20-F

 

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, 2015

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)

Gerardo Carlos Paz

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:

1,695,859,459 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.

x Yes ¨ 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 x 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 Boardx 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

i

 

TABLE OF CONTENTS

PART I
Item 1.	Identity of Directors, Senior Management and Advisors	9
Item 2.	Offer Statistics and Expected Timetable	9
Item 3.	Key Information	9
	Selected Financial Data	9
	Exchange Rates	11
	Risk Factors	13
Item 4.	Information on the Company	50
	History and Development of the Company	50
	Our Business	50
	The Argentine Electricity Sector	110
Item 4A.	Unresolved Staff Comments	140
Item 5.	Operating and Financial Review and Prospects	140
Item 6.	Directors, Senior Management and Employees	216
Item 7.	Major Shareholders and Related Party Transactions	228
Item 8.	Financial Information	230
	Consolidated Financial Statements	230
	Legal Proceedings	230
	Dividends	240
Item 9.	The Offer and Listing	241
	Trading History	241
	The Argentine Securities Market	243
Item 10.	Additional Information	246
	Memorandum and Articles of Association	246
	Material Contracts	246
	Exchange Controls	246
	Taxation	249
	Dividends and Paying Agents	253
	Documents on Display	254
Item 11.	Quantitative and Qualitative Disclosures about Market Risk	255
Item 12.	Description of Securities Other than Equity Securities	260
	Description of American Depositary Shares	260
PART II
Item 13.	Defaults, Dividend Arrearages and Delinquencies	262
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	262
Item 15.	Controls and Procedures	262
Item 16A.	Audit Committee Financial Expert	263
Item 16B.	Code of Ethics	263
Item 16C.	Principal Accountant Fees and Services	263
Item 16D.	Exemptions from the Listing Standards for Audit Committees	264
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	264
Item 16F.	Change in Registrant’s Certifying Accountant	264
Item 16G.	Corporate Governance	265
Item 16 H.	Mine Safety Disclosure	270
PART III
Item 17.	Financial Statements	271
Item 18.	Financial Statements	271
Item 19.	Exhibits	271
	Index to Financial Statements	F1

2

 

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, 2015 and 2014,and for each of the three years in the period ended December 31, 2015, and the notes thereto (the “Consolidated Financial Statements”).  The Consolidated Financial Statements have been audited by Price Waterhouse & Co. S.R.L., an independent registered public accounting firm in Buenos Aires, Argentina, member firm of PricewaterhouseCoopers International Limited network, whose report is included in this annual report. Specially, with respect to Compañía de Transporte de Energía Eléctrica en Alta Tensión S.A. (“ Transener”) and Transportadora de Gas del Sur S.A. (“TGS”), given that the stake in such companies constitutes an interest in a joint venture and associate, respectively, they are not consolidated and they are measured under 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”). This annual report along with the Consolidated Financial Statement included herein have been approved by resolution of the Board of Directors’ meeting of the Company held on April 27, 2016.

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 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 significant 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”) in February 2009; and a  joint controlling interest in Compañía Inversora en Transmisión Eléctrica Citelec S.A. (“Citelec”) in September 2006, which owns a controlling stake in Transener.

Recent Developments

Authorization of the merger among CTG, EGSSAH and EGSSA

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 EGSSAH and EGSSA the merged companies. The purpose of the merger was to optimize the resources of each of the companies by simplifying and consolidating their administrative and operational structure. For accounting, fiscal and legal purposes, the effective corporate reorganization date was retroactive to October 1, 2013.  As a result of this merger, as EGSSAH was a public company, having its shares listed in the Mercado de Valores de Buenos Aires S.A. (the “Buenos Aires Stock Market” or “MERVAL”), CTG as the surviving company requested the relevant authorities for its shares to be listed in the Buenos Aires Stock Market.  In November 2015, the approvals of the relevant authorities were granted and CTG’s shares were listed in the Buenos Aires Stock Market.  For more information please see “Item 4.Our Business—Generation Business—Güemes—History.”

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CTG and ENDISA

On November 18, 2015, the board of directors of CTG and Energía Distribuída S.A. (“ENDISA”) resolved that it would be beneficial for these companies to merge into a single company, where CTG would be the surviving 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 4, 2016, and in connection with the required procedures, the board of directors of ENDISA and CTG approved the special financial statements required for the merger, the preliminary merger agreement executed between CTG and ENDISA, and the offering memorandum that describes the terms and conditions of the merger. For accounting, fiscal and legal purposes, the merger will be effective from January 1, 2016. On April 14 and April 21, 2016, the shareholders of CTG and ENDISA, respectively, approved the merger and all of its documentation. On March 8, 2016, 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.

If the approvals of the merger are not be obtained, the Company does not expect significant negative effects arising as a consequence thereof, due to the fact that CTG and ENDISA were consolidated before the merger and will continue to be consolidated after it.

CIESA Transaction – Assignment of ICSID Claim

Pursuant to a Call Option Agreement (the “Call Option Agreement”) dated March 11, 2011,entered into by and among the Company, Inversiones Argentina II and GEB Corp. (parent company of Inversiones Argentina II), on such date, the Company purchased an option for U.S.$ 1.0 million, exercisable at any time during a period of 18 months thereafter, to acquire the rights over the lawsuit initiated by Ponderosa Assets L.P. and Enron Creditors Recovery Corp. (the “Arbitration”) against the Republic of Argentina before the International Centre for Settlement of Investment Disputes (the “ICSID”) of the World Bank (the “ICSID Claim”) for freezing and pesifing U.S. dollar-based gas transportation tariffs in violation of certain provisions of the bilateral investment treaty between the United States and Argentina (see “Item 3. -Risk Factors – Our Generation Business”).  On October 6, 2011 the Company exercised the option and, therefore, in consideration of the amount of U.S.$ 25 million acquired the rights over the ICSID Claim  to control, suspend and waive the Arbitration proceedings against the Republic of Argentina pursuant to the Call Option Agreement.

On November 20, 2012, Ponderosa Assets Holding I LLC and Ponderosa Assets Holding II LLC (two subsidiaries of Pampa Inversiones) entered into an assignment agreement with Enron Creditors Recovery Corp., Citicorp North America, Inc., Atlantic Commercial Finance, Inc., Enron Global Power & Pipelines L.L.C., and Citibank N.A., pursuant to which (i) Enron Creditors Recovery Corp. transferred all of its right, title and interest in and to the general partnership interest in Ponderosa Assets L.P. to Ponderosa Assets Holding I LLC, and (ii) each of Citicorp North America, Inc., Atlantic Commercial Finance, Inc., Enron Global Power & Pipelines L.L.C. and any other relevant affiliate of Enron Creditors Recovery Corp. transferred all of its rights, title and interest in and to the limited partnership interests in Ponderosa Assets L.P. to Ponderosa Assets Holding II LLC. As a consequence thereof, Ponderosa Assets Holding I LLC and Ponderosa Assets Holding II LLC became the owners of Ponderosa Assets L.P., which is the formal plaintiff under the ICSID Claim.

On October 7, 2015, pursuant to the occurrence of certain events relating to an increase in TGS’s tariff that was a condition under a loan granted from TGS to the Company for U.S.$. 26 million, the Company assigned to TGS, all its rights and obligations under the ICSID Claim to cancel the amounts owed under the loan. For further information please see “Item 5. – Operating and Financial Review and Prospects – Debt.”

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Execution of Warrants

On September 27, 2006, we executed the Opportunities Assignment Agreement with Marcelo Mindlin, Damián Mindlin, Gustavo Mariani and Ricardo Torres (the “Key Executives”.  As amended, the Opportunities Assignment Agreement provided that, until September 28, 2014, these four individuals were obliged to offer to us on a priority basis any investment opportunity relating to assets and opportunities in the energy sector (including electricity, oil and gas and alternative energies) in all the stages of its production and commercialization in or outside Argentina that each of these four individuals or all of them as a group may identify, provided that such investment was within our financial possibilities.

As consideration for Marcelo Mindlin, Damián Mindlin, Gustavo Mariani and Ricardo Torres’ agreeing to offer to us the investment opportunities mentioned above, our shareholders approved the issuance of certain warrants to these four individuals on June 16, 2006.  Such warrants were issued to these individuals on September 27, 2006.  As amended, the warrants agreements provide that the warrants shall confer to the Key Executives (or any company controlled by any of them that holds such warrants), on their respective exercise date, the right to subscribe for shares of our common stock representing 20% of our capital stock before the execution of the warrants.  The warrants were issued in three series divided into three equal parts (Series I, II and III). 

Series I, Series II and Series III warrants vested by fifths on each of September 28, 2010, September 28, 2011, September 28, 2012, September 28, 2013, and September 28, 2014.  The exercise period for such warrants was 15 years, commencing on their issuance date on September 27, 2006. The exercise price of the warrants was U.S. $ 0.27.

On November 23, 2015, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“BAML”) notified us, on behalf of the holders of the warrants, of their decision to exercise, the outstanding warrants, which granted them the right to subscribe 381,548,564 of our shares of our common sotck.  The aggregate exercise price of the warrants paid by the Key Executives was U.S.$ 103,018,112, which was payable to us in Pesos as provided in the warrant agreements. As a consequence, we issued the underlying amount of new shares of our common stock, of which (i) a portion was sold in the form of ADSs in a public offering, and (ii) the remainder was delivered to the holders of warrants in the form of ADSs.

After the exercise of the warrants and the issuance of the shares, the new shares represent a 22.5% of our capital stock. This capital increase, as well as the public offering and listing of the shares issued, had been duly authorized by the Argentine National Exchange Commission and the Buenos Aires Stock Exchange.

Legal proceedings involving the Loma de la Lata Project

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 178MW (the “Loma de la Lata 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”).

As a consequence of the delays in the Loma de la Lata Project, the lower power of the steam turbine installed, and certain defaults of the Project Counterparties in their obligations assumed under the Project Agreements, Loma de la Lata, in exercise of its contractual rights, required of 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 bank guarantees issued under the Project Agreements.

5

 

In this context, in 2011, the International Chamber of Commerce Secretary, notified Loma de la Lata that an arbitration request had been filed by the Contractor.

On December 30, 2011, Loma de la Lata rejected before the Court of the International Chamber of Commerce the claim of the Contractor and filed a counterclaim with respect to the Project Counterparties for the integral recovery of the damages caused as a consequence of both parties defaults under the Project Agreements.

                On March 27, 2013, the parties filed their respective briefs of their claims (the Contractor for the amount of U.S.$ 97,546,030.40 and Loma de la Lata for the amount of U.S.$ 228,245,293.), presenting the corresponding evidence. On July 26, 2013, the parties submitted their respective responses, and on October 15, 2013, they submitted their last responses before the hearings. Such hearings took place in March 2014 and in May 2014 where the parties submitted their final allegations.

On June 11, 2015, the arbitral award on this dispute was issued in which, (i) breaches by the Project Counterparties were acknowledged, (ii) the Project Counterparties were ordered to pay for the damages to Loma de la Lata an amount of U.S.$ 49.3 million, and (iii) such amount was offset with certain credits of the Project Counterparties against Loma de la Lata, which resulted in a final amount due by the Project Counterparties to Loma de la Lata of U.S.$15.1 million (the “Arbitral Award”).

On December 3, 2015, Loma de la Lata and the Project Counterparties entered into an agreement to comply with the Arbitral Award, pursuant to which the Project Counterparties agreed to pay Loma de la Lata an amount of U.S.$. 15.3 million, in four different installments, the first three of U.S.$. 4 million and the last one of U.S.$. 3.3 million, each to be due on December 12, 2015, January 30, 2016, February 27, 2016 and March 30, 2016, respectively (the “Payment Agreement”). The Payment Agreement is governed under the laws of Spain and the parties agreed to submit any dispute the jurisdiction of the courts of Spain.

The Project Counterparties breached the Payment Agreement by failing to timely pay the installments of the Payment Agreement. Loma de la Lata initiated the enforcement of the Payment Agreement before the courts of Spain As of the date of this annual report, Loma de la Lata had received the full amount under the Payment Agrement which amounted to U.$.S15.7 million, including interests and costs, the first week of May, 2016. For further information please see “Item 8. – Legal Proceedings involving Loma de la Lata.”

Potential acquisition of Petrobras Argentina S.A.

                The Company and Petroleo Brasileiro S.A. (“Petrobras Brasil”) are in negotiations for the acquisition by the Company of 67.2% of the capital stock and voting rights of Petrobras Argentina S.A. (“Petrobras”) owned by Petrobras Participaciones S.L., a wholly owned subsidiary of Petrobras Brasil (the “Petrobras Acquisition”).

                On March 1, 2016, the Company and Petrobras Brasil executed an Exclusivity Agreement, pursuant to which the parties agreed to a 30-day exclusivity period, which was extended until May 1, 2016, to continue their advanced negotiations in connection with the Petrobras Acquisition.

                The consummation of the Petrobras Acquisition is subject to the successful completion of the negotiation of the terms and conditions and the execution of definitive documents relating to such transaction, and the approval of such terms, conditions and documents by the corporate bodies of Petrobras Brasil and the Company. The closing of the Petrobras Acquisition will also be subject to the satisfaction of conditions precedent usual and customary for transactions of this nature, including regulatory approvals, to be included in the definitive documents. As of the date of this annual report, the parties are still negotiating the terms and conditions of the Petrobras Acquisition.

Potential sale of our indirect stake in Transportadora de Gas del Sur

As part of the Company’s ongoing evaluation of its corporate strategy, including the potential acquisition of new assets, on March 9, 2016, its Board of Directors approved the commencement of negotiations regarding the sale of the Company’s indirect stake in TGS. For a brief description about TGS, please see “Item 4. – Our Business – TGS”.

On April 22, 2016, the Company agreed with Harz Energy, a subsidiary of Grupo Neuss (the “Potential Buyer”) a 45-day exclusivity period to complete the sale of the Company’s indirect stake in TGS. The Company and the Potential Buyer agreed certain terms and commercial conditions including (i) as consideration for granting to the Potential Buyer the exclusivity period, the Potential Buyer paid to the Company U.S.$ 3.0 million which would be deemed as an advance payment of a portion of the purchase price; and (ii) in the event that the sale of TGS to the Potential Buyer is completed, the purchase price will be U.S.$ 250 million.

