20-F 1 pamform20f_2013.htm FORM 20F 2013 pamform20f_2013.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, 2013

 

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)

Ricardo Torres

Ortiz de Ocampo 3302, Building #4

C1425DSR, City of Buenos Aires

Argentina

Tel.: + 54 11 4809 9500 / Fax: + 54 11 4809 9541

(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  

x No

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  

x No

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. 

x Yes  

¨ 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

6

Item 2.

Offer Statistics and Expected Timetable

6

Item 3.

Key Information

6

 

Selected Financial Data

6

 

Exchange Rates

9

 

Risk Factors

10

Item 4.

Information on the Company

40

 

History and Development of the Company

40

 

Our Business

40

 

The Argentine Electricity Sector

88

Item 4A.

Unresolved Staff Comments

114

Item 5.

Operating and Financial Review and Prospects

114

Item 6.

Directors, Senior Management and Employees

179

Item 7.

Major Shareholders and Related Party Transactions

193

Item 8.

Financial Information

195

 

Consolidated Financial Statements

195

 

Legal Proceedings

195

 

Dividends

204

Item 9.

The Offer and Listing

205

 

Trading History

205

 

The Argentine Securities Market

207

Item 10.

Additional Information

210

 

Memorandum and Articles of Association

210

 

Material Contracts

210

 

Exchange Controls

210

 

Taxation

218

 

Dividends and Paying Agents

222

 

Documents on Display

223

Item 11.

Quantitative and Qualitative Disclosures about Market Risk

224

Item 12.

Description of Securities Other than Equity Securities

228

 

Description of American Depositary Shares

228

 

 

PART II

Item 13.

Defaults, Dividend Arrearages and Delinquencies

230

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

230

Item 15.

Controls and Procedures

230

Item 16A.

Audit Committee Financial Expert

231

Item 16B.

Code of Ethics.

231

Item 16C.

Principal Accountant Fees and Services

231

Item 16D.

Exemptions from the Listing Standards for Audit Committees

232

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

232

Item 16F.

Change in Registrant’s Certifying Accountant

232

Item 16G.

Corporate Governance

232

Item 16 H.

Mine Safety Disclosure

237

 

 

PART III

Item 17.

Financial Statements

238

Item 18.

Financial Statements

238

Item 19.

Exhibits

238

 

Index to Financial Statements

F1

 

 

 

i

 

 


 
 

 

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, 2013 and December 31, 2012, and for each of the three years in the period the years ended December 31, 2013, and the notes thereto (the “Consolidated Financial Statements”).  The Consolidated Financial Statements have been audited by Price Waterhouse & Co. S.R.L., whose report is included in this annual report. Specially, with respect to Transener and TGS, given that the stake in such companies constitutes an interest in a joint venture and associate, respectively, it is not consolidated and it is valued according to the equity method of accounting in the Consolidated Financial Statements.

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 10, 2014.

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” or “CPB”) 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” or “Pampa Inversiones”) in January 2007; a direct interest in Central Térmica Güemes S.A. (“Güemes” or “CTG”); 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 (under the company Hidroeléctrica los Nihuiles S.A. (“HINISA”)) and Hidroeléctrica Diamante (under the company Hidroeléctrica Diamante S.A. (“HIDISA”)), respectively, a direct interest in Petrolera Pampa S.A. (“Petrolera Pampa” or “PEPASA”) 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

EDELAR and EMDERSA Sale

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

 

2

 

 


 
 

 

MERGERS

·         CTG, EGSSA and EGSSAH

On September 27, 2013, the boards of directors of CTG, EGSSA Holding S.A. (“EGSSAH”) and Emdersa Generación Salta S.A. (“EGSSA”) resolved that it would be beneficial for these companies if they were merged into a single company, where CTG would be the surviving company and EGGSSAH and EGSSA the merged companies. 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 November 5, 2013, pursuant to the required procedures, the boards of directors of CTG, EGSSAH and EGSSA approved the special financial statements of each Company for merger purposes, the preliminary merger agreement executed among CTG, EGSSAH and EGSSA, and the offering memorandum that describes the terms and conditions of the merger. For accounting, fiscal and legal purposes, the effective corporate reorganization date shall be retroactive to October 1, 2013. On December 20, 2013, a shareholders’ meeting of each company took place, where the merger and all of the documentation relating to it were approved. On November 6, 2013, the administrative approvals of the Comisión Nacional de Valores (Argentine Securities Commission, or “CNV”) and the Bolsa de Comercio de Buenos Aires (Buenos Aires Stock Exchange or “BCBA”) were requested, which, as of the date of this annual report have not been granted. Also, on February 13, 2014 the final merger agreement was executed.  Finally, as of the date of this annual report, the approvals of other relevant authorities are still pending.

In the case that the respective approvals are not obtained, the Company does not expect significant negative effects, due to the fact that CTG, EGSSA and EGSSAH were consolidated before the merger and continue to be consolidated after it.

·         Edenor and Emdersa Holding S.A.

On October 7, 2013, Edenor resolved to initiate the proceedings pursuant to which Edenor will absorb Emdersa Holding S.A. (“EMDERSAH”) in order to optimize its resources, simplifying its corporate, administrative and operating structure.  On December 20, 2013, the merger of EMDERSAH into Edenor was approved by an extraordinary shareholders’ meeting, as well as all documentation and information required by applicable regulation towards that end. As of the date of this annual report, the approval of the merger by the Superintendence of Corporations (Inspección General de Justicia or “IGJ”) is pending. The effective reorganization date for all legal, accounting and tax purposes will be retroactive to October 1, 2013.

CTLL and Powerco

On December 17, 2013, the boards of directors of CTLL and Powerco S.A. (“Powerco”) resolved that it would be beneficial for these companies to merge into a single company, where CTLL would be the surviving company and Powerco the merged 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 7, 2014, and in connection with the required procedures, the boards of directors of CTLL and Powerco approved the special financial statements for merger purposes of each Company, the preliminary merger agreement executed among CTLL and Powerco, and the offering memorandum that describes the terms and conditions of the merger. For accounting, fiscal and legal purposes, the effective corporate reorganization date shall be retroactive to January 1, 2014. The shareholders’ meeting of each company will take place on April 28, 2014, where the merger and all of the documentation relating to it will be approved. On March 11, 2014, the administrative approvals of the CNV and the BCBA were requested, which, as of the date of this annual report have not been granted. Also, as of the date of this annual report, the definitive merger agreement had not been executed and, therefore the approvals of the provincial authorities and of the IGJ are still pending.

In the case that the respective approvals would not be obtained, the Company does not expect significant negative effects, due to the fact that CTLL and Powerco were consolidated even before the merger and continue to be consolidated after it.

 

 

3

 

 


 
 

 

 

OTHER DEVELOPMENTS

 

Creation of Pampa Comercializadora S.A.

 

                On September 9, 2013, the Company and its subsidiary Pampa Participaciones S.A. decided to constitute a new company, Pampa Comercializadora S.A. whose core business will be the commercialization of the energy generated by the rest of the subsidiaries of the Company. On September 17, 2013, the creation of this new subsidiary was registered before the IGJ.

 

PEPASA’S IPO

                On November 6, 2013, the shareholders’ meeting of Petrolera Pampa resolved to request the authorization of the CNV for an initial public offering of its shares, increasing its capital stock for up to an amount of 59,700,000 shares. On December 12, 2013, through Resolution No. 17,248, the CNV granted Petrolera Pampa the required authorizations for the initial public offering of its shares (the “IPO”). As a consequence, on January 14, 2014, Petrolera Pampa issued 59,700,000 new ordinary shares with a par value of Ps.1 and entitled to 1 vote per share, representing 50% of Petrolera Pampa’s capital stock. Additionally, the shareholders of Petrolera Pampa prior to the IPO (the Company and Pampa Participaciones) assigned to their shareholders as of October 15, 2013, their preemptive and accretion rights over the capital stock increase. Thus, as a result of the capital stock issuance, 17,839,483 shares were subscribed in exercise of such preemptive rights and 41,860,517 were subscribed in exercise of such accretion rights.

