Province of Mendoza currently owns 47.6% of the capital stock of HINISA.  In 2006, the Province of Mendoza publicly announced its intention to sell shares representing 37% of the capital stock of HINISA.  See “Item 4.  Information on the Company—Our Business—Our Generation Business—Nihuiles and Diamante—Nihuiles.”  Pursuant to HINISA’s concession, if the Province of Mendoza sells these shares, Nihuiles will be required to sell 20% of HINISA’s capital stock and would no longer own a controlling 52.4% interest in HINISA.  In addition, according to HINISA’s by-laws, Nihuiles would not be permitted to purchase any additional shares of HINISA.

We currently consolidate the results of operations of Nihuiles.  If Nihuiles loses its controlling interest in HINISA, it may have a significant adverse effect on the value of our investment in Nihuiles and on our consolidated results of operations and the market value of our ADSs.  In addition, neither we nor Nihuiles has any control over the timing of the Province of Mendoza’s proposed sale or the price at which Nihuiles would be required to sell its 20% of HINISA’s shares.  As a result, these shares may be sold at a time and price per share that are adverse to our interests and the return on our investment in Nihuiles.

Piedra Buena could be exposed to third party claims on real property utilized for its operations that could result in the imposition of significant damages, for which we have not established a provision in our financial statements for potential losses

At the time of Piedra Buena’s privatization in 1997, the Province of Buenos Aires agreed to expropriate and transfer to Piedra Buena the real property on which the plant was built and to create administrative easements in favor of Piedra Buena over the third party lands through which a gas pipeline and an electricity transmission line run.  Although the Province of Buenos Aires is in the process of expropriating the property on which the plant is built, as of the date of this annual report, it has not transferred all of the real property with clear and marketable title to Piedra Buena.  In addition, the Province of Buenos Aires has not created the administrative easements for Piedra Buena’s gas pipeline or the electricity transmission line.  In July 2008, Piedra Buena sued the Province of Buenos Aires seeking the creation of the administrative easements in favor of Piedra Buena.  Piedra Buena has received several complaint letters from third parties seeking compensation for the use of this land.  See “Item 8.  Financial Information—Legal Proceedings—Generation—Legal proceedings involving Piedra Buena’s real estate.”  If the Province does not complete the expropriation process or the administrative easement process, Piedra Buena may be exposed to judicial claims by third parties seeking compensation or damages for which we have not established a provision in our financial statements.  If Piedra Buena were required to pay material damages or compensation for the right to use this real property as a result of adverse outcomes from legal proceedings, we could be required to use cash from operations to cover such costs, which could have a materially adverse effect on our financial condition and consolidated results of operations and cause the market value of our ADSs to decline.  

Piedra Buena could be subject to fines and penalties for not having a concession for the use of sea water for the refrigeration of its generation units

Piedra Buena uses sea water to refrigerate its generation units.  According to applicable provincial law, such activity requires a concession to be granted by the provincial government. In the documentation that we received with the privatization of Central Piedra Buena, no concession was included.  Piedra Buena consulted the regulatory authorities who informed that, according to their files, no such concession has been granted to Piedra Buena.  The penalties for such infringement may vary from the application of up to a Ps. 50,000 fine to the closing of the plant. While Piedra Buena considers that the likelihood of any such penalties being imposed is low, we cannot assure you that the operation of Piedra Buena would not be affected if such penalties were to be imposed.

 

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Risks Relating to our Transmission Business

If we are not able to renegotiate our transmission tariffs regime directly or gain access to another mechanism to generate additional income with the Argentine Government in a timely fashion, it could have a material adverse impact on our financial condition and results of operations

In January 2002, pursuant to the Public Emergency Law, tariffs for the provision of public services, including the transmission of electricity, were converted from their original U.S. Dollar values to Pesos (at a rate of Ps. 1.00 per U.S. $1.00) and frozen at those levels.  Additionally, contract clauses in Transener’s and Transba S.A. (Transba)’s concession agreements requiring adjustments to their tariffs based on foreign inflation indexes and certain other indexation mechanisms were revoked.  The Public Emergency Law also required the renegotiation of public service concession agreements.  In connection with such renegotiation process, Transener and Transba entered into agreements with the Argentine Government in 2005 that provided for an average tariff increase on fixed charges of 31% for Transener and 25% for Transba.  Although these companies’ operating costs have significantly increased since 2005, the Ente Nacional Regulador de la Electricidad (the Argentine National Electricity Regulator, or the “ENRE”) has not totally adjusted tariffs accordingly.  On December 21, 2010, the ENRE and the Secretariat of Energy acknowledged Transener’s and Transba´s (see “Item 4. Information on the Company – Business Overview – Our Transmission Business”) right to collect amounts resulting from the variations of costs during the period June 2005 – November 2010, which payment would be based on CAMMESA’s availability of funds and such payments must be used for investments by us in the transmission system as instructed by the Secretariat of Energy.  A mechanism for the calculation and payment of cost variations from December 1, 2010 to December 31, 2011 was also established.  Hence, and considering that such agreements expired on December 31, 2011, on March 6 and March 27, 2012, Transener and Transba submitted judicial claims in the federal courts in order to obtain the full compliance of the Instrumental Agreements.

 

On July 16, 2012, Transener received a copy of SE Note No. 4309, by which the Secretariat of Energy instructed CAMMESA to enter into a third Addendum to the Financing Agreement with Transener and Transba, increasing the related amounts by the sum of Ps. 231,754,810 and Ps. 98,234,993, respectively (as informed by CAMMESA to the Secretariat of Energy through Note B-70754-1).

 

In such Note, the Secretariat of Energy provided  that, prior to the fulfillment of the third Addendum, Transener and Transba should submit before CAMMESA the evidence of the withdrawal of the claims related to the Instrumental Agreements. This provision remains under analysis as of the date of this annual report.

 

As of December 31, 2012 Transener and Transba had received only Ps. 207,000,000 in accordance with the Instrumental Agreements.

 

Transener and Transba are also currently in communication with the relevant authorities to implement a scheme that would better allow them to fund their business plan.

 

We cannot make any assurances that Transener and/or Transba will receive the full amount recognized on the Instrumental Agreements or that similar adjustments will be made in the future, according to the Unidad de Renegociación y Análisis de Contratos de Servicios Públicos (Renegotiation and Analysis of Public Services Contracts Unit, or the “UNIREN ACT”) and/or the Instrumental Agreements.  If operating costs continue to increase and we do not receive any increase in revenues as a result of a tariff adjustment because of the RTI and/or the full compliance of the Instrumental Agreements, our financial position and results of operations may be adversely affected, which could negatively impact the value of our shares or the ADSs.

 

Our transmission capacity may be disrupted, which could result in material penalties being imposed on us

Our electricity transmission business depends on Transener’s and Transba’s ability to transmit electricity over long distances through their transmission networks.  Our financial condition and results of operations would be adversely affected if a natural disaster, accident or other disruption were to cause a material curtailment of our transmission capacity.  Argentina’s transmission system has evolved from a radial pattern to a fully integrated transmission grid system.  However, there are areas where generation and demand are connected by a single transmission line or, in some cases, two or more transmission lines in parallel.  Accordingly, the outage of any single line could totally disconnect entire sections of the Sistema de Interconexión Nacional (the National Interconnection System, or NIS).  The concession agreements establish a system of penalties, which Transener and Transba may incur if defined parts of their networks are not available to transmit electricity, including in cases of force majeure.  Consistent with industry standards, Transener and Transba do not maintain business interruption insurance and we cannot make assurances that any future disruption in Transener’s or Transba’s transmission capacity would not result in the imposition of material penalties, the payment of which would require us to use funds from operations and could have a material adverse effect on our financial condition and consolidated results of operations and cause the market value of our ADSs to decline.

 

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The ENRE may reject our request to redetermine the revenues derived from expansion of the NIS as a result of the pesification of these revenues, which would result in a significant shortfall that could adversely affect our financial condition

The Public Emergency Law also affected the revenues we receive in connection with Transener’s expansion of the NIS.  In particular, the income from the construction, operation and maintenance of an approximately 1,300 km high-voltage electricity transmission line (500 kilovolts (“kV”)) from the Comahue region to the Abasto substation was converted into Pesos at a rate of Ps. 1.00 per U.S. $1.00 and then adjusted for inflation.  Transener has asked the ENRE, in its capacity as the main party to the construction, operation and maintenance agreement relating to Transener’s construction of the transmission line, (which includes approximately 2,550 high voltage towers and the expansion of the Piedra del Águila, Choele Choel, Bahía Blanca, Olavarría and Abasto substations, which we refer to collectively as the Fourth Line), to redetermine such revenue.  In December 2008 (Resolution No. 653/08), the ENRE approved the redetermination of our revenues and established that, as of October 2008, the income to be collected in connection with the Fourth Line is Ps. 75.9 million (plus taxes).  However, because the ENRE has not developed an adjustment procedure, Transener has filed an administrative claim with the ENRE.  We cannot predict when the ENRE will respond to our request.  Notwithstanding the above, on March 30, 2011, the ENRE (Resolution No. 150/11) approved a new value for the income to be collected in connection with the Fourth Line of Ps. 95.9 million (plus taxes), with effect from July 2010, and instructed CAMMESA to make the corresponding adjustments.  On April 7, 2011, Transener formally requested clarifications as the new resolution failed to include retroactive interests.  On September 7, 2011, Transener asked the ENRE for a new determination of the Fourth Line’s revenue related to the cost variation from July 2010 to July 2011 according to the above mentioned Resolutions Nos. 653/08 and 150/11. 

 

                On April 25, 2012, the ENRE issued Resolution No. 90/2012 which established a new annual rate of Ps. 113.4 million as from August 2011 and instructed CAMMESA to make the adjustments, including interest. During the year ended December 31, 2012, revenues were recognized in the amount of Ps. 7.3 million, corresponding to the retroactive adjustment for year 2011.

 

                On September 12, 2012, Transener asked the ENRE for a new determination of the Fourth Line’s revenue related to the cost variation from August 2012 according to the above mentioned Resolution 90/12. The response to this request is pending. If the ENRE fails to increase the revenues we receive under the Fourth Line contract on the terms requested, we could face significant losses on our investment in the construction of, and losses in the operation and maintenance of, such transmission line, which could have a material adverse effect on our overall financial condition and results of operations and cause the market value of our ADSs to decline. 

 

Increasing competition in our non-regulated transmission activities could lead to lower revenues

We generate a material portion of our transmission revenues from non-regulated transmission activities, including the construction and installation of electrical assets and equipment, non-network line operation and maintenance, supervision of the expansion of the NIS, supervision of independent transmitters’ operation and maintenance and other services.  On a consolidated basis, Transener’s other net revenues for the year ended December 31, 2012, were Ps. 156.7 million (Ps. 78.3 million on a proportional consolidated basis), representing 29,6% of Transener’s consolidated net revenues for such period.  We believe that these non-regulated revenues will continue to be an important part of our transmission business.  Historically, Transener has not experienced significant competition in these areas of service (with the exception of its construction and international activities).  However, we cannot make any assurance that competition will not substantially increase in the future or that such competition will not contribute directly to decreased revenues, which would adversely affect our financial condition and results of operations and cause the market value of our ADSs to decline.

 

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Transener is highly leveraged, which could limit its financing options or even its ability to service its debt and consequently have an adverse effect on our results of operations

As of December 31, 2012, Transener’s total consolidated indebtedness, denominated in U.S. Dollars and Pesos, amounted to the equivalent of approximately U.S. $154.7 million (Ps. 760.9 million), including accrued but unpaid interest, penalties, post-default interest rate increases and the effect of the discount to net present value applied to its restructured debt under IFRS.  Transener’s leverage may impair its ability to service its indebtedness and obtain additional financing in the future, withstand competitive pressure and adverse economic conditions or take advantage of significant business opportunities that may arise, each of which could adversely affect our results of operations or growth prospects and cause the market value of our ADSs to decline.

Transener has not completed the legal transfer and registration of title of all of the properties transferred to it and Transba pursuant to the transmission concessions, which could result in potentially significant losses if any defect in title is later discovered

Under their concessions, Transener and Transba became the owners of a large number of properties, including land and buildings associated with the substations, transformers, and other installations previously owned by the predecessor owners of Transener and Transba.  Transener is in the process of finalizing certain formalities to legally perfect the transfer of title to these properties to Transener and Transba.  Transener and Transba have completed the legal transfer of, and Transener and Transba have registered title to, approximately 87% and 67%, respectively, of these properties as of December 31, 2012.  Transener is taking steps to establish and/or record legal title to the remaining properties.  Although the concessions contain representations by the predecessor owners of Transener and Transba that they possessed good and valid title to all such properties, if Transener discovers any defects in title during such process, Transener will be liable for any payments required to cure such defects because the predecessor owners no longer exist.  We cannot make assurances that any such defect in title, or the costs associated with curing such defect, will not adversely affect our financial condition or results of operations or could cause the market value of our ADSs to decline. 

 

Risks Relating to our Distribution Business

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

Edenor is currently engaged in an Integral Tariff Review (Revisión Tarifaria Integral, or “Edenor RTI”) with the ENRE, as required by the agreement that Edenor entered into with the Argentine Government in February 2006 relating to the adjustment and renegotiation of the terms of the concession (as amended from time to time, the “Adjustment Agreement”).  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 (the “CMM”), requires the ENRE to review Edenor’s actual distribution costs every six months (in May and November of each year) and adjust Edenor’s distribution margins to reflect variations of 5% or more in Edenor’s distribution cost base.  Edenor may also request that the ENRE apply the CMM at any time that the variation in Edenor’s distribution cost base is at least 10% or more.  Any adjustments, however, are subject to the ENRE’s assessment of variations in Edenor’s costs, and we cannot guarantee that the ENRE will approve adjustments that are sufficient to cover Edenor’s actual incremental costs.  In the past, even when the ENRE has approved adjustments to Edenor’s tariffs, there has been a lag between when Edenor actually experiences increases in the distribution costs and when Edenor receives increased revenues following the corresponding adjustments to its distribution margins pursuant to the CMM.  In addition, Edenor has 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 Edenor was granted under the CMM in October 2007 and July 2008, we cannot assure you that Edenor will receive similar adjustments in the future. As of the date of this annual report, Edenor has requested ten additional increases under the CMM beginning in May 2008, which increases are still being reviewed by the ENRE (other than the request submitted in May 2008). Under the terms of the Adjustment Agreement, these ten increases should have been approved in May 2008, November 2008, May 2009, November 2009, May 2010, November 2010, May 2011,  November 2011, May 2012 and November 2012. 

 

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During the years ended December 31, 2011 and 2012, Edenor recorded a significant decrease in net income and operating income, and Edenor’s working capital and liquidity levels were negatively affected, primarily as a result of the delay in obtaining a tariff increase and in having the tariff adjusted to reflect increases in the distribution costs, coupled with a constant increase in operating costs to maintain adequate service levels, all of which has affected Edenor’s capacity to perform its commercial obligations. In this context and in light of the situation that affects the electricity sector, the ENRE issued Resolution No. 347/12 in November 2012, which establishes the application of fixed and variable charges that have allowed Edenor to obtain additional revenue as from November 2012. However, such additional revenue is insufficient to make up Edenor’s operating deficit due to the constant increase in operating costs and the estimated salary or third-party costs increases for the year 2013.

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

Edenor has prepared its annual financial statements for the fiscal year ended December 31, 2012, assuming that Edenor will continue as a going concern. However, Edenor’s independent auditors, PriceWaterhouseCoopers, issued a report dated April 30, 2013 on its financial statements as of and for the years ended December 31, 2012 and 2011, which contains an explanatory paragraph expressing substantial doubt as to its ability to continue as a going concern.  As discussed in Edenor’s financial statements, the delays in obtaining tariff increases and the cost adjustments recognition requested by Edenor in accordance with the terms of the Adjustment Agreement, together with the continuous increase in operating expenses that are necessary to maintain its level of service, have significantly affected the economic and financial position of Edenor and have raised substantial doubt with respect to its ability to continue as a going concern.  However, Edenor’s financial statements as of and for the year ended December 31, 2012 and 2011 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty.

The goal of the RTI is to achieve a comprehensive revision of Edenor’s tariff structure, including further increases in its distribution margins and periodic adjustments based on changes in Edenor’s cost base, to provide Edenor with an adequate return on Edenor’s 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 Edenor’s costs or provide Edenor with an adequate return on its asset base.  Moreover, the RTI could result in the adoption of an entirely new regulatory framework for Edenor’s business, with additional terms and restrictions on Edenor’s 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 Edenor’s operations.