6

 

Acquisition of Greenwind S.A – Eolic Project

In order to continue expanding the Company’s generation business, on April 18, 2016, Loma de la Lata acquired 100% of the capital stock and shares of Greenwind S.A. (“Greenwind”), for an amount of U.S.$ 2.1 millon. Greenwind is a company incorporated under the laws of Argentina whose purpose is to develop an eolic project named “Corti” which will consist of a wind farm with a 100MW capacity, located in Bahía Blanca, Province of Buenos Aires. For such purpose, Greenwind has a legal right of use and profit from the 1,500 hectare and a wind measurement for a 4 year period.

Functional and Presentation Currency

The Company and almost all of its subsidiaries keep their accounting records and prepare their financial statements in Argentine Pesos, 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 Argentine 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 (See “Exchange rate” below).

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.$” and “Dollars” are to U.S. Dollars, and references to “Ps.”, “AR$” 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, 2015, the seller exchange rate reported by the Banco de la Nación Argentina (“Banco Nación”), as of December 31, 2015 of U.S. $1.00 = Ps. 12.99, unless otherwise indicated.  These conversions should not be considered representations that any such amounts have been, could have been or could be converted into U.S. Dollars at that or at any other exchange rate.  On April 19, 2016, the exchange rate was Ps. 14.19, to U.S.$ 1.  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.- Risk Factors,” “Item 4.- Our Business” and “Item5.- Operating and Financial Review and Prospects.”  Some of the matters discussed concerning our business operations and financial performance include estimates and forward-looking statements within the meaning of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”).

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

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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 the government future 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.  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.

8

 

PART I

Item 1. Identity of Directors, Senior Management and Advisors

                        Not applicable.

Item 2.             Offer Statistics and Expected Timetable

                        Not applicable.

Item 3.             Key Information

SELECTED FINANCIAL DATA

The following table presents our selected financial data for each of the years in the five-year period ended December 31, 2015. The selected consolidated statement of comprehensive income (loss) and statement of cash flow data for the years ended December 31, 2015, 2014, 2013, 2012 and 2011 and the selected consolidated statement of financial position as of December 31, 2015 and 2014, have been prepared in accordance with IFRS as issued by the IASB and, with the exception of the financial data as of December 31, 2011, 2012 and 2013, have been derived from our Consolidated Financial Statements included elsewhere in this annual report.  The financial data as of December 31, 2011, 2012 and 2013, is derived from our audited consolidated financial statements that are not included in this annual report, which were audited by Price Waterhouse & Co. S.R.L., member firm of PricewaterhouseCoopers network, an independent registered public accounting firm. 

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.” 

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	At December 31,
	2015	2015	2014	2013	2012	2011
	(US$) (1)	(Pesos)	(Pesos)	(Pesos)	(Pesos)	(Pesos)
STATEMENT OF FINANCIAL POSITION
Non-current assets:
Investments in joint ventures	17,237,795	223,918,951	226,894,893	188,644,285	192,315,761	222,219,616
Investments in associates	9,487,092	123,237,325	133,169,584	134,774,654	132,546,155	130,251,204
Property, plant and equipment	1,116,890,152	14,508,403,073	9,218,099,975	6,902,661,359	6,019,372,559	5,847,071,944
Intangible assets	56,517,928	734,167,886	872,384,099	901,846,313	1,798,492,198	1,791,802,004
Biological assets	142,700	1,853,667	1,894,481	1,935,296	1,976,109	1,935,511
Financial assets at fair value through profit and loss	198,474,419	2,578,182,705	963,012,962	432,729,855	303,792,067	553,768,412
Deferred tax asset	4,024,631	52,279,953	93,681,916	63,214,262	87,532,301	116,574,172
Trade and other receivables	90,022,886	1,169,397,290	954,842,893	366,685,679	421,117,506	342,191,671
Total non-current assets	1,492,797,602	19,391,440,850	12,463,980,803	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	18,888	245,361	198,470	564,431	497,255	99,003
Inventories	17,356,643	225,462,790	135,570,860	114,615,289	107,342,562	60,421,699
Financial assets at fair value through profit and loss	314,166,244	4,081,019,508	1,028,577,127	844,259,368	236,646,460	172,193,934
Trade and other receivables	379,880,333	4,934,645,531	2,903,411,995	2,256,967,076	1,541,543,369	1,373,557,822
Derivatives financial instruments	15,177	197,150	-	-	-	1,315,707
Cash and cash equivalents	39,768,893	516,597,918	335,234,106	341,668,865	156,647,001	245,623,669
Total current assets	751,206,178	9,758,168,258	4,402,992,558	3,558,075,029	2,127,142,341	1,898,715,834
Assets classified as held for sale	-	-		11,987,500	235,196,934	1,183,952,808
Total assets	2,244,003,780	29,149,609,108	16,866,973,361	12,562,554,232	11,319,483,931	12,088,483,176
Shareholders´ equity
Share capital	130,551,152	1,695,859,459	1,314,310,895	1,314,310,895	1,314,310,895	1,314,310,895
Additional paid-in capital	94,802,407	1,231,483,268	342,984,871	263,489,911	1,018,352,216	1,536,759,469
Legal reserve	3,961,675	51,462,158	14,304,190	-	-	27,396,793
Voluntary rerserve	75,271,824	977,780,998	271,779,611	-	-	-
Reserve for directors’ options	-	-	266,060,067	259,351,053	250,405,701	241,460,349
Retained earnings (Accumulated losses)	235,957,615	3,065,089,423	743,159,355	286,083,801	(771,796,574)	(667,906,366)
Other comprehensive loss	(2,393,087)	(31,086,202)	(32,191,096)	(24,385,321)	(10,753,372)	(12,650,920)
Equity attributable to owners of the company	538,151,586	6,990,589,104	2,920,407,893	2,098,850,339	1,800,518,866	2,439,370,220
Non-controlling interest	107,052,282	1,390,609,148	633,431,122	775,971,764	529,796,278	1,327,964,340
Total equity	645,203,869	8,381,198,252	3,553,839,015	2,874,822,103	2,330,315,144	3,767,334,560
Non-current liabilities:
Trade and other payables	207,757,502	2,698,769,957	1,909,433,852	1,295,851,077	2,230,282,210	1,568,886,646
Borrowings	514,607,101	6,684,746,241	3,786,988,603	2,924,530,436	2,218,483,028	2,487,650,894
Deferred revenue	11,841,095	153,815,820	109,089,120	33,665,717	264,427,265	174,796,000
Salaries and social security payable	6,161,612	80,039,338	62,858,307	25,959,305	17,460,281	23,584,607
Defined benefit plans	20,358,342	264,454,859	196,587,957	136,521,808	120,902,649	103,634,036
Deferred tax liabilities	45,541,805	591,588,053	470,584,488	416,561,631	625,429,965	821,124,172
Taxes payable	29,904,773	388,463,004	281,231,713	150,095,508	61,545,202	45,675,917
Provisions	24,155,425	313,778,975	119,527,656	91,464,804	86,409,533	69,975,102
Total non-current liabilities	860,327,656	11,175,656,247	6,936,301,696	5,074,650,286	5,624,940,133	5,295,327,374
Current liabilities:
Trade and other payables	512,123,588	6,652,485,409	4,536,471,292	3,098,555,391	1,687,978,624	1,082,963,093
Borrowings	100,666,888	1,307,662,872	783,583,090	753,571,799	790,916,969	893,801,060
Deferred revenue	58,790	763,684	763,684	-	-	-
Salaries and social security payable	68,280,817	886,967,815	725,274,898	501,445,076	447,870,658	324,900,133
Defined benefit plans	3,548,066	46,089,380	26,759,690	8,552,119	21,846,945	14,888,746
Taxes payable	46,967,858	610,112,473	231,928,622	239,718,270	248,119,227	196,282,111
Derivatives financial instruments	1,391,948	18,081,410	47,880,462	-	-	-
Provisions	5,434,301	70,591,566	24,170,912	11,239,188	11,659,708	11,399,017
Total current liabilities	738,472,256	9,592,754,609	6,376,832,650	4,613,081,843	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	1,598,799,912	20,768,410,856	13,313,134,346	9,687,732,129	8,989,168,787	8,321,148,616
Total liabilities and equity	2,244,003,780	29,149,609,108	16,866,973,361	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, 2015 have been translated into U.S.$ at the average between the purchase and seller exchange rate for U.S. $ quoted by Banco Nación on December 31, 2015 of Ps. 12.990 to U.S.$1.00.  See “Item 3. - Key Information—Exchange Rates.”

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	For the year ended December 31,
	2015	2015	2014	2013	2012	2011
	(US$) (1)	(Pesos)	(Pesos)	(Pesos)	(Pesos)	(Pesos)
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
Revenue	551,253,382	7,160,781,433	6,204,645,511	5,334,993,550	6,695,364,819	5,229,666,000
Cost of sales	(546,019,287)	(7,092,790,535)	(6,029,079,708)	(5,603,274,246)	(6,355,771,263)	(4,726,852,788)
Gross profit	5,234,095	67,990,898	175,565,803	(268,280,696)	339,593,556	502,813,212
Selling expenses	(74,879,294)	(972,682,033)	(713,360,347)	(634,221,473)	(414,002,396)	(282,577,570)
Administrative expenses	(95,410,783)	(1,239,386,075)	(837,458,716)	(563,852,810)	(463,317,509)	(379,815,207)
Other operating income	72,415,553	940,678,036	311,975,857	466,220,030	196,418,100	132,580,010
Other operating expenses	(58,075,554)	(754,401,446)	(447,074,876)	(204,039,316)	(203,949,959)	(134,804,547)
Reversal of impairment of property, plant and equipment	1,944,569	25,259,957	88,406,704	-	-	-
Impairment of property, plant and equipment	-	-	-	-	(108,283,569)	(557,668,671)
Share of profit (loss) of joint ventures	714,224	9,277,768	34,208,368	(4,799,349)	(31,020,306)	(14,605,490)
Share of (loss) profit of associates	(764,608)	(9,932,259)	(1,605,070)	2,228,499	2,294,951	19,779,284
Impairment of intangible assets	-	-	-	-	-	(90,056,095)
Profit of acquisition of subsidiaries	-	-	-	-	-	505,936,374
Operating loss before higher costs recognition and SE Resolution No. 32/15	(148,821,798)	(1,933,195,154)	(1,389,342,277)	(1,206,745,115)	(682,267,132)	(298,418,700)
Income recognition on account of the RTI - SE Resolution No. 32/15	386,844,783	5,025,113,729	-	-	-	-
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes	42,455,615	551,498,435	2,271,926,952	2,933,051,544	-	-
Operating profit (loss)	280,478,600	3,643,417,010	882,584,675	1,726,306,429	(682,267,132)	(298,418,700)
Financial income	26,830,464	348,527,733	440,541,774	336,295,165	143,263,842	92,803,259
Financial cost	(96,790,977)	(1,257,314,794)	(1,113,228,906)	(813,875,720)	(501,942,312)	(417,859,940)
Other financial results	130,944,651	1,700,971,014	420,055,021	(519,261,217)	(203,001,724)	(142,516,846)
Financial results, net	60,984,138	792,183,953	(252,632,111)	(996,841,772)	(561,680,194)	(467,573,527)
Profit (Loss) before income tax	341,462,738	4,435,600,963	629,952,564	729,464,657	(1,243,947,326)	(765,992,227)
Income tax	(45,171,436)	(586,776,949)	(100,412,278)	12,178,991	133,311,022	36,912,458
Profit (Loss) for the year from continuing operations	296,291,302	3,848,824,014	529,540,286	741,643,648	(1,110,636,304)	(729,079,769)
Discontinued operations	-	-	-	(126,858,328)	31,066,521	(90,851,233)
Total Profit (Loss) of the year	296,291,302	3,848,824,014	529,540,286	614,785,320	(1,079,569,783)	(819,931,002)
Total Profit (Loss) of the year attributable to:
Owners of the company	235,957,615	3,065,089,423	743,159,355	286,083,801	(649,694,254)	(741,395,337)
Non - controlling interest	60,333,687	783,734,591	(213,619,069)	328,701,519	(429,875,529)	(78,535,665)
Basic earnings (loss) per share from continuing operations	0.1752	2.2760	0.5654	0.2829	(0.5133)	(0.5297)
Diluted earnings (loss) per share from continuing operations	0.1752	2.2760	0.5082	0.2829	(0.5133)	(0.5297)
Basic (loss) earnings per share from discontinued operations	-	-	-	(0.0652)	0.0190	(0.0344)
Diluted (loss) earnings per share from discontinued operations	-	-	-	(0.0652)	0.0186	(0.0344)
Dividends per share (2)	-	-	-	-	-	0.0138
Basic earning (loss) per ADS (2) from continuing operations	0.0070	0.0910	0.0226	0.0113	(0.0205)	(0.0212)
Diluted earning (loss) per ADS (2) from continuing operations	0.0070	0.0910	0.0203	0.0113	(0.0205)	(0.0212)
Basic (loss) earning per ADS (2) from discontinuing operations	-	-	-	(0.0026)	0.0008	(0.0014)
Diluted (loss) earning per ADS (2) from discontinuing operations	-	-	-	(0.0026)	0.0007	(0.0014)
Dividends per ADS (3)	-	-	-	-	-	0.0006
Weighted average amount of outstanding shares	103,673,317	1,346,716,389	1,314,310,895	1,314,310,895	1,314,310,895	1,314,310,895
CASH FLOW DATA
Net cash generated by operating activities	352,629,902	4,580,662,424	2,574,156,965	1,656,196,597	1,198,056,614	1,063,758,464
Net cash used in investing activities	(547,692,154)	(7,114,521,077)	(2,472,053,463)	(1,456,587,868)	(903,135,054)	(1,657,527,373)
Net cash generated by (used in) financing activities	203,029,408	2,637,352,005	(147,688,277)	(76,931,201)	(542,226,508)	383,135,512

⁽¹⁾ Solely for the convenience of the reader, Peso amounts as of December 31, 2015 have been translated into U.S.$ at the average between the purchaser and seller exchange rate for U.S.$ quoted by Banco Nación on December 31, 2015 of Ps. 12.990 to U.S.$ $1.00.  See “Item 3. - Key Information—Exchange Rates.”

⁽²⁾ Each ADS represents 25 common shares.

⁽³⁾ In 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

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.

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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 April1 through April 19, 2016.