Functional and Presentation Currency

The Company and almost all of its subsidiaries maintain their accounting records and prepare their financial statements in Argentine Pesos (“Ps.” or “AR$”), which is their functional currency and also the presentation currency incorporated in the Consolidated Financial Statements. Our subsidiary PISA, however, maintains its accounting records and prepares its financial statements in Uruguayan Pesos but its functional currency is Argentina 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 are translated 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, certain totals may therefore not precisely equal the sum of the numbers presented.

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 Dollars using, for the information provided as of December 31, 2013, the seller exchange rate reported by the Banco de la Nación Argentina (“Banco Nación”), as of December 31, 2013 of U.S. $1.00 = Ps. 6.521, 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.  In January 2014, the Peso lost approximately 23% of its value with respect to the Dollar.  On April 23, 2014, the exchange rate was Ps. 8.00 to U.S.$1.00. As a result of fluctuations in the Dollar/Argentine Peso exchange rate, the exchange rate at such date may not be indicative of current or future exchange rates. See “Item 3. Key Information—Exchange Rates” and “Item 3.  Key Information—Risk Factors—Risks Relating to Argentina—Fluctuations in the value of the Argentine Peso could adversely affect the Argentine economy, which could, in turn adversely affect our results of operations.”  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”).

 

4

 

 


 
 

 

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.”

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.

 

 

 

5

 

 


 
 

 

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 selected financial data for each of the years in the three-year period ended December 31, 2013, 2012 and 2011. The selected consolidated statement of comprehensive income (loss) and statement of cash flow data for the years ended December 31, 2013, 2012 and 2011 and the selected consolidated statement of financial position as of December 31, 2013 and December 31, 2012 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.  We have not included selected financial data as of and for the years ended December 31, 2009 and 2010, as we began presenting our financial statements in accordance with IFRS for the fiscal year ending December 31, 2012, with an official IFRS “adoption date” of January 1, 2012 and a “transition date” to IFRS of January 1, 2011.  Based on such adoption and transition dates, we were not required to prepare financial statements in accordance with IFRS as of and for the years ended December 31, 2009 and 2010 and therefore are unable to present selected financial data in accordance with IFRS for this period without unreasonable effort and expense.

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”. 

Comparative information

Financial Statements as of December 31, 2012 and 2011, included for comparative purposes, are derived from the financial statements at those dates. Certain reclassifications have been made to those financial statements to keep the consistency in the presentation with the amounts of the current year, mainly because of certain discontinued operations.  See Note 19 to our Consolidated Financial Statements.

 

 

 

 

 

 

 

 

 

6

 

 


 
 

 

 

 

 

At December 31,

 

 

2013

 

2013

 

2012

 

2011

 

 

(US$) (1)

 

(Pesos)

 

(Pesos)

 

(Pesos)

STATEMENT OF FINANCIAL POSITION

 

 

 

 

 

 

 

 

Non-current assets:

 

 

 

 

 

 

 

 

Investments in joint ventures

 

29,017,733

 

188,644,285

 

192,315,761

 

222,219,616

Investments in associates

 

20,731,373

 

134,774,654

 

132,546,155

 

130,251,204

Property, plant and equipment

 

1,061,784,550

 

6,902,661,359

 

6,019,372,559

 

5,847,071,944

Intangible assets

 

138,724,244

 

901,846,313

 

1,798,492,198

 

1,791,802,004

Biological assets

 

297,692

 

1,935,296

 

1,976,109

 

1,935,511

Financial assets at fair value through profit and loss

 

66,563,583

 

432,729,855

 

303,792,067

 

553,768,412

Deferred tax asset

 

9,723,775

 

63,214,262

 

87,532,301

 

116,574,172

Trade and other receivables

 

56,404,504

 

366,685,679

 

421,117,506

 

342,191,671

Total non-current assets

 

1,383,247,455

 

8,992,491,703

 

8,957,144,656

 

9,005,814,534

Current assets:

 

 

 

 

 

 

 

 

Infrastructure under construction

 

-

 

-

 

84,465,694

 

45,504,000

Biological assets

 

86,822

 

564,431

 

497,255

 

99,003

Inventories

 

17,490,641

 

113,706,655

 

107,342,562

 

60,421,699

Trade and other receivables

 

347,312,061

 

2,257,875,710

 

1,541,543,369

 

1,373,557,822

Derivatives financial instruments

 

-

 

-

 

-

 

1,315,707

Financial assets at fair value through profit and loss

 

129,866,077

 

844,259,368

 

236,646,460

 

172,193,934

Cash and cash equivalents

 

52,556,355

 

341,668,865

 

156,647,001

 

245,623,669

Total current assets

 

547,311,956

 

3,558,075,029

 

2,127,142,341

 

1,898,715,834

Assets classified as held for sale

 

1,843,947

 

11,987,500

 

235,196,934

 

1,183,952,808

Total assets

 

1,932,403,358

 

12,562,554,232

 

11,319,483,931

 

12,088,483,176

Shareholders´ equity

 

 

 

 

 

 

 

 

Share capital

 

202,170,573

 

1,314,310,895

 

1,314,310,895

 

1,314,310,895

Additional paid-in capital

 

40,530,674

 

263,489,911

 

1,018,352,216

 

1,536,759,469

Reserve for directors’ options

 

39,894,024

 

259,351,053

 

250,405,701

 

241,460,349

Legal reserve

 

-

 

-

 

-

 

27,396,793

Retained earnings (Accumulated losses)

 

44,006,122

 

286,083,801

 

(771,796,574)

 

(667,906,366)

Other comprehensive loss

 

(3,751,011)

 

(24,385,321)

 

(10,753,372)

 

(12,650,920)

Equity attributable to owners of the company

 

322,850,383

 

2,098,850,339

 

1,800,518,866

 

2,439,370,220

Non-controlling interest

 

119,361,908

 

775,971,764

 

529,796,278

 

1,327,964,340

Total equity

 

442,212,291

 

2,874,822,103

 

2,330,315,144

 

3,767,334,560

Non-current liabilities:

 

 

 

 

 

 

 

 

Trade and other payables

 

199,331,038

 

1,295,851,077

 

2,230,282,210

 

1,568,886,646

Borrowings

 

449,858,550

 

2,924,530,436

 

2,218,483,028

 

2,487,650,894

Deferred revenues

 

5,178,544

 

33,665,717

 

264,427,265

 

174,796,000

Salaries and social security payable

 

3,993,125

 

25,959,305

 

17,460,281

 

23,584,607

Defined benefit plans

 

21,000,124

 

136,521,808

 

120,902,649

 

103,634,036

Deferred tax liabilities

 

64,076,547

 

416,561,631

 

625,429,965

 

821,124,172

Taxes payable

 

23,088,065

 

150,095,508

 

61,545,202

 

45,675,917

Provisions

 

13,894,941

 

90,331,010

 

86,409,533

 

69,975,102

Total non-current liabilities

 

780,420,934

 

5,073,516,492

 

5,624,940,133

 

5,295,327,374

Current liabilities:

 

 

 

 

 

 

 

 

Trade and other payables

 

476,627,502

 

3,098,555,391

 

1,687,978,624

 

1,082,963,093

Borrowings

 

115,916,290

 

753,571,799

 

790,916,969

 

893,801,060

Salaries and social security payable

 

77,133,530

 

501,445,076

 

447,870,658

 

324,900,133

Defined benefit plans

 

1,315,508

 

8,552,119

 

21,846,945

 

14,888,746

Taxes payable

 

36,874,061

 

239,718,270

 

248,119,227

 

196,282,111

Provisions

 

1,903,243

 

12,372,982

 

11,659,708

 

11,399,017

Total current liabilities

 

709,770,133

 

4,614,215,637

 

3,208,392,131

 

2,524,234,160

Liabilities associated to assets classified as held for sale

 

-

 

-

 

155,836,523

 

501,587,082

Total liabilities

 

1,490,191,067

 

9,687,732,129

 

8,989,168,787

 

8,321,148,616

Total liabilities and equity

 

1,932,403,358

 

12,562,554,232

 

11,319,483,931

 

12,088,483,176

 

(1) Solely for the convenience of the reader, Peso amounts as of December 31, 2013 have been translated into U.S.$ at the average buy/sell rate for U.S. $ quoted by Banco Nación on December 31, 2013 of Ps. 6.501 to U.S. $1.00.  See “Presentation of Information—Exchange Rate.”