 

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

In November 2006, two Argentine consumer associations, Asociación Civil por la Igualdad y la Justicia (the “ACIJ”) and  Consumidores Libres Cooperativa Limitada de Provisión de Servicios de Acción Comunitaria, brought an action against Edenor and the Argentine Government before a federal administrative court seeking to block the ratification of the Adjustment Agreement on the grounds that the approval mechanism was unconstitutional.  In March 2007, the federal administrative court dismissed these claims and ruled in Edenor’s favor on the grounds that the adoption of Executive Decree No. 1957/06, which ratified the Adjustment Agreement, rendered this action moot.  The ACIJ appealed this decision in April 2007, and the appeal was decided in Edenor’s favor.  However, in April 2008, the ACIJ filed another complaint challenging the procedures utilized by the Argentine Congress in approving the Adjustment Agreement, to which Edenor timely replied.  In addition, in 2008, the defensor del pueblo (Public Ombudsman) filed a claim opposing the resolutions establishing the tariff schedule, effective as of October 1, 2008, and naming Edenor as defendant.  On January 27, 2009, the ENRE notified Edenor of a preliminary injunction, as a result of the Ombudsman’s claim, pursuant to which Edenor was ordered to refrain from cutting the energy supply to customers challenging the October 2008 tariff increase until a decision is reached with respect to the claim.  This injunction has been appealed by Edenor and the Argentine Government, the resolution of which is still pending as of the date of this annual report.  In addition, in December 2009, another Argentine consumer association, Unión de Usuarios y Consumidores, brought an action against Edenor and the Argentine Government seeking to annul certain retroactive tariff increases.  In November 2010, the relevant court upheld the claim.  Edenor 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 Federal – Sala V) overturned the judgment of the lower administrative court.  The Unión de Usuarios y Consumidores filed an extraordinary federal appeal (“Recurso Extraordinario Federal”) against such decision, which was granted on March 11, 2011.  The proceeding has been taken to the Supreme Court of Justice.  We cannot make assurances regarding how these complaints will be resolved, nor can we make assurances that other actions or requests for injunctive relief will not be brought by these or other groups seeking to reverse the adjustments Edenor has 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 distribution customers, and a decline in our results of operations, which may have a material adverse effect on our financial condition and the market value of our shares and 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 and decreased results of operations

In recent years, the condition of the Argentine electricity market has provided little incentive to generators to further invest in increasing their generation capacity, which would require material long-term financial commitments.  As a result, Argentine electricity generators are currently operating at near full capacity and may not be able to guarantee the supply of electricity to distribution companies which, in turn, could limit the ability of these companies, including Edenor, to provide electricity to customers, and could lead to a decline in growth of such companies.  Under Argentine law, distribution companies, such as Edenor, are responsible to their customers for any disruption in the supply of electricity.  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.  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, which claims, fines and penalties could have a materially adverse effect on our financial condition and consolidated results of operations and cause the market value of our ADSs to decline.

Our distribution business has 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 our distribution business has 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 distribution business 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 these accrued fines and penalties pursuant to the Adjustment Agreement and to allow Edenor 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, 2012, December 31, 2011 and January 1, 2011, our accrued fines and penalties totaled Ps. 662.0 million, Ps. 542.2 million and Ps. 455.4 million, respectively (taking into account our adjustment to fines and penalties following the ratification of the Adjustment Agreement).  If our distribution business fails to comply with any of these conditions, the Argentine Government may seek to obtain payment of these fines and penalties.  In addition, we cannot assure you that our distribution business will not incur material fines in the future, which could have a material adverse effect on our financial condition and results of operations and the market value of our shares and ADSs.

 

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

Our distribution concession does not permit our distribution business to pass through to our customers the cost of additional energy purchased to cover any energy losses that exceed the loss factor contemplated by the concession, which is, on average, 10%.  As a result, if our distribution business experiences energy losses in excess of those contemplated by the concession, we may record lower operating profits than we anticipate.  Prior to the 2001 and 2002 economic crisis in Argentina, Edenor 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 the concession.  However, during the last couple of years, Edenor’s level of energy losses, particularly Edenor’s 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 Edenor continues making investments to reduce energy losses, these losses continue to exceed the 10% average loss factor in the concession, and based on the current economic turmoil, we do not expect these losses to decrease in the near term.  Energy losses in our distribution business amounted to 13.3% in 2012, 12.6% in 2011 and 12.5% in 2010.  We cannot assure you that energy losses will not increase again in future periods, which may lead to lower margins in our distribution segment and could adversely affect our financial condition and consolidated results of operations and the market value of our shares and ADSs.

The Argentine Government could foreclose on its pledge over Edenor’s Class A shares under certain circumstances, which could have a material adverse effect on our business and financial condition

Pursuant to our distribution concession and the provisions of the Adjustment Agreement, the Argentine Government has the right to foreclose on its pledge over Edenor’s Class A common shares and sell these shares to a third-party buyer if:

·         the fines and penalties incurred in any given year exceed 20% of Edenor’s gross energy sales, net of taxes (which corresponds to Edenor’s energy sales);

·         Edenor repeatedly and materially breaches the terms of our distribution concession and does not remedy these breaches upon the request of the ENRE;

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

·         Edenor or EASA obstructs the sale of Class A common shares at the end of any management period under our distribution concession;

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

·         Edenor’s shareholders amend its 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

·         Edenor, 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.

In 2012, the fines and penalties imposed on Edenor by the ENRE amounted to Ps. 124.7 million, which represented 3.3% of Edenor’s energy sales.

 

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If the Argentine Government were to foreclose on its pledge over Edenor’s 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 of the pledge on Edenor’s Class A common shares may be deemed to constitute a change of control under the terms of Edenor’s Senior Notes due 2017 and 2022.  See “—Edenor may not have the ability to raise the funds necessary to finance a change of control offer as required by Edenor’s Senior Notes due 2017 and 2022.”  If the Argentine Government forecloses its pledge over Edenor’s 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 distribution 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 obligation under our distribution concession or in such a way that Edenor’s service is materially affected, we can request the termination of our distribution concession, after giving the Argentine Government 90 days’ prior notice. Upon termination of our distribution 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 Edenor, net of the payment of any debt owed by Edenor 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 might incur material labor liabilities in connection with outsourcing in our distribution business that could have an adverse effect on our business and results of operations

We outsource a number of activities related to our distribution business to third-party contractors in order to maintain a flexible cost base.  As of December 31, 2012, we had approximately 2,777 third-party employees under contract in our distribution business.  Although we have very strict policies regarding compliance with labor and social security obligations by 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 the 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 would be favorable to us.  If we were to incur material labor liabilities in connection with the outsourcing of our distribution business, such liabilities could have an adverse effect on our financial condition and consolidated results of operations and the market value of our shares and ADSs.

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

A substantial number of Edenor’s assets are essential to the public service Edenor provides.  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 Edenor by Edenor’s shareholders may be substantially limited to the extent Edenor’s shareholders seek to attach those assets to obtain payment on their judgment.

If Edenor’s 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 Edenor’s ability to pay dividends or make distributions or payments to EASA, Edenor’s 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 Edenor’s Class A shares held by EASA, the Argentine Government would have the right under our distribution concession to foreclose its pledge over Edenor’s Class A shares held by the Argentine Government, which could trigger a repurchase obligation under the terms of Edenor’s restructured debt and Edenor’s Senior Notes due 2017 and 2022, and have a material adverse effect on our results of operations and financial condition.

 

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Loss of exclusivity to distribute electricity in our service area may be adversely affected by technological or other changes in the energy distribution industry, the loss of which would have a material adverse effect on our business

Although our distribution 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 would 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 in our distribution segment, which could have a material adverse effect on our financial condition and consolidated results of operations and the market value of our shares and ADSs.

Edenor’s acquisitions of EMDERSA and AESEBA and the subsequent divestitures of AESEBA and the subsidiaries of EMDERSA are subject to formal approval by the Argentine Antitrust Commission, and in some cases by the ENRE

In March 2011, Edenor acquired EMDERSA and AESEBA and several related companies, which used to be our subsidiaries.  Edenor has since then decided to divest, and is currently divesting, such companies.  These acquisitions and divestitures are subject to formal approval by the Argentine Antitrust Commission and, in some cases, by the ENRE.  Although we have submitted all required documentation to the Argentine Antitrust Commission and to the ENRE, we cannot assure you that the Argentine Antitrust Commission or the ENRE, as applicable, will authorize such acquisitions or divestitures and, therefore, the acquisitions may be revoked or the divestitures may never be perfected if the relevant approvals are not granted. If we do not have the regulatory authorization to consummate the acquisitions and divestitures, this could have an adverse effect on our financial condition and consolidated results of operations and the market value of our shares and ADSs.

A potential nationalization or expropriation of 51% of Edenor’s capital stock, represented by its 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 the capital stock of Edenor and appointed five Class B directors in the last Shareholders’ meeting. The remaining directors were appointed by the Class A shares.

If the Argentine Government were to expropriate 51% of Edenor’s capital stock, represented by Edenor’s 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 Edenor’s shareholders, including the election of a majority of Edenor’s directors, and would be able to direct Edenor’s operations.

If the Argentine Government nationalizes or expropriates 51% of Edenor’s capital stock, represented by its 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 Edenors’s ADSs and Class B common shares to decline.

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

 

 

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As of the date of this annual report, approximately U.S.$324.8 million of Edenor’s financial debt is represented by its Senior Notes due 2017 and 2022.  Under the indentures for the Senior Notes due 2017 and 2022, if a change of control occurs, Edenor must offer to buy back any and all such notes that are outstanding at a purchase price equal to 100% of the aggregate principal amount of such notes, plus any accrued and unpaid interest thereon and additional amounts, if any, through the purchase date.  Edenor may not have sufficient funds available to it to make the required repurchases of the Senior Notes due 2017 and 2022 upon a change of control.  If Edenor fails 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 Edenor’s debt instruments then outstanding.

A significant portion of Edenor’s outstanding financial indebtedness contains bankruptcy, reorganization proceedings and expropriation events of default, and Edenor may be required to repay all of its outstanding debt upon the occurrence of any such events

As of the date of this annual report, approximately U.S.$324.8 million of Edenor’s financial debt is represented by its Senior Notes due 2017 and 2022.  Under the indentures for the Senior Notes due 2017 and 2022, certain expropriation and condemnation events with respect to Edenor may constitute an event of default, which if declared could trigger an acceleration under the notes and require Edenor to immediately repay all such accelerated debt.  In addition, all of Edenor’s outstanding financial indebtedness contains certain bankruptcy-related and reorganization proceedings (concurso preventivo) related events of default.  If Edenor is not able to fulfill certain payment obligations as a result of its current financial situation, and the requirements set forth in the Argentine Bankruptcy Law No. 24,522 are met, any creditor, or even Edenor, could file for its bankruptcy, or Edenor could file for a voluntary reorganization proceeding (concurso preventivo).  In addition, all of Edenor’s outstanding financial indebtedness also contains cross-default provisions and/or cross-acceleration provisions that could cause all of Edenor’s debt to be accelerated if the debt containing expropriation, bankruptcy and/or reorganization proceedings events of default goes into default or is accelerated. In such a case, Edenor 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, Edenor could face short-term liquidity problems, which could adversely affect our results of operations and cause the market value of our ADSs to decline.

Edenor is currently required by law to undertake a mandatory capital stock reduction and may in the future be required to be dissolved and liquidated

Edenor’s losses for the fiscal year 2012 exceeded its reserves plus 50% of its capital stock at the end of that year, and Edenor is therefore required to reduce its capital stock pursuant to Article 206 of the BCL.  In addition, if Edenor’s shareholders’ equity becomes negative (that is, if Edenor’s total liabilities exceed its total assets) at any year-end, Edenor will be required to dissolve and liquidate pursuant to Article 94 of the BCL unless it receives a capital contribution which would result in Edenor’s assets exceeding its liabilities.  A mandatory capital stock reduction of Edenor could adversely affect our results of operations and financial conditions and cause the market value of our ADSs and Edenor’s 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 Edenor’s ADSs and Class B common shares, respectively, if Edenor’s shareholders’ equity becomes negative or if Edenor’s financial situation further deteriorates

The New York Stock Exchange (“NYSE”) and/or the Buenos Aires Stock Exchange may suspend and/or cancel the listing of Edenor’s ADSs and Class B common shares, respectively, if Edenor’s shareholders’ equity becomes negative, or upon the occurrence of certain events relating to Edenor’s financial situation.

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 Buenos Aires Stock Exchange will suspend the listing of Edenor’s Class B common shares if Edenor’s financial statements or the financial information that Edenor provides indicate that Edenor’s shareholders’ equity becomes negative.  Furthermore, the Buenos Aires Stock Exchange may cancel the listing of Edenor’s Class B common shares if it determines that Edenor’s shareholders’ equity and Edenor’s financial and economic situation do not justify Edenor’s access to the stock market or if the NYSE cancels the listing of Edenor’s ADSs. 

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

 

The designation of supervisors (veedores) by the CNV 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 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 the Company violated the interests of minority shareholders or any holder of securities subject to the regime of a public offering, it may appoint a supervisor (veedor), who will have veto powers.  Additionally, the CNV may suspend the board of directors for a period of 180 days, until the CNV rectifies the situation.  This measure may only be appealed before the Ministry of Economy and Finance.  If the CNV makes an inspection and considers that any right of a minority shareholder or holder of any security has been breached, it may proceed to suspend the board of directors for the 180-day period, in which case the economic and financial situation of the Company could be negatively affected.

 

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Risks Relating to our Shares and ADSs

Restrictions on the movement of capital out of Argentina may impair the ability of holders of ADSs to receive dividends and distributions on, and the proceeds of any sale of, the shares underlying the ADSs, which could affect the market value of 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 government to impose this kind 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 shares and ADSs.

ADS holders’ 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.

 

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Holders of ADSs may be unable to exercise voting rights with respect to the 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 one of our shareholders and, therefore, holders of ADSs will not have shareholder rights.  The depositary will be the holder of the shares underlying the ADSs and holders may exercise voting rights with respect to the 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 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 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 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 shares and shares represented by ADSs may not be voted as the holders of ADSs desire.  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.

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.  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 our by-laws could deter takeover attempts and have an adverse impact on the price of our shares and the ADSs

Our by-laws contain provisions that may discourage, delay or make more difficult a change in control of our Company or the removal of our directors, such as the rules that require any shareholder to present a tender offer as a result of the acquisition of a significant participation or the acquisition of a controlling interest in the event it purchases shares representing 35% or more than 50%, respectively, of our capital stock.  These provisions, as well as other provisions of our charter and by-laws, 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

We were incorporated as an Argentine limited liability corporation (sociedad anónima) on February 20, 1945 with duration of 99 years, until June 30, 2044, under the name Frigorífico La Pampa S.A.  In 2003, we suspended our former business activities, which were limited to the ownership and operation of a cold storage warehouse building.  In 2005, Messrs. Damián Mindlin, Gustavo Mariani and Ricardo Torres acquired a controlling stake in us.  Following this acquisition, we changed our name to Pampa Holding S.A.  As a result of the acquisitions we have made since 2006, we are currently the largest fully integrated electricity company in Argentina and, through our subsidiaries and co-controlled companies, we engage in the generation, transmission and distribution of electricity in Argentina.  We changed our name again to Pampa Energía S.A. in September 2008.

We operate our electricity businesses in a highly regulated environment.  Our hydroelectric generation activities and our transmission and distribution activities are subject to the terms of concessions granted by the Argentine Government.  Our oil and gas business is also operated under a highly regulated environment and our upstream operations are subject to the terms of concession agreements with provincial governments and joint venture agreements with our partners.  In addition, our electricity prices and our transmission and distributions tariffs are subject to regulation by Federal and respective provincial governments.  In addition, our electricity prices and our transmission and distribution tariffs are subject to regulation by the Argentine Government, acting through the Secretariat of Energy and the ENRE and, in relation with certain of our distribution businesses, to relevant provincial authorities.

Pampa Energía S.A. (in English, Pampa Energy Inc.) is organized as a sociedad anónima under the laws of Argentina.  Our principal executive offices are located at Ortiz de Ocampo 3302, Building #4, City of Buenos Aires, Argentina (C1425DSR).  Our telephone number is + 54 11 4809 9500.  Our website address is www.pampaenergia.com.  None of the information available on our website or elsewhere will be deemed to be included or incorporated by reference into this annual report.

OUR BUSINESS

Overview

We are the largest fully integrated electricity company in Argentina.  Our generation subsidiaries had an aggregate installed generating capacity of 2,217 MW as of December 31, 2012, representing 7.1% of the installed generating capacity in Argentina at such date, and generated a total of 8,516 net GWh of electricity during the year ended December 31, 2012, representing 6.8% of total electricity generated in Argentina during such period.  We own an indirect co-controlling interest in Transener, which operates and maintains the largest high voltage electricity transmission system in Argentina, with more than 17,800 km (including Transba) of high voltage transmission lines that, as of December 31, 2012, represented approximately 95% of the high voltage system in Argentina, according to the information made available by CAMMESA.  We believe that our subsidiary Edenor is the largest electricity distribution company in Argentina, in terms of number of customers and electricity sold (in terms of both GWh and Pesos) in 2012, based on publicly available figures released by electricity distribution companies in Argentina.

Our principal assets, as of the date of this annual report, are divided among our electricity generation, transmission and distribution businesses, as follows:

·         Generation.  Our generation assets include:

-         HINISA and HIDISA, two hydroelectric power generation systems with an aggregate installed capacity of 653 MW located in the Province of Mendoza, which we acquired in October 2006;

-         Güemes, a thermal generation plant with an installed capacity of 361 MW located in the Province of Salta, which we acquired in January 2007;

 

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-         Loma de la Lata, a thermal generation plant with an installed capacity of 553 MW (includes 178 MW from closing of the combined cycle, which started commercial operations on November 1, 2011 at 165 MW) located in the Province of Neuquén (close to one of Argentina’s largest gas fields bearing the same name as the plant), which we acquired in May 2007;

-         Piedra Buena, a thermal generation plant with an installed capacity of 620 MW located in Ingeniero White, Bahia Blanca, in the Province of Buenos Aires, which we acquired in August 2007; and

-         EGGSA, a thermal generation plant with an installed capacity of 30 MW located in Piquirenda, General San Martin, in the Province of Salta, which we acquired in March 2011.