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

Overview

We are a stock corporation (sociedad anónima) incorporated under the laws of the Republic of Argentina and substantially all of our revenues are earned in Argentina and substantially all of our operations, facilities, and customers are located in Argentina.  Accordingly, our financial condition and results of operations depend to a significant extent on macroeconomic, regulatory, political and financial conditions prevailing in Argentina, including growth, inflation rates, currency exchange rates, interest rates, and other local, regional and international events and conditions that may affect Argentina in any manner.  For example, slower economic growth or economic recession could lead to a decreased demand for electricity in 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 (including tariffs and other compensation of public services), foreign exchange controls and taxes, have had and may in the future 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 or regional financial crisis and unfavorable credit and market conditions may negatively affect our liquidity, customers, business, and results of operations

The effects of a global or regional 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.  Such was the case in 2008, when the global economic crisis led to a sudden economic decline in Argentina in 2009, accompanied by inflationary pressures, depreciation of the Peso and a drop in consumer and investor confidence.

The effect of the economic crisis on our customers and on us cannot be predicted.  Weak global and local 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. Weak global and local economic conditions could lead to reduce demand or lower prices for energy, which could have a negative effect on our revenues. The financial and economic situation in Argentina or other countries in Latin America, such as Brazil, may also have a negative impact on us and third parties with whom we do, or may do, business. 

In addition, the global economic crisis that began in the fourth quarter of 2008, triggering an international stock market crash and the insolvency of major financial institutions, limited the ability of Argentine companies to access international financial markets as they had in the past or made such access significantly more costly for Argentine issuers.  A similar global or regional financial crisis in the future could limit our ability to access credit or capital markets at a time when we require financing, thereby impairing our flexibility to react to changing economic and business conditions (see “Argentina’s ability to obtain financing from international markets is limited, in part due to the unresolved litigation with holdout bondholders, which may impair its ability to foster economic growth and, consequently, affect our business, results of operations and prospects for growth” above). For these reasons, any of the foregoing factors could together or independently have an adverse effect on our results of operations and financial condition and cause the market value of our ADSs to decline.

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

The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high levels of inflation and currency devaluation.  Sustainable economic growth in Argentina is dependent on a variety of factors, including the international demand for Argentine exports, the stability and competitiveness of the Argentine Peso against foreign currencies, the 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:

·The gross domestic product (“GDP”) growth has declined, 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;

·Argentina’s public debt as a percentage of GDP remains high, the availability of long-term credit is scarce and international financing remains limited;

·continued increases in public expenditure could result in fiscal deficits and affect economic growth;

·inflation remains high and threatens to continue at those levels;

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

·a significant number of protests or strikes could take place, as they have in the past, which could adversely affect various sectors of the Argentina economy;

·energy or natural gas supply may not be sufficient to supply increased industrial activity (thereby limiting industrial development) and consumption;

·unemployment and informal employment remains high; and

·in the climate created by the above-mentioned conditions, demand for foreign currency has grown, generating a capital flight effect to which the Fernández de Kirchner administration reacted in the past with regulations and currency exchange transfer restrictions.

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 entities 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 the recent congressional and presidential elections on the future economic and political environment of Argentina is uncertain, but likely to be material

Presidential and congressional elections in Argentina took place on October 25, 2015, and a runoff election (ballotage) between the two leading Presidential candidates was held on November 22, 2015, which resulted in Mr. Mauricio Macri being elected President of Argentina.  The Macri administration assumed office on December 10, 2015, and is expected to adjust longstanding fiscal and monetary policies that have resulted in recurrent public sector deficits, inflation and pervasive foreign exchange controls and limited foreign investment. 

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Since assuming office, the Macri administration has announced and already implemented several significant economic and policy reforms, including:

·Electricity system state of emergency and reforms.The Macri administration declared the state of emergency of the national electricity system that will remain in effect until December 31, 2017. The state of emergency allows the Argentine Government to take actions designed to guarantee the supply of electricity.  In addition, following the Macri administration’s announcement that it would reexamine energy subsidy policies, the ME&M increased electricity rates for the wholesale market for purchases made between February 1 and April 30, 2016.   This increase is expected to be used to reduce subsidies to the sector. Also, through various Resolutions the Argentine Government has increased the tariff for generators and distributors, as described in this annual report (i.e.,ENRE Resolution No. 1/2016 and SEE Resolution No. 22/2016).

• INDEC reforms.  In light of questions raised by the International Monetary Fund (“IMF”) regarding the reliability of the information produced by the INDEC, the Macri administration appointed Mr. Jorge Todesca, previously a director of a private consulting firm, as head of the INDEC.  It is expected that the INDEC will implement certain methodological reforms and adjust certain macroeconomic statistics on the basis of these reforms.  On January 8, 2016, Decree No. 55/2016 was issued by the Argentine government declaring a state of administrative emergency on the national statistical system and on the official agency in charge of the system, the INDEC, until December 31, 2016. Following the declared emergency, the INDEC has ceased publishing statistical data until a rearrangement of its technical and administrative structure is finalized. During the implementation of these reforms, however, the INDEC will use official CPI figures and other statistics published by the Province of San Luis and the City of Buenos Aires.  Despite these expected reforms, there is uncertainty as to whether official data will be sufficiently corrected and within what time period such data will be corrected, and what effect these reforms will have on the Argentine economy and public accounts.

• Foreign exchange reforms.  In addition, the Macri administration implemented certain reforms to the foreign exchange market regulatory framework that provide greater flexibility and easier access to the foreign exchange market.  The principal measures adopted as of the date of this annual report include: (i) the elimination of the requirement to register foreign exchange transactions in the Argentine Tax Authority’s (“AFIP”) database; (ii) the elimination of the requirement to transfer the proceeds of new financial indebtedness transactions into Argentina and settle such proceeds through the single and free‑floating foreign exchange market (the “MULC”); (iii) the reestablishment of the U.S.$2.0 million monthly limit per resident on the creation of offshore assets; (iv) a decrease from 30% to 0% of the registered, non-transferable and non-interest-bearing deposit required in connection with certain transactions involving foreign currency inflows; (v) the reduction of the required period that the proceeds of any new financial indebtedness incurred by residents, held by foreign creditors and transferred through the MULC must be maintained in Argentina from 365 calendar days to 120 calendar days from the date of the transfer of the relevant amount; and (vi) the elimination of the requirement of a minimum holding period (72 business hours) for purchases and subsequent sales of the securities. In addition, on December 17, 2015, following the announcement of the lifting of a significant portion of exchange restrictions, the Peso depreciated approximately 36% against the U.S. Dollar.  The exchange rate published by Banco Nación as of April 19, 2016, was Ps. 14.19 to U.S.$1.00.

• Foreign trade reforms.  The Macri administration eliminated export duties on wheat, corn, beef and regional products, and reduced the export duty on soybeans by 5% to 30%.  Further, the 5% export duty on most industrial exports and export duties on mining exports were eliminated.  With respect to payments of existing debts for imports of goods and services, the Macri administration announced the gradual elimination of amount limitations for access to the MULC and eliminated the amount for any new transactions.  As of December 17, 2015, the amount limitations for such existing debt transactions are expected to gradually decrease and be eliminated in June 2016.

• Financial Policy. Soon after taking office, the Macri administration sought to settle the outstanding claims with holdout creditors.  See “—Argentina’s ability to obtain financing from international markets is limited, in part due to the unresolved litigation with holdout bondholders, which may impair its ability to foster economic growth and, consequently, affect our business, results of operations and prospects for growth.”

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As of the date of this annual report, the impact that these measures and any future measures taken by the Macri administration will have on the Argentine economy as a whole, and the electricity sector in particular, cannot be predicted.  While we believe that the effect of the planned liberalization of the economy will be positive for our business by stimulating economic activity, it is not possible to predict such effect with certainty and such liberalization could also be disruptive to the economy and fail to benefit or harm our business.  In addition, there is uncertainty as to which measures announced during the Presidential campaign by the Macri administration will be taken and when.  Since assuming office, the Macri administration has begun reviewing certain public employee contracts in several sectors and reformed energy and gas sector tariffs. However, we cannot predict how the Macri administration will address certain other political and economic issues that were central during the presidential election campaign, such as the financing of public expenditures, public service subsidies and tax reforms, or the impact that any measures related to these matters that are implemented by the Macri administration will have on the Argentine economy as a whole.  In addition, political parties opposed to the Macri administration retained a majority of the seats in the Argentine Congress in the recent elections, which will require the Macri administration to seek political support from the opposition for its economic proposals and creates further uncertainty as to the ability of the Macri administration to pass any measure which it may expect to implement.  Political uncertainty in Argentina relating to the measures to be taken by the Macri administration in respect of the Argentine economy could lead to volatility in the market prices of securities of Argentine companies, such as ours. We cannot assure you the impact that these measures or any future measures taken by the Macri administration will have on the Argentine economy, 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.

If the high levels of inflation continue, the Argentine economy and our results of operations could be adversely affected

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 pressures, evidenced by significantly higher fuel, energy and food prices, among other factors.  According to data published by the Instituto Nacional de Estadística y Censos (National Statistics and Census Institute or “INDEC”), the rate of inflation reached 10.6% in 2013, 21.4% in 2014 and 11.9% in the ten-month period ended October 31, 2015.  The wholesale price index (“WPI”) increased 12.7%, 13.1%, 14.8% and 28.3% in each of those years, respectively, and 10.6% in the ten-month period ended October 31, 2015.  In November 2015, the INDEC suspended the publication of the consumer price index (the “CPI”) and the WPI.  See “—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, in turn, limit our ability to access credit and the capital markets” below.  The previous administration has in the past 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 rate affects Argentina’s foreign competitiveness by diluting the effects of the Argentine Peso devaluation, negatively impacting employment and the level of economic activity and employment and undermining confidence in Argentina’s banking system, which may 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 inflationary environment could undermine our results of operations 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.

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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, in turn, may limit our ability to access credit and the capital markets

In January 2007, INDEC modified its methodology used to calculate 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, through 2015, the credibility of the CPI, as well as other indexes published by the INDEC have been called into question.

On November 23, 2010, the Fernández de Kirchner administration began consulting with the IMF for technical assistance in order to prepare a new national consumer price index with the aim of modernizing the current statistical system.  However, Argentina was subsequently censured by the IMF in 2014 for failing to make sufficient progress in adopting remedial measures to address the quality of official data, including inflation and GDP.

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 represented the first national indicator to measure changes in prices of final consumption by households. Unlike the previous price index, which only measured inflation in the urban sprawl of the City of Buenos Aires, the new price index is calculated by measuring prices of goods across the entire urban population of the 24 provinces of Argentina. Using this new methodology, the consumer price index rose to 11.9% in the ten-month period ended October 31, 2015. Although this new methodology brought inflation statistics closer to those estimated by private sources, material differences between official inflation data and private estimates remained during 2015. In November 2015, the INDEC suspended the publication of the CPI and the WPI.

On January 8, 2016, Decree No. 55/2016 was issued by the Argentine government declaring a state of administrative emergency on the national statistical system and on the official agency in charge of the system, the INDEC, until December 31, 2016. Following the declared emergency, the INDEC ceased publishing statistical data until a rearrangement of its technical and administrative structure is finalized. During the implementation of these reforms, however, INDEC will use official CPI figures and other statistics published by the Province of San Luis and the City of Buenos Aires.  Despite these expected reforms, there is uncertainty as to whether official data will be sufficiently corrected and within what time period such data will be corrected, and what effect these reforms will have on the Argentine economy.The Macri administration has released an alternative CPI index based on data from the City of Buenos Aires and the Province of San Luis and is currently working on a new inflation index.  According to the most recent publicly available information based on data from the Province of San Luis, the CPI grew by 31.6% in 2015 and the inflation rate was 6.5%, 4.2% and 2.7%, in December 2015, January 2016 and February 2016, respectively. According to the most recent publicly available information based on data from the City of Buenos Aires, the CPI grew by 26.9% in 2015 and the inflation rate was 3.9%, 4.1% and 4.0%, in December 2015, January 2016 and February 2016, respectively.

No official inflation data has been released since the new INDEC authorities have taken charge, and there is uncertainty regarding current rates of inflation.

The discontinuation of the publication of indices by the INDEC has generated uncertainty in Argentina’s economy, and any future required correction or restatement of the INDEC indices could result in a decrease in confidence in Argentina’s economy, which, in turn, could 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, in part due to the unresolved litigation with holdout bondholders, which may impair its ability to foster economic growth and, consequently, affect our business, results of operations and prospects for growth

The prospects for Argentine companies of accessing financial markets might be limited in terms of the amount of financing available, and the conditions and cost of such financing.

Economic policy measures adopted by the Argentine Government, may continue to prevent Argentine companies such as us from accessing the international capital markets or make the terms of any such transactions less favorable than those provided to companies in other countries in the region, and may therefore negatively impact our financial condition or cash flows.

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In 2005 and 2010, Argentina conducted exchange offers to restructure part of its sovereign debt that had been in default since the end of 2001.  As a result of these exchange offers, Argentina restructured over 92% of its eligible defaulted debt. 

Commencing in 2002, holdout creditors filed numerous lawsuits against Argentina in several jurisdictions, including the United States, Italy, Germany, and Japan.  These lawsuits generally assert that Argentina failed to make timely payments of interest or principal on their bonds, and seek judgments for the face value of or accrued interest on those bonds.  Judgments have been issued in numerous proceedings in the United States and Germany, but to date creditors have not succeeded, with a few minor exceptions, in executing on those judgments. 

In February 2012, plaintiffs in 13 actions in New York, involving claims for U.S.$ 428 million in principal, plus interest, obtained a U.S. district court order enjoining Argentina from making interest payments in full on the bonds issued pursuant to the 2005 and 2010 exchange offers (“Exchange Bonds”) unless Argentina paid the plaintiffs in full, under the theory that the former payments violated the pari passu clause in the 1994 Fiscal Agency Agreement (the “FAA”) governing those non‑performing bonds.  The U.S. district court order was stayed pending appeals.  The Second Circuit Court of Appeals confirmed the so-called pari passu injunctions, and on June 16, 2014 the U.S. Supreme Court denied Argentina’s petition for a writ of certiorari and the stay of the pari passu injunctions was vacated on June 18, 2014.  Additionally, in 2015, plaintiffs that had obtained pari passu injunctions amended their complaints to include claims that Argentina’s servicing of more recently issued BONAR 2024 bonds, as well as all external indebtedness in general, would violate the pari passu clause.  The U.S. district court has not ruled on these new claims and discovery among the parties remains ongoing.  On October 30, 2015, the U.S. district court issued new pari passu injunctions, substantially identical to the ones already in effect, in 49 additional proceedings, involving claims for over U.S.$ 2.1 billion under the 1994 FAA, plus billions more in pre- and post-judgment interest.  On November 10, 2015, Argentina appealed the decision.