 

 

 

 

 

7

 

 


 
 

 

 

 

For the year ended December 31,

 

 

2013

 

2013

 

2012

 

2011

 

 

(US$) (1)

 

(Pesos)

 

(Pesos)

 

(Pesos)

STATEMENT OF COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

Sales

 

820,641,986

 

5,334,993,550

 

6,695,364,819

 

5,229,666,000

Cost of sales

 

(861,186,702)

 

(5,598,574,748)

 

(6,355,771,263)

 

(4,726,852,788)

Gross profit

 

(40,544,716)

 

(263,581,198)

 

339,593,556

 

502,813,212

Selling expenses

 

(97,742,112)

 

(635,421,473)

 

(414,002,396)

 

(282,577,570)

Administrative expenses

 

(86,816,083)

 

(564,391,356)

 

(463,317,509)

 

(379,815,207)

Other operating income

 

71,715,125

 

466,220,030

 

196,418,100

 

132,580,010

Other operating expenses

 

(32,526,325)

 

(211,453,638)

 

(203,949,959)

 

(134,804,547)

Loss of joint ventures

 

(738,248)

 

(4,799,349)

 

(31,020,306)

 

(14,605,490)

Share of profit of associates

 

342,793

 

2,228,499

 

2,294,951

 

19,779,284

Impairment of property, plant and equipment

 

-

 

-

 

(108,283,569)

 

(557,668,671)

Impairment of intangible assets

 

-

 

-

 

-

 

(90,056,095)

Profit of acquisition of subsidiaries

 

-

 

-

 

-

 

505,936,374

Operating loss before Resolution ES No. 250/13 and ES Note No. 6852/13

 

(186,309,565)

 

(1,211,198,485)

 

(682,267,132)

 

(298,418,700)

Higher Costs Recognition - Resolution ES No. 250/13 and ES Note No. 6852/13

 

451,169,288

 

2,933,051,544

 

-

 

-

Operating profit (loss)

 

264,859,723

 

1,721,853,059

 

(682,267,132)

 

(298,418,700)

Financial income

 

51,935,108

 

337,630,137

 

143,263,842

 

92,803,259

Financial cost

 

(125,471,071)

 

(815,687,431)

 

(501,942,312)

 

(417,859,940)

Other financial results

 

(78,577,390)

 

(510,831,610)

 

(203,001,724)

 

(142,516,846)

Financial results, net

 

(152,113,352)

 

(988,888,904)

 

(561,680,194)

 

(467,573,527)

Profit (Loss) before income tax

 

112,746,371

 

732,964,155

 

(1,243,947,326)

 

(765,992,227)

Income tax

 

1,335,101

 

8,679,493

 

133,311,022

 

36,912,458

Profit (Loss) for the year from continuing operations

 

114,081,472

 

741,643,648

 

(1,110,636,304)

 

(729,079,769)

Discontinued operations

 

(19,513,664)

 

(126,858,328)

 

31,066,521

 

(90,851,233)

Total Profit (Loss) of the year

 

94,567,808

 

614,785,320

 

(1,079,569,783)

 

(819,931,002)

 

 

 

 

 

 

 

 

 

Total Profit (Loss) of the year attributable to:

 

 

 

 

 

 

 

 

Owners of the company

 

44,006,122

 

286,083,801

 

(649,694,254)

 

(741,395,337)

Non - controlling interest

 

50,561,686

 

328,701,519

 

(429,875,529)

 

(78,535,665)

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

 

0.0435  

 

0.2829

 

(0.5133)

 

(0.5297)

Basic (loss) earnings per share from discontinued operations

 

(0.0100) 

 

(0.0652)

 

0.0190

 

(0.0344)

Diluted (loss) earnings per share from discontinued operations

 

(0.0100) 

 

(0.0652)

 

0.0186

 

(0.0344)

Dividends per share (2)

 

-

 

-

 

-

 

0.0138

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

 

0.0017  

 

0.0113

 

(0.0205)

 

(0.0212)

Basic (loss) earning per ADS (3) from discontinuing operations

 

(0.0004) 

 

(0.0026)

 

0.0008

 

(0.0014)

Diluted (loss) earning per ADS (3) from discontinuing operations

 

(0.0004) 

 

(0.0026)

 

0.0007

 

 

Dividends per ADS (3)

 

-

 

-

 

-

 

0.0006

Weighted average amount of outstanding shares

 

202,170,573

 

1,314,310,895

 

1,314,310,895

 

1,314,310,895

 

 

 

 

 

 

 

 

 

CASH FLOW DATA

 

 

 

 

 

 

 

 

Net cash generated by operating activities

 

276,236,566

 

1,795,813,916

 

1,198,056,614

 

1,063,758,464

Net cash used in investing activities

 

(242,337,574)

 

(1,575,436,567)

 

(903,135,054)

 

(1,657,527,373)

Net cash used in financing activities

 

(15,028,430)

 

(97,699,821)

 

(542,226,508)

 

383,135,512

 

 

 

(1) Solely for the convenience of the reader, Peso amounts as of December 31, 2013 have been translated into US$ at the average buy/sell rate for US$ quoted by Banco Nación on December 31, 2013 of Ps. 6.501 to US$ $1.00.  See “Presentation of Information—Exchange 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 2011, we 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.

 

 

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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.

 

 

 

Exchange rates(1)

 

 

(in Pesos per US Dollars)

 

High

Low

Average(2)

Period end

Year ended December 31,

 

 

 

 

 

2009

 

3.854

3.449

3.730

3.800

2010

 

3.988

3.794

3.913

3.976

2011

 

4.304

3.972

4.131

4.304

2012

 

4.918

4.304

4.552

4.918

2013

 

6.521

4.925

5.484

6.521

 

 

 

 

 

 

Month

 

 

 

 

 

November 2013

 

6.141

5.931

6.018

6.141

December 2013

 

6.521

6.158

6.330

6.521

January 2014

 

8.015

6.545

7.117

8.010

February 2014

 

8.006

7.760

7.847

7.874

March 2014

 

8.005

7.861

7.933

8.002

April 2014(3)

 

8.002

8.000

8.001

8.000

 

_____________________

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 25, 2014.

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.

 

 

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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 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 vulnerable and any significant decline could adversely affect our financial condition  

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

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

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

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

 

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·         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;

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

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

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

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

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

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

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

 

11

 

 


 
 

 

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

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

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

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

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

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

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

 

12

 

 


 
 

 

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

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

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

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

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

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

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

 

13

 

 


 
 

 

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

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

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

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

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

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

Since 2011, the Argentine Government has adopted exchange controls such as requiring an authorization of tax authorities to access the foreign currency exchange market and introduced measures that have imposed limits on access to the foreign exchange market to retail transactions. It is widely reported that the peso/U.S. Dollar exchange rate in the unofficial market substantially differs from the official foreign exchange rate. See “Exchange Rates” and “Item 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. 

 

14

 

 


 
 

 

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

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

Prior to 2009, a significant portion of the local demand for securities of Argentine companies came from Argentine private pension funds. In response to the global economic crisis, in December 2008, by means of Argentine Law No. 26,425, the Argentine Congress unified the Argentine pension and retirement system into a system publicly administered by the Administración Nacional de la Seguridad Social (the National Social Security Agency, or “ANSES”), eliminating the pension and retirement system previously administered by private managers. In accordance with the new law, private pension managers transferred all of the assets administered by them under the pension and retirement system to the ANSES. With the nationalization of Argentina’s private pension funds, the Argentine government became a significant shareholder in many of the country’s public companies. In April 2011, the Argentine Government lifted certain restrictions pursuant to which ANSES was prevented from exercising more than 5% of its voting rights in any stock exchange listed company (regardless of the equity interest held by ANSES in such companies). ANSES has publicly stated that it intends to exercise its voting rights in excess of such 5% limit in order to appoint directors in different stock exchange listed companies in which it holds an interest exceeding 5%. ANSES’s interests may differ from those of other investors and, consequently, those investors may understand that ANSES’s actions might have an adverse effect on such companies. As of the date of this annual report, ANSES owns shares representing 23.23% of the capital stock of the Company and also owns shares of the capital stock of our subsidiaries Edenor and Transener.