·         Transmission.  We participate in the electricity transmission business through our co-controlling interest in Transener, which owns, operates and maintains the largest high voltage electricity transmission system in Argentina, and, through its subsidiary Transba, which owns and operates a separate high voltage transmission system located within the Province of Buenos Aires.  We acquired our co-controlling interest in Transener in September 2006.

·         Distribution.  We are engaged in the electricity distribution business through our subsidiary Edenor, which holds a concession to distribute electricity on an exclusive basis to the northwestern zone of the greater Buenos Aires metropolitan area and the northern portion of the City of Buenos Aires, comprising an area of 4,637 square kilometers and a population of approximately 2.7 million clients.  We acquired our controlling interest in Edenor in September 2007.  In addition, Edenor, through  EMDERSAH, which in turn controls EMDERSA, which in turn controls EDELAR, provides services to approximately 120,000 clients.   Please see “Item 5. Operating and Financial Review and Prospects—Overview”.

In addition to our principal electricity assets, we hold other non-electricity assets and investments, including: our investments in Petrolera Pampa; 4.3% of the capital stock of TGS; a 10.0% stake in the share capital of CIESA; and the character of “Beneficiario” and “Fidecomisario” under the MSA Trust, owner of 40% of the capital stock of CIESA; our investments in Bodega Loma de la Lata S.A.; and our investments in Pampa Real Estate S.A.  Please see “Item 5. Operating and Financial Review and Prospects—Overview”. 

The following chart sets forth our corporate structure as of the date of this annual report.

 

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Our Generation Business

The following chart depicts our electricity generation assets and our respective shares of the Argentine power generation market as of and for the years ended December 31, 2012 and 2011.  Our generation operations derive revenues from the sale of electricity in the spot market and under term contracts, including Energía Plus contracts and WEM Supply Agreements.  When one of our units supplying a term contract is not being dispatched, we purchase the energy required to supply that contract from the spot market.  A unit may not be dispatched at a particular moment due to several reasons, including programmed and unscheduled maintenance or non dispatch by CAMMESA due to declared operating costs that are higher than the marginal cost at that given moment.

 

Hydroelectric

Thermal

Total

Summary of Electricity Generation Assets

HINISA

HIDISA

CTG1

CTLL2

CPB

CTP

Installed Capacity (MW)

265

388

361

553

620

30

2.217

Market Share

0.9%

1.2%

1.2%

1.8%

2.0%

0.1%

7.1%

               

Net Generation 2012 (GWh)

689

441

1,533

2,479

3,265

110

8,516

Variation Net Generation 2012 - 2011

0.6%

0.4%

1.2%

2.0%

2.6%

0.1%

6.8%

Sales 2012 (GWh)

965

721

2,016

2,769

3,829

110

10,410

               

Net Generation 2011 (GWh)

586

406

1.846

1.185

3.434

66

7.523

Market Share

17.5%

8.7%

-16.9%

109.2%

-4.9%

65.1%

13.2%

Sales 2011(GWh)

873

706

2.325

1.199

4.152

66

9,321

               

Average Price 2012 (Ps. / MWh)

186.2

215.9

226.0

260.8

540.0

420.9

348.4

Average Gross Margin 2012 (Ps. / MWh)

59.9

49.1

49.6

120.2

1.7

231.3

53.6

Average Gross Margin 2011 (Ps. / MWh)

63.6

44.1

64.8

58.6

28.9

125.8

46.8

 

 

 

 

 

 

 

 

 

Sources: Pampa Energía S.A. and CAMMESA

Note: Gross Margin before amortization and depreciation charges. Electricity sales do not include the GWh physical equivalents as per Note 6866/09.

(1)Güemes includes results through Powerco.

(2)Loma de la Lata’s installed capacity includes 178 MW from closing of the combined cycle, which started commercial operations on November 1, 2011 at 165 MW.

 

We are involved in several projects within the framework of the Argentine Government’s Energía Plus regulations and other market-based pricing frameworks. 

Our Energía Plus projects include:

·         Güemes’ Open-Cycle: this project is the first of the Energía Plus expansion projects completed.  Construction was completed on the project in July 2008, and commercial operations began in September 2008.  The project consisted of a new natural gas-powered turbo generator.  As a result of the commencement of commercial operations, Güemes’ installed capacity increased by approximately 40%, or an additional 100 MW, reaching a total installed capacity of approximately 361 MW.  The supplier of the new equipment was GE Packaged Power.  The new open-cycle has an efficiency of approximately 1,998 kilocalories per kilowatt hour (Kcal/KWh), or 43%.

·         Loma de la Lata Project: this project consisted of the expansion of Loma de la Lata’s electricity generation capacity by 178 MW by means of converting the plant into a combined cycle system generator.  Commercial operations began in November 1, 2011.  The project consists of a new Siemens steam-turbine generator of approximately 178 MW.  As a result of the commencement of commercial operations, Loma de la Lata’s installed capacity increased by approximately 50%, reaching a total installed capacity of approximately 553 MW.  (See “Item 4. Information on the Company - Our

 

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Business – Loma de la Lata” and “Item 8. Legal Proceedings – Legal proceedings involving Loma de la Lata”).

 

Other Projects

 

·            Central Térmica Piquirenda: According to the Complementary Agreement (as defined hereinafter) executed by Pampa Generators (as defined hereinafter), the parties must build a new power generation plant with a total capacity of 45 MW (hereinafter the “Project”). The Project is divided in two stages, the first stage consists in building the new plant with a generation capacity of 30 MW, and the second stage consists on increasing the generation capacity by incorporating the remaining 15 MW. The plant will be constructed in the premises of Central Térmica Piquirenda, which is owned by EGSSA.

The first stage of the Project was concluded according to the original schedule.  The construction of the second stage of the Project has not yet started due to the failure by the Secretariat of Energy to fulfill its obligation to cancel the Sales Settlements with Maturity Dates To Be Determined (“LVFVDs,” per the initials in Spanish -a regime under which generators of electricity receive partial payment for amounts due to them for energy provided to the system, with the rest of such amounts remaining in the form of a credit) up to the required amount of 35% of the investment made for the first stage as established in the Complementary Agreement.

 

Nihuiles and Diamante 

History 

In May 2006, we entered into a stock purchase agreement with EDF International S.A. (EDFI), a wholly owned subsidiary of Electricité de France (EDF), to acquire approximately 64.9% of the voting capital stock of Nihuiles and 56.0% of the voting capital stock of Diamante.  Simultaneously, we entered into an agreement with Stein Ferroaleaciones S.A. (Stein) pursuant to which Stein agreed to pay 15% of the purchase price owed to EDFI in consideration for a 9.7% equity interest in Nihuiles and an 8.4% interest in Diamante.  In addition, in June 2006, we made an offer to Banco Galicia to purchase its 12.5% interest in Nihuiles and its 12.5% interest in Diamante.  On that same date, we also made an offer to Nucleamiento Inversor S.A. (NISA) to purchase its 22.6% interest in Nihuiles and its 31.5% interest in Diamante.  All of these offers were accepted in June 2006 and all transactions, including the purchase from EDFI and the transaction with Stein, closed in October 2006.  As a result of these transactions, we acquired 90.3% of the capital stock of Nihuiles and 91.6% of the capital stock of Diamante, for a total purchase price of U.S. $55.1 million.  In January 2008, we acquired the shares previously held by HIDISA’s Employee Participation Program, representing 2% of the stock capital of HIDISA.  Following this acquisition, all Class C shares of HIDISA were converted to Class B shares, which are freely transferable to third parties.  As a result, we currently control, directly and indirectly, 56% of the capital stock and voting rights of HIDISA.  On December 18, 2009, the shareholders of HINISA agreed to cancel its Class “E” shares corresponding to HINISA’s Employee Stock Option Plan, representing 2% of its capital stock for Ps.4.4 million.  As a result we now indirectly own 47.2% of the shares and votes of HINISA.

In October 2006, we entered into a shareholders’ agreement with Ultracore Energy S.A. (Ultracore), a company controlled by the Stein family, and Stein, which sets forth the rights and obligations of the respective parties with respect to Nihuiles and Diamante.  Among other things, such agreement provides for:

(1)     a right of first refusal in our favor;

(2)     a tag along right in favor of Ultracore, by which Ultracore is entitled to include its shares in any sale by us of our own shares;

(3)     the right of Ultracore to appoint one director and one alternate director in each of HINISA, HIDISA, Nihuiles and Diamante;

(4)     a veto right in favor of Ultracore in respect of certain governance matters; and

 

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(5)     our obligation to cause HINISA’s board of directors to consider the execution of an electric energy supply agreement with Stein.

In October 2006, we entered into an option agreement with Mr. Aldo Héctor Ostropolsky pursuant to which we granted him (for a price of U.S. $30,000) an option to purchase from us shares representing 1.62% of Nihuiles’ voting capital stock and shares representing 1.4% of Diamante’s voting capital stock, which option can be exercised by Mr. Ostropolsky during a period of eight years. 

Below are charts depicting the corporate structures of Nihuiles and Diamante as of the date of this annual report: 

Nihuiles

 

Diamante

 

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Nihuiles

Nihuiles is a holding company that owns Class A and Class B shares representing 31.63% and 20.41%, respectively, of the voting capital stock of HINISA, a hydroelectric generation company with an installed capacity of 265.2 MW located in the Province of Mendoza.  HINISA operates under a provincial concession for the hydroelectric use of water from the Atuel River, located in the department of San Rafael in the Province of Mendoza (approximately 1,100 km southwest of Buenos Aires) and under a national concession for the generation and commercialization of hydroelectric power.  In addition, HINISA owns 4.5% of the capital stock of Termoeléctrica José de San Martín S.A. and 4.5% of the capital stock of Termoeléctrica Manuel Belgrano S.A.

The Province of Mendoza currently owns Class D shares representing 10.21% of the capital stock of HINISA and Class C shares representing 37.75% of the capital stock of HINISA, and publicly announced in 2006 its intention to sell its Class C shares.  Pursuant to HINISA’s public concession contracts, if the Province of Mendoza sells its Class C shares in HINISA, Nihuiles would be required to sell its Class B shares of HINISA (representing 20% of HINISA’s capital stock) through a public offering promptly after the Province’s sale of its Class C shares.  Assuming that the Province of Mendoza sells its 37% interest in HINISA, and consequently Nihuiles is required to sell its Class B shares (representing 20% of the capital stock of HINISA), Nihuiles would no longer own a controlling interest in HINISA and would not be permitted to purchase any additional shares (of any class) of HINISA.  Neither Nihuiles nor we have any control over the timing of the Province of Mendoza’s proposed sale or the price at which Nihuiles would be required to sell its Class B shares of HINISA.  As a result, such shares may be sold at a time and price per share that is adverse to our interests.  As of the date of this annual report, the Province of Mendoza has expressed no intention to modify HINISA’s by-laws.  See “Item 3.  Key Information—Risk Factors—Risks Relating to our Generation Business—We may no longer own a controlling interest in HINISA if the Province of Mendoza sells its participation in HINISA.”  We are currently monitoring circumstances with the Province of Mendoza and analyzing our situation in order to preserve all available options to us in the event of a possible sale of the capital stock of HINISA by the Province.

In addition, pursuant to Decree No. 334/06 promulgated by the Province of Mendoza, HINISA’s by-laws may be amended to ensure that the Province retains certain governance rights in HINISA after disposing of its Class C shares.  The proposed amendments, which would be subject to the approval of our board of directors, would include the Province of Mendoza’s right to vote in respect of any of following actions: (1) any action that may directly affect the interest of minority shareholders, such as profit distribution policy, exploitation, management and external advisory costs, etc.; (2) changes to the terms and conditions relating to Nihuiles’ electricity generation as a result of the development of the Grande River and Atuel River projects; (3) certain changes to the operational conditions of Nihuiles; and (4) any agreements within the term market of the WEM. 

Pursuant to the Decree No. 1651/07 of the Province of Mendoza, the Province has initiated a public bidding process in order to select a financial advisor to advise the Province in the public offering of its Class C shares and, if such offering is successful, to advise the Province in the sale of its Class D shares.  As of the date of this annual report, we are not aware of the selection of any such financial advisor.  In addition, Decree No. 1838/08 of the Province of Mendoza states that, notwithstanding the provisions of Decree No. 1651/07, the time period granted to HINISA to obtain the authorization for a public offering of the Class C shares, remains suspended.  As a result, HINISA is not currently seeking any authorization to complete a public offering.

Diamante

Diamante is a holding company that owns 59% of the voting capital stock of HIDISA, a hydroelectric generation company with an installed capacity of 388 MW located in the Province of Mendoza.  HIDISA operates under a provincial concession for the hydroelectric use of water from the Diamante River, located in the department of San Rafael in the Province of Mendoza, and under a national concession for the generation and commercialization of hydroelectric power.  HIDISA owns 2.4% of the capital stock of Termoeléctrica José de San Martín S.A. and 2.4% of the capital stock of Termoeléctrica Manuel Belgrano S.A.

 

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Summary of HINISA and HIDISA concessions

HINISA’s and HIDISA’s main corporate purpose is the generation, sale and bulk trading of electric power through the exploitation of hydroelectric systems pursuant to the terms and conditions of the following concessions:

·         Provincial concessions granted by the government of the Province of Mendoza with similar terms and conditions (for HINISA and HIDISA) and at each company’s own risk for the hydroelectric exploitation of the Atuel River, in the case of HINISA, and the Diamante River, in the case of HIDISA.  These concessions were granted pursuant to Provincial Law No. 6,088 dated December 21, 1993 and related provisions.

·         National concessions granted by the Argentine Government with similar terms and conditions (for HINISA and HIDISA) and at each company’s own risk for hydroelectric power generation through HINISA’s and HIDISA’s respective hydroelectric systems.  These concessions were granted pursuant to Laws No. 15,336, No. 23,696 and No. 24,065 and related provisions.

Term.  The term of the HINISA and HIDISA concession agreements is 30 years, starting from June 1, 1994 in the case of HINISA and October 19, 1994 in the case of HIDISA.

The concessions provided for the creation of the following authorities:

·         The Secretariat of Energy, which is the governing authority under the concession granted by the Argentine Government.  Pursuant to Decree No. 570/96, certain responsibilities and authority of the Secretariat of Energy were transferred to the ENRE;

·         The Ministry of Infrastructure, Housing and Transportation of the Province of Mendoza, which is the governing authority under the concession granted by the provincial authorities;

·         The Province of Mendoza Irrigation General Department, which is the governing authority with respect to irrigation matters (in cooperation with Obras Sanitarias de Mendoza S.A.);

·         ORSEP, which is the governing authority with respect to dam safety matters; and

·         The Secretariat of the Environment of the Province of Mendoza, which is the governing authority with respect to environmental matters.

Royalty payments.  Each of HINISA and HIDISA is required under the respective concessions to make the following monthly royalty payments:

·         Royalties in favor of (1) the Province of Mendoza, up to 12% in the case of HIDISA and up to 6% in the case of HINISA, and (2) the Province of La Pampa, up to 6% in the case of HINISA, in each case, of the amount resulting from the application of the corresponding bulk sale rate to the electricity sold, pursuant to the provisions of Section 43 of Law No. 15,336, as amended by Law No. 23,164.  Pursuant to applicable regulations, in order to establish the basis for the calculation of such royalties, the monomic price (the price of electricity that includes both the price of energy and the capacity charge) of the electricity produced resulting from the following formula should be used: the sum of the value of power generated at the hour value fixed by the wholesale market plus the amount receivable for the power rendered to the spot market if such power were sold within a certain month, divided by the total power generated during the given month;

·         Royalties in favor of the Argentine Government of (1) up to 2.5% of the amount used as the basis for the royalties calculation in the case of HIDISA, and (2) up to 1.5%, estimated on the same basis in the case of HINISA; and

 

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·         Royalties in favor of the Province of Mendoza of up to 2.5% of the amount used as the basis for the royalties calculation for both HINISA and HIDISA.

Contingency fund.  HINISA and HIDISA, along with the other Argentine hydroelectric generation companies, are obligated to make quarterly payments to a foundation that owns and manages a contingency fund created to cover up to 80% of the aggregate amount of potential costs relating to any repair of the hydroelectric systems at any of the hydroelectric generation companies’ plants, including those of HINISA and HIDISA, that are not covered by their respective insurance policies.

As a result of the economic crisis in Argentina in 2001 and 2002, the foundation’s administrative council decided that the contribution to the contingency fund in U.S. Dollars required under the concessions, the bidding terms and conditions and the relevant provisions of HINISA’s and HIDISA’s by-laws should be converted into Pesos at an exchange rate of Ps. 1.00 = U.S. $1.00.  The indexation clauses contained in such concessions were also replaced with the “CER” (a benchmark stabilization coefficient).  Upon the conversion from U.S. Dollars to Pesos, the Peso value of the contingency fund exceeded the required funding.  As a result, HINISA and HIDISA, along with the other hydroelectric generation companies, have suspended payments to the contingency fund.  However, we can make no assurance that HINISA and HIDISA will not be required to resume making payments to the contingency fund in the future.

From the effective date of the concessions until the suspension of payments, HINISA and HIDISA made contributions totaling U.S. $1.3 million and U.S. $1.9 million, respectively.  