In 2014, the Argentine Government took a number of steps intended to continue servicing the bonds issued in the 2005 and 2010 exchange offers, which had limited success. Holdout creditors continued to litigate expanding the scope of issues to include payment by the Argentine government on debt other than the Exchange Bonds and the independence of the Central Bank.

The Macri administration engaged in negotiations with holders of defaulted bonds in December 2015 with a view to bringing closure to fifteen years of litigation. In February 2016, the Argentine government entered into an agreement in principle to settle with certain holders of defaulted debt and put forward a proposal to other holders of defaulted debt, including those with pending claims in U.S. courts, subject to two conditions: obtaining approval by the Argentine Congress and the lifting of the pari passu injunctions. On March 2, 2016, the U.S. district court agreed to vacate the pari passu injunctions, subject to two conditions:  first, the repealing of all legislative obstacles to settlement with holders of defaulted debt securities issued under the FAA, and second, the full payment to holders of pari passu injunctions with whom the Argentine Government had entered into an agreement in principle on or before February 29, 2016, in accordance with the specific terms of such agreements. The U.S. district court’s order has been appealed and on April 13, 2016 was affirmed by the Second Circuit Court of Appeals. On March 31, 2016, the Argentine Congress repealed the legislative obstacles to the settlement and approved the settlement proposal. As of the date of this annual report, the Argentine government has reached settlement agreements with holders of a significant portion of the defaulted bonds.

As of the date of this annual report, litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in several jurisdictions, although the size of the claims involved has decreased significantly.  The lifting of the injunctions issued by the United States courts preventing bondholders from receiving their interest payments on the bonds issued pursuant to the 2005 and 2010 exchange offers and the related subsequent events paved the way for the Argentine Government to regain access to the international capital markets, with an issue of U.S.$.16.5 billion aggregate principal amount of 3-year, 5-year, 10-year and 30-year bonds on April 22, 2016 and the pari passu injunctions were vacated.  

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

Fluctuations in the value of the Peso may also adversely affect the Argentine economy, our financial condition and results of operations.  The devaluation of the Argentine Peso could have a negative impact on the ability of certain Argentine businesses to service 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. After several years of moderate variations in the nominal exchange rate, the peso lost more than 30% of its value with respect to the US Dollar in each of 2013 and 2014, and in 2015, the Peso lost approximately 52% of its value with respect to the U.S. Dollar including a depreciation of approximately 34% mainly experienced after December 17, 2015 following the announcement of the lifting of a significant portion of foreign exchange restrictions.  Since the devaluation in December 2015, the Central Bank has allowed the Peso to float and limited interventions to those needed to ensure the orderly functioning of the foreign exchange market. As of April 19, 2016, the exchange rate was Ps 14.19 to U.S.$1.00.  We are unable to predict the future value of the Peso against the U.S. Dollar.  If the Argentine Peso devalues further, the negative effects on the Argentine economy could have adverse consequences to our businesses, our results of operations and the market value of our ADSs, including as measured in U.S. Dollars.

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

Government intervention may adversely affect the Argentine economy and, as a result, our business and results of operations

In the recent past, the Fernández de Kirchner administration increased its direct intervention in the economy, including through the implementation of expropriation and nationalization measures, price controls and exchange controls.

In response to the global economic crisis, in December 2008, Law No. 26,425 was passed, the Argentine Congress unifying 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 the “ANSES”), and 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.  Prior to 2009, a significant portion of the local demand for securities of Argentine companies came from Argentine private pension funds.  With the nationalization of Argentina’s private pension funds, the Argentine Government, through the ANSES, 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 had been 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 since exercised its voting rights in excess of such 5% limit in order to appoint directors in different stock exchange listed companies.  ANSES’s interests may differ from, or conflict with, those of the other investors in such companies.  In addition, in September 2015, Law No. 27,181 was enacted, which prohibits the sale of shares in Argentine public companies held by the Argentine Government or any other action that limits, alters or modifies the use, ownership or nature of such shares, without the prior authorization of Congress.  Additionally, Law No. 27,181 created the National Government Equity Holdings Agency (Agencia Nacional de Participaciones Estatales en Empresas), a decentralized agency operating under the scope of the Argentine Executive Branch, which is in charge of implementing any policies and actions related to the exercise by the Argentine Government of any rights arising out of the shares it holds.  As of the date of this annual report, ANSES owns shares representing 18% of our capital stock, and also owns shares of capital stock of Edenor, CTG and Transener.

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Beginning in April 2012, the Fernández de Kirchner administration provided for the nationalization of YPF and imposed major changes to the legal framework in which oil companies operate, principally through the enactment of Law No. 26,741 and Decree No. 1,277/2012.  In February 2014, the Fernández de Kirchner administration 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 amounted to U.S.$5.0 billion, payable by delivery of Argentine sovereign bonds with various maturities.  Additionally, on December 19, 2012, the Fernández de Kirchner administration issued Decree No. 2,552/2012, pursuant to which it 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 enforcement of Decree No. 2,552/2012. Although the decision was appealed by the Argentine government, the Supreme Court of Justice rejected such appeal and confirmed the Federal Civil and Commercial Chamber’s injunction subject to a decision on the merits.

Notwithstanding the measures recently adopted by the Macri administration, we cannot assure you that these or other measures that may be adopted by the current or any future 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 and investments will not have a material adverse effect on the Argentine economy and, as a consequence, adversely affect our financial condition, our results of operations or cause the market value of our ADSs to decline.

The implementation in the future of new exchange controls and restrictions on capital inflows and outflows could limit the availability of international credit and could threaten the financial system, adversely affecting the Argentine economy and, as a result, our business

During 2001 and the first half of 2002, Argentina experienced a mass withdrawal of deposits from the financial system as a result of a lack of confidence in the Argentine Government’s ability to repay its debt and sustain the parity between the Peso and the U.S. Dollar. This caused a liquidity crisis in the Argentine financial system, which led the Argentine Government to impose 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.  In addition to the foreign exchange restrictions applicable to outflows, in June 2005 the Argentine Government adopted various rules and regulations that established new restrictive controls on capital inflows into Argentina, 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.

Through a combination of foreign exchange and tax regulations from 2011 until President Macri assumed office in 2015, the Fernández de Kirchner administration significantly curtailed access to the foreign exchange market by individuals and private-sector entities.  In addition, during the last few years under the Fernández de Kirchner administration, the Central Bank exercised a de facto prior approval power for certain foreign exchange transactions otherwise authorized to be carried out under applicable regulations, such as dividend payments or repayment of principal of inter-company loans as well as the import of goods, by means of regulating the amount of foreign currency available to financial institutions to conduct such transactions.  The number of exchange controls introduced in the past and in particular after 2011, during the Fernández de Kirchner administration, gave rise to an unofficial U.S. Dollar trading market. The Peso/U.S. Dollar exchange rate in such market substantially differed from the official Peso/U.S. Dollar exchange rate.  See “Item 3—Key Information—Exchange Rates” and “Item 10—Exchange Controls.” 

Additionally, the level of international reserves deposited with the Central Bank significantly decreased from US$47.4 billion as of November 1, 2011 to US$25.6 billion as of December 31, 2015, resulting in a reduced capacity of the Argentine government to intervene in the foreign exchange market and to provide access to such markets to private sector entities like us. The Macri administration recently announced a program intended to increase the level of international reserves deposited with the Central Bank through the execution of certain agreements with several foreign entities. As a result of the measures taken under such program, the international reserves increased to US$30.0 billion as of January 30, 2016.

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Notwithstanding the measures recently adopted by the Macri administration, in the future the Argentine Government could impose exchange controls, transfer restrictions or restrictions on the movement of capital 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, principal or dividend payments abroad.  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 and, consequently, adversely affect our business and results of operations and cause the market value of our ADSs to decline.  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 of the Company.

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 and economic and financial conditions in Argentina’s major trading partners, in particular, Brazil. For example, the current devaluation of the Brazilian currency and the slowdown of its economy may negatively affect the Argentine economy, and in turn, our business and results of operations. Although economic conditions can vary from country to country, investors’ perception of the events occurring in other countries have substantially affected in the past, and may continue to substantially affect capital flows to other countries and the value of securities in other countries, including Argentina.  The Argentine economy was adversely impacted by the political and economic events that occurred in several emerging economies in the 1990s, including those in Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia in 1998 and the Brazilian devaluation of its currency in January 1999.

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

The actions taken by the Fernández de Kirchner administration to reduce imports may adversely affect our ability to access capital goods that are necessary for our operations

In 2012, the Argentine Government adopted an import procedure pursuant to which local authorities must pre-approve any import of products and services to Argentina as a precondition to allowing importers access to the foreign exchange market for the payment of such imported products and services. In 2012, the European Union, the United States of America and Japan filed claims with the World Trade Organization (“WTO”) against certain import-related requirements maintained by Argentina. Recently, the WTO found that those measures are not consistent with Argentina’s obligations under the WTO and requested removal. On December 22, 2015, through Resolution No. 3,823, AFIP removed the import authorization system in place since 2012 denominated Affidavit Advance Import (“DJAI”) and replaced it with the new Comprehensive Import Monitoring System (“SIMI”). Among other changes, local authorities must now reply to any request for approval within a ten-day period from the date in which the request is filed.

We cannot assure that the Argentine Government will not modify current export tax rates and import regulations. We cannot predict the impact that any changes may have on our results of operations and financial condition.

Application of certain laws and regulations is uncertain and could adversely affect our results of operations and financial condition.

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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 implemented pursuant to the judicial reform bill is a time limitation on injunctions imposed in proceedings brought against the Argentine government and the creation of three new chambers of Casación, each of which must hear an appeal before the matter is considered bythe 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 has the authority to appoint judges, present charges against them and suspend or remove them.  As of the date of this annual report, several aspects of this legislation have been struck down as unconstitutional by the Argentine Supreme Court.

On August 7, 2014, Law No. 26,944 on State Responsibility was enacted to regulate government actions. Said law governs the responsibility of the Argentine Government regarding the damages that its activity or inactivity may cause to individuals’ properties or rights. Such law establishes that the Argentine Government’s responsibility is objective and direct, that the provisions of the civil and commercial codes are not applicable to the actions of the Argentine Government in a direct or subsidiary manner and that no dissuasive financial penalties may be imposed on the Argentine Government, its agents or officers.

On September 18, 2014, the Argentine Congress enacted Law No. 26,991 amending Law No. 20,680 (the “Supply Law”), which became effective on September 28, 2014, to increase control over the supply of goods and provision of services. Such initiative includes the ability of the Argentine Government to regulate consumer rights under Article 42 of the Constitution and permits the creation of an authority to maintain the prices of goods and services (the “Observer of Prices of Goods and Services”). The Supply Law, as amended: (i) requires the continued production of goods to meet basic requirements; (ii) creates an obligation to publish prices of goods and services produced and borrowed; (iii) allows financial information to be requested and seized; and (iv) increases fines for judicial and fiscal persons. The reforms and creation of the Observer of Prices of Goods and Services could adversely affect our operations.  An initiative to regulate questions of consumer rights was also approved, creating the Conciliación Previa en las Relaciones de Consumo (Prior Conciliatory Procedures For Consumer Relations, or the “COPREC”), where users and consumers may present claims free of charge and have them resolved within 30 days.

The Supply Law applies to all economic processes linked to goods, facilities and services which, either directly or indirectly, satisfy basic consumer needs (“Basic Needs Goods”) and grants a broad range of powers to its enforcing agency. It also grants the enforcing agency the power to order the sale, production, distribution or delivery of Basic Needs Goods throughout the country in case of a shortage of supply.

On October 1, 2014, the Argentine Congress approved the reform, update and unification of the National Civil and Commercial codes. A single new National Civil and Commercial Code became effective on August 1, 2015. The consequences of the reform and its subsequent judicial application cannot be predicted.

The long-term impact of recently adopted legislation on Argentina’s legal system and future administrative or judicial proceedings, including potential future claims by us against the Argentine Government, cannot be predicted.

Risks Relating to the Argentine Electricity and Oil and Gas Sectors

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

To address the Argentine economic crisis in 2001 and 2002, the Argentine Government adopted the Public Emergency Law and other regulations, which made a number of material changes to the regulatory framework applicable to the electricity sector.  These changes severely affected electricity generation, distribution and transmission companies and included the freezing of distribution nominal margins, the revocation of adjustment and inflation indexation mechanisms of tariffs, a limitation on the ability of electricity distribution companies to pass on to the consumer increases in costs due to regulatory charges and the introduction of a new price-setting mechanism in the wholesale electricity market (the “WEM”) which had a significant impact on electricity generators and generated substantial price differences within the market.  The Argentine Government has continued to intervene in this sector, by, for example, granting temporary nominal margin increases, proposing a new social tariff regime for residents of poverty-stricken areas, removing discretionary subsidies, 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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 On December 17, 2015, the Argentine Government issued Decree No. 134/15 declaring the emergency of the National Electricity Sector until December 31, 2017, and instructing the Ministry of Energy and Mining (“ME&M”) to adopt any measure the ME&M deems necessary regarding the generation, transmission and distribution segments, to adjust the quality, and guarantee the provision of, electricity.

On January 25, 2016, the ME&M issued Resolution No. 6/2016, approving the seasonal WEM prices for each category of users for the period from February 2016 through April 2016. Such resolution readjusted the seasonal prices set forth in the regulatory framework. Energy prices in the spot market had been set by CAMMESA which determined the price charged by generators for energy sold in the spot market of the wholesale electricity market on an hourly basis. The WEM prices resulted in the elimination of certain energy subsidies and a substantial increase in electricity rates for individuals. Resolution No. 6/2016 introduced different prices depending on customers’ categories.

The ME&M, issued Resolution No. 7/2016 pursuant to which it instructed the ENRE to, among others, (i) adjust the value-added for the distribution (the “VAD”) using the transitional tariff regime included in 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 (the “Adjustment Agreement”), (ii) implement a social tariff regime and a reduction of such WEM prices for certain consumers, and (iii) effect a revision of the Integral Tariff Revision (Revisión Tarifaria Integral or “RTI”) that has to be implemented before December 31, 2016. Also the Resolution No. 7/2016 derogated the PUREE and the Secretariat of Energy’s (“SE”) Resolution No. 32/2015.