 

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

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

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

 

 

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

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

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

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

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

 

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

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

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

 

Risks Relating to the 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 pesification of tariffs, 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.  Some of these proceedings have 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 SE Resolution No. 2016/2012, 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 ENRE Resolution No. 347/2012, 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 Edenor 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. 628/2008. 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 Edenor 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 SE Resolution No. 95/2013, 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. 95/2013—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 (an increase of 3.2% from 2012 to 2013). This increase in electricity demand since 2003 reflects the relative low cost, in real terms, of electricity to consumers due to the freezing of margins and the elimination of the inflation adjustment provisions in distribution concessions coupled with the devaluation of the Peso, the inflation and the pesification of the tariffs.  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. Such cut in subsidies affected only a small portion of our customers (namely, certain industries, such as oil and gas and certain distribution areas with high purchasing power). 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 in electricity generation, transmission and distribution capacities, 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.

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.

 

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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 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  

Law No. 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 (prior to its nationalization) and Petrobras Argentina S.A.’s (“Petrobras”) 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, Petrobras and YPF 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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Petrolera Pampa’s inclusion in the Encouragement Program for Excess Injection of Natural Gas may be discontinued or we may not be able to collect the compensation offered thereunder

Through Resolution No. 27/13, the Comisión de Planificación y Coordinación Estratégica del Plan Nacional de Inversiones Hidrocarburíferas (National Investment Plan for Hydrocarbon’s Strategic Planning and Coordination Commission or the “Commission”) included Petrolera Pampa’s project as one of the projects to receive the compensation of US$ 7.5 /MMBTU for volume in excess of an agreed threshold (See “Item 4. Information on the Company – Our Business – Other Business – Gas Market”).

Petrolera Pampa cannot assure the continuity of this program or the timely collection of the correct compensation offered thereunder.

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, 2013, approximately 79.43% 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 2013, and due to inflationary pressures, we have reopened negotiations during the first months of 2014 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 venture agreements in which it participates, and actions undertaken by the operators in such joint venture agreements 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 agreement. 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 undertaken by the operator. Such actions could have a material adverse effect on the success of these joint venture agreements, 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 (as happened in January 2014, see “Fluctuations in the value of the Argentine Peso could adversely affect the Argentine economy, which could, in turn adversely affect our results of operations”) 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 Compañía de Inversiones de Energía S.A. or “CIESA”) would obtain, on the one hand, direct and indirect ownership over 50% of CIESA’s equity, which in turn would control 51% of Transportadora de Gas del Sur S.A. (“TGS”), and on the other hand, a direct 3.76% stake in TGS (originally, 4.3%). 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 “Item 4. Information on the Company – Other Projects - TGS - Ciesa Transaction”).  We cannot assure 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.

 

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.”

Downgrades in our credit ratings could have negative effects on our funding costs and business operations

Credit ratings are assigned to the Company and its subsidiaries. The credit ratings are based on information furnished by us or obtained by the credit rating agencies from independent sources and are also influenced by the credit ratings of Argentine Government bonds and general views regarding the Argentine financial system as a whole. The credit ratings are subject to revision, suspension or withdrawal by the credit rating agencies at any time. A downgrade, suspension or withdrawal in our credit ratings could result in, among other things, the following: (i) increased funding costs and other difficulties in raising funds; (ii) the need to provide additional collateral in connection with financial market transactions; and (iii) the termination or cancellation of existing agreements.  As a result, our business, financial condition and results of operations could be materially and adversely affected.

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

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

 

 

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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.  While under the new remuneration scheme established by SE Resolution No. 95/2013 such constraints should not affect the price that is paid to the generator, our dispatch may nonetheless be affected by such transmissions constraints.  We cannot make any assurance that required investments will be made to increase the capacity of the system.  As a result of lower dispatch, 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

Changes in regulations governing the dispatch of generators may affect our generators

Pursuant to Note No. 5129/13, the Secretariat of Energy instructed CAMMESA to optimize the dispatch of WEM’s generators according to the available fuels and their actual costs. Such modifications may result in a lower dispatch of our generators and, in turn, could adversely affect our results of operations and financial conditions.

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 CAMMESA, which collects revenue from other wholesale electricity market agents.  Since 2012, a significant number of wholesale electricity market agents –mostly distributors, including Edenor - 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 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 95/2013 – New price scheme and other modifications to the WEM”), the revenues of electricity generators will depend on the payments received from CAMMESA. Additionally, due to the scheme implemented by SE Resolution No. 95/2013, 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.  

 

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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 and declining reserves.  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 under SE Resolution 1281/2006 and/or have executed WEM Supply Agreements under SE Resolution No. 220/2007, and both regulations require 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. 220/2007”.

Furthermore, upon the issuance of SE Resolution No. 95/2013, 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.  

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

Loma de la Lata and EGSSA (now merged into CTG) have executed several natural gas provision agreements with producers whose production is included under the terms of the “Gas Plus” program (SE Resolution No. 24/2008).  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 (now merged into CTG) 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 (now merged into CTG) 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 (now merged into CTG) obligations and to keep the agreements alive. As a consequence of this situation, Loma de la Lata and/or EGSSA (now merged into CTG) 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. 220/2007, 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 (now merged into CTG) WEM Supply Contracts under SE Resolution No. 220/2007 (see “WEM Supply Contracts under SE Resolution No. 220/2007”) 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.

Penalties may be applied under Piedra Buena’s Loan Agreement with CAMMESA

On March 22, 2011, Piedra Buena celebrated a Loan Agreement with CAMMESA for a total amount of Ps. 69.610.005 for the execution of several works. This loan is to be repaid in 48 equal monthly installments. Upon the completion of the works, Piedra Buena must guarantee the availability of electricity equal to or higher than 80% of its capacity. A breach of such commitment would give CAMMESA the right to impose penalties of up to 25% of the amount of an installment, which in turn may adversely affect Piedra Buena’s results of operations. As of December 31, 2013, Piedra Buena was subject to penalties for up to an amount of Ps. 4.7 million.

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 (each as defined below). In addition to the claim for integral damages recovery made by Loma de la Lata, the claim of the Project Counterparties (as defined below) 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 2013, the water intake at Los Nihuiles and Diamante available for electricity generation was 56% and 51% 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.

 

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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. Please see “Item 4. Information on the Company – Our Business – Piedra Buena – Operations”. 

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, through EMESA, 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 Consolidated 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 Consolidated 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.  

 

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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.

The unfulfillment of the requirements of the Energy Plus Program or its modification or cancellation may affect CTG’s (and, eventually, Loma de la Lata’s) profits

If CTG (and, eventually, Loma de la Lata, if it obtains the required approvals to participate in the Energy Plus Program. Please see “Loma de la Lata may not obtain the approval to participate in the Energy Plus Program”) does not comply with the requirements of the Energy Plus Program (SE Resolution No. 1281/2006) or if such program is modified or canceled, CTG and Loma de la Lata would have to sell their production on the spot market, and also, eventually, under the remuneration scheme applicable under SE Resolution 95/2013, which could affect CTG’s and Loma de la Lata’s revenues.

Moreover we cannot assure you that, due to measures adopted by the Secretariat of Energy or its failure to promote the Energy Plus market, the demand of such market will not decrease, which could cause CTG and Loma de la Lata) to have to sell their production in the spot market under the remuneration scheme applicable under SE Resolution 95/2013, affecting CTG’s and Loma de la Lata’s revenues.

In Note No. 567/07, as amended, the Secretariat of Energy established the “Cargo Medio Incremental de la Demanda Excedente” (“CMIEE”) as a maximum fee for WEM users with a capacity higher than 300 KW(“WEM Large Users”) for their surplus demand in the event that they do not have their demand backed with a contract under the Energy Plus Program. As of the date of this annual report, the CMIEE applicable to Grandes Usuarios Mayores (Major Large Users, or “GUMAs”) and Grandes Usuarios Menores (Minor Large Users, or “GUMEs”) is equal to 320 Ps./MWh and for Grandes Usuarios del Distribuidor (Major Distribution Users or “GUDIs”) 445 $/MWh. The CMIEE implies an indirect maximum limit to the price that generators under the Energy Plus Program may charge. The detrimental effect that such limits could have on our generators would worsen if the Peso continues its devaluation. As a consequence, if the CMIEE is not adjusted or a higher devaluation of the Peso occurs, this could result in a fall in prices charged by our generators under their Energy Plus Program contracts, forcing such generators to sell the capacity and energy unsold in the spot market at lower prices.