HINISA and HIDISA are subject to potential penalties and fines under their respective concessions that are calculated on the basis of the aggregate gross amount invoiced for the 12-month period preceding the imposition of any such penalty.  Such penalties and fines range from 0.1% to 1% (in cases of breach of the terms of the agreement or regulations applicable to electric power generation, dam safety, water management, environmental protection, and non-compliance of instructions from ORSEP, CAMMESA, any of the governing authorities or the ENRE); from 0.02% to 0.2% (in cases of delays or lack of payment of contributions to the contingency fund and insurance policies and for taking action without prior authorization of the respective governing authorities), from 0.01% to 0.1% (in cases of failure to submit any requested information or failure to file mandatory reports); from 0.03% to 0.3% (in cases of failure to keep routes and roads open to traffic and free from soil, air or water pollution, and delays in the fulfillment of mandatory works) and from 1% to 10% (in cases of any actions considered by the governing authorities as termination events under the concessions).  In the event that the fines levied over a 12-month period exceed 20% of the gross amount invoiced for power sales, the granting authority would be entitled to terminate the relevant concession agreement.

Performance guaranties.  As security for the performance of their obligations under the respective concessions, HINISA and HIDISA have each deposited Ps. 2.0 million for the benefit of the relevant granting authority under the respective concession.  Absent any set off by the relevant granting authority in the event of a breach or any other event of non-compliance under the terms of the respective concession agreements, the guarantee amounts would be released to HINISA and HIDISA, respectively, upon the expiration or termination of the respective concession agreements.

Termination of concessions.  HIDISA and HINISA’s concession agreements may be terminated for the following reasons:

·         Breach of material contractual and legal obligations.  In such case, HINISA or HIDISA, as applicable, shall remain in charge of their concessions during a transitional period established by the granting authority, not exceeding 12 months, and shall indemnify the Argentine Government and the Province of Mendoza for any damages caused (the granting authorities may also apply the performance guarantee amounts toward the payment of any damages).  Within 90 days following the receipt of the relevant termination notice, a new company must be incorporated, which would be granted a similar concession and a public bidding process would be called for the purpose of selling the shares of such newly formed company.  After deducting all fines, interests and withholdings for prospective claims, the balance would be distributed to HINISA or HIDISA, as applicable, as the only compensation for the transfer of the concessions;

 

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·         Certain bankruptcy events in respect of HINISA or HIDISA (as applicable), including any liquidation or winding-up proceedings.  In such case, the termination of the relevant concession shall be automatic;

·         Force majeure or certain actions by third parties that prevent the compliance by HINISA and HIDISA of their respective obligations under their respective concession agreements;

·         Termination by the granting authority due to a breach of its contractual and/or legal obligations; or

·         Expiration of the respective terms of the concession agreements.

In addition, Section 14(d) of Law No. 6088 of the Province of Mendoza provides for the termination of the concessions for reasons of public interest or expropriation for public use.

After the termination of the concession agreements for any cause, any assets transferred to HINISA and HIDISA under the respective concession agreements shall be reassigned to the Province of Mendoza and the Argentine Government, as applicable.

HINISA’s operations

HINISA holds a concession for the generation, sale and bulk trading of electricity from Nihuiles’ hydroelectric system (the “Nihuiles System”).  The Nihuiles System consists of three dams and three hydroelectric power generation plants (Nihuil I, Nihuil II and Nihuil III), as well as a compensator dam, which is used to manage the system’s water flow for irrigation purposes.  The Nihuiles System is located in the Atuel River in the department of San Rafael in the Province of Mendoza.  The City of San Rafael is located approximately 1,100 km southwest of Buenos Aires and 75 km from Nihuil I.  The Nihuiles System covers a total distance of approximately 40 km with a height ranging from 440 m to 480 m.  The Nihuiles System has a total nominal installed capacity of 265.2 MW.  Since 1990, the average annual generation has totaled 884 GWh, with the highest level of generation (1,250 GWh) recorded in 2006 and the lowest level (586 GWh) recorded in 2011.

HINISA’s revenues consist of sales of energy and capacity.  In 2012, 53% of HINISA’s sales were into the term market.  Total revenues for the year ended December 31, 2012 were Ps. 180 million, corresponding due to a generation of 689 GWh, 17.5% higher than in 2011, with a hydraulic contribution of 732 Hm3, 2.2%  higher than in 2011.

The following chart shows certain relevant statistical data on HINISA(1): 

 

2008

2009

2010

2011

2012

Net Generation (GWh)

886

854

778

586

689

Energy Purchases (GWh)

370

308

302

287

276

Total Energy Sales (GWh)

1,256

1,162

1,080

873

965

           

Average Price (Ps. / MWh)

121.3

133.5

158.7

190.7

186.2

Average Gross Profit (Ps./ MWh)

54.10

60.30

66.00

63.60

59.90

Note: Gross Margin before amortization and depreciation charges.

 

(1)                 In 2012 and 2011, the average gross profit was calculated according to the financial statements prepared according to IFRS. In 2010, 2009 and 2008, the average gross profit was calculated according to the financial statements prepared according to Argentine GAAP.

HIDISA’s operations

HIDISA holds a concession for the generation, sale and bulk trading of electricity from Diamante’s hydroelectric system (the Diamante System).  The Diamante System consists of three dams and three hydroelectric power generation plants (Agua del Toro, Los Reyunos and El Tigre).  The Diamante System covers a total distance of approximately 55 km with a height differential between 873 m and 1,338 m.  The Diamante System has a total nominal installed capacity and effective power of 388.4 MW.  Since 1990, the average annual generation has totaled 595 GWh, with the highest level of generation (943 GWh) recorded in 2006 and the lowest level (375 GWh) recorded in 1997. 

 

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HIDISA’s revenues consist of sales of energy and capacity.  In 2012, 45% of HIDISA’s sales were into the term market.  Total revenues for the year ended December 31, 2012 were Ps. 156 million, for a net generation of 441 GWh, 8.7% higher than in 2011, with a hydraulic contribution of 728 Hm3, 5.5%  higher than in 2011.

  

The following chart shows certain relevant statistical data on HIDISA:

 

2008

2009

2010

2011

2012

Net Generation (GWh)

617

600

538

406

441

Energy Purchases (GWh)

351

327

313

300

280

Total Energy Sales (GWh)

968

927

851

706

721

           

Average Price (Ps. / MWh)

142.4

160.6

183.2

217.9

215.9

Average Gross Profit (Ps. / MWh)

56.7

65.4

64.0

44.1

49.1

Note: Gross Margin before amortization and depreciation charges.

 

Güemes 

History

Our subsidiary Güemes, located in the northwestern region of Argentina, in the City of General Güemes, Province of Salta, is a major generator within the WEM.  Güemes was privatized in 1992 and awarded to the consortium composed of Iberdrola, Duke, TCW and certain other investors.  The purchase price paid by this consortium was U.S. $86.2 million for 60% of the capital stock of Güemes, in addition to the assumption of U.S. $60 million in indebtedness.

In November 2006 and December 2006, we entered into purchase agreements to acquire indirect control of Güemes for a total purchase price of U.S. $16.6 million.  In January 2007, we consummated the acquisition through the purchase of (1) 100% of the voting capital stock of Dilurey S.A. (Dilurey), a corporation organized under the laws of Uruguay, which held at that time 90% of the capital stock of Powerco, a corporation organized in the Province of Salta, which in turn owned 60% of the voting capital stock of Güemes, and (2) an additional 8% of the capital stock of Powerco.  On June 9, 2010 Dilurey changed its name to Pampa Inversiones S.A. (Pampa Inversiones).  In November 2006, we also entered into a one-year option agreement with Mr. Carlos Armando Peralta, the former chief executive officer of Güemes, pursuant to which Mr. Peralta and we had an option to sell or purchase, respectively, shares of Powerco representing 2% of Powerco’s capital stock held by Mr. Peralta.  In August 2007, pursuant to this option agreement, we acquired the remaining 2% of the capital stock of Powerco from Mr. Peralta for U.S. $460,000.  In September 2007, Loma de la Lata, one our wholly owned subsidiaries, subscribed 180,869,600 non-voting preferred shares issued by Güemes, which were subsequently converted into ordinary shares (representing 74.19% of Güemes’ total voting capital stock).  In addition, on October 3, 2008, we acquired all of the shares of the Güemes employee stock ownership program (representing 2.58% of Güemes’ total voting capital stock), and as a result we currently hold directly and indirectly 92.26% of Güemes’ total voting capital stock.   

Aside from our ownership interest in Güemes, the Argentine Government owns 7.74% of Güemes’ voting capital stock.  Below there is a chart depicting the corporate structure of Güemes as of the date of this annual report: 

 

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Operations

The following chart shows certain relevant statistical data on Güemes

 

2008

2009

2010

2011

2012

Net Generation (GWh)

1,724

1,699

1,533

1,846

1,533

Energy Purchases (GWh)

252

521

640

480

483

Total Energy Sales (GWh)

1,976

2,220

2,173

2,326

2,016

           

Average Price (Ps. / MWh)

167.5

197.5

233

224.1

226

Average Gross Profit (Ps. / MWh)

62.8

77.9

76.4

64.8

49.6

Note: Gross Margin before amortization and depreciation charges. It includes results through Powerco.

 

Güemes has a total installed capacity of 361 MW, comprised of 261 MW steam generation units and a 100 MW gas combustion turbine.  Güemes had net production of 1,533 GWh in 2012.  Güemes provides system quality assurance (frequency and voltage) to the northwestern and northern regions of Argentina and due to its geographical location it is able to receive gas from Bolivia.  Güemes steam turbines are open cycle generation units with a gross capacity of 261 MW  and an average availability level of net production of 1.7 million MWh per year.  Güemes steam turbine combustion equipment is comprised of two Skoda steam turbines with a gross capacity of 63 MW each and a third Skoda steam turbine with a gross capacity of 135 MW.  Güemes gas turbine equipment is comprised of a GE MW LMS100 aero-derivative gas-fired turbine generator with a gross capacity of 100 MW.  Güemes mostly sells electricity to the local term market and to the Energía Plus market (see “Güemes - Expansion Project” below). Total revenues for the year ended December 31, 2012 were Ps. 455 million, for a net generation of 1,533 GWh, 16.9% lower than in 2011.

 

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Güemes entered into an electricity export agreement with Comercializadora de Energía del Mercosur S.A. (“CEMSA”) for the sale of 150 MW of generation to support CEMSA’s sales to the Administración Nacional de Usinas y Transmisiones Eléctricas de la República del Uruguay (UTE).  This agreement, executed in February 2003 with an original term of two years, was later extended until October 31, 2009.  In November 2009, Güemes renegotiated the agreement including new pricing terms. The Agreement expired on December 31, 2011. 

 

On January 10, 2012, Güemes sent UTE an offer for the execution of an electricity export agreement for up to 150 MW to be in force from February 1, 2012 to July 31, 2013. UTE accepted such offer on March 23, 2012 (hereinafter the “Export Agreement”). The Export Agreement is conditioned to the granting of the authorizations required under Argentine and Uruguayan law.  According to the Export Agreement, UTE must program its requirement weekly and call for such export on a daily basis which will be subject to the confirmation of Güemes and to the confirmation from CAMMESA of the surpluses that may be exported.

 

Additionally, on April 11, 2012, Güemes requested to the Secretariat of Energy the granting of the corresponding authorization under Law N°24,065 in order to obtain an exportation permission. As of the date of this annual report, the Secretariat of Energy has not granted such authorization.

 

Güemes’ current installed generation (361 MW) has an estimated maximum gas consumption level of 2,250 Dam3/day, which is a measure of the volume of gas consumed in a day.  One cubic decameter (“Dam3”) per day is equal to 1,000 cubic meters per day.  In September 2010, an agreement was entered into with ENARSA for the provision of gas imported from Bolivia.  During 2011 and 2012, Güemes kept the agreement with ENARSA for an Agreed Daily Maximum Quantity of 460 Dam3 per day.  With respect to gas transportation contracts, Güemes is currently a party to a 350 Dam3 per day firm transportation contract with Transportadora de Gas del Norte S.A. (“TGN”) that is scheduled to expire in 2027, a 500 Dam3 per day distribution contract with Gasnor that is scheduled to expire in May 2014, a 250 Dam3 per day firm transportation contract (also with Gasnor) which expires in 2013 and finally a 440 Dam3 per day non – firm gas transportation contract with Gasnor which expires in April 2013 with an automatic renewal.  Güemes is currently analyzing alternatives with Gas Plus and renegotiating a contract renewal with ENARSA.

In 2012, Güemes’ generation depended on electricity demand in the Provinces of Salta and Jujuy, on new generation capacity available in that region and on transmission restrictions.  A new 132 KV transmission line linking Cobos with Salta Norte became operational in 2011 and permitted the dispatch of one of the 63 MW steam turbines as base load.  Additionally, Güemes is able to dispatch its full installed capacity without restrictions through the new North West Region to North East Region (NOA-NEA) 500Kv. high voltage transmission line that became operational on August 2011.

Güemes expansion project

Consistent with our strategy of enhancing the value and profitability of our generation assets by expanding the generating capacity of certain of our power generation plants within the framework of the Energía Plus regulations, in 2008 we completed the first of these projects, which expanded Güemes’ generation capacity through the installation of a new, state-of-the-art gas-fired turbine. 

Construction was completed on the project in July 2008, and commercial operations commenced in September 2008.  Güemes’ installed capacity increased by approximately 40%, or an additional 100 MW, reaching a total installed capacity of approximately 361 MW.  The new open-cycle has an efficiency of approximately 1,998 kilocalories per kilowatt hour (Kcal/KWh), or 43%.  Our investment in this expansion project totaled approximately U.S. $65 million (See “Our Business – Our Generation Business”).

 

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Royalty assignment agreement

In June 2007, Güemes and the Province of Salta entered into a royalty assignment agreement pursuant to which the Province has agreed to assign to Güemes approximately 400,000 m3 per day of natural gas which the Province is entitled to collect as in-kind royalties in respect of natural gas produced within the provincial territory.  In consideration for such assignment, Güemes will pay a 5% premium over the applicable average wellhead gas price.  The term of the agreement is five years, starting from the date of the first delivery of natural gas, and is subject to an automatic renewal clause.  The daily amount under the agreement can be increased to 500,000 m3 per day if the production of gas in the Province of Salta increases from its current levels.  As of the date of this annual report, Güemes had not requested any deliveries under this agreement because it was able to supply the new 100 MW of generation with gas contracted with ENARSA. 

Loma de la Lata 

History

In December 2006, Central Puerto S.A. (Central Puerto) agreed to sell and assign to us all of the property (both tangible and intangible), land, assets, equipment and personnel (including contracts relating to management personnel) that comprised Central Puerto’s thermal generation plant located at Loma de la Lata in the Province of Neuquén, for a total purchase price of U.S. $60 million.  The purchase of the Loma de la Lata generation asset from Central Puerto was consummated in May 2007. 

Operations

Loma de la Lata owns the thermal generation plant located at Loma de la Lata in the Province of Neuquén, which has an installed capacity of approximately 553 MW.  The Loma de la Lata plant has three gas turbines with a capacity of 125 MW each and a one steam turbine with a capacity of 178 MW  and is located near one of the largest gas fields in Argentina bearing the same name.  Loma de la Lata had a net production of 2,479 GWh in 2012. Total revenues for the year ended December 31, 2012 were Ps. 722 million, 109.2% higher than in 2011.

During the period 1997-2012, the average annual generation has totaled 1,283 GWh, with the highest level of generation (2,479 GWh) recorded in 2012 and the lowest level (272 GWh) recorded in 2002. 

The following chart shows certain relevant statistical data on Loma de la Lata:

 

2008

2009

2010

2011

2012

Net Generation (GWh)

1,745

926

448

1,185

2,479

Energy Purchases (GWh)

72

26

29

14

290

Total Energy Sales (GWh)

1,817

952

477

1,199

2,769

           

Average Price (Ps. / MWh)

106.4

136.1

192.7

202.9

260.8

Average Gross Profit (Ps. / MWh)

27.5

24.2

24

58.6

120.2

Note: Gross Margin before amortization and depreciation charges.

       

 

Loma de la Lata expansion project

On November 1, 2011, the Company initiated the commercial operations of the Loma de la Lata Project, which involved the expansion of generation capacity in Loma de la Lata in approximately 165 MW (originally 178 MW) by converting the plant into a generating combined cycle unit. The project increased the capacity of Loma de la Lata in approximately 50% without the need for additional gas consumption, resulting in greater efficiency. For the expansion mentioned above, the Company has entered into two Project Agreements.

Project Agreements

 

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In 2007 Loma de la Lata entered into certain agreements in order to procure and build an expansion of its Loma de la Lata Power Plant through the conversion to a combined cycle by adding three heat recovery steam generators and one steam turbine of 178 MW (the “Project” or the “Expansion”). For such purpose, on September 6, 2007 Loma de la Lata entered into (i) a construction turnkey contract (as amended, the “Construction Agreement”) with a joint venture formed by Isolux Corsan Argentina SA and Tecna Estudios y Proyectos de Ingeniería S.A. (collectively, the “Builder” or “Contractor”), and (ii) a contract to supply materials, equipment and spare parts from abroad in connection with the project (as periodically amended, the “Supply Agreement” and together with the Construction Agreement, the “Project Agreements”) with a Joint Venture formed under Law N°18/1.982 of Spain between Isolux Ingeniería SA and Tecna Proyectos y Operaciones S.A. (the “Supplier” and together with the Builder, the “Project Counterparties”).

Under the Construction Agreement, it was expected that commercial operation of the Project would begin in June 2010, the time that was set for the delivery of the formal provisional acceptance of the Loma de la Lata plant under the Project Agreements. Due to different problems, mostly due to the Contractor such as delays in compliance and labor disputes, December 5, 2010 was agreed as the new date for the beginning of commercial operations.