As of the date of this annual report, the Argentine Government maintains the remuneration scheme implemented for the generation segment in 2013. The last changes were implemented by the Secretariat of Energy through its Resolution No. 22/2016, dated March 31, 2016, as described in “Item 4.—The Argentine Electricity Sector—SE Resolution No. 95/2013, as amended—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 measures adopted by the Argentine Government through the ME&M under the emergency declared by Decree No. 134/15, or other similar regulation that may be adopted in the future, 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, we cannot assure you that these measures will be sufficient to address the structural problems created for our company by the economic crisis and in its aftermath or that similar measures extending the relief granted will be enacted in the future.

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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 8.9% from 2012 to 2015). 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, subsidies in the energy purchase price 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 January 2016, the ENRE, approved a new tariff scheme for Edenor and Empresa Distribuidora Sur S.A. (“Edesur”) which included the WEM prices approved by ME&M Resolution No. 7/2016 and an increase in the VAD. In this respect, we cannot assure you that these measures or any future measures (including new 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 that may be 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, Decree No. 1277/2012 and Law No. 27,007. 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, and 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” (as amended by Law No. 27,007) provides for oil and gas concessions to remain in effect for 25, 30 or 35 years, depending on the concession, as from the date of their award, and further provides for the concession term to be extended for periods of 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 revoked certain of YPF’s (prior to its nationalization) and Petrobras Argentina S.A.’s (“Petrobras”) concessions in 2012.  Petrolera Pampa has formed partnerships in projects with proved gas reserves to be developed by major oil and gas companies, such as Ysur Energía Argentina S.R.L. (“Ysur”) (formerly Apache Energía Argentina S.R.L. or “Apache”), Petrobras and YPF and is currently negotiating agreements that involve potential oil and gas production with Petrolera Pampa as operator. See “Item 4.—Our Business—Oil and Gas—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.

Oil and gas reserves in Argentina are likely to decline

Many oil and gas fields in Argentina are mature and without significant investment into development and exploration activities, reserves are likely to be depleted.  Such investments do not, however, guarantee the success of oil and gas activities.  Access to crude oil and natural gas reserves is essential to an oil and gas company’s sustained production and generation of income.  Given our strategy of investing almost exclusively in areas with proved oil and gas reserves, a decline in proved oil and gas reserves in Argentina could have an adverse effect on our business and results of operations.

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Risks Relating to our Company

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

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

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

The majority of the employees in the electricity sector are affiliated with labor unions.  As of December 31, 2015, approximately 81.0% 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 2014.  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.  —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 us 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.  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 obtain the necessary financing to purchase our partner’s interest.  For example, we own a  joint 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.  —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.

Our performance is largely dependent on recruiting and retaining key personnel

Our current and future performance and the operation of our business are dependent upon the contributions of our senior management and our skilled team of engineers and other employees. We depend on our ability to attract, train, motivate and retain key management and specialized personnel with the necessary skills and experience. There is no guarantee that we will be successfull in retaining and attracting key personnel and the replacement of any key personnel who were to leave could be difficult and time consuming. The loss of the experience and services of key personnel or the inability to recruit suitable replacements and additional staff could have a material adverse effect on our business, financial condition and results of operations.

If we are not able to effectively hedge our currency risk in full and, as a result, a devaluation of the Peso occurrs, there may be 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.  If we are not able 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.

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, direct and indirect ownership over 50% of CIESA’s equity, which in turn would control 51% of TGS. The implementation of the restructuring has already been approved by the Ente Nacional Regulador del Gas (the National Gas Regulating Agency, or the “ENARGAS”), and has not expressly been approved by the Argentine Antitrust Commission (see “Item 4. Our Business – Other Projects - TGS - CIESA Transaction”).  We cannot assure that the Argentine Antitrust Commission will expressly approve the Restructuring Agreement, and although the Company believes that from a legal stand point the Restructuring Agreement has been tacitly approved by the Argentine Antitrust Commission, the board of directors of the Company is evaluating the legal and factual implications and other courses of action without having made a decision as of the date of this annual report. The outcome of this matter may adversely affect the financial position and results of operations of the Company. If the potential sale of our indirect stake in TGS occurs we cannot assure that the Argentine Antitrust Commission will expressly approve such sale.

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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—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 is subject to limited appeals.  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 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.

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

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

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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 can be generated than can be transmitted.  While under the new remuneration scheme established by SE Resolution No. 95/2013, as amended, 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 or any other modifications under the emergency established by Decree No. 134/15 or any other measures thereof, 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, 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 No. 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. 

Even though the ME&M No. 7/2016 approved new WEM seasonal prices and adopted several measures, as described in “Item 3. – Key Factors – Risk Factors – Risks Relating to our Generation Business”. The Argentine Government has intervened in the electricity sector in the past, and is likely to continue intervening, in order to reduce the distributor’s debt with CAMMESA, 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. The Argentine Electricity Sector - SE Resolution No. 95/2013, as amended – 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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New measures encouraging renewable energy generation projects may affect our generation assets sales

On October 15, 2015, Law No. 27.191 was enacted. Pursuant to such law, among other measures, is established that, by December 31, 2025, 20% of the total domestic energy demand must be provided through renewable energy sources. In order to meet such goal, the law obliges Wholesale Users and CAMMESA to cover their respective portion of domestic energy demand with sources of renewable energy by 8%, by December 31, 2017. The percentage to be covered with renewable energy increases every two year up to the abovementioned 20% on 2025. The law also includes tax and other benefits for new renewable energy projects.

Law No. 27,191 was partially regulated by Decree No. 531/2016, and further regulation is required for its implementation, However, we cannot make any assurances that the implementation of the law and its regulation will not affect our generators sales, particularly in our sales under the Energy Plus regime, which, in turn, could adversely affect our results of operations and financial conditions.

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 “Item 4. – The Argentine Electricity Sector - 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 “Item 4. The Argentine Electricity Sector - Electricity Prices – Energía Plus” and “WEM Supply Agreements under SE Resolution No. 220/2007”.

Notwithstanding, as of the issuance of SE Resolution No. 95/2013, as amended, generators will depend on the fuels that CAMMESA supplies them for their operations, since through such resolution the Secretariat of Energy appointed CAMMESA as the sole supplier of fuels for the generation sector.

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 depends on the recognition by CAMMESA of Gas Plus costs

Loma de la Lata has 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 (gas market value for generators).  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.   CAMMESA has to recognize the Gas Plus cost to Loma de la Lata in order for Loma de la Lata 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 to pay the natural gas suppliers may be affected.  Consequently, in such a situation, Loma de la Lata 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 obligations and to keep the agreements in force. As a consequence of this situation, Loma de la Lata 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.

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Additionally 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. – The Argentine Electricity Sector - Natural Gas Supply under the Gas Plus Program”.

However, as of the issuance of SE Resolution No. 95/2013, as amended, generators will depend on the fuels that CAMMESA supplies them for their operations, since through such resolution the Secretariat of Energy appointed CAMMESA as the sole supplier of fuels for the generation sector. Consequently, as of the termination of the current gas supply agreements, Loma de la Lata and EGSSA (now merged into CTG) will no longer need to have firm gas supply agreements with suppliers and request the recognition of costos thereunder to CAMMESA as it will depend on CAMMESA’s gas supply (See “Item 3.- Key Information – Risk Factors – Risk Relating to our Generation Business – 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 material adversely affect our results of operations”). In September 2015, CAMMESA informed Loma de la Lata that, in accordance with SE Resolution No. 529/14, that after the first automatic renewal of the term of the natural gas supply agreements, CAMMESA will no longer acknowledge (i) any further automatic renewals of such agreements, and (ii) the costs associated to such supply, including the additional 10% of such costs established in the “Convenio Marco para el Cierre del Ciclo Combinado de Loma de la Lata” Entered into among Loma de la Lata and the SE in December 2008.  Loma de la Lata has taken the necessary measures to protect its interest. (Please see “Item 8 – Legal Proceedings Involving Loma de la Lata”).

We cannot assure you that the changes on the terms and conditions for the provision of natural gas under the Gas Plus Program and, particularly, the lack of recognition of costs associated with Loma de la Lata’s supply pursuant to SE Resolution No. 529/14 described above, 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 Agreements 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 Agreements under SE Resolution No. 220/2007 (see “Item 4.- The Argentine Electricity Sector - WEM Supply Agreements 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.

A breach of the availability commitment set forth in Piedra Buena’s Loan Agreement with CAMMESA may adversely impact Piedra Buena’s results of operations

On April 8, 2014, Piedra Buena executed a loan agreement with CAMMESA for an amount equal to the peso-equivalent of U.S.$ 82.6 million plus the associated taxes and nationalization costs. This loan is to be repaid in 48 equal installments. As long as Piedra Buena’s availability is higher than 80% (summer) or 83% (winter), Piedra Buena’s payment obligations shall be limited to the revenue established to cover extraordinary maintenance works (SE Resolution No. 529/2014, as amended) and 50% of the Debt Payment Cash Flow (as defined in such agreement) (See “Item 5 – Debt – Generation – Piedra Buena”). If Piedra Buena’s availability is below the abovementioned percentages, Piedra Buena shall pay the applicable installment.  A breach of the availability commitments set forth in the loan agreement and the consequent acceleration of the loan may adversely impact in Piedra Buena’s results of operations.

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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 2014, the water intake at Los Nihuiles and Diamante available for electricity generation was 62% and 64% lower, respectively, as compared to 2006.  A prolonged continuation of poor conditions could force the Argentine Government to focus its generation efforts on the use of other sources of electricity generation.  In the event of electricity shortages, the Argentine Government could mandate the implementation of broad electricity conservation programs, including mandatory reductions in electricity generation or consumption; the government could also mandate increased production from thermal plants that use fossil fuels as their generation sources and preserve the available water resources for future electricity generation.  Although such a shift in production could benefit our thermal generation plants, it would negatively affect our hydroelectric plants and any mandated reduction in electricity generation or consumption could reduce revenues in our generation business and lead to a decline in our consolidated results of operations, which may have a material adverse effect on our financial condition and the market value of our shares and ADSs.

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

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

We may experience operational difficulties that could require us to temporarily suspend operations or otherwise affect our ability to generate electricity and, as a result, adversely impact our operating results.  These difficulties may affect our generation equipment, electromechanical components or, in general, any of our assets required for the supply of electricity.  We cannot make any assurances that events of such nature will not occur in the future.  While we maintain comprehensive insurance for each of our facilities, we cannot make any assurances that the amounts for which we are insured or the amounts that we may receive under such insurance policies would cover all of our losses.  If operational difficulties impede our generation of electricity, the disruption may lead to reduced revenues from our generation segment, which would have an adverse effect on our consolidated results of operations and may negatively affect the market value of our shares or ADSs. Please see “Item 4.- Our Business – Piedra Buena – Operations”.

We may 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 52.04% controlling stake in HINISA, a hydroelectric generation company in the Province of Mendoza, Argentina, and the Province of Mendoza, through EMESA, currently owns 47.96% of the capital stock of HINISA.  In 2006, the Province of Mendoza publicly announced its intention to sell shares representing 37.75% of the capital stock of HINISA.  See “Item 4.—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 52.04% interest in HINISA.  In addition, according to HINISA’s by-laws, Nihuiles would not be permitted to purchase any additional shares of HINISA.

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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. - 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.

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 profits

If CTG  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 would have to sell its production on the spot market, and also, eventually, under the remuneration scheme applicable under SE Resolution No. 95/2013, as amended, which could affect CTG’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 to have to sell its production in the spot market under the remuneration scheme applicable under SE Resolution No. 95/2013, as amended, affecting CTG’s revenues. In September 2015, CAMMESA issued Note No. B-102407-4, pursuant to which it obliged CTG to sell its uncommitted production under the Energy Plus Program to the spot market under the price scheme established by SE Resolution No. 482/2015.

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 650 Ps./MWh and for Grandes Usuarios del Distribuidor (Major Distribution Users or “GUDIs”) 0 $/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 or in a discontinuance of the Energy Plus contracts, forcing such generators to sell the capacity and energy unsold in the spot market at lower prices.

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Risks Relating to our Transmission Business

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

In January 2002, pursuant to the Public Emergency Law, tariffs for the provision of public services, including the transmission of electricity, were converted from their original U.S. Dollar values to Pesos (at a rate of Ps. 1.00 per U.S. $1.00) and frozen at those levels.  Additionally, contract clauses in Transener’s and Transba S.A. (“Transba”)’s concession agreements requiring adjustments to their tariffs based on foreign inflation indexes and certain other indexation mechanisms were revoked.  The Public Emergency Law also required the renegotiation of public service concession agreements.  In connection with such renegotiation process, Transener and Transba entered into agreements with the Argentine Government in 2005 that provided for an average tariff increase on fixed charges of 31% for Transener and 25% for Transba.  Although these companies’ operating costs have significantly increased since 2005, the Ente Nacional Regulador de la Electricidad (the Argentine National Electricity Regulator, or the “ENRE”) has not totally adjusted tariffs accordingly.  On December 21, 2010, the ENRE and the Secretariat of Energy acknowledged Transener’s and Transba’s (see “Item 4. - Our Business – 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. 

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 herein), 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 February 14, 2014, Transba and Transener, respectively, negotiated a third Addendum (together, the “Addenda III”) to their Financing Agreements (as defined herein) with CAMMESA, to increase their related amounts by the sum of Ps. 324.8 million and Ps. 785.8 million.

On September 2, 2014, Transener and Transba executed with CAMMESA the New Financing Agreements. The New Financing Agreements provided:  i) that the Financing Agreements, together with their Addendums I, II and III, are concluded; ii) the granting to Transener and Transba of  new loans in the amount of Ps. 622.2 million and Ps. 240.7 million, respectively, corresponding to receivables acknowledged by the SE and the ENRE on account of cost variations for the January 2013-May 2014 period; and iii) the assignment as collateral of the receivables recognized on account of higher costs as at May 31, 2014 pursuant to the Renewal Agreement.

For the year ended December 31, 2015, Transener and Transba recorded revenues from sales as well as accured nterests amounting to Ps. 1,502.6 million in accordance with the Instrumental Agreements and the Renewal Agreement.

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On March 17, 2015, Transener and Transba executed with CAMMESA new amendments to their New Financing Agreements (the “Addenda IV”), setting forth: i) the granting to Transener and Transba of  new loans in the amount of Ps. 563.6 million and Ps. 178.3 million, respectively, corresponding to (a) the outstading amount due pursuant to the Financing Agreement as of January 2015, and (b) receivables acknowledged by the Secretariat of Energy and the ENRE on account of cost variations for the June 2014-November 2014 period; and ii) the assignment as collateral of the receivables recognized on account of higher costs as at November 30, 2014 pursuant to the Renewal Agreement.