Loma de la Lata may not obtain the approval to participate in the Energy Plus Program

While the full capacity of Loma de la Lata’s steam turbine is currently sold under a WEM Supply Contracts pursuant to SE Resolution No. 220/2007, if upon the termination of or the amendment to such contract, the Secretariat of Energy does not approve Loma de la Lata’s participation in the Energy Plus Program, Loma de la Lata will be forced to sell its production in the spot market under the remuneration scheme approved under SE Resolution No.95/2013 which would affect its revenues.

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 of June 2005 – to November 2010 in an instrumental agreement (the “Instrumental Agreement”), which payment would be based on CAMMESA’s availability of funds, with such payments to 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.  

 

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In May 2013, Transener and Transba executed with the ENRE and the SE, a Renewal Agreement of the Instrumental Agreement (the “Renewal Agreement”), setting forth:

 

(i)                   the recognition of Transener and Transba’s rights to collect the amounts resulting from the variations of costs during the period from December 2010 to December 2012,

(ii)                 the payment of outstanding balances from Addenda II (as defined below), and

(iii)                a procedure for the updating and payment of cost variations incurred from January 1, 2013 to December 31, 2015, calculated biannually.

 

On October 25, 2013 and January 29, 2014, Transba and Transener, respectively, negotiated a third Addendum (together, the “Addenda III”) to their Financing Agreements (as defined below) with CAMMESA, to increase their related amounts by the sum of Ps. 324,850,385 and Ps. 785,844,648.

 

As of December 31, 2013 Transener and Transba had recognized only Ps. 581.0 million in accordance with the Instrumental Agreements and the Renewal Agreement.

 

Pursuant to the Renewal Agreement, Transener and Transba are currently in communication with the relevant authorities to implement a scheme that would better allow them to fund their business plan.  This information consists of monthly cash flows, investments execution and implementation of funds requirements.

 

We cannot make any assurances that Transener and/or Transba will receive the full amount recognized on the Instrumental Agreements and Renewal 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 or Renewal 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 (ENRE Resolution No. 653/2008), 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 (ENRE Resolution No. 150/2011) 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. 653/2008 and 150/2011. 

 

                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 August 28, 2013, the ENRE issued Resolution No. 244/2013, which established a new annual rate of Ps. 131.2 million as from August 2012 and instructed CAMMESA to make the adjustments, including interest.

 

                On September 13, 2013, Transener presented a Motion for Reconsideration of ENRE Resolution No. 244/2013, which was accepted by the ENRE. As a consequence, on December 4, 2013, the ENRE issued Resolution No. 346/2013 which established a new annual rate of Ps. 132.2 million from August 2012 and instructed CAMMESA to make the adjustments, including interest.

 

                On September 23, 2013, Transener asked the ENRE for a new determination of the Fourth Line’s revenue related to the cost variation from August 2013 according to the above mentioned ENRE Resolution No.244/13.

 

                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, 2013, were Ps. 187.8 million (Ps. 93.9 million on a proportional interest basis), representing 21.5% 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, 2013, Transener’s total consolidated indebtedness, denominated in U.S. Dollars and Pesos, amounted to the equivalent of approximately U.S. $141.9 million (Ps. 925.1 million), including accrued but unpaid interest and the effect of the adjustments applied to its 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, 2013.  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

From the execution of 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”) and as required by them, Edenor is engaged in the Integral Tariff Review (Revisión Tarifaria Integral, or “Edenor RTI”) with the ENRE.  However, the timeline for completing this process and the favorability to us of the final resolution are both uncertain.

The Adjustment Agreement currently contemplates a cost adjustment mechanism for the transition period during which the RTI is being conducted.  This mechanism, known as the Cost Monitoring Mechanism (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 twelve additional increases under the CMM since May 2008, eleven of which have been recognized by the ENRE), that have been applied retroactively to amounts owed to Edenor up to September 2013, pursuant to SE Resolution 250/2013 and subsequent Note No. 6852/2013), but have not been transferred to the tariff structure as of the date of this annual report. Under the terms of the Adjustment Agreement, these twelve increases should have been approved in May and November of each year from 2008 on. 

 

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During the years ended December 31, 2012 and 2011, Edenor recorded a significant decrease in net income and operating income (we recorded operating loss in 2012), 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. 347/2012 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 2014.

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 ease 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 may cause 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, 2013, assuming that Edenor will continue as a going concern. However, Edenor’s independent auditors, PricewaterhouseCoopers, issued a report dated March 7, 2014 on its financial statements as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011, which contains an explanatory paragraph expressing substantial doubt as to its ability to continue as a going concern.  As discussed in Edenor’s financial statements, despite the recognition of the CMM retroactive adjustments set in SE Resolution 250/2013 and Note No. 6852/2013, the steady increase in the operating costs necessary to maintain the level of service and the delay in obtaining genuine tariff increases will continue to affect Edenor’s operating results and have raised substantial doubt with respect to its ability to continue as a going concern.  In this respect, the recognition of the CMM retroactive adjustments is not enough to restore Edenor’s economic and financial conditions to the level required by a public service concession such as Edenor’s concession.  Edenor Management’s plans in response to these matters are also described in Edenor’s financial statements. However, Edenor’s financial statements as of December 31, 2013 and 2012 and for the years ended December 31, 2013, 2012 and 2011 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty.

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.

 

 

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Edenor’s inability to obtain tariff adjustments in line with the actual changes in costs could deepen Edenor’s inability to meet its trade obligations and could also have a material adverse effect on Edenor’s ability to meet its financial obligations

            Although SE Resolution 250/2013 and Note No. 6852/2013 recognized the corresponding CMM adjustments retroactively, these have not been sufficient to support the real variation in costs, principally due to salary adjustments and increased operating expenses above the inflation recorded by the INDEC. Edenor’s inability to obtain tariff adjustments in line with the actual change in costs has deepened its inability to meet obligations vis-a-vis  CAMMESA, Edenor’s major supplier, and has had a material adverse effect on Edenor’s ability to meet its financial obligations as a result of a shortage in liquidity, which may result in the need to restructure Edenor’s debt and may have a material adverse effect on Edenor’s business and results of operations.

Edenor’s distribution tariffs may be subject to challenges by Argentine consumer and other groups

Edenor’s tariff has been challenged by Argentine consumer associations, such as the action brought  against Edenor in December 2009, by an Argentine consumer association, (Unión de Usuarios y Consumidores), seeking to annul certain retroactive tariff increases.  In November 2010, the relevant court upheld the claim.  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 a Federal Extraordinary Appeal (“Recurso Extraordinario Federal”) against such decision, which was granted on March 11, 2011.  On October 1, 2013, the Supreme Court of Justice decide to dismiss the Federal Extraordinary Appeal that had been filed.  A final judgment on favor of Edenor has been rendered.

We cannot make assurances that other actions or requests for injunctive relief will not be brought by these or other groups seeking to reverse the adjustments 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 in our financial condition and the market value of our shares and ADSs.

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.

 

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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, 2013, December 31, 2012 and December 31, 2011, our accrued fines and penalties totaled Ps. 923.8 million, Ps. 662.0 million, Ps. 542.2 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.

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 13.0% in 2013, 13.3% in 2012 and 12.6% in 2011.  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;

 

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·         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.  We are, through our subsidiary IEASA, currently engaged in a dispute with a former shareholder of EASA in connection with the suspension and release of such ICSID claims. See “legal Proceedings – Other Legal Proceedings”.

In 2013, the fines and penalties imposed on Edenor by the ENRE amounted to Ps. 287.5 million, which represented 8.4% of Edenor’s energy sales.

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.