Despite the new settled date, new delays by the Project Counterparties occurred and, in addition to this on February 8, 2011, an operational error, along with an error in design, took place causing extensive damage on the steam turbine, and caused further delays in startup (the “February 8 Event”).  Consequently, it became necessary to undertake a comprehensive repair of the steam turbine and other parts, which included the performance of tests and an integral review of the turbine.  One part of the damage was caused in the turbine rotor, which was repaired but will have to be replaced in no more than three years from the beginning of the commercial operation, if operated at nominal load, based on the recommendation of the manufacturer.

In this context, on March 30, 2011 the Project Counterparties made an offer to Loma de la Lata (the “Offer”) which provided (i) the necessary mechanisms to be adopted in order to repair the damages, and (ii) the steps to be followed in order to initiate the commercial operation of the Project.

In connection with the February 8 Event, Loma de la Lata filed the corresponding claims before the insurance companies in order to be compensated for the loss of profits and for the additional financial and administrative costs incurred in connection with the delay of commercial operation of the Expansion. The insurance companies recognized compensation in favor of Loma de la Lata in an amount of U.S.$ 30.5 million.

Under the terms and conditions of the Offer, the Project Counterparties granted Loma de la Lata, upon the delivery of the formal provisional acceptance of the Expansion pursuant to the terms of the Construction Agreement, an exceptional discount in an amount equal to the amount of the last payment to be made under Project Agreements. The total discount (including the adjustment) was valued at U.S.$ 18 million.  The offer was accepted by Loma de la Lata. The recognition in earnings of this discount is effective upon the provisional reception of the Expansion work by CTLL; therefore, its recognition in earnings has been postponed until the occurrence of such event.

In August 2011, while repairs of the turbine were still taking place, the Project Counterparties informed Loma de la Lata that Siemens, the turbine manufacturer, had detected some defects on the steam turbine’s that generated vibrations in the last stage blades in other turbines of the same type installed in other power plants. This generated the need for additional modifications to the turbine which would imply a restriction on the power to be produced until the redesign and reengineering of the extracted blades was performed, which was estimated to take at least two years. In that context the last stage blades were replaced by a baffle plate, which further delayed the Project’s commercial operation date.

Finally, the commercial operation of the Expansion began on November 1, 2011, with a provisory baffle plate and blade dummies, with a power of 165 MW, 10.73 MW less than the original power guaranteed by the Project Counterparties under the Project Agreements (175.73 MW). The provisional blade wheel should be replaced when the Project Counterparties and the turbine supplier find a solution to the problem. Additionally, it is estimated that the process of replacing the blades will take about a month.

The Project had a total cost of approximately U.S.$ 230.3 million plus VAT, excluding financial capital costs.

 

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In addition, the Project Agreements provide the application of certain compensations for delays or failures attributable to the Contractor for not delivering the Project in due time or for not reaching the values (power and boilers’ counter-pressure) guaranteed by the Project Counterparties.

Given the delays in the hand over of the Project, the lower power of the steam turbine installed, and certain defaults of the Project Counterparties to the obligations assumed under the Project Agreements, Loma de la Lata, in exercise of its contractual rights, required the Project Counterparties the payment of the penalties for the delays established in the Construction Agreement and of damages for the other breaches. Both requirements were rejected, and Loma de la Lata executed the banking guarantees issued under the Project Agreements.

 

In this context, on December 1, 2011, the International Chamber of Commerce Secretary, notified Loma de la Lata that an arbitration request was filed by the Contractor, pursuant to which the Contractor claimed, among other things, the refund of the sums received for the foreclosure of the guarantees.

On December 30, 2011, Loma de la Lata rejected the claim filed by the Contractor before the Court of the International Chamber of Commerce and filed a counter claim with respect to the Project Counterparties for the integral recovery of the damages caused as a consequence of both parties defaults under the Project Agreements. See “Item 8. Financial Information - Legal Proceedings involving Loma de la Lata”.

On November 14, 2012 another major incident occurred in the Plant. A failure of the steam turbine protection systems, due to a defective design, caused severe damage to the steam turbine and associated equipment. Loma de la Lata notified the insurance companies in order to be compensated for the damage suffered. See - “Insurance Claim” below. As of the date of this annual report, the production of the steam turbine is in the process of being set up.

Insurance Claim

In connection with the event on November 14, 2012, Loma de la Lata is making the necessary filings before the insurance companies and following the usual processes in order to be compensated for the damages suffered due to the new failure. After reporting the incident, Loma de la Lata has answered certain inquiries from the insurance companies and received visits from their representatives. Despite the fact that this process is long because of the complexity of the Project, the type of the incident and the magnitude of the damage, the insurance companies have accepted the claim and have made advance payments to Loma de la Lata.  As of the date of this annual report, Loma de la Lata has collected from the insurance companies an initial cash advance of Ps. 30.5.

Agreements in connection with the Loma de la Lata Expansion Project

On October 4, 2009 Loma de la Lata entered into a WEM Supply Agreement under SE Resolution No. 220/07 with CAMMESA to sell CAMMESA a part of the net power capacity resulting from the expansion project and the corresponding generated electricity.  This agreement covers a minimum of 50% of the net capacity generated by the expansion project, with the final percentage to be determined at the time commercial operation begin and will depend on the amount of credits, from Loma de la Lata’s or third parties, arising from Resolution 406/2003 from the Secretariat of Energy of Argentina, that are allocated to the Expansion Project.  The agreement sets a capacity payment of U.S.$ 33,383 per MW-month and an energy payment of U.S.$4 per MWh. The term of the agreement is 10 years from the date in which commercial operation begin.  Loma de la Lata intends to sell the remaining electricity generated by the additional power generation capacity resulting from the Loma de la Lata expansion project under the Energía Plus program. For this reason, Loma de la Lata presents two Energía Plus contracts to CAMMESA with a report of Loma de la Lata’s generation costs, according to the applicable procedures. To become effective, these contracts are sent to the Ministerio de Planificación Federal, Inversión Pública y Servicios (Federal Planning, Public Investment and Service Ministry), where they must be approved. As of the date of this annual report, the Federal Planning, Public Investment and Service Ministry has not approved the contracts.

On December 15,  2010, Loma de la Lata executed an amendment to the above mentioned contract by means of which Loma de la Lata may sell the total capacity and energy generated by the new generation unit to CAMMESA for a period of three years.

 

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Natural gas supply

To be able to sell the electricity generated by the Loma de la Lata expansion project within the Energía  Plus  market and under the agreement with CAMMESA rather than in the spot market (as described above), Loma de la Lata will need to have firm gas supply contracts in place at the time it begins commercial operations.

Loma de la Lata is located close to the largest gas field in Argentina, which bears the same name.  This gas field is 100% owned by YPF, the largest oil and gas company in Argentina.  The Loma de la Lata gas field delivers approximately 33,000 Dam3 per day.  Loma de la Lata’s maximum gas consumption is estimated at approximately 2,800 Dam3 per day.  Loma de la Lata has also acquired from Central Puerto the gas pipeline that connects the plant to YPF’s gas field and is able to enter into gas supply agreements with gas producers other than YPF and then swap them with YPF in exchange for gas at the site. 

Because the Loma de la Lata’s expansion project will help reduce the consumption of fuel oil and/or gas oil by the Argentine electric system, Loma de la Lata has been granted by the Secretariat of Energy the right to pass through to customers, in its variable cost of production, the cost of gas that Loma de la Lata purchases through the Gas Plus scheme.  The Gas Plus is a program launched by Secretariat of Energy in order to stimulate natural gas production in tight sands and other new fields.  As stated in Resolution 24/08, producers of natural gas will receive a higher price for natural gas volumes sold under this program, but the profit for each development project has to be approved by the Secretariat of Energy.  The authorized prices of gas under the Gas Plus program as of the date of this annual report (U.S. $4.10 per MM BTU to U.S. $6.50 per MM BTU) are higher than the regulated gas prices for thermal generation.  As a result of this agreement, the Company, and Loma de la Lata in particular, will become an important consumer of gas obtained under the Gas Plus program in Argentina. Moreover by means of the Notes No. 3456/12 and 4377/12, the Secretariat of Energy introduced several modifications to the terms and conditions for the provision of natural gas recognized under the Gas Plus Program for energy generation . See “Item 4. Information on the Company -Natural Gas Supply under the Gas Plus Program”.  

As of the date of this annual report, Loma de la Lata is a party to the following gas agreements:

·         Firm natural gas wellhead supply agreements with Apache Energía Argentina S.R.L. for up to 800 Dam3 per day and 700 Dam3 per day, both expiring in 2013. With respect to the second agreement, Loma de la Lata has a non-firm supply agreement for 300 Dam3 per day, and a right of first refusal in order to make firm this 300 Dam3 per day.

·         Firm gas supply agreement with Pan American Energy LLC Argentine branch for up to 900 Dam3 per day expiring in December 2013.

·         Transportation agreements with TGS and TGN, which allows Loma de la Lata to receive natural gas from natural gas producers other than YPF and to store gas if for any reason the plant is not able to burn the gas assigned.  Instead of returning the gas to the gas producer, the gas is “stored” in the pipeline.

Piedra Buena 

History

In July 2007, we entered into a stock purchase agreement with Albanesi S.A. and certain subsidiaries of MatlinPatterson for the acquisition of 100% of the capital stock of IBP, which in turn holds 100% of the capital stock of Piedra Buena, which owns a thermal generation plant located in Ingeniero White, Bahía Blanca, in the Province of Buenos Aires, approximately 600 kilometers from the City of Buenos Aires.  The total purchase price for the acquisition, which closed in August 2007, was U.S. $85 million and also included the acquisition of 100% of the capital stock of IPC Operations Limited, a company organized in the United Kingdom whose Argentine subsidiary provides certain management services to Piedra Buena.

 

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Operations

Piedra Buena is an open-cycle thermal generation plant with an installed capacity of 620 MW, consisting of two identical conventional units (Unit 29 and Unit 30) with a capacity of 310 MW each.  Piedra Buena can be powered either by natural gas or by No. 6 fuel oil (though it was originally designed and partially equipped to burn coal as well).  The plant currently stores up to 60,000 m3 of fuel oil in two separate storage tanks and owns, operates and maintains a 22-kilometer natural gas pipeline that is connected to the main pipeline of TGS.  Furthermore, given Piedra Buena’s 39-hectare area, the plant’s fuel storage capacity could be expanded.  Piedra Buena supplies the electricity it generates through its 27-kilometer 500 kV transmission lines, which are connected to the 500 kV transmission system.  In addition, Piedra Buena has its own facilities at the Bahía Blanca port, and although Piedra Buena shares these facilities with other companies, it has a priority access right to use the port’s loading facilities.  Piedra Buena sells electricity to the spot market and the local term market. 

Piedra Buena’s revenues consist of sales of energy and capacity. Total revenues for the year ended December 31, 2012 were Ps. 2,068 million, for a net generation of 3,265 GWh, 4.9% lower than in 2011. During the 1997-2012 period, the average annual generation has totaled 2,106 GWh, with the highest level of generation (3,434 GWh) recorded in 2011 and the lowest level (189 GWh) recorded in 2002. 

The following chart shows certain relevant statistical data on Piedra Buena:

 

2008

2009

2010

2011

2012

Net Generation (GWh)

3,312

2,390

2,646

3,434

3,265

Energy Purchases (GWh)

415

808

755

718

565

Total Energy Sales (GWh)

3,727

3,198

3,401

4,152

3,830

           

Average Price (Ps. / MWh)

261.3

255.2

398.5

424

540

Average Gross Profit (Ps. / MWh)

20.4

13.8

28.3

28.9

1.7

Note: Gross Margin before amortization and depreciation charges.

 

The price of the electricity generated with fuel oil is regulated by the Secretariat of Energy.  In addition, in 2008, the Secretariat of Energy changed the amount paid to generators in exchange for energy generated through fuel oil and financed by the generators.  The price paid by generators for the purchase of fuel oil was capped at U.S. $60.50/barrel plus an additional 10% of the total purchase cost for financial and administrative charges.  In recognition of this price increase, the Secretariat of Energy instructed CAMMESA to recognize, as of April 24, 2008, the maximum capped price plus the 10% administrative cost, plus the cost of shipping the fuel oil, for the purchase of fuel oil of national origin by electricity generators.  In October 2008, in reaction to significant variations in the price of crude oil and its derivatives in the international fuel market, the Secretariat of Energy again revised the calculation for the price of fuel oil.  Specifically, the Secretariat of Energy instructed CAMMESA to recognize, as of November 1, 2008, a price based on a weekly average of 10 listed prices, less a differential of U.S. $2.50/barrel, plus the 10% for administrative and financial expenses, plus the shipping cost.  In the event that listed prices in the international market increase, the maximum benchmark price to be recognized will be U.S. $60.50/barrel, plus the 10% for administrative costs, plus the cost of shipping. 

In April 2011 the Secretariat of Energy instructed CAMMESA to recognize to generators a price of U.S.$62/bbl for fuel oil produced with crude oil owned by refineries. In case that fuel oil was produced with crude oil purchased by refineries, the price for that fuel oil should be the minimum between the price based on a weekly average of 10 listed prices, less a differential of U.S. $2.50/barrel, and the monthly weighted average price of Escalante crude oil for the domestic market month plus U.S.$16,50/bbl.  The maximum benchmark price to be recognized will be U.S. $60.50/barrel, plus 10% of U.S.$/bbl for administrative costs, plus the cost of shipping. 

In April 2012, the Secretariat of Energy instructed CAMMESA to centralize purchases of fuel oil of national origin to main suppliers in order to optimize fuel oil supply to thermal generators. The established term for this instruction covered the period from April 2012 through May 2013. The Secretariat of Energy entitled CAMMESA to pay to such main suppliers (ESSO, SHELL and YPF) for these purchases of fuel oil of national origin a higher capped price (based on the Escalante crude oil domestic price) than the in force price authorized to be recognized to WEM thermal generators. In response to this instruction, CAMMESA was notified of a reservation of the right to acquire fuel oil directly from suppliers by Piedra Buena, subject to applicable technical and commercial conditions.

 

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As of the date of this annual report, Piedra Buena is party to an interruptible gas supply contract with Powerco (4,000 Dam3 per day) and non-firm agreements with certain producers which are dependent on the availability of gas of those producers (Pan American Sur, Total Austral) at the time Piedra Buena requires it.  Piedra Buena is also a party to an interruptible gas transportation contract with Camuzzi Gas Pampeana for a daily-variable capacity, and to interruptible gas transportation contracts with TGS for up to 3,600 Dam3 per day.  Piedra Buena also is a party in firm natural gas transportation capacity agreements for 214 Dam3 per day with Powerco, and for another 214 Dam3 per day with TGS. 

Central Térmica Piquirenda

Central Térmica Piquirenda (“CTP”) is located in the northwestern region of Argentina, in a location known as Piquirenda, District of Aguaray, Department of General San Martín, Province of Salta. The construction started at the beginning of 2008 and finished by 2010. It has a 30 MW thermal electricity generation plant comprised by ten GE Jenbacher JGS 620 gas-powered motor-generators, which represent 0.1% of the installed capacity in Argentina.

CTP started commercial operation on May 3, 2011. On July 15, 2011, CTP signed the Supply contract with the WEM under SE Resolution  220/07. The agreed prices are U.S.$18,000/MW per month and the amount recognized as maintenance and operation costs is U.S.$10/MWh, adding a variable price for cost of fuel. On July 14, 2011, under Note SE No. 4,997, the SE authorized CTP to fire Gas Plus as generation fuel.

CTP’s revenues are mainly composed of energy and capacity sales. Total revenues for the year ended December 31, 2012 were Ps. 45 million, corresponding to a net generation of 110GWh, 65.1% higher than 2011.

The following chart shows certain relevant statistical data on CTP:

 

2011

2012

Net Generation (GWh)

66

110

Energy Purchases (GWh)

-

-

Total Energy Sales (GWh)

66

110

     

Average Price (Ps. / MWh)

388

420.9

Average Gross Profit (Ps. / MWh)

125.8

231.3

Note: Gross Margin before amortization and depreciation charges.

   

 

Our Transmission Business 

Citelec

History

In September 2006, we entered into a stock purchase agreement with Dolphin Opportunity LLC to acquire 68,400,462 shares of Transelec Argentina S.A. (“Transelec”), representing 89.76% of Transelec’s capital stock, at a purchase price of U.S. $48.5 million.  Transelec owns 50% of Citelec’s capital stock, which in turn owns 52.65% of the capital stock of Transener, the largest high voltage electricity transmission company in Argentina.  Transener’s Class B common shares are listed on the Buenos Aires Stock Exchange, and the remaining 47.3% of Transener is held by minority public shareholders and the ANSES.  The remaining 50% of Citelec’s capital stock was more recently acquired equally by Electroingeniería S.A. (“Electroingeniería”), which in turn transferred its participation to Grupo Eling S.A. and the Argentine state-owned company, Energía Argentina S.A. (“Enarsa”).  The remaining 10.24% of Transelec’s capital stock was acquired in January 2008 from Marcelo Mindlin, Damián Mindlin and Gustavo Mariani  upon the exercise of the put option held by them at a price of Ps. 38.8 million (U.S. $12.3 million).

 

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Transener was privatized in July 1993, when Citelec was awarded the Argentine Government’s controlling stake in Transener.  In August 1997, the Province of Buenos Aires privatized Transba, a company organized in March 1996 to own and operate the regional electricity transmission system of the Province of Buenos Aires.  Transener acquired 90% of Transba’s capital stock on August 5, 1997.