In September 2015, Transener and Transba executed with the ENRE and the SE, an Amendment to the Renewal Agreement (the “Amendment to the Renewal Agreement”), setting forth the 2015 year financial - economic projection and investment plan in the amount of $ 431.9 million and $ 186.6 million for Transener and Transba, respectively, and granting additional non-reimbursable resources for the execution of such investment plan.

On November 25, 2015, Transener and Transba executed with CAMMESA the financing agreements for the implementation of the Amendment to the Renewal Agreement, setting forth: i) the granting to Transener and Transba of  new loans in the amount of Ps. 508,9 million and Ps. 317,6 million, respectively, corresponding to (a) receivables acknowledged by the SE and the ENRE on account of cost variations for the December 2014-May 2015 period; and ii) the additional investments required pursuant to the Amendment to the Renewal Agreement.

Pursuant to the Renewal Agreement and the Amendment 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, the Renewal Agreements and the Amendment to the Renewal Agreement 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.

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.  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.

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                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 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 ENRE Resolution No.244/2013.  On March 12, 2014, the ENRE issued Resolution No. 79/2014, which established a new annual rate of Ps. 156.2 million as from August 2013 and instructed CAMMESA to make the adjustments necessary for the retroactive payment, including the corresponding interest.  On April 3, 2014, Transener presented a Motion for Reconsideration of ENRE’s Resolution No. 79/2014, which was partially accepted by the ENRE. As a consequence, on November 12, 2014, the ENRE issued Resolution No. 332/2014 which established a new annual rate of Ps. 158.6 million beginning in August 2013 and instructed CAMMESA to make the adjustments necessary for the retroactive payment, including the corresponding interest.

                On September 12, 2014, Transener asked the ENRE for a new determination of the Fourth Line’s revenue related to the cost variation from August 2014 to December 19, 2014.

                In this respect, Transener requested the ENRE to determine the remuneration corresponding to the Operation and Maintenance of the Fourth Line since December 21, 2014.

                On August 5, 2015, the ENRE issued Resolution No. 272/2015, which established the remuneration corresponding to the Operation and Maintenance of the Fourth Line from December 21, 2014 and instructed CAMMESA to make the adjustments necessary to implement the retroactive payment of the remuneration set forth in ENRE Resolution No. 272/2015, including the interest applicable to such remuneration.

                Even though the ENRE issued Resolution No. 272/2015, if CAMMESA does not make the necessary adjustments to implement the retroactive payment described above, we could face significant 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 (a) the construction and installation of electrical assets and equipment, (b) non-network line operation and maintenance,(c) the Fourth line’s operation and maintenance, (d) any adjustment by the Cost Variation Index (“IVC”) (according to the Definitive Agreement, the Instrumental Agreement and the Renewal Agreement) and (e) other services.  On a consolidated basis, Transener’s other net revenues for the year ended December 31, 2015, were Ps. 187.7 million (Ps. 93.9 million on a proportional interest basis), representing 9.6% of Transener’s consolidated net revenues for such period.  We believe that these non-regulated revenues will continue to be an important part of our transmission business.  Historically, Transener has not experienced significant competition in these areas of service (with the exception of its construction and international activities).  However, we cannot make any assurance that competition will not substantially increase in the future or that such competition will not contribute directly to decreased revenues, which would adversely affect our financial condition and results of operations and cause the market value of our ADSs to decline.

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

As of December 31, 2015, Transener’s total consolidated indebtedness, denominated in U.S. Dollars and Pesos, amounted to the equivalent of approximately U.S. $120.5 million (Ps. 1,565.4 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, 2015.  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. 

Since the execution of the Adjustment Agreement and as required by them, Edenor has been engaged in the RTI with the ENRE.  However, the timeline for completing this process and the favorability to us of the final resolution are both uncertain. ME&M Resolution No. 7/2016 issued in January 2016 established that the new deadline for the completion of the RTI process at the end of 2016.

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 the ENRE’s approval of adjustments have not been sufficient to cover Edenor’s actual incremental costs in a timely manner.  In the past, even when the ENRE has approved adjustments to Edenor’s tariffs, there has been a lag between the time when Edenor actually experienced increases in the distribution costs and the time when Edenor received increased income following the corresponding adjustments to its distribution margins pursuant to the CMM.   

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During the years ended December 31, 2012 and 2011, Edenor recorded a significant decrease in net income and operating income (recording and 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 affected the electricity sector, the ENRE issued Resolution No. 347/2012 in November 2012, which established the application of fixed and variable charges that have allowed Edenor to obtain additional revenue as from November 2012 through 2016. However, changes made by SE Resolution No. 250/2013 and Notes No. 6852/2013, No. 4012/2014, No. 486/2014 and No. 1136/2014 and the additional revenue obtained throught SE Resolutino No. 347/2012 were insufficient to make up Edenor’s operating deficit in 2014, due to the constant increase in operating costs.

In March 2015, the Secretariat of Energy issued SE Resolution No. 32/2015 pursuant to which it granted Edenor a temporary income increase through funds provided by CAMMESA, applicable retroactively as from February 1, 2015, to cover costs and investments associated with the regular provision of the public service of distribution of energy on account of the future RTI.

In January 2016, the ME&M issued Resolution No. 7/2016, pursuant to which the ENRE implemented a VAD adjustment to the tariff schedule on account of the future RTI in effect as of February 1, 2016, and is expected to take all necessary action to conclude the RTI process by December 31, 2016.

In addition, such resolution: (i) abrogated the PUREE; (ii) repealed SE Resolution No. 32/2015 as from the date the ENRE resolution implementing the new tariff schedule becomes effective; (iii) discontinued the application of mechanisms that imply the transfer of funds from CAMMESA in the form of loan agreements with CAMMESA; and (iv) ordered the implementation of the actions required to terminate the trusts created pursuant to Resolution No. 347/2012 of the ENRE.

Pursuant to Resolution No. 7/2016, the ENRE issued Resolution No. 1/2016 establishing a new tariff structure. However,  if Edenor is not able to recover all future cost increases, and/or if there is a significant lag time between when Edenor incurs the incremental costs and when it receives income increase, 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. 

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.

Edenor’s inability to obtain tariff adjustments in line with the actual changes in costs could result in Edenor’s inability to meet its trade obligations and could also have a material adverse effect on Edenor’s ability to meet its financial obligationsAlthough Resolution No. 7/2016 issued by the ME&M and Resolution No. 1/2016 of the ENRE established a new tariff scheme pursuant to the terms of the Adjustment Agreement and on account of the future RTI, it did not include any adjustment method to reflect future variations in costs. If inflation levels in 2016 continue the trend of 2015, the increase in tariffs provided by Resolution No. 1/2016 of the ENRE may prove insufficient to support the real variation in costs.

Edenor’s inability to obtain tariff adjustments in line with future changes in costs could result in Edenor’s inability to meet obligations vis-a-vis CAMMESA, Edenor’s major supplier, and could have 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, financial condition and results of operations.  Furthermore, in case Edenor was unable to obtain such tariff adjustments, we cannot assure that CAMMESA or any other governmental entity will provide Edenor the financing or that any future financing would be available in favorable terms, which may seriously impair our ability to continue providing the service.

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

In recent years, 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 administrative 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 decided to dismiss the Federal Extraordinary Appeal that had been filed.  A final judgment in favor of Edenor has been rendered.

In February 2016, Edenor adjusted its tariff again, and as of the date of this annual report, there had not been any challenges thereto. However, 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 were successful and prevented 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.

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, in particular as a result of a recent measure adopted by the ENRE

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.  Since 2001, the amount of fines and penalties imposed on our distribution business has increased significantly. As of December 31, 2015, 2014 and 2013, Edenor’s accrued fines and penalties totaled Ps.1,253.1 million (including Ps.186.3 million under the ENRE settlement agreement), Ps. 1,102.8 million and Ps. 923.8 million, respectively (taking into account adjustments made to fines and penalties following the ratification of the Adjustment Agreement).

 Although the Argentine Government has agreed to waive a portion of these accrued fines and penalties pursuant to the Adjustment Agreement and to allow Edenor to repay the remaining balance over time, this waiver and repayment plan is subject to a number of conditions, including compliance with quality of service standards, reporting obligations and required capital investments. 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.

On April 15, 2016, the ENRE issued Note No. 120,151(the “Note”) establishing that all fines and penalties imposed by the ENRE after April 15, 2016 (whether with respect to events occurring on or after such date or events occurring prior to the date thereof but for which fines or penalties had not been imposed on Edenor by such date that include a reference to “the Note” must be valued according to the KWh values in effect as of the last date of the semester or period during which the event giving rise to the penalty occurred, including any increases or adjustments applicable to Edenor’s “remuneration” at such date. In addition, the Note provides that fines and penalties that fall within the purview of the Note are to accrue interest from last day of the semester on which the event giving rise to the penalty occurred until the date they are paid by Edenor. As of the date of this annual report, it is unclear how the ENRE will consider that the fines and penalties not yet imposed on Edenor relating to events that occurred prior to April 15, 2016, should be valued as per Edenor’s “remuneration” and Edenor has therefore calculated the amount of such fines and penalties according to its interpretation of the Note. Regarding this, Edenor believes that the term “remuneration” should be interpreted to mean those amounts effectively paid by the users through the tariff.

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                As of the date of this annual report, fines and penalties in an aggregate amount equal to Ps. 757.2 million are subject to the Note. Edenor believes that such amount as adjusted to reflect accrued interest according to the Note would increase by Ps. 129.0 million. If the ENRE interprets that the term “remuneration” includes all amounts received by Edenor in the form, or in lieu, of subsidies, such amount could be significantly higher (in a range of three to five times higher).

In addition, based on recent verbal exchanges with certain officials the Macri administration, believes that fines and penalties already imposed on Edenor (but not yet paid) should also bear interest until the time of payment or waiver thereof. If interest over such penalties was to be payable by Edenor (which Edenor believes should not be the case), its results of operations could be materially and adversely affected.

In Edenor’s opinion, any adjustments to its fines and penalties (whether by virtue of the Note or otherwise, and including the accrual of interest as provided in the Note) should not be applicable to Edenor because the delay in imposing such fines and penalties was caused by the Argentine Government and was not within its control. Additionally, if such adjustments are made applicable to Edenor, Edenor believes the Argentine Government would be binding Edenor to the terms of the Adjustment Agreement without taking into account that it has not recognized certain of its rights thereunder, such as Edenor’s right to have tariffs adjusted to reflect increases in operation costs that are necessary for adequately providing its services. 

In addition, we cannot assure you that our distribution business will not incur significant 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 allow 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 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 contemplated in the concession, and based on the current tariff schedule and the economic turmoil, we do not expect these losses to decrease in the near term.  Energy losses in our distribution business amounted to 14.9 % in 2015, 14.3% in 2014 and 13.0% in 2013.  We cannot assure you that energy losses will not increase again in future periods, which may lead to lower margins in our distribution segment and could adversely affect our financial condition and consolidated results of operations and the market value of our shares and ADSs.

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

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

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

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

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

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

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

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

·Edenor, or any existing shareholders or former shareholders of EASA who have brought a claim against the Argentine Government in the ICSID do not desist from such ICSID claims following completion of the RTI and the approval of a new tariff regime. 

In 2015, the fines and penalties imposed on Edenor by the ENRE amounted to an estimated Ps. 281.7 million, which represented 7.6% 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 potential 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 may 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 an additional 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.

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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 that may be adopted in the future by the Argentine Government could limit or delay Edenor’s ability to purchase capital goods that are necessary for our operations (including carrying out specific projects) (see “The actions taken by the Fernández de Kirchner administration to reduce imports may adversely affect our ability to access capital goods that are necessary for our operations”). Under Edenor’s concession, it is obligated to satisfy all of the demand for electricity originated in its concession area, maintaining at all times certain service quality standards that have been established for its concession. If Edenor is not able to purchase significant capital goods to satisfy all of the demand or suffer unexpected delays in the import process, it could face fines and penalties which may, in turn, adversely affect its activity, financial position and results of operations.

We could 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, 2015, we had approximately 2,927 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 will not initiate legal actions to seek indemnification from us based upon a number of judicial rulings issued by labor courts in Argentina which have recognized joint and several liability between the contractor and the entity to which it is supplying services under certain circumstances.  We cannot make any assurances that such proceedings will not be brought against us or that the outcome of such proceedings would be favorable to us.  If we were to incur material labor liabilities in connection with the outsourcing of our distribution business, such liabilities could have an adverse effect on our financial condition and consolidated results of operations and the market value of our shares and ADSs.

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

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

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

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

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

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

A potential nationalization or expropriation of 51% of Edenor’s capital stock, represented by its Class A shares, may limit the capacity of the Class B common shares to participate in the Board of Directors

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

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

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

Edenor may not have the ability to raise the funds necessary to repay its commercial debt with CAMMESA, Edenor’s major supplier

As of December 31, 2015, Edenor owed approximately Ps.3,360.6 million (including interest) to CAMMESA.  Although Edenor submitted to CAMMESA a repayment plan in November 2015, as of the date of this annual report negotiations with CAMMESA continue with respect to a final repayment schedule. This debt therefore remains due and unpaid and Edenor has not secured any waivers from CAMMESA. If CAMMESA request that Edenor repay such debt in a single payment, 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.$191.1 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.

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All 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.$191.1 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 acceleration of our obligations 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 and/or bankruptcy and/or reorganization proceeding events of default goes into default or is accelerated. In such a case, Edenor would expect to actively pursue formal waivers from the corresponding financial creditors to avoid this potential situation, but in case those waivers are not obtained and immediate repayment will be required, Edenor could face short-term liquidity problems, which could adversely affect our results of operations and cause the market value of our ADSs to decline.

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

Edenor’s losses for 2014 exceeded its reserves plus more than 50% of its capital stock at the end of that year, and Edenor was therefore required to mandatorily reduce its capital stock pursuant to Article 206 of the Argentine Corporations Law unless it received a capital contribution or expected future revenues or results of operations which would result in its liabilities not exceeding 50% of its assets. In the shareholders’ meeting held on April 28, 2015 it was decided not to proceed with the mandatory stock reduction considering the better results in the first quarter of 2015. If Edenor’s losses for any fiscal year exceed its reserves plus 50% or more of its capital stock at the end of any such year, it will fall under the purview of Section 206 of the Argentine Corporations Law and will be required to mandatorily reduce its capital stock. Moreover, if Edenor’s shareholders equity becomes negative (that is, if Edenor’s total liabilities exceed its total assets) at the end of any fiscal year, Edenor will be required to dissolve and liquidate pursuant to Article 94 of the Argentine Corporations Law unless Edenor receives a capital contribution or expect future revenues or results of operations which would result in its assets exceeding its liabilities. A mandatory capital stock reduction can adversely affect Edenor’s results of operations and financial conditions.