Edenor may be unable to import certain equipment to meet the growing demand for electricity, which could lead to a breach of Edenor’s concession and could have a material adverse effect on its operations and financial position

                Certain restrictions on imports imposed by Argentine Government could limit Edenor’s ability to purchase capital goods that are necessary for its operations (including carrying out specific projects). Under Edenor’s concession, we are obligated to satisfy all of the demand for electricity originated in Edenor’s concession area, maintaining at all times a service quality standard that has been established for Edenor’s concession. If Edenor was to incur material labor liabilities in connection with the outsourcing of its distribution business, such liabilities could have an adverse effect Edenor’s financial condition and consolidated results of operations.

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, 2013, we had approximately 2,518 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.

 

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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.

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.

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.

 

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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 repay its commercial debt with CAMMESA, Edenor’s major supplier

As of December 31, 2013, Edenor owed approximately Ps.1,500.6 million to CAMMESA. This debt is due and unpaid and Edenor has not secured any waivers from CAMMESA, if CAMMESA request that Edenor repay such debt, it may be unable to raise the funds to repay it and, consequently, Edenor could be exposed to a cash attachment, which could in turn result in Edenor’s filing for a voluntary reorganization proceeding (concurso preventivo), which could cause the market value of our 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

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 events of default related to  bankruptcy and voluntary reorganization proceedings (concurso preventivo).  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 may be mandatorily required to conduct a capital stock reduction and may in the future be required to be dissolved and liquidated

In the absence of any tariff adjustment, it is possible that during 2014, Edenors’s accumulated deficit exceeds its reserves plus 50% of its capital stock, in which case, under current applicable regulations, Edenor will be required to mandatorily reduce its capital stock pursuant to Article 206 of the Argentine Corporate Law (“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 or expect future revenues or results of operations 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.

 

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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, upon occurrence of certain events relating to Edenor’s financial situation

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, in certain circumstances, including upon the occurrence of certain events relating to Edenor’s financial situation. For example, the NYSE may decide such suspension or cancellation if its shareholders’ equity becomes negative.

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

The 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.

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

Weather conditions may influence the demand for electricity, Edenor’s ability to provide it and the costs of providing it.  In particular, severe weather may adversely affect Edenor’s results of operations by causing significant demand increases, which Edenor may be unable to meet without a significant increase in operating costs. This could strongly impact the continuity of Edenor services and its quality indicators. For example, the exceptional thunderstorms that occurred in April and December of 2013 and a heat wave that occurred in December of 2013 affected the continuity of our services, both in the low voltage and medium voltage networks.  Furthermore, any such disruptions in the provision of Edenor’ services could expose Edenor to fines and orders to compensate those customers affected by any such power cuts, as has occurred in the past.  Edenor’s financial condition, results of operations and cash flows could therefore be negatively affected by changes in weather conditions and severe weather.

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.

 

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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.

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.

 

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

Because we are a limited liability corporation, our shareholders are not liable for our obligations.  Shareholders are generally liable only for the payment of the shares they subscribe.  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 bylaws and of Argentine securities laws could deter takeover attempts and have an adverse impact on the price of our shares and the ADSs

Our bylaws and Argentine securities laws contain provisions that may discourage, delay or make more difficult a change in control of our Company, such as the requirement, upon the acquisition of a certain percentage of our capital stock, to launch a tender offer to acquire a certain percentage of our capital stock, which percentage ranges from 10% to 100% depending on several factors.  These provisions may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interest of our shareholders and may adversely affect the market value of our shares and ADSs.  In addition, the provisions of our bylaws and of Argentine securities laws with respect to the obligation to launch a mandatory tender offer differ in certain respects; as of the date of filing of this annual report, it is unclear whether the provisions of our bylaws, which might be more beneficial to minority shareholders under certain circumstances than the provisions of Argentine securities laws in effect as of the date hereof, would prevail over the provisions of Argentine securities laws.

 

 

 

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Item 4. Information on the Company

HISTORY AND DEVELOPMENT OF THE COMPANY

Pampa Energía S.A. (in English, Pampa Energy Inc., hereinafter referred to as “Pampa Energía”) is incorporated 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.

We were incorporated on February 20, 1945, for a 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 several 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 are engaged in the generation, transmission and distribution of electricity in Argentina.  We changed our name again to Pampa Energía S.A. in September 2008 and have operated under this name since then.

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 government, acting through the Secretariat of Energy and the ENRE, and respective provincial governments, acting through the respective provincial authorities.

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, 2013, representing 7.1% of the installed generating capacity in Argentina at such date, and generated a total of 7,018 net GWh of electricity during the year ended December 31, 2013, representing 5.4% 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 18,373 km (including Transba) of high voltage transmission lines that, as of December 31, 2013, represented approximately 90% 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 2013, 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, including (i) a thermal generation plant (Central Térmica Güemes) with an installed capacity of 361 MW located in General Güemes, in the Province of Salta, which we acquired in January 2007; and (ii) a thermal generation plant (Central Térmica Piquirenda) with an installed capacity of 30 MW located in Piquirenda, General San Martin, in the Province of Salta, which we acquired in March 2011;

 

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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; and

-         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.

·         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 2.8 million customers.  We acquired our controlling interest in Edenor in September 2007. 

In addition to our principal electricity assets, we hold other non-electricity assets and investments, including: 50% of the capital stock of Petrolera Pampa (as of December 31, 2013 our interest in Petrolera Pampa was 100%); 3.76% of the capital stock of TGS; a 10% stake in the share capital of CIESA; and the character of “Beneficiario” (interest beneficiary) and “Fidecomisario”(principal beneficiary) under the MSA Trust, owner of 40% of the capital stock of CIESA; and our investments in Bodega Loma de la Lata S.A..  Please see “Item 5. Operating and Financial Review and Prospects—Overview”. 

Organizational structure

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, 2013, 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.

 

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Hydroelectric

Thermal

Total

Summary of Electricity Generation Assets

HINISA

HIDISA

CTG1

CTLLL2

CPB

CTP

Installed Capacity (MW)

265

388

361

553

620

30

2,217

Market Share

0.8%

1.2%

1.1%

1.8%

2.0%

0.1%

7.1%

               

Net Generation 2013 (GWh)

616

421

1,675

1,947

2,229

130

7,018

Market Share

0.5%

0.3%

1.3%

1.5%

1.7%

0.1%

5.4%

Sales 2013(GWh)

833

630

2,268

2,372

2,676

130

8,909

 

           

 

Net Generation 2012 (GWh)

689

441

1,533

2,479

3,265

110

8,516

Market Share

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

Variation Net Generation 2012 - 2011

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 2013 (Ps. / MWh)

167.3

202.7

222.0

237.3

144.1

n.a.

193.0

Average Gross Margin 2013 (Ps. / MWh)

33.1

27.9

61.4

103.0

-12.0

n.a.

44.5

Average Gross Margin 2012 (Ps. / MWh)

60.2

49.6

41.3

118.9

1.8

222.2

51.6

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.

(1) Due to CTG’s merger with EGSSA and EGSSA Holding, the 2013 average price and gross margin takes into account CTP results.

(2)CTLL’s installed capacity includes 178 MW from conversion to combined cycle, which was commissioned 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’s 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 gross 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 consisted of installing a new Siemens steam-turbine generator of three heat-recovery steam generators in order to increase capacity of the plant by 178 MW, reaching a total installed capacity of approximately 553 MW.  Because of certain problems with the new turbines, the increase was of 165MW instead of 178MW (see “Item 4. Information on the Company - Our Business – Loma de la Lata” and “Item 8. Financial Information - Legal Proceedings – Legal proceedings involving Loma de la Lata”).

 

Other Projects

 

 

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·            Central Térmica Piquirenda: According to the Complementary Agreement (as defined hereinafter) executed by the Pampa Generators (as defined hereinafter), the parties must build a new power generation plant with a total capacity of 45 MW (hereinafter the “Project CTP”). The Project CTP 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 CTG.

The first stage of the Project CTP was concluded according to the original schedule.  The construction of the second stage of the Project CTP 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 30% 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 capital stock 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

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

 

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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. 

Additionally, through Provincial Law No. 8,423, the Province of Mendoza created the company Empresa Mendocina de Energía Sociedad Anónima con Participación Estatal Mayoritaria (“EMESA”).  Finally, on November 5, 2013 through Provincial Decree No. 2,058 the Province of Mendoza transferred all the equity owned in HIDISA and HINISA to EMESA.