Transener’s operations

Transener is a leading utility company engaged in the supply of high voltage electricity transmission in Argentina.  Transener operates and maintains the leading electricity transmission system in Argentina at the 500 kv level under a concession agreement under which Transener holds an exclusive 95-year concession to provide high voltage electricity transmission services throughout the Transener network spanning 11,656 km Transener also indirectly owns and operates one of the six regional transmission networks in Argentina, the Transba network.  The Transba concession grants Transba an exclusive 95-year concession to provide electricity transmission services (from the 66 kV to the 220 kV levels) in the Province of Buenos Aires via trunk lines, which are the main transmission lines that connect to all other lower voltage transmission systems owned and maintained by distribution companies in a certain region, throughout the Transba network spanning approximately 6,158 km.

Transener also generates additional revenues from, among other things, the construction, operation and maintenance of the Fourth Line, and services provided to third parties, some of which are provided outside of Argentina. 

The Company, Electroingeniería and Enarsa have entered into an operating agreement under which each of the Company, Electroingeniería and Enarsa provides to Transener certain services, expertise, know-how and technical assistance in connection with Transener’s operations.  In addition, the Company, Electroingeniería and Enarsa provide advice and coordination services in the areas of human resources, general administration, information systems, quality control and consulting.  The operating fee payable by Transener under such agreement is equal to 2.75% of its annual revenues and the insurances cost of the operators directly related with the provision of services under operating agreements.  Fees for operating services are included as a component of operating expenses in Transener’s consolidated statements and in 2012 represented approximately Ps. 9.6 million.

The following chart depicts the organizational structure through which Transener operates:

Our transmission operations generate both regulated and non-regulated revenues.  Regulated revenues are derived from tariffs for the transmission of electricity over Transener’s high voltage system.  On a consolidated basis, Transener’s net regulated revenues for the year ended December 31, 2012, were Ps. 357,9 million (Ps. 178,9 million on proportional consolidated basis), representing 67,7% of Transener’s consolidated net revenues for such period.

 

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In addition, we derive non-regulated revenues from Transener’s Fourth Line operations and other businesses.  Transener and a group of certain electricity generators from the Grupo de Generadores del Comahue (Comahue Generators Group) entered into an agreement for the construction, operation and maintenance of the Fourth Line project.  Pursuant to this agreement, the Comahue Generators Group pays the construction price and operating and maintenance fees to Transener in U.S. Dollars in monthly, equal and consecutive installments during the 15-year period beginning in December 1999, and that ends in December 2014.  Following the adoption of the Public Emergency Law, which requires payments to be denominated in Pesos (subject to CER adjustment on a monthly basis), Transener applied to the ENRE for the re-denomination of the payments under this agreement.  In December 2008 by means of Resolution 653/08, the ENRE approved the redetermination of the payments to Ps. 75.9 million (plus taxes), effective October 2008.  Because the ENRE did not set an adjustment procedure for these payments, Transener submitted an administrative claim.  We cannot predict when the ENRE will respond to our request.  Notwithstanding the above, on March 30, 2011 the ENRE (through Resolution 150/11) approved a new value for the income to be collected in connection with the Fourth Line of Ps. 95.9 million (plus taxes), in effect from July 2010, and instructed CAMMESA to make the corresponding adjustments.  On April 7, 2011 Transener formally requested clarifications as the new resolution failed to include retroactive interests.  On September 7, 2011, Transener asked the ENRE for a new determination of the Fourth Line’s revenue related to the cost variation from July 2010 to July 2011 according to Resolutions 653/08 and 150/11 mentioned above. 

On April 25, 2012, the ENRE issued Resolution N° 90/2012, which established a new annual fee of Ps. 113.4 million as from August 2011 and instructed CAMMESA to make the adjustments, including interest. During the year ended December 31, 2012, revenues were recognized in the amount of Ps. 7.3 million corresponding to the retroactive adjustment for the year 2011.

 

On September 12, 2012, Transener asked the ENRE for a new determination of the Fourth Line’s revenue related to the cost variation from August 2012 according to the above mentioned Resolution 90/12. The response to this request is pending.

On a consolidated basis, Transener’s net Fourth Line revenues for the year ended December 31, 2012, were Ps. 14.3 million (Ps. 7.2 million on a proportional consolidated basis), representing 2.7% of Transener’s consolidated net revenues for such period.

Other non-regulated revenues for Transener are generated through services provided to third parties with assets not covered by its concession, such as:

·         the participation in NIS expansion projects (other than Fourth Line Revenue) under construction, operation and maintenance contracts approved by the ENRE;

·         supervision of independent transmission companies that perform construction, operation and maintenance operations relating to NIS expansion;

·         priority maintenance and construction work required under Resolution No. 1/03 of the Secretariat of Energy and its modifications and amendments;

·         the operation and maintenance of NIS expansion projects of the Plan Federal de Transporte;

·         the operation and maintenance of certain assets of the Transener network;

·         operation and maintenance services provided to third parties who are not independent transmission companies;

·         non-network line operation and maintenance;

·         international operations; and

·         other services (which include, among others, technical assistance, engineering services, equipment installation and training).

 

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In recent years, Transener’s international operations mainly consisted of the operation and maintenance of high voltage transmissions lines in Brazil, through the provision of contracted services to certain companies that were awarded transmission concessions in Brazil.  Most of these contracts were concluded in 2007.  In 2009, Transener entered into new contracts to deliver services in Brazil.  In 2010, Transener wrote-down its investment in Transener Internacional Ltda., due to the adverse situation that the subsidiary was going through. On March 25, 2012, Transener’s board of directors approved the termination of three remaining operation and maintenance agreements. For this reason, the results related to the operation of such subsidiary are presented as discontinued operations.

On a consolidated basis, Transener’s other net revenues for the year ended December 31, 2012, were Ps. 156.7 million (Ps. 78.3 million on proportional consolidated basis), representing 29.6% of Transener’s consolidated net revenues for such period.

Tariffs

The tariffs that Transener and Transba receive under their concession agreements are reviewed periodically by the ENRE in accordance with such concession agreements and with Argentine Law No. 24,065 (the Electricity Law) and are subject to deductions for penalties for non-availability of the network that are calculated pursuant to a formula set forth in the concession agreements and applicable regulations.  Originally, pursuant to the concession agreements, Transener’s and Transba’s tariffs were calculated in U.S. Dollars and converted into Pesos based on the exchange rate applicable at the time of invoicing.  The concession agreements provided for a semiannual adjustment based on a formula related to the U.S. CPI (Consumer Price Index) and U.S. PPI (Producer Price Index).  The concession agreements also provided for electricity transmission revenue to be revised every five years by the ENRE.  However, the Public Emergency Law converted Transener’s and Transba’s revenues into Pesos at a rate of Ps. 1.00 per U.S. $1.00 and adjustments to the U.S. CPI/PPI provided for under the terms of the concession agreements were disallowed.  Transener completed its first tariff review process in 1998, but as a consequence of the Public Emergency Law, Transener’s second tariff review process (and Transba’s first tariff review process) was replaced by the renegotiation process contemplated by the Public Emergency Law.  In connection with this renegotiation process, Transener and Transba entered into new agreements with the Argentine Government.  These agreements, among other things, provide for rules for a transition period with retroactive effect from June 1, 2005 until the effectiveness of the Revisión Tarifaria Integral (Integral Tariff Review, or the Transener RTI), pursuant to which rules Transener’s tariffs were increased by an average of 31% and Transba’s tariffs were increased by an average of 25%.  These agreements also provide rules for the full tariff review to be conducted by the ENRE. 

Transition period rules

The following is a brief summary of the principal rules for the transition period:

Tariffs.  Transener received an average tariff increase of 31% and Transba received an average tariff increase of 25%, commencing on June 1, 2005. See “Electricity prices and tariff – Tariff”.

Penalty system.  Penalties related to quality of service under the concessions, which otherwise would be payable by Transener, may be applied by Transener to investments in addition to the investments included in the Transener RTI, provided that Transener has met certain applicable service quality standards.  No penalties will be applied to Transener in connection with certain outages that are not attributable to Transener.

Financial projections.  Transener’s current agreement with the Argentine Government is based on economic and financial projections for 2005 that were submitted by Transener, including operating costs, investments, amortizations, taxes, fees and cash balance estimations.  The tariff may be adjusted by the ENRE during the transition period depending on cost-variations over costs reflected in the 2005 financial projections.  Transener must also comply with the investments included in these financial projections in order to use its cash balance to pay dividends and debt.  Transener must report on a quarterly basis to the ENRE with respect to its financial performance. 

 

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Cost increases and the Instrumental Agreements

Transener and Transba requested ENRE to readjust their respective tariffs taking into account the impact of the salary increases resulting from the application of Decrees No. 392/03, 1347/03, 2005/04 and 1295/05 and the increases in operating costs that Transener and Transba have incurred since December 2004.  For this purpose, Transener and Transba requested the recognition of the impact of these increases on salaries and operating costs in their remuneration.  On July 31, 2008, the ENRE adopted Resolutions No. 328/08 and No. 327/08, which grant Transener and Transba an adjustment in their tariffs to partially compensate them for these cost increases.  The adjusted tariffs are effective retroactively as from July 1, 2008.  Because the real tariff increases granted by the ENRE (23.4% and 28.0% for Transener and Transba, respectively) does not match the real cost increase incurred as of 2004, Transener and Transba have submitted administrative claims seeking to be compensated for this difference. 

Due to the increase in labor costs resulting from the application of National Executive Branch Decree No. 392/04 and subsequent regulation, and the major operating costs incurred since 2004, Transener and Transba have certified the costs variations that had effectively occurred on each quarter, filing the respective claims before the ENRE, in order to readjust their regulated remuneration according to the clauses established in definitive agreements (the “Definitive Agreements”) for such purpose.  In that sense, Transener and Transba, unsuccessfully required the ENRE to recognize the cost increases in the tariff that occurred after the Definitive Agreement had been entered into, which led to the initiation of judicial claims by the companies.  The UNIREN ACT has stated that the mechanism for the monitoring of costs and the regime of service quality had been set to last up to the enforcement of Transener and Transba’s RTI, respectively, that the delay in the definition of such process was not attributable to Transener and Transba and it could not lead to undermine their rights.

Finally, on December 21, 2010, an instrumental agreement (the “Instrumental Agreement”) related to the Definitive Agreement was entered into with the Secretariat of Energy and the ENRE, setting forth the following:

(i)                   the recognition of Transener and Transba´s rights to collect the amounts resulting from the variations of costs during the period from June 2005 to November 2010,

(ii)                 the mandatory cancellation of the financing received from CAMMESA, through the assignment of credits resulting from the recognition of the above mentioned variations of costs,

(iii)                a mechanism of cancellation of the pending balances,

(iv)                an additional financing amount to be directed to investments in the transmission system for the amount of Ps. 34.0 million for Transener and Ps. 18.4 million for Transba, to be cancelled through the mechanism described in (ii), and

(v)                 a procedure for the updating and payment of cost variations incurred from December 1, 2010 to December 31, 2011, calculated biannually.

 

The results arising from the recognition of the variations of costs on behalf of the Secretariat of Energy and the ENRE, have been registered in the financial statements, up to the amounts received as of December 31, 2012, through the financing of CAMMESA. Consequently, net revenues amounting to Ps. 52.8 million and Ps. 27.6 million, and interest income amounting to Ps. 57.1 million and Ps. 31.7 million, have been registered by Transener and Transba during the fiscal years ended December 31, 2012 and 2011, respectively.

In February 2011, CAMMESA made an estimation of the amounts owed to Transener and Transba due to variations of costs during the period from June 2005 to November 2010. As of January 17, 2011 such amounts were as follows:

 

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Differences for Connection and Capacity

 

Transba

Transener

Total

 

(in millions of Pesos)

Principal

75.9

189.3

265.2

Interest

43.2

104.8

148

Total

119.1

294.1

413.2

 

 

Pursuant to the Instrumental Agreement and subject to its fulfillment, Transener and Transba withdrew their judicial claims for delay against the ENRE requesting the recognition of the increased costs and the public hearing in order to complete the full RTI.

On May 12, 2009 Transener and Transba entered into Financing Agreements with CAMMESA for an amount of Ps. 59.7 million and Ps. 30.7 million, respectively. On January 5, 2010, extensions of the above-mentioned agreements were subscribed for an amount up to Ps. 107.7 million and Ps. 42.7 million, for Transener and Transba, respectively (Addendas I).

 

On May 2, 2011 new extensions of the Financing Agreements (Addendas II) were entered into with CAMMESA, which provide the following: i) the amounts received as of January 17, 2011 by Transener and Transba by virtue of the loans granted by the Financing Agreements with CAMMESA would be cancelled, ii) a new loan for Transener and Transba for the amount of Ps. 289.7 million and Ps. 134.1 million respectively, corresponding to the credits recognized by the Secretariat of Energy and the ENRE resulting from the variations of costs incurred during the period June 2005 – November 2010 would be granted, and iii) all amounts owed to Transener and Transba for major costs as of November 2010 under the Instrumental Agreements would serve as a guarantee for the Addendas II.

 

However, such commitments mentioned in ii) above, have not been fully complied with since as of December 31, 2011 the amounts received from CAMMESA reached 21% of the amounts for variations of costs from June 2005 to November 2010. Additionally, no amount due to Transener and Transba for cost variation from December 1, 2010 up to December 31, 2011 has been received.

Hence, and considering that such agreements expired on December 31, 2011, on March 6 and March 27, 2012, Transener and Transba, respectively, submitted judicial claims in the federal courts in order to obtain the full compliance with the Instrumental Agreements.

 

On July 16, 2012, Transener received a copy of SE Note No. 4309, by which the Secretariat of Energy instructed CAMMESA to enter into a third Addendum to the Financing Agreement with Transener and Transba, increasing the amount by the sums of Ps. 231,754,810 and Ps. 98,234,993, respectively (which were informed by CAMMESA to the Secretariat of Energy through Note B-70754-1).

 

In such Note, the Secretariat of Energy provided that, prior to the fulfillment of the third Addendum, Transener and Transba should submit before CAMMESA the evidence of the withdrawal of the above mentioned claims. This provision remains under analysis as of the date of this annual report.

The outcome of the Transener RTI, however, is highly uncertain as to both its timing and final result.  We cannot assure you that the renegotiation process will conclude in a timely manner or that the revised tariff structure will cover our costs and compensate us for inflation and currency devaluations in the future and provide us with an adequate return on our transmission assets.

Full Tariff Review (Transener RTI)

According to the terms of the Transener’s agreement with the Argentine Government, the Transener RTI will be based on the Electricity Law and tariffs will be determined based on costs, necessary investments, non-automatic tariff adjustment mechanisms, the impact of unregulated activities, and the rate of return and capital base.  The ENRE will schedule a public hearing to analyze Transener’s and Transba’s tariff proposal before applying the new charges for the next tariff period.

 

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If the variation of Transener’s remuneration resulting from the Transener RTI is higher than the tariff increase during the transition period, then the tariff increase would be implemented in three semiannual stages.

In August 2005 Transener and Transba presented their respective tariff proposals for the new tariff regime to be implemented in February 2006 and May 2006, respectively.  However, on January 13, 2006, the ENRE issued Resolution No. 60, postponing the public hearing that was originally scheduled for February 23, 2006.  Subsequently, the ENRE issued Resolution No. 423/06 extending the application of the tariff scheme and the other transition period rules from February 1, 2006 (in the case of Transener) and from May 2006 (in the case Transba) until, in each case, the conclusion of the Transener RTI process.  On June 6, 2007, in accordance with the terms of the Transener’s agreement with the Argentine Government and Law No. 24.065, the ENRE requested that Transener and Transba submit their respective tariff proposals.  In September 2007, Transener and Transba again presented their respective tariff and regulation proposals to the ENRE for the five-year period from 2008 to 2013. 

On July 30, 2008, the Secretariat of Energy adopted Resolutions No. 869/08 and No. 870/2008, which established that the new tariffs to be adopted pursuant to the Transener RTI will become effective in February 2009.  Pursuant to such resolutions, Transener and Transba submitted their tariff proposals on December 4 and 3, 2008, respectively.  However, as of the date of this annual report, the ENRE has not yet called the public hearing mandated by the Energy Secretariat in its Resolutions No. 869/08 and 870/08 whereby new tariff schedules had to be approved in February 2009.  In October 2009, the two companies filed actions with the courts for the protection of their constitutional rights on grounds of the delay by ENRE to call the Public Hearing and institute the RTI process, and to ask the court to order the ENRE to inform the reasons for the delay and to set a new deadline for establishing the new tariff schedule.  On April 27, 2010, a ruling was issued by a federal court requiring the ENRE to respond to the requests of the two companies, using the information filed on December 3, 2008, within the term of 20 days. The ENRE appealed the ruling. On December 21, 2010, while the appeal was still pending, we entered into the Instrumental Agreements with the ENRE. As a result of the execution of the Instrumental Agreements, we dropped our claim against the ENRE.

Considering that the Instrumental Agreements expired on December 31, 2011, Transener and Transba believe that they would be in a legal position to re-submit their claims against the ENRE in order to obtain a new tariff pursuant to the RTI.  See “Item 3. Key Information -Risk Factors – Risks related to our Transmission business - If we are not able to renegotiate our transmission tariffs on more favorable terms with the Argentine Government in a timely fashion, it could have a material adverse impact on our financial condition and results of operations”.

The Transener Concession Agreement

Transener entered into a concession agreement with the Secretariat of Energy on July 16, 1993.  Transener’s concession grants Transener the exclusive right (subject to certain limitations described below) to provide service of high voltage electricity transmission throughout the Transener network until July 17, 2088.  The Argentine Government may grant Transener an extension of the concession for up to ten years at no additional cost, provided that Transener requests such extension at least 18 months prior to the expiration of the concession.  If such extension is granted, the Argentine Government is entitled to terminate the exclusivity of the concession.