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.”

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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 Oil and Gas business

Petrolera Pampa is not the operating partner in all of the joint ventures (joint operations for accounting purposes) in which it participates, and actions undertaken by the operators in such joint ventures could have a material adverse effect on the success of these operations

Our subsidiary Petrolera Pampa 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 joint ventures (joint operations for accounting purposes). Under the terms and conditions of these agreements, one of the parties takes the role of operator of the joint venture, and thus assumes responsibility for executing all activities undertaken pursuant to the joint venture agreement. However, Petrolera Pampa 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. Such actions could have a material adverse effect on the success of these joint ventures, and thus adversely affect Petrolera Pampa’s financial condition and results of operations.

Petrolera Pampa conducts all of its operations through joint ventures, and its failure to resolve any material disagreements with its partners or to continue such joint ventures could have a material adverse effect on the success of such operations

Petrolera Pampa conducts all of its oil and gas operations through joint ventures and as a result, the continuation of such joint ventures is vital to its success.  Any material disagreements with Petrolera Pampa’s partners could have an adverse effect on the success of such joint ventures.  In the event that any of Petrolera Pampa’s partners were to decide to terminate its relationship with Petrolera Pampa in respect of a joint venture or sell its interest in a joint venture, Petrolera Pampa may not be able to replace that partner or obtain the necessary financing to purchase that partner’s interest.  Accordingly, Petrolera Pampa’s failure to resolve disagreements with its partners or to maintain its joint ventures could adversely affect its ability to conduct the underlying operations of such joint venture, which, in turn, could negatively affect Petrolera Pampa’s financial condition and results of operations.

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Any failure of Petrolera Pampa to comply with its commitments to make certain investments under its investment agreements could negatively affect its results of operations

Petrolera Pampa has commitments to make certain investments under its investment agreements.  Failure to comply with such commitments in a timely manner could result in a breach of the relevant partnership agreement, foreclosure of any guarantees and/or the loss of all rights over the underlying area, which could have an adverse effect on Petrolera Pampa’s results of operations.  

Petrolera Pampa’s ability to generate revenues and meet its financial obligations is dependent on the success of its oil and gas exploration and production projects, which are concentrated in a single block

Petrolera Pampa’s sole corporate purpose is the study, exploration, exploitation, commercialization, industrialization and storage of solid, liquid and/or gaseous hydrocarbons and their derivatives.  Petrolera Pampa’s ability to generate revenues, cover its fixed and variable costs and meet its financial obligations depends on the success of Petrolera Pampa’s oil and gas exploration and production projects.  As of December 31, 2015, more than 95% of Petrolera Pampa’s total revenues were derived from the sale of natural gas.  A significant portion of Petrolera Pampa’s natural gas production, 72%, was concentrated in the Rincón del Mangrullo block.  Accordingly, any unexpected interruption in production at this block for an extended period of time could negatively impact Petrolera Pampa’s results of operations and ability to generate sufficient cash flows. 

Petrolera Pampa’s results of operations are also dependent, to a significant extent, on its continued participation in two key government programs and its ability to collect payments under such programs

Petrolera Pampa’s results of operations and financial condition also depend, to a significant extent, on its continued participation in two key programs established by the Argentine Government with the aim of generating higher levels of activity, investment and employment in the domestic natural gas sector.

Upon formation, one of Petrolera Pampa’s primary objectives was to capitalize on the opportunity to sell natural gas under the Gas Plus Program, which was created by the Ministry of Energy in 2008 to encourage natural gas production in Argentina.  In 2015, through the Gas Plus Program, Petrolera Pampa was able to sell 31% of its natural gas production at a price higher than the average price in the domestic market.  However, various factors, including certain regulatory requirements, may affect its ability to sell natural gas under this program.

In 2013, Petrolera Pampa also began participating in the Programa de Estímulo a la Inyección Excedente de Gas Natural (Natural Gas Surplus Injection Stimulus Program, or the “Natural Gas Stimulus Program”).  Companies that participate in the Natural Gas Stimulus Program agree to a minimum injection volume (the “Base Volume”) to be sold at a fixed price (the “Base Price”) and receive U.S.$7.50 per mmBtu for any amount of natural gas produced in excess of the Base Volume (the “Surplus Injection”).  The Argentine Government agrees to compensate participating companies, on a monthly basis, for: (i) any difference between U.S.$7.50 per mmBtu and the price actually received for the sale of the Surplus Injection and (ii) any difference between the Base Price and the price actually received for the sale of the Base Volume.

As of the date of this annual report, we receive U.S.$7.50 per mmBtu from the Argentine Government for any volume of natural gas that we produce in excess of an agreed threshold with respect to 91% of Petrolera Pampa’s total natural gas production.  However, as of the date of this annual report, Petrolera Pampa has only collected payments from the Argentine Government through April 2015.  Although Petrolera Pampa’s compensation is denominated in U.S. Dollars, it is billed in Pesos and converted at the prevailing exchange rate during the month in which the payment is made, thereby leaving Petrolera Pampa exposed to an exchange rate risk between the billing date and the collection date.  As of December 31, 2015, overdue payables due to us under the Natural Gas Stimulus Program amounted to Ps. 451.8 million. If Petrolera Pampa does not collect the Natural Gas Stimulus Program compensation in a timely manner or if its total compensation decreases as a result of exchange rate fluctuations, Petrolera Pampa may face liquidity restraints that could negatively affect its financial conditions and ability to pay its debts and as a consequence could affect its results of operations and conditions. 

In addition, if Petrolera Pampa is unable to fulfill its commitments under the Natural Gas Stimulus Program, it may not receive any compensation for Surplus Injection and it may be removed from the program or pay fines, among other potential consequences.  The Argentine Government may also not be obligated to pay such compensation if certain conditions are met, such as LNG import prices remaining below U.S.$7.50 per mmBtu for a continued period of six months.  Petrolera Pampa is not currently obligated to pay royalties on the compensation it receives from the Argentine Government in connection with the Natural Gas Stimulus Program.  We cannot, however, guarantee that Petrolera Pampa will not be required to pay royalties or other charges for the amounts it receives in the future or the amounts it has received in the past, which, in turn, could affect its results of operations. 

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Petrolera Pampa additionally faces the risk of the Argentine Government suspending the Gas Plus Program and/or the Natural Gas Stimulus Program, as was the case when the Ministerio de Planificación Federal, Inversión Pública y Servicios (Ministry of Federal Planning, Public Investment and Services) suspended the implementation of the “Oil Plus” program in February 2012 in response to market conditions.  If the same were to occur to either of these key programs, Petrolera Pampa’s ability to generate revenues would be substantially impaired, which, in turn, would negatively affect its results of operations.

Unless Petrolera Pampa replaces its oil and gas reserves, its reserves and production will decline over time

Production from oil and gas fields declines as reserves are depleted, with the rate of decline depending on reservoir characteristics.  Accordingly, the amount of proved reserves declines as these reserves are produced.  The level of Petrolera Pampa’s future oil and natural gas reserves and production, and therefore its cash flows and income, are highly dependent on its success in efficiently developing its current reserves, entering into new investment agreements and economically finding or acquiring additional recoverable reserves.  While Petrolera Pampa has had success in identifying and developing commercially exploitable deposits and drilling locations in the past, it may be unable to replicate that success in the future.  Petrolera Pampa may not identify any more commercially exploitable deposits or successfully drill, complete or produce more oil or gas reserves, and the wells that it has drilled and currently plan to drill may not result in the discovery or production of any further oil or natural gas.  If Petrolera Pampa is unable to replace its current and future production, the value of its reserves will decrease, and its results of operations could be negatively affected.

Petrolera Pampa’s estimated oil and gas reserves are based on assumptions that may prove inaccurate

Petrolera Pampa’s oil and gas reserves estimates as of December 31, 2015 are based on the Netherland, Sewell & Associates, Inc. (“Independent Reserves Engineers Firm”) year-end reserves report (the “Reserves Report”).  Although classified as “proved reserves”, the reserves estimates set forth in the Reserves Report are based on certain assumptions that may prove inaccurate. The Independent Reserves Engineers Firm’s primary economic assumptions in estimates included oil and gas sales prices determined according to the guidelines described in the Reserves Report, future expenditures and other economic assumptions (including interests, royalties and taxes) provided by Petrolera Pampa.

Oil and gas reserves engineering is a subjective process of estimating accumulations of oil and gas that cannot be measured in an exact way, and estimates of other engineers may differ materially from those set out in this offering memorandum.  Numerous assumptions and uncertainties are inherent in estimating quantities of proved oil and gas reserves, including projecting future rates of production, timing and amounts of development expenditures and prices of oil and gas, many of which are beyond Petrolera Pampa’s control.  Results of drilling, testing and production after the date of the estimate may require revisions to be made.  The estimate of Petrolera Pampa’s oil and gas reserves would be impacted if, for example, Petrolera Pampa was unable to sell the oil and natural gas it produces.  Accordingly, reserves estimates are often materially different from the quantities of oil and gas that are ultimately recovered, and if such recovered quantities are substantially lower than the initial reserves estimates, this could have a material adverse impact on Petrolera Pampa’s results of operations.

We face significant competition in the acquisition of exploratory acreage and oil and natural gas reserves

The Argentine oil and gas industry is extremely competitive.  When Petrolera Pampa bids for exploration or exploitation rights with respect to a block, it faces significant competition not only from private companies, but also public companies.  In fact, the provinces of La Pampa, Neuquén and Chubut have formed companies to carry out oil and gas activities on behalf of their respective provincial governments.  The state-owned energy companies ENARSA S.A. and YPF are also major players in the Argentine oil and gas market.  As a result, Petrolera Pampa cannot assure that we will be able to acquire new exploratory acreage or oil and gas reserves in the future, which could negatively affect its financial condition and results of operations. There can be no assurance that the participation of ENARSA or YPF S.A. (or any provincial owned company) in the bidding processes for new oil and gas concessions will not influence market forces in such a manner that could have an adverse effect on Petrolera Pampa’s financial condition and results of operations.

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Petrolera Pampa may incur significant costs and liabilities related to environmental, health and safety matters

Petrolera Pampa’s operations, like those of other companies in the Argentine oil and gas industry, are subject to a wide range of environmental, health and safety laws and regulations.  These laws and regulations have a substantial impact on Petrolera Pampa’s operations and could result in material adverse effects on its financial position and results of operations. 

Environmental, health and safety regulation and case law in Argentina is developing at a rapid pace and no assurance can be provided that such developments will not increase Petrolera Pampa’s cost of doing business and liabilities.  In addition, due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, new regulatory requirements to reduce greenhouse gas emissions, such as carbon taxes, increased efficiency standards, or the adoption of cap and trade regimes.  If adopted in Argentina, these requirements could make Petrolera Pampa’s products more expensive as well as shift hydrocarbon demand toward relatively lower-carbon sources such as renewable energies.

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 and the requirement for Central Bank approval prior to acquiring foreign currency for certain types of investments.  Although the transfer of funds abroad in order to pay dividends no longer requires Central Bank approval to the extent such dividend payments are made in connection with audited financial statements approved by a shareholders’ meeting, restrictions on the movement of capital to and from Argentina such as those that previously existed could, if reinstated, impair or prevent the conversion of dividends, distributions, or the proceeds from any sale of shares, as the case may be, from Pesos into U.S. Dollars and the remittance of such U.S. Dollars abroad.  We cannot assure you that the Argentine Government will not take similar measures in the future.  In such a case, the depositary for the ADSs may hold the Pesos it cannot otherwise convert for the account of the ADS holders who have not been paid.  Nonetheless, the adoption by the Argentine Government of restrictions on the movement of capital out of Argentina may affect the ability of our foreign shareholders and holders of ADSs to obtain the full value of their shares and ADSs and may adversely affect the market value of our shares and ADSs.

ADS holders’ ability to receive cash dividends may be limited

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

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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.

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 corporate 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 joint controlled companies, we are engaged in the generation, transmission and distribution of electricity in Argentina and also in the oil and gas business.  We changed our corporate 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 (joint operations for accounting purposes) with our partners.  In addition, our electricity prices and our transmission and distributions tariffs are subject to regulation by Argentine Government, acting through the ME&M and its Secretariats 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, 2015, representing 6.6% of the installed generating capacity in Argentina at such date, and generated a total of 8,057 net GWh of electricity during the year ended December 31, 2015, representing approximately 6% of total electricity generated in Argentina during such period.  We own an indirect  joint controlling interest in Transener, which operates and maintains the largest high voltage electricity transmission system in Argentina, with approximately 18,523 km (including Transba) of high voltage transmission lines that, as of December 31, 2015, 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 2015, 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. Loma de la Lata is finalizing a new expansion through the construction of new gas turbines which will increase its installed capacity by 120 MW. For further information please see “Item 4. – Our Business – Generation – Loma de la Lata – Loma de la Lata 2014 expansion project”; 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.

- 100% of Greenwind whose purpose is to develop an eolic project named “Corti” which will consist of a wind farm with a 100MW capacity, located in Bahía Blanca, Province of Buenos Aires. For such purpose, Greenwind has a legal right of use and profit from a land ofthe 1,500 hectares and with a wind measurement for a 4 year period.·Transmission.  We participate in the electricity transmission business through our  jointly 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 joint 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. 

·Oil and Gas. We are engaged in the oil and gas business through our subsidiary Petrolera Pampa. We own 49.6% of its capital stock.

In addition to our principal electricity assets, we hold other non-electricity assets and investments, including: 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 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, 2015, 2014 and 2013.  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. 