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, through EMESA, 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 following authorities oversee HINISA and HIDISA’s fulfillment of their obligations under their respective concession agreement:

·         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 of the Province of Mendoza, which is the governing authority under the concession granted by the provincial authorities;

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

·         The Organismo Regulador de Seguridad de Presas, (the Dam Safety Regulating Body, or “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 setoff 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; 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 873 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 2013, 54% of HINISA’s sales were into the term market.  Total revenues for the year ended December 31, 2013 were Ps. 139 million, due to a generation of 616 GWh, 10.6% lower than in 2012, with a hydraulic contribution of 710 Hm3, 2.6% lower than in 2012.

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

 

 

2009

2010

2011

2012(*)

2013(*)

Net Generation (GWh)

854

778

586

689

616

Energy Purchases (GWh)

308

302

287

276

217

Total Energy Sales (GWh)

1,162

1,080

873

965

833

 

 

 

 

 

 

Average Price (AR$ / MWh)

133.5

158.7

190.7

186.2

167.3

Average Gross Margin (AR$ / MWh)

60.3

66.0

63.6

60.2

33.1

(1)       Note: Gross Margin before depreciation and amortization.

(*) Numbers prepared in accordance with IFRS.

 

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 588 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 2013, 48% of HIDISA’s sales were into the term market.  Total revenues for the year ended December 31, 2013 were Ps. 128 million, for a net generation of 421 GWh, 4.6% lower than in 2012, with a hydraulic contribution of 802 Hm3, 10.5% higher than in 2012.

  

The following chart shows certain relevant statistical data on HIDISA:

 

2009

2010

2011

2012(*)

2013(*)

Net Generation (GWh)

600

538

406

441

421

Energy Purchases (GWh)

327

313

300

280

209

Total Energy Sales (GWh)

927

851

706

721

630

   

 

 

 

 

Average Price (AR$ / MWh)

160.6

183.2

217.9

215.9

202.7

Average Gross Margin (AR$ / MWh)

65.4

64.0

44.1

49.6

27.9

 

Note: Gross Margin before depreciation and amortization.

(*) Numbers prepared in accordance with IFRS.

 

Güemes 

Central Térmica Güemes

History

Our thermal generation plant Central Térmica Güemes, is located in the northwestern region of Argentina, in the City of General Güemes, Province of Salta.  This plant 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.  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 of our wholly owned subsidiaries, subscribed 180,869,600 non-voting preferred shares issued by Güemes, which were subsequently converted into ordinary shares (representing 74.20% 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.   

 

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Aside from our ownership interest in Güemes, the Argentine Government owns 7.74% of Güemes’ voting capital stock. 

More recently, in December 2013, EGSSA (which was the owner of Central Térmica Piquirenda) and EGSSAH merged with CTG, with CTG as surviving company and EGGSSAH and EGSSA as the merged companies. For more information please see “Presentation of Information – Recent Developments – Merges – CTG, EGSSA and EGSSAH”

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 in early 2008 and was completed by 2010. It has a 30 MW thermal electricity generation plant comprised of ten GE Jenbacher JGS 620 gas-powered motor-generators, which represent 0.1% of the installed capacity in Argentina.

CTP started commercial operations on May 3, 2011. On July 15, 2011, CTP executed the WEM Supply contract under SE Resolution No. 220/2007. The agreed price is 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 SE Note No. 4,997, the SE authorized CTP to fire Gas Plus as generation fuel.  CTP has a firm contract with Petrolera Pampa for up to 172 Dam3 per day, which expires in July 2015.

Below there is a chart depicting the corporate structure of Güemes as of the date of this annual report: 

 

    

Operations

The following chart shows certain relevant statistical data on Güemes

 

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2009

2010

2011(*)

2012(*)

2013(*)

Net Generation (GWh)

1,699

1,533

1,846

1,533

1,675

Energy Purchases (GWh)

521

640

480

483

593

Total Energy Sales (GWh)

2,220

2,172

2,325

2,016

2,268

   

 

 

 

 

Average Price (AR$ / MWh)

197.5

233.0

224.1

218.6

222.0

Average Gross Margin (AR$ / MWh)

77.9

76.4

64.8

41.3

61.4

(*) Numbers prepared in accordance with IFRS.

 

The following chart shows certain relevant statistical data on CTP:

 

2011

2012

2013

Net Generation (GWh)

66

110

130

 

 

 

 

Average Price (AR$ / MWh)

388.0

411.8

n.a.

Average Gross Margin (AR$ / MWh)

125.8

222.2

n.a.

 

Note: Gross Margin before depreciation and amortization. * Due to CTG merger with EGSSA and EGSSA Holding, the 2013 average price and gross margin takes into account CTP results.

 

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 1,675 GWh in 2013.  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, 2013 (which includes CTG and CTP) were Ps. 503 million, for a net generation of 1,675 GWh, 9.2% higher than in 2012.

 

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.

 

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Additionally, on April 11, 2012, Güemes requested to the Secretariat of Energy the granting of the corresponding authorization under Law No.24,065 in order to obtain an export permit. When the electricity export agreement expired on July 31, 2013, the Secretariat of Energy has not granted such authorization.

 

In 2013, 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”).

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 natural gas to Güemes, 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 may reach 500,000 m3 per day if the production of gas in the Province of Salta increases from the production level existing at the time of the agreement’s execution.  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 several suppliers, such as Pan American Energy LLC, Total Austral S.A. or Pluspetrol S.A. 

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. 

CTLL is currently in the process of completing its merger with Powerco, with CTLL as the surviving company and Powerco as the merged company. For more information please, see “Presentation of Information – Recent Developments – Mergers – CTLL and Powerco”

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  gross 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 1,947 GWh in 2013, 21.4% lower than in 2012. Total revenues for the year ended December 31, 2013 were Ps. 563 million.

 

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During the period 1997-2013, the average annual generation has totaled 1,322 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:

 

2009

2010

2011(*)

2012(*)

2013(*)

Net Generation (GWh)

926

448

1,185

2,479

1,947

Energy Purchases (GWh)

26

29

14

290

425

Total Energy Sales (GWh)

952

476

1,199

2,769

2,372

   

 

 

 

 

Average Price (AR$ / MWh)

136.1

192.7

202.9

260.4

237.3

Average Gross Margin (AR$ / MWh)

24.2

24.0

58.6

118.9

103.0

  

Note: Gross Margin before depreciation and amortization.

(*) Numbers prepared in accordance with IFRS.

 

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 gross generation capacity in Loma de la Lata by 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 by 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

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 No.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 Project Agreements, 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’s breach, 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 to the steam turbine, which 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.  The greater 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.

 

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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, (ii) a discount equivalent to the last payment due under the Project Agreements which would be effective upon Provisional Acceptance, and (iii) 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.

As described above, 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 Project Agreements, 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.

In August 2011, while repairs of the turbine were still taking place, the Project Counterparties informed Loma de la Lata that Siemens A.G., the turbine manufacturer, had detected some defects on similar  steam turbines which generated vibrations in the last stage blades. This generated the need for additional modifications to the turbine which would imply a restriction on the power output 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.

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 and for not reaching the values (power and boilers’ counter-pressure) guaranteed by the Project Counterparties.

Given the delays in the handover 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 by BBVA and Commerzbank to secure the Project Counterparties’ obligations 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 had been 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 counterclaim against the Project Counterparties for the integral recovery of the damages caused as a consequence of the Project Counterparties’ defaults under the Project Agreements. See “Item 8. Financial Information - Legal Proceedings involving Loma de la Lata”.

 

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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 included a claim for the damages produced by the event in the arbitration process against the Project Counterparties, and notified the insurance companies in order to be compensated for the damage suffered. See - “Insurance Claim” below. The steam turbine went back into commercial operation in June 2013.

 

Insurance Claim

In connection with the event on November 14, 2012, Loma de la Lata made the necessary filings before the insurance companies and followed 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 answered certain inquiries from the insurance companies and received visits from their representatives. Despite the fact that this process is lengthy because of the complexity of the Project, the type of the incident and the magnitude of the damage, the insurance companies accepted the claim and 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 U.S. $ 43.7 million as compensation.

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. 220/2007 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 SE Resolution No.406/2003, that are allocated to the 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.