Under the terms of the Transener concession agreement, Transener is required to, among other things, transmit high voltage electricity in compliance with certain quality standards, provide access to existing transmission capacity in the Transener network to WEM agents, comply with social security and environmental regulations and operate and maintain the transmission system in compliance with required quality standards.  In addition, the Transener Concession Agreement requires Transener to monitor the expansions of the Transener Network, inform CAMMESA of any new connections to the Transener Network, provide CAMMESA with information required for the administration of the WEM and process any request for expansion to the Transener Network.

The 95-year term of the Transener concession is divided into nine management periods.  The first management period, which began in 1993, has a 15-year term, and each subsequent management period lasts ten years.  At least six months prior to the commencement of each ten-year management period, the ENRE is required to call for bids for the purchase of the controlling stake in Transener (represented by Transener’s Class A shares).  The then current owner(s) of the controlling stake in Transener may submit (under seal) their valuation of the controlling stake in Transener and, if their valuation is greater than or equal to the amount of the highest bid submitted by other parties, the owners of such controlling stake will retain ownership of such interest in Transener without making any payment to the Argentine Government.  Consequently, if the owner(s) of the controlling stake in Transener wish to retain control at the end of any management period, they may bid an amount that would ensure their continued control without incurring any additional cost as a result of such bid.  In the event another bid exceeds that of the then current owners of the controlling stake in Transener, the party submitting such bid would receive the controlling stake in consideration for the submitted bid amount, which would be paid to the then current owners of the controlling stake in Transener.  Transener’s rights and obligations under its concession agreements will not be affected by any change in the ownership of the controlling stake.  As of the date of this annual report, the Transener Concession Agreement is in its second Transener Management Period, which is scheduled to end on July 2018, although Transener has requested that the ENRE extend the first Transener Management Period for five years after the completion of the Full Tariff Review in accordance with the Transener Definitive Agreement.

 

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The transmission service provided by Transener is granted on an exclusive basis because it is considered a natural monopoly.  If technological innovations could make the provision of such service under competitive conditions actually practicable, the Argentine Government reserves the right to terminate the exclusivity of Transener’s concession.  Such right by the Argentine Government may only be exercised at the beginning of each management period provided that notice of such exercise is communicated to the then current owners of the controlling stake in Transener no later than six months prior to the commencement of the following management period.

The Argentine Government may terminate the Transener concession only if Transener enters into bankruptcy, and Transener may terminate the concession agreement if the government breaches the terms of the concession.  In addition, Transener’s concession includes a pledge in favor of the Argentine Government of all of the Transener Class A Shares held by Citelec, which constitute a controlling stake in Transener.  Upon the occurrence of certain events of default specified in the concession agreement (including, among others, if (1) penalties in any 12-month period exceed 5% of our total regulated revenue during such 12-month period; (2) a transmission line or connection equipment is out of service for more than 30 days; (3) the Transener network has on average, more than 2.5 forced outages per 100km over a 12-month period); or (4) a transformer is out of service for more than 60 days), the Argentine Government may enforce the pledge on the Class A Shares and sell the controlling stake in Transener in a public bidding process in which the holders of such controlling stake will not be allowed to participate.  However, the enforcement of the pledge does not cause the termination of Transener’s concession.  The concession could only be revoked if Transener is declared bankrupt (in which case, the Argentine Government would have the right under the concession to foreclose its pledge over the Class A shares).

The Transba Concession Agreement

The Transba concession agreement, which is similar to Transener’s concession agreement, was entered into by Transba and the Secretariat of Energy on July 31, 1997.  Transba’s concession grants to Transba an exclusive right to provide service of electricity transmission throughout the Transba network until August 1, 2092.  The Argentine Government may grant Transba an extension of the concession for up to 10 years with no additional cost, provided that Transba requests such extension at least 18 months prior to the expiration of the concession.  If such extension is granted, the Argentine Government is entitled to terminate the exclusivity of the concession.

Under the concession, Transba is required to, among other things, transmit electricity via trunk lines in compliance with certain quality standards, provide access to existing transmission capacity in the Transba network to WEM agents and maintain the Transba network to ensure continued provision of the services.  In addition, Transba’s concession requires the monitoring of connections to the Transba network, the provision of information to CAMMESA about any new connections to the Transba network, the provision of information to CAMMESA required for the administration of the WEM and process any request for expansion in the transmission capacity of the Transba network.

Transba’s concession is also similar in other material respects to Transener’s concession and provides for, among other things, nine management periods of ten years each (or, in the case of the first such management period, 15 years) commencing on the date of Transba’s concession agreement, a bidding procedure with respect to controlling stake in Transba and termination provisions similar to those included in Transener’s concession agreement.  In addition, Transba’s concession agreement also provides for a pledge in favor of the Argentine Government of all of Transba Class A Shares that are held by Transener, which constitute the Transener’s controlling stake in Transba.  Upon the occurrence of certain events of default, specified in Transba’s concession agreement (including, among others, if (1) penalties in any 12-month period exceed 15% of Transba’s total revenues, (2) a transmission line is out of service for more or connection equipment is out of service for more than 30 days, or (3) the Transba network has on average more than seven forced outages per 100 km over a 12-month period) or (4) a transformer is out of service for more than 45 days), the Argentine Government may enforce the pledge on the Class A shares of Transba held by Transener and sell such shares in a public bidding process, pursuant to which Transener would lose its controlling stake in Transba.

 

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Property, plant and equipment

As of December 31, 2012, Transener operated and maintained the following assets throughout 20 provinces in Argentina:

Transmission Lines

 

500 kV

11,088 km

220 kV

568 km

Connection Equipment

 

500 kV linkage

37

220 kV linkage

4

132 kV linkage

95

Transformation Equipment

 

Capacity

13,450 MVA

Reactive Equipment

 

Capacity

14,938 MVAr

 

 

                As of December 31, 2012, Transba operated and maintained the following assets in the province of Buenos Aires:

Transmission Lines

 

220 kV

177 km

132 kV

5,584 km

66 kV

398 km

Connection Equipment

 

500 kV linkage

2

220 kV linkage

1

132 kV linkage

59

66 kV

6

33 kV

190

13,2 kV

327

Transformation Equipment

 

Capacity

5,397 MVA

Reactive Equipment

 

Capacity

125,5 MVAr

 

 

 

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Our Distribution Business 

Electricidad Argentina (EASA)

EASA is the holding company of Edenor, our main distribution subsidiary.  In June 2007, we agreed to acquire from EASA’s former indirect shareholders their interests in Dolphin Energía S.A. (DESA) and IEASA S.A. (IEASA), which collectively held 100% of EASA’s capital stock, in exchange for new shares of our capital stock.  The total number of shares of our capital stock to be received by the indirect EASA shareholders was subsequently adjusted pursuant to the terms of a stock subscription agreement entered into in July 2007.  Following the receipt of a fairness opinion and the favorable review by our audit committee, the terms of such transaction were approved by our shareholders at a meeting held on August 30, 2007.  The transaction closed on September 28, 2007, on which date we issued 480,194,242 shares of our capital stock to the former indirect shareholders of EASA.  On March 28, 2011, DESA and IEASA merged, the surviving company being IEASA.

Prior to its acquisition in September 2005 by, among others, DESA and IEASA, EASA’s capital stock was held by EDFI, and was engaged in certain other business activities (including holding the capital stock of other EDF affiliates).  Since October 2005, EASA’s activities have been limited to the holding of its 51% controlling stake in Edenor and to providing certain financial consulting services to Edenor.  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 new U.S. Dollar‑denominated notes in exchange for the cancellation of approximately 99.94% of its outstanding financial debt.  Since EASA’s activities are limited to the holding of its controlling stake in Edenor, EASA’s ability to meet its debt service obligations under these new notes depends largely on the payment by Edenor of dividends or other distributions or payments to EASA.

In April 2007, Edenor completed the initial public offering of its Class B common shares, in the form of shares and ADSs.  Edenor’s ADSs are listed on The New York Stock Exchange under the symbol “EDN”, and its Class B shares are listed on the Buenos Aires Stock Exchange under the same symbol.  Following the initial public offering, EASA continues to hold 51% of Edenor’s common stock (in the form of Class A shares), and substantially all of the remaining 48.46% of Edenor’s common stock is held by the public.

In accordance with the terms of Edenor’s concession, EASA has pledged its 51% stake in Edenor to the Argentine Government to secure the obligations set forth in the concession.  See “Empresa Distribuidora y Comercializadora Norte (Edenor)—Edenor’s Concession—Pledge of Class A Shares.”

Empresa Distribuidora y Comercializadora Norte (Edenor) 

Edenor was the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2012.  Edenor holds a concession to distribute electricity on an exclusive basis to the northwestern zone of the greater Buenos Aires metropolitan area and the northern portion of the City of Buenos Aires, comprising an area of 4,637 square kilometers and a population of approximately seven million people.  As of December 31, 2012, Edenor served 2,726,422 customers. 

Edenor’s concession

Edenor is a public service company incorporated on July 21, 1992 as part of the privatization of the Argentine state‑owned electricity utility, SEGBA.  At the time of privatization, SEGBA was divided into three electricity distribution companies, including Edenor, and four electricity generation companies, and, as part of the privatization process, in August 1992 the Argentine Government granted Edenor a concession to distribute electricity on an exclusive basis within a specified area, which we refer to as Edenor’s service area, for a period of 95 years.

In September 2005, Edenor entered into the Adjustment Agreement.  The ratification of the Adjustment Agreement by the Argentine Government was completed in January 2007.  Pursuant to the Adjustment Agreement, the Argentine Government granted Edenor an increase of 28% in its distribution margin, subject to a cap in the increase of Edenor’s average tariff of 15%, to be allocated solely to Edenor’s non-residential customers (including large users that purchase electricity in the wheeling system).  The increase is effective retroactively from November 1, 2005 and will remain in effect until the approval of a new tariff scheme under the Edenor RTI.  See “—Tariffs.”

 

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Term.  Edenor’s concession currently expires on August 31, 2087 and can be extended for one additional 10-year period at Edenor’s request.  The concession period was initially divided into an initial management period of 15 years expiring August 31, 2007, followed by eight ten-year periods.  However, in July 2007, the initial management period was extended, at Edenor’s request, for an additional five-year period from the entry into force of the new tariff structure to be adopted under the Edenor RTI.  The remaining ten-year periods will run from the expiration of the extension of the initial management period.  In addition, before the end of each management period under the concession, the ENRE will arrange for an international public bidding procedure to be conducted for the sale of 51 % of Edenor’s capital stock and voting rights in similar conditions to those under which EASA acquired its stake.  If EASA is the highest bidder or if EASA’s bid equals the highest bid, it will retain 51% of Edenor’s stock, but no funds need to be paid to the Argentine Government and EASA will have no further obligation with respect to its bid.  There is no restriction as to the amount EASA may bid.   

Obligations.  Under the concession, Edenor is obligated to supply electricity upon request by the owner or occupant of any premises in its service area.  Edenor is entitled to charge for the electricity supplied at rates that are established by tariffs set by the ENRE.  Pursuant to its concession, Edenor 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.

Edenor’s concession requires it 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 the concession.  Edenor is 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 electricity distribution services.  The ENRE also requires Edenor to compile and periodically submit various types of reports regarding the quality of its service and other technical and commercial data.

Fines and penalties.  Pursuant to the concession, the ENRE may impose various fines and penalties on Edenor if it fails to comply with its obligations under the concession, including a failure to meet any of the quality and delivery standards set forth in the concession.  The ENRE may also impose fines for any of network installations that it considers may pose a safety or security hazard in public spaces, including streets and sidewalks.  In addition, the ENRE may impose fines for inconsistency in technical information required to be furnished to the ENRE.

Pursuant to the Adjustment Agreement, the ENRE granted Edenor a payment plan in respect of a part of Edenor’s accrued fines and penalties and agreed, subject to certain conditions, to forgive the remainder upon the completion of the Edenor RTI.  The amount of accrued fines and penalties subject to forgiveness and to the payment plan are adjusted from time to time to reflect any subsequent increases in Edenor’s distribution margins pursuant to the Adjustment Agreement, including CMM adjustments.  For the year ended on December 31, 2008, Edenor recorded adjustments of Ps. 17.2 million, to reflect CMM adjustments.  Edenor did not record any adjustments in the period 2009-2012.  As of the date of this annual report, we estimate that the ENRE will forgive approximately Ps. 71.4 million of Edenor’s accrued fines and penalties upon the completion of the Edenor RTI, and that Edenor will be required to pay the balance in accordance with the payment plan provided for in the Adjustment Agreement, although Edenor cannot be certain of the amount, if any, that will ultimately be forgiven.  This payment plan allows Edenor to repay these fines and penalties in fourteen semiannual installments commencing after a 180-day grace period from the date the Edenor RTI comes into effect.  In 2012, on a standalone basis, the fines and penalties imposed on Edenor by the ENRE amounted to Ps. 116.9 million, which represented 4.0% of Edenor’s energy sales.  As of December 31, 2012 Edenor’s accrued fines and penalties amounted to Ps. 662 million, as compared to Ps. 531.9 million as of December 31, 2011.

 

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Pledge of Class A shares.  In accordance with the concession, EASA has pledged its 51% stake in Edenor to the Argentine Government to secure the obligations set forth in the concession.  The Adjustment Agreement extends the pledge to secure the obligations under that agreement as well.  The Argentine Government may foreclose its pledge over the Class A shares and sell them in an public bidding process if any of the following occur:

·         Edenor incurs penalties in excess of 20% of its gross energy sales, net of taxes (which corresponds to our energy sales) in any given year;

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

·         material and repeated breaches of the concession that are not remedied upon request of the ENRE;

·         EASA creates any lien or encumbrances on the Class A shares (other than the pledge to the Argentine Government);

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

·         Edenor’s articles of incorporation or voting rights are amended in a way that modifies the voting rights of the Class A shares without the ENRE’s approval; or

·         Edenor or any existing or former shareholder of EASA who has brought claims against the Argentine Government in the ICSID does not desist from its ICSID claims against the Argentine Government following completion of the Edenor RTI and the approval of a new tariff regime.

Revocation of concession.  The Argentine Government has the right to revoke the concession if Edenor enters into bankruptcy and the government decides that it shall not continue rendering services, in which case all of its assets will be transferred to a new state‑owned company that will be sold in an international public bidding process.  At the conclusion of this bidding process, the purchase price will be delivered to the bankruptcy court in favor of Edenor’s creditors, net of any debt owed by Edenor to the Argentine Government, and any residual proceeds will be distributed to Edenor’s shareholders.

Tariffs.  Under the terms of Edenor’s concession, the tariffs charged by Edenor (other than those applied to customers in the wheeling system) are composed of:

·         the cost of electric power purchases, which Edenor passes on to its customers, and a fixed charge (which varies depending on the category and level of consumption of each customer and their energy purchase prices) to cover a portion of Edenor’s energy losses in its distribution activities (determined by reference to a fixed percentage of energy and power capacity for each respective voltage level set forth in our distribution concession);

·         Edenor’s regulated distribution margin, which is known as the value‑added for distribution, or “VAD”, to cover its operating expenses, taxes and amortization expenses and to provide Edenor with an adequate return on its asset base, plus the fixed charge contemplated under Resolution 347/12; and

·         any taxes imposed by the Province of Buenos Aires or the City of Buenos Aires, which may differ in each jurisdiction.

Certain large users are eligible to purchase their energy needs directly from generators in the WEM and acquire from Edenor only the service of delivering that electricity to them.  Edenor’s tariffs for these large users (known as wheeling charges) do not include, therefore, charges for energy purchases.  Accordingly, wheeling charges consist of the fixed charge for recognized energy losses (determined by reference to a fixed percentage of energy and power capacity for each respective voltage level set forth in Edenor’s concession) and Edenor’s distribution margin. 

 

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According to the current regulatory framework, the ENRE is required to adjust the seasonal price charged to distributors in the wholesale electricity market every six months.  Since January 2005, the ENRE failed to make these adjustments.  In November 2008, the ENRE issued Resolution No. 628/08, which established the new tariffs applied by Edenor as of October 1, 2008 and modified seasonal prices charged to distributors, including the consumption levels that make up the pricing ladder.  The new pricing ladder sets prices according to the following levels of consumption: bimonthly consumption up to 1,000 kWh; bimonthly consumption greater than 1,000 kWh and less than or equal to 1,400 kWh; bimonthly consumption greater than 1,400 kWh and less than or equal to 2,800 kWh; and bimonthly consumption greater than 2,800 kWh.  In addition, the ENRE authorized Edenor to pass through some regulatory charges associated with the electric power purchases to its customers, excluding residential customers with consumption levels below 1,000 kWh.  On August 14, 2009, the ENRE adopted Resolution No. 433/2009 approving two tariff charts to be applied by Edenor, for the winter period. These charts were based on the new subsidized seasonal prices set forth in Resolution No. 652/09 issued by the Secretariat of Energy. The new price charts were aimed at reducing the impact of increased winter electric energy consumption on the electricity bills payable by certain residential customers with bi-monthly consumption exceeding 1,000 kWh. The ENRE also instructed Edenor to break down the floating charges included in all invoices into the amounts subsidized and not subsidized by the Argentine Government.

During the winter periods for the years 2009-2012, the seasonal rate chart was revised twice. For the months of June and July, tariffs were revised so that residential customers with bi-monthly consumption levels above 1,000 kWh received a full subsidy for their energy purchases. For the months of August and September, residential customers with bi-monthly consumption levels above 1,000 kWh received a subsidy equal to a 70 percent of their energy purchase price.

On November 7, 2011 the Secretariat of Energy issued Resolution No. 1301/11 establishing seasonal summer programming, eliminating subsidies for certain economic activities for which the relevant clients, according to the Resolution, are in a position to pay the real costs of the service.

This provision has been extended to residential users discriminated by geographic area and type of residence. These revised rate schedules did not affect our VAD.

Edenor’s concession authorizes it to charge VAD for its services to seek to cover its operating expenses, taxes and amortization expenses and to provide Edenor with an adequate return on its asset base.  Edenor’s concession originally contemplated a fixed distribution margin for each tariff parameter with semiannual adjustments based on variations in the U.S. wholesale price and U.S. consumer price indexes.  However, the Public Emergency Law, enacted in January 2002, among other measures, revoked all adjustment clauses in U.S. Dollars or other foreign currencies and indexation clauses.  As a result, the adjustment provisions contained in Edenor’s concession were no longer in force and, from January 2002 through February 2007, Edenor was required to charge the same fixed distribution margin in Pesos established in 2002, without any type of currency or inflation adjustment. 

Pursuant to the Adjustment Agreement, which came into effect in February 2007, the Argentine Government granted Edenor an increase of 28% in Edenor’s distribution margin, including a 5% increase to fund specified capital expenditures required by the Adjustment Agreement, subject to a 15% cap on the increase of Edenor’s average tariff.  Although this increase applies to all of Edenor’s tariff categories, the amount of the increase was only allocated to Edenor’s non-residential customers (including wheeling customers), which customers, as a result, experienced an increase in VAD greater than 28%, while Edenor’s residential customers did not experience any increase in VAD.  The increase is effective retroactively from November 1, 2005 and will remain in effect until the approval of a new tariff scheme under the integral tariff revision process described below. 

The Adjustment Agreement also contemplates the CMM, which requires the ENRE to review Edenor’s actual distribution costs every six months (in May and November of each year).  If the variation between Edenor’s actual distribution costs and Edenor’s recognized distribution costs (as adjusted by any subsequent CMM) is 5% or more, the ENRE is required to adjust Edenor’s distribution margin to reflect Edenor’s actual distribution cost base.  Edenor may also request that the CMM be applied at any time that the variation between Edenor’s actual distribution costs and Edenor’s then recognized distribution costs is 10% or more.  On January 30, 2007, in addition to formally approving Edenor’s new tariff schedule reflecting the 28% increase provided by the Adjustment Agreement, the ENRE applied the CMM retroactively in each of May and November 2006, which resulted in an additional 8.032% increase in Edenor’s distribution margins effective May 1, 2006.  This increase, when compounded with the 28% increase granted under the Adjustment Agreement, resulted in an overall 38.3% increase in Edenor’s distribution margins. 

 

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Also on February 13, 2007, the ENRE authorized EDENOR to bill our clients (excluding residential clients) 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 which we have continued to invoice in 55 monthly installments since February 2007.  As of the day of this Annual Report, EDENOR had invoiced the total amount.

In October 2007, the Secretariat of Energy issued Resolution No. 1037/2007, which granted Edenor 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 their tariff structure, and, instead, EDENOR was allowed to retain the funds that they are required to collect and transfer to the fund established by the Plan de Uso Racional de la Energía Eléctrica (Rational Use of Electric Energy Plan, or the “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, EDENOR obtained an increase of approximately 17.9% in their distribution margin, which they incorporated into that 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 their 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 bimonthly consumption levels over 650 kWh.  In addition, the ENRE authorized EDENOR to be reimbursed 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, from the PUREE funds.    

Furthermore, EDENOR requested an additional increase in their 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.  As of the date of this annual report, the ENRE has not approved a new tariff scheme including this tariff increase nor has it authorized Edenor to collect such increase by other means for example through an off-setting mechanism against contributions made to the PUREE, as was the case in the past.

As of December 31, 2012, EDENOR had submitted to the ENRE ten requests for CMM adjustments as described in the table below, since May 2008:

Assessment Period

Application Date

CMM Adjustment Requested

November 2007 – April 2008

May 2008

5.791%

May 2008 – October 2008

November 2008

5.684%

November 2008 – April 2009

May 2009

5.068%

May 2009 – October 2009

November 2009

5.041%

November 2009 – April 2010

May 2010

7.103%

May 2010 – October 2010

November 2010

7.240%

November 2010 – April 2011

May 2011

6.104%

May 2011 – October 2011

November 2011

7.721 %

November 2011 – April 2012

May 2012

8.529%

May 2012 – October 2012

November 2012

7.316%

Cumulative:

 

88.664%

 

 

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As of the date of this annual report the ENRE has not yet responded to these requests, other than the request submitted in May 2008.  However, Edenor has become aware of certain communications of the ENRE to the Under-Secretariat of Management Control and Coordination of the Ministry of Federal Planning, according to which the analysis made by them shows percentages similar to those calculated by Edenor with regard to CMM ratios.

Based on this information, Edenor has estimated that the claims effectively made for CMM adjustments, which were not transferred to tariffs nor authorized to be collected by other means, amount to approximately Ps.1,999 million. In accordance with Edenor’s estimations, the real major costs are significantly higher than the ones determined with the CMM adjustments that have been requested.

As of December 31, 2012 and 2011 the amounts collected by Edenor through the PUREE, amounted to Ps. 1,277.8 million and Ps. 867.1 million, respectively, and have been disclosed under other non-current liabilities. Until such time as the CMM adjustments are effectively transferred to the tariffs, Edenor is entitled to use PUREE excess funds that it would otherwise be required to transfer to CAMMESA, as established in SE Resolution No. 1037/07, in order to reimburse Edenor for the amounts it is owed for CMM increases not yet reflected in Edenor’s distribution margin. As of the date of this annual report, Edenor has neither recognized nor accrued any amount receivable for this concept in its consolidated financial statements.

 

Although we believe that these increases comply with the terms of the CMM, we cannot assure you that the ENRE will grant Edenor these increases in full, or at all, or if granted, that Edenor will be able to bill its customers or otherwise recover these increases from other sources of payment (such as PUREE).

On November 23, 2012, the ENRE issued Resolution No. 347/2012, authorizing the Company to apply a fixed charge tariff differentiated by category, to be used exclusively to finance infrastructure and corrective maintenance of the facilities, all in accordance with the provisions of clause 4.2 of the Adjustment Agreement. To this end, it creates a Trust in which Edenor shall deposit the funds raised and which will be responsible for paying contractors for and on behalf of Edenor. These increases, and any subsequent increases granted under the CMM, will remain in effect until the approval of a new tariff scheme pursuant to the Edenor RTI, with the ENRE under the Adjustment Agreement.  The Edenor RTI will cover, among other factors, a recalculation of the compensation Edenor receives for its distribution services, including taxes that are not currently passed through to Edenor’s customers (such as taxes on financial transactions), a revised analysis of Edenor’s distribution costs, modifications to Edenor’s quality of service standards and penalty scheme and, finally, a revision of Edenor’s asset base and rate of return. Although in the whereas clauses of Resolution No. 347/2012 the ENRE recognizes the existence of CMM adjustment requests and it is indicated that the authorized charges are on account of CMM adjustments, nothing is said about what provisions will apply concerning the effect thereof for the period elapsed between the date such requests were made and the date of their application to the customer’s bill.

On November 12, 2009, Edenor submitted an integral tariff proposal to the ENRE’s Board of Directors as requested by ENRE Resolution No. 467/08.  The proposal included, among other factors, a recalculation of the compensation Edenor receives for its distribution services, including taxes that are not currently passed through to their customers (such as taxes on financial transactions), a revised analysis of its distribution costs, modification to its quality of service standards and penalty scheme and, finally, a revision of its asset base and rate of return. 

However, as of the date of this annual report, the Edenor RTI has not yet been completed, and the outcome of the renegotiation of Edenor’s tariff structure is highly uncertain.  We cannot assure you that the renegotiation process will conclude in a timely manner or that the revised tariff structure will provide Edenor with an adequate return on its asset base, or that if an adjustment agreement is reached that it will not be challenged by Argentine consumer and other groups, something that, if successful, could materially adversely affect Edenor’s ability to implement any tariff adjustments granted by the Argentine Government.

The delays in obtaining tariff increases, recognition of cost adjustments requested by Edenor in accordance with the terms of the Adjustment Agreement and the continuous increase in operating expenses have affected significantly the economic and financial position of our subsidiary and has raised substantial doubt with respect to its ability to continue as a going concern.  The Company’s management plans in response to these matters are described in Note 46 to the Consolidated Financial Statements.  However, Edenor’s financial statements as of and for the year ended December 31, 2012 and 2011 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty.

Customers.  As of December 31, 2012, Edenor served 2,726,422 customers.  Edenor defines a “customer” as one meter. Edenor classifies its customers pursuant to the following tariff categories:

 

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·         Residential  (T1-R1 to R9): residential customers whose peak capacity demand is less than 10kW.  In 2012, this category accounted for approximately 42% of Edenor’s electricity sales.

·         Small commercial (T1-G1 and T1-G2): commercial customers whose peak capacity demand is less than 10kW.  In 2012, this category accounted for approximately 8% of Edenor’s electricity sales.

·         Medium commercial (T2): customers whose peak capacity demand is equal to or greater than 10kW but less than 50kW.  In 2012, this category accounted for approximately 8% of Edenor’s electricity sales.

·         Industrial  (T3): industrial customers whose peak capacity demand is equal to or greater than 50kW.  In 2012, this category accounted for approximately 16% of Edenor’s electricity sales.  This category does not include customers who purchase their electricity requirements directly through the wholesale electricity market under the wheeling system.

·         Wheeling System: large users who purchase their electricity requirements directly from generation or broker companies through the wholesale electricity market.  As of December 31, 2012, the total number of such large users was 707, and in 2012 this category represented approximately 21% of our electricity sales.

·         Others: public lighting (T1-PL) and shantytown customers whose peak capacity demand is less than 10kW.  In 2012, this category accounted for approximately 5% of Edenor’s electricity sales. 

Edenor strives to maintain an accurate categorization of its customers in order to charge the appropriate tariff to each customer.  In particular, Edenor focuses on its residential tariff categorizations to both minimize the number of commercial and industrial customers who are classified as residential customers and to identify residential customers whose peak capacity demand exceeds 10kW and therefore do not qualify as residential users.

ShantytownsIn accordance with the terms of its concession, Edenor supplies electricity to low-income areas and shantytowns located within its service area.  In October 2003, Edenor, Edesur and Edelap entered into a framework agreement with the Argentine Government and the Province of Buenos Aires to regulate their supply to low-income areas and shantytowns.  Under this agreement, Edenor is compensated for the service Edenor provides to shantytowns by a commission formed in each shantytown that collects funds from residents of the shantytown.  In addition, Edenor is compensated separately by the municipality in which each shantytown is located, and, if there is any payment shortfall, by a special fund to which the Argentine Government contributes an amount equal to 21%, and the Province of Buenos Aires 15.5%, of the compensation, net of taxes, paid by those customers with payment problems and meter irregularities who are regularized under the framework agreement. 

On June 23, 2008, Edenor signed an amendment to the Framework Agreement with the Argentine Government, the Province of Buenos Aires and other national electric distributors agreeing to extend the Framework Agreement for four years from January 1, 2007 (the “Amended 2003 Framework Agreement”).  The Argentine Government ratified the amendment on September 22, 2008 and the Province of Buenos Aires ratified the amendment on May 15, 2009.

On July 22, 2011, the Company, together with Edesur S.A. and Edelap S.A., entered into an Addendum with the Federal Government and the Government of the Province of Buenos Aires, for the renewal for a term of four years of the Amended 2003 Framework Agreement.  Such extension was approved on September 21, 2012 by Resolution 248/12 issued by the ENRE and ratified by the Ministry of Federal Planning, Public Investment and Services through Resolution 247.

 

At December 31, 2012, receivable balances with the Argentine Government and the Government of the Province of Buenos Aires amount to Ps. 25.4 million and Ps. 25.7 million respectively.

 

With respect to the amount receivable, on October 18, 2012 Edenor entered into an Agreement for the Settlement of Non-financial Obligations and the Subscription of Buenos Aires Province Government Bonds with the Province of Buenos Aires, pursuant to which Edenor agreed to receive an amount of Ps. 325,000 in cash and subscribe Series B Bonds for a residual nominal value of Ps. 6.1 million, as settlement of the debt that at December 31, 2010 such Province had with Edenor for the electric power supplied to low-income areas.

 

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Energy losses.  Energy losses are equivalent to the difference between energy purchased and energy sold.  Technical losses represent the energy that is lost during transmission and distribution within the network as a consequence of natural heating of the conductors that transmit electricity from the generating plants to the customers.  Non-technical losses are primarily due to illegal use of Edenor’s services.  Energy losses require Edenor to purchase additional electricity to satisfy demand and its concession allows Edenor to recover from its customers the cost of these purchases up to a loss factor specified in the concession for each tariff category.  The average loss factor under Edenor’s concession is 10%. 

The following table illustrates Edenor’s estimation of the approximate breakdown between technical and non-technical energy losses experienced in its service area since 2003:

 

Year ended December 31,

 

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

Technical losses

10.5%

9.8%

9.8%

9.8%

9.8%

9.6%

8.6%

8.3%

8.1%

8.0%

Non‑technical losses

2.8%

2.8%

2.7%

2.1%

1.0%

2.0%

2.5%

2.7%

3.4%

4.7%

Total losses

13.3%

12.6%

12.5%

11.9%

10.8%

11.6%

11.1%

11.0%

11.5%

12.7%

 

Acquisition of EMDERSA and AESEBA

On January 19, 2011 we agreed to acquire, directly or through one or more designees, from certain subsidiaries of AEI the following assets:

(i)                   77.2% of the outstanding capital stock of EMDERSA, a company engaged in the distribution of electricity in the Argentine provinces of San Luis, La Rioja and Salta through its subsidiaries EDESAL, EDELAR and EDESA, and in the generation of electricity through its subsidiary EGSSA; and

(ii)                 100% of the outstanding capital stock of AESEBA, an electric utility company, which owns 90% of the outstanding capital stock of EDEN, an electricity distribution company with the concession area in the northern zone of the Province of Buenos Aires.

Pursuant to the terms of the sale of the shares described above, on February 25, 2011 the Company made an offer to Edenor, which Edenor accepted on March 4, 2011, to become the purchaser of the shares described above and Edenor purchased the shares (other than shares representing approximately 0.01% of the outstanding capital stock of AESEBA, in respect of which the Company remained as purchaser) on March 4, 2011 for a total purchase price of U.S. $140.0 million. The transaction also involved the assignment to certain of our affiliates of certain rights that AEI had over AESEBA, EDEN and EMDERSA and its subsidiaries.

As of the date of this annual report Edenor has taken actions to divest some of the assets described above. For information about the sales of EDESA, EDESAL and EDELAR, please see. Presentation of Information –Recent Developments   

 

Aeseba and its Subsidiaries

Aeseba is a holding company that owns 90% of the outstanding capital stock of Eden, an electricity distribution company that supplies electricity to a service area with a population of approximately 1.0 million that encompasses approximately 42,000 square miles in the northern part of the Province of Buenos Aires.  As of December 31, 2012, Eden had approximately 343,951 customers and sold approximately 2,863 GWh of electricity

 

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in 2012.  The remaining ownership interest in Eden is owned by its employees.  The acquisition of Eden is still pending antitrust approval.

Eden holds an exclusive long-term renewable concession from the relevant regulator or the Province of Buenos Aires.  Eden’s concession agreement is divided into nine administrative periods, the first of which lasts 15 years and expires on June 2, 2012, followed by eight ten-year periods thereafter.  At the end of the current term, a competitive bid process for the sale of a minimum of 51% of the share capital of Eden will take place.  We can participate in the bidding and will only be required to sell and transfer control of our interest in Eden if there is a higher bid, in which case we will receive the amount bid by such bidder.  Following such auction, a new ten-year concession will be granted to Eden at the end of which the auction process would be held again.

Tariffs for Argentine electricity distribution companies are reviewed periodically by the regulators within the service area in which the concession is located (in the case of Eden this is the Buenos Aires Province).  Eden periodically has RTIs, and as of the date of this annual report, Eden’s tariffs are currently under a RTI process.  Under its current tariff scheme, the tariffs are designed to provide for a pass-through to customers of the main variable cost items (mainly power purchase costs and transmission charges), recovery of reasonable operating and administrative costs, incentives to reduce costs and make required capital investments and a regulated rate of return on its regulated asset base.  Tariffs are also adjusted for inflation of fixed costs and to pass-through adjustments to variable costs.  Eden has been granted adjustments to its tariff periodically to reflect increases in costs.

The table below summarizes energy sales information regarding Eden.

 

Year ended December 31,

 

2012

2011

2010

 

(in MWh, except percentages)

Residential

625,805

22.8%

619,224

22.2%

598,679

22.6%

Commercial

346,821

12.1%

331,086

11.9%

308,304

11.7%

Public lighting

80,783

2.8%

79,716

2.9%

77,319

2.9%

Large users

1,488,579

52.0%

1,462,983

52.5%

1,359,219

51.4%

Industrial (WEM's large customers)

294,126

10.3%

291,400

10.5%

299,936

11.3%

Total

2,836,114

100.0%

2,784,409

100.0%

2,643,457

100