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 Loma de la Lata’s Project helps to 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 the Secretariat of Energy in order to stimulate natural gas production in tight sands and other new fields.  As stated in SE Resolution No. 24/2008, 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. $5.20 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”.  

 

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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 agreement with Apache Energía Argentina S.R.L. for up to 1,100 Dam3 per day, expiring in 2014.  This contract includes about 100 Dam3 per day produced by Petrolera Pampa

·         Firm gas supply agreement with Pan American Energy LLC Argentine branch for up to 1,700 Dam3 per day expiring in December 2014.

·         Firm gas supply agreement with Petrolera Pampa for up to 172 Dam3 per day expiring September 2014, having an automatic renewal clause.

Piedra Buena 

History

In July 2007, we entered into a stock purchase agreement with Albanesi S.A. and certain subsidiaries of Matlin Patterson 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.

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, 2013 were Ps. 386 million, for a net generation of 2,229 GWh, 31.7% lower than in 2012. During the 1997-2013 period, the average annual generation has totaled 2,113 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:

 

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2009

2010

2011(*)

2012(*)

2013(*)

Net Generation (GWh)

2,390

2,646

3,434

3,265

2,229

Energy Purchases (GWh)

808

755

718

565

447

Total Energy Sales (GWh)

3,198

3,401

4,152

3,829

2,676

   

 

 

 

 

Average Price (AR$ / MWh)

255.2

398.5

424.0

539.8

144.1

Average Gross Margin (AR$ / MWh)

13.8

28.3

28.9

1.8

(12.0)

Note: Gross Margin before depreciation and amortization.

(*) Numbers prepared in accordance with IFRS.

 

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.

As of the date of this annual report, Piedra Buena is no longer buying natural gas pursuant to SE Resolution No. 95/2013. Consequently, CAMMESA centralizes the acquisition of fuels for WEM’s generators (For more information please see “Our Business – The Argentine Electric Sector - SE Resolution No. 95/2013 – New price scheme and other modifications to the WEM”). It only maintains natural gas transport contracts that were active at the time such resolution was issued, such as, for example, the interruptible gas transportation contract with Camuzzi Gas Pampeana for a daily-variable capacity, and the interruptible gas transportation contracts with TGS for up to 3,600 Dam3 per day.

Finally, Piedra Buena does not have sufficient funds to begin the major maintenance works in Unit 29 scheduled for the year 2014 or to perform the annual seasonable maintenance works scheduled for early 2014. It should be pointed out that if the necessary funds are obtained, maintenance works will initially have a negative impact on Piedra Buena’s operating cash flows, since these tasks will prevent the plant from generating power during a period of approximately six months.

According to Piedra Buena’s management estimates, the new remuneration scheme implemented through SE Resolution No. 95/2013 —even within a scenario of maximum availability of Piedra Buena’s units— would not allow it to generate sufficient income during the following months to cover the minimum maintenance costs necessary to guarantee normal operating conditions for the generation dispatch during that same period

 

 

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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.  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).

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”). 

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 12,214 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 6,159 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 2013 represented approximately Ps. 16.6 million.

 

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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, 2013, were Ps. 670.8 million (Ps. 335.4 million on a proportional interest basis), representing 76.8% of Transener’s consolidated net revenues for such period.

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 No.653/2008, 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 No. 150/2011) 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 No. 653/2008 and 150/2011 mentioned above. 

On April 25, 2012, the ENRE issued Resolution No. 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 August 28, 2013, the ENRE issued Resolution No. 244/2013 which established a new annual rate of Ps. 131.2 million (including interest) as from August 2012 and instructed CAMMESA to make the respective adjustments.

 

                On September 13, 2013, Transener presented a motion for reconsideration of the Resolution No. 244/2013, which was accepted by the ENRE. As a consequence, on December 4, 2013, the ENRE issued Resolution No. 346/2013 which established a new annual rate of Ps. 132.2 million (including interest) as from August 2012 and instructed CAMMESA to make further adjustments.

 

On September 23, 2013, Transener requested the ENRE for a new determination of the Fourth Line’s revenue related to the cost variation from August 2013 according to the above-mentioned Resolution No. 244/2013.The response to this request is still pending.

 

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On a consolidated basis, Transener’s net Fourth Line revenues for the year ended December 31, 2013, were Ps. 15.2 million (Ps. 7.6 million on a proportional interest basis), representing 1.7% 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 SE Resolution No. 1/2003 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).

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, 2013 were Ps. 187.8 million (Ps. 93.9 million on a proportional interest basis), representing 21.5% 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. 

 

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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. 

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. 328/2008 and No. 327/2008, which granted 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) do 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 Agreements 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, the Instrumental Agreement related to the Definitive Agreements was entered into with the Secretariat of Energy and the ENRE, setting forth the following:

(iv)                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,

 

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(v)                 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,

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

(vii)              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

(viii)             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, 2013, through the financing of CAMMESA. Consequently, net revenues amounting to Ps. 367.2 million and Ps. 52.8 million, and interest income amounting to Ps. 213.8 million and Ps. 57.1 million, have been registered by Transener and Transba during the fiscal years ended December 31, 2013 and 2012, 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:

Differences for Connection and Capacity

 

 

Transba

Transener

Total

(in millions of Pesos)

Principal

75.9

189.3

265.2

Interest

43.2

104.8

148.0

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 (the “Financing Agreements”). 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 (together, the “Addenda I”).

 

On May 2, 2011 new extensions of the Financing Agreements (“Addenda 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 Addenda II.

 

In May 2013, Transener and Transba executed with the ENRE and the Secretariat of Energy, the Renewal Agreement, setting forth:  

 

(i)                   the recognition of Transener and Transba´s rights to collect the amounts resulting from the variations of costs during the period from December 2010 to December 2012,

(ii)                 the payment of outstanding balances from Addenda II, and

(iii)                a procedure for the updating and payment of cost variations incurred from January 1, 2013 to December 31, 2015, calculated biannually.

 

On October 25, 2013 and January 29, 2014, Transba and Transener negotiated their Addenda III.

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.

 

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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.

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. 423/2006 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 SE Resolutions No. 869/2008 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 3 and 4, 2008, respectively.  However, as of the date of this annual report, the ENRE has not yet called the public hearing mandated by the Secretariat of Energy in its SE Resolutions No. 869/2008 and 870/2008 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 the 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 (the “Transener Concession Agreement”).  The Transener Concession Agreement 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.

 

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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 management period, which is scheduled to end on July 2018, although Transener has requested that the ENRE extend the first management period for five years after the completion of the FTR in accordance with the Definitive Agreements with Transener.

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.

 

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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 than, 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.

Property, plant and equipment

As of December 31, 2013, Transener operated and maintained the following assets throughout 22 provinces in Argentina:

Transmission Lines   
500 kV  11,645 km 
220 kV  568 km 
Connection Equipment   
500 kVlinkage  37 
220 kVlinkage  6 
132 kVlinkage  96 
Transformation Equipment   
Capacity  13,850 MVA 
Reactive Equipment   
Capacity  14,919 MVAr 

    

 

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                As of December 31, 2013, 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  57 
66 kV  5 
33 kV  192 
13,2 kV  328 
Transformation Equipment   
Capacity  5,485 MVA 
Reactive Equipment   
Capacity  125,5 MVAr 

 

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.

 

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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)

We believe 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 2013.  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, 2013, Edenor served 2,772,893 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.”

Term.  Edenor’s concession currently expires on August 31, 2087 and can be extended for one additional 10-year period at Edenor’s request  and can be extended for one additional 10-year period if Edenor requests the extension at least 15 months before expiration. The Argentine Government may choose, however, to grant Edenor the extension on a non-exclusive basis.  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.

 

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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 since 2009.  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 2013, the fines and penalties imposed on Edenor by the ENRE amounted to Ps. 287.5 million, which represented 8.3% of Edenor’s energy sales.  As of December 31, 2013 Edenor’s accrued fines and penalties amounted to Ps. 923.8 million, as compared to Ps. 662.0 million as of December 31, 2012.

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 a 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.  We are, through IEASA, currently engaged in a dispute with a former shareholder of EASA in connection with the suspension and release of such ICSID claims. See “legal Proceedings – Other Legal Proceedings”.

 

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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