	Hydroelectric		Thermal				Total
Summary of Electricty Generation Assets	HINISA	HIDISA	CTG	CTLLL	CPB	CTP
Installed Capacity (MW)	265	388	361	553	620	30	2,217
Market Share	0.8%	1.2%	1.1%	1.7%	1.9%	0.1%	7.1%
Net Generation 2015 (GWh)	538	367	1,682	2,582	2,737	152	8,057
Market Share	0.4%	0.3%	1.3%	1.9%	2.0%	0.1%	6.0%
Sales 2015 (GWh)	539	367	2,283	2,582	2,739	152	8,661
Net Generation 2014 (GWh)	516	322	1,528	3,421	3,090	131	9,008
Variation Net Generation 2015-2014	+4.3%	+13.8%	+10.0%	-24.5%	-11.4%	+15.7%	-10.6%
Sales 2014 (GWh)	549	351	2,124	3,502	3,144	131	9,802
Net Generation 2013 (GWh)	616	421	1,675	1,947	2,229	130	7,018
Market Share	-16.2%	-23.4%	-8.8%	75.7%	38.6%	0.6%	28.4%
Sales 2013 (GWh)	833	630	2,268	2,372	2,676	130	8,909
Average Price 2015 (Ps. / MWh)	160.2	174.5	304.2	407.1	152.2	699.6	279.3
Average Gross Margin 2015 (Ps. / MWh)	22.4	-14.1	111.4	322.7	41.9	n.a.	141.5
Average Gross Margin 2014 (Ps. / MWh)	20.6	-24.2	102.4	228.8	39.7	n.a.	118.3
Average Gross Margin 2013 (Ps. / MWh)	33.1	27.9	51.9	103.0	-12.0	n.a.	44.45

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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 was 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 turbine, the increase was of 165MW instead of 178MW (see “Item 4. - Our Business – Loma de la Lata” and “Item 8. - Legal Proceedings – Legal proceedings involving Loma de la Lata”).

Other Projects

·Central Térmica Piquirenda: According to the Complementary Agreement (as defined hereinafter) executed by 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.

According to the Specific Conditions,the second stage of the Project CTP shall not be performed. The engines that amounted to the 15 MW of the secong stage shall be installed in Loma de la Lata (See “Item 4. – Our Business – Our Generation Business – Loma de la Lata’s 2014 Expansion Project”).

·Loma de la Lata’s 2014 Expansion Project: In September 2014, the Argentine Government, through the Secretariat of Energy, and the leading companies of the Argentine energy sector (including Loma de la Lata, CPB, CTG, HIDISA, HINISA and EGSSA (now merged into CTG)), executed the 2014 Thermal Generation Expansion Agreement for the expansion of the total thermal generation capacity in Argentina.  The 2014 Thermal Generation Expansion Agreement contemplates the execution of individual agreements between the Secretariat of Energy and each generation company (and its affiliates) to provide for the specific terms and conditions for the execution of new generation projects. On October 27, 2014, Pampa’s Generators executed the Specific Conditions.

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Under the 2014 Expansion Agreements, subject to the satisfaction of certain conditions precedent  provided in the Specific Conditions, Pampa’s Generators agreed to expand the generating capacity of Loma de la Lata by 120 MW through the installation of a new aero-derivative gas-fired turbine generator (105 MW) and two gas-powered motor-generators (15 MW). For further information please see “Item4. - Our Business – Generation Business – Loma de la Lata – Loma de la Lata’s 2014 Expansion Project.”

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, 61% 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 52.04% 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.

 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.

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

Nihuiles

Diamante

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.

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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 37.75% 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, one of our principal generation assets, 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. 334/2006 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 the 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. 1651/2007 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.1838/2008 of the Province of Mendoza states that, notwithstanding the provisions of Decree No. 1651/2007, 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.

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.

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·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 (currently, the Secretariat of Electric 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

·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.

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

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

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

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

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

·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.

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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 847 GWh, with the highest level of generation (1,250 GWh) recorded in 2006 and the lowest level (516 GWh) recorded in 2014.

HINISA’s revenues consist of sales of energy and capacity.  In 2015, 98% of HINISA’s sales were into the spot market.  Total revenues for the year ended December 31, 2015 were Ps. 86.3 million, due to energy sales of 539 GWh, 1.9% lower than in 2014, with a hydraulic contribution of 674 Hm3, 12% higher than in 2014.

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

	2011	2012(*)	2013(*)	2014(*)	2015(*)
Net Generation (GWh)	586	689	616	516	538
Energy Purchases (GWh)	287	276	217	33	1
Total Energy Sales (GWh)	873	965	833	549	539
Average Price (Ps. / MWh)	190.7	186.2	167.3	155.6	160.2
Average Gross Margin (Ps. / MWh)	63.6	60.2	33.1	20.6	22.4

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

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 569 GWh, with the highest level of generation (943 GWh) recorded in 2006 and the lowest level (322 GWh) recorded in 2014. 

HIDISA’s revenues consist of sales of energy and capacity.  In 2015, 100% of HIDISA’s sales were into the spot market.  Total revenues for the year ended December 31, 2015 were Ps. 63.9 million, for energy sales of 367 GWh, 4.4% higher than in 2014, with a hydraulic contribution of 700 Hm3, 9.0% higher than in 2014.

The following chart shows certain relevant statistical data on HIDISA:

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	2011	2012(*)	2013(*)	2014(*)	2015(*)
Net Generation (GWh)	406	441	421	322	367
Energy Purchases (GWh)	300	280	209	29	0
Total Energy Sales (GWh)	706	721	630	351	367
Average Price (Ps. / MWh)	217.9	215.9	202.7	166.2	174.5
Average Gross Margin (Ps. / MWh)	44.1	49.6	27.9	(24.2)	(14.1)

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

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 S.A. (“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). 

On September 27, 2013, the boards of directors of CTG, EGSSAH and 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 EGSSAH 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 was 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 February 13, 2014 the final merger agreement was executed.  As a result of this merger, as EGSSAH was a public company, having its shares listed in the Mercado de Valores deBuenos Aires S.A. (the “Buenos Aires Stock Market” or “MERVAL”), CTG as the surviving company requested the relevant authorities for its shares to be listed in the Buenos Aires Stock Market.  

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In November 2015, the approvals of the relevant authorities were granted and CTG’s shares were listed in the MERVAL The shareholders of Güemes are (i) the Company which currently holds, directly and indirectly, 90.43% of Güemes’ voting capital stock, (ii) the Argentine Government which holds 6.70% of Güemes’ voting capital stock, and (iii) minority public shareholders and the ANSES, which hold the remaining 2.87% of Güemes’ voting capital stock.

Also, on November 18, 2015, the board of directors of CTG and ENDISA resolved that it would be beneficial for these companies to merge into a single company, where CTG would be the surviving 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 4, 2016, and in connection with the required procedures, the boards of directors of ENDISA and CTG approved the special financial statements required for the merger, the preliminary merger agreement executed between CTG and ENDISA, and the offering memorandum that describes the terms and conditions of the merger. For accounting, fiscal and legal purposes, the merger will be effective from January 1, 2016. On April 14 and April 21, 2016, the shareholders of CTG and ENDISA, respectively, approved the merger and all of its documentation. On March 8, 2016, the administrative approvals of the CNV and the BCBA were requested, which, as of the date of this annual report had not been granted. Also, as of the date of this annual report, the definitive merger agreement has not been executed and, therefore, the approvals of the provincial authorities and of the IGJ were still pending.

If the approvals of the merger are not obtained, the Company does not expect significant negative effects arising as a consequence thereof, due to the fact that CTG and ENDISA were consolidated before the merger and will continue to be consolidated after it.

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 Agreements 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. 

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

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Operations

The following chart shows certain relevant statistical data on Güemes:

	2011	2012	2013	2014	2015
Net Generation (GWh)	1,846	1,533	1,675	1,528	1,682
Energy Purchases (GWh)	480	483	593	596	601
Total Energy Sales (GWh)	2,325	2,016	2,268	2,124	2,283
Average Price (Ps. / MWh)	224.1	218.6	196.8	293	304.2
Average Gross Margin (Ps. / MWh)	64.8	41.3	51.9	102.4	111.4

The following chart shows certain relevant statistical data on CTP:

	2011	2012	2013	2014	2015
Net Generation (GWh)	66	110	130	131	152
Average Price (Ps. / MWh)	388	411.8	440.3	678.2	699.6
Average Gross Margin (Ps. / MWh)	125.8	222.2	n.a.	n.a.	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.

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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 1,682 GWh in 2015.  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 spot market and to the Energía Plus market (see “Güemes - Expansion Project” below). Total revenues for the year ended December 31, 2015 (which includes CTG and CTP) were Ps. 801 million, for energy sales of 2,283 GWh for CTG, 7.5% higher than in 2014 and for energy sales of 152GWh for CTP, 15.7% higher than in 2014.

In 2015, Güemes’ generation depended on (i) electricity demand in the provinces of Salta and Jujuy, (ii) the availability of natural gas, and (iii) the transmission restrictions.   

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 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 “Item 4. - 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 or Petrolera Pampa. 

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. 

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On December 17, 2013, the boards of directors of CTLL and 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 was 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 corporate reorganization was deemed effective from January 1, 2014. The shareholders’ meeting of each company took place on April 28, 2014, where the merger and all of the documentation relating to it was approved. On June 3, 2014, the final merger agreement was executed and on September 15, 2015, the merger was finally registered before the corresponding authorities.  

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 capacity of 178 MW and is located near one of the largest gas fields in Argentina bearing the same name.  Loma de la Lata had a net production of 2,582 GWh in 2015, 26.3% lower than in 2014. Total revenues for the year ended December 31, 2015, were Ps. 1,051 million, 10.98% higher than in 2014.

During the period 1997-2015, the average annual generation has totaled 1,499 GWh, with the highest level of generation (3,421 GWh) recorded in 2014 and the lowest level (272 GWh) recorded in 2002. 

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

	2011	2012	2013	2014	2015
Net Generation (GWh)	1,185	2,479	1,947	3,421	2,582
Energy Purchases (GWh)	14	290	425	81	--
Total Energy Sales (GWh)	1,199	2,769	2,372	3,502	2,582
Average Price (Ps. / MWh)	202.9	260.4	237.3	270.4	407.1
Average Gross Margin (Ps. / MWh)	58.6	118.9	103	228.8	322.7

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

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 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 the Expansion. For such purpose, on September 6, 2007 Loma de la Lata entered into  the Project Agreements with the Project Counterparties.

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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 related to the Contractor’s breach, such as delays in compliance and labor disputes, the parties agreed to postpone the beginning of commercial operations until December 5, 2010.

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 the 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.

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 (granted as compensation for breaches) 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 a compensation for breaches in an amount equal to the amount of the last payment to be made under the Project Agreements which would be effective upon the delivery of the formal provisional acceptance of the Expansion pursuant to the terms of the Project Agreements. The total compensation (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. 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.

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 additional 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.

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In this context, in 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. - Legal Proceedings involving Loma de la Lata”.

On November 14, 2012, another major incident occurred in the plant. A failure of the steam turbine protection systems, due to a defective design, caused severe damage to the steam turbine and associated equipment. Loma de la Lata 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.

Agreements in connection with the Loma de la Lata Expansion Project

In December 2008, Loma de la Lata and the S E executed the“Convenio Marco para el Cierre del Ciclo Combinado Loma de la Lata”, setting forth the specific conditions for the construction and operation of the Project. Under such agreement, the SE agreed to make the necessary amendments to the existing regulation at the date of the agreement, to acknowledge Loma de la Lata an additional 10% of the cost associated with the supply of natural gas, under the Gas Plus Program, for the operation of Loma de la Lata’s plant.

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. The term of the amendment was extended to the total term of the WEM Supply Agreement pursuant to the Specific Conditions (See Item 4.– Our Business – Our Generation Business - Loma de la Lata’s 2014 Expansion Project).

Natural gas supply

To be able to sell the electricity generated by the Loma de la Lata expansion project under the agreement with CAMMESA, Loma de la Lata needed to have firm gas supply contracts in place at the time it began 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 2,700 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. 

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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. - The Argentine Electricity Sector -Natural Gas Supply under the Gas Plus Program”.

During 2015, Loma de la Lata was a party to the following gas agreements (the “Natural Gas Supply Agreements”):

·Firm gas supply agreement with Pan American Energy LLC Argentine branch for up to 2,528 Dam3 per day expiring in December 2015, having a one year-term automatic renewal clause.

·Firm gas supply agreement with Petrolera Pampa for up to 172 Dam3 per day expiring September 2015, having a one year-term automatic renewal clause.

As of the issuance of SE Resolution No. 529/2014, as amended, generators will depend on the fuels that CAMMESA supplies them for their operations, since through such resolution the Secretariat of Energy appointed CAMMESA as the sole supplier of fuels for the generation sector (See “Item 3. – Key Information – Risk Factors – Risk Relating to our Generation Business – Our ability to generate electricity in out 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”). Consequently, as of the termination of the current gas supply agreements, Loma de la Lata will not need to have firm gas supply agreements to ensure the availability of the WEM Supply Agreement executed under SE Resolution No. 220/2007.

In September 2015, CAMMESA informed Loma de la Lata that, in accordance with the provisions of SE Resolution No. 529/14, that after the first automatic renewal of the term of the Natural Gas Supply Agreements, CAMMESA will no longer acknowledge (i) further automatic renewals of such agreements, and (ii) the costs associated to such supply, including the additional 10% of such costs established in the “Convenio Marco para el Cierre del Ciclo Combinado de Loma de la Lata.”

As a consequence thereof: (i) on September 3, 2015 Loma de la Lata declared the force majeure of the Natural Gas Agreement with Pan American Energy LLC Argentine branch, resulting in the suspension of the obligations of Loma de Lata thereunder, and filed claims against CAMMESA in connection with such agreement; and (ii) on January 1, 2016, declared the force majeure of the Natural Gas Agreement with Petrolera Pampa, resulting in the suspension of the obligations of Loma de Lata thereunder, and filed claims against CAMMESA in connection with such agreement.  As of the date of this annual report, the administrative claims filed by Loma de la Lata against CAMMESA are still pending.

Loma de la Lata’s 2014 Expansion Project

In September 2014, the Argentine Government, through the Secretariat of Energy, and the leading companies of the Argentine energy sector (including Pampa’s Generator), executed the 2014 Thermal Generation Expansion Agreement for the expansion of the total thermal generation capacity in Argentina.

The 2014 Thermal Generation Expansion Agreement contemplates the execution of individual agreements between the Secretariat of Energy and each corporation (and its affiliates) to provide for the specific terms and conditions for the execution of new generation projects. On October 27, 2014, the Pampa’s Generators executed the Specific Conditions.

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Under the 2014 Thermal Generation Expansion Agreement and the Specific Conditions, subject to the satisfaction of certain conditions precedent (including the execution of a WEM Supply Agreement under SE Resolution No. 220/2007, Pampa’s Generators agreed to execute the Loma de la Lata 2014 Expansion Project to expand the generation capacity of Loma de la Lata by 120MW.

The Loma de la Lata 2014 Expansion Project will be financed by CAMMESA up to an amount equivalent to:(i) the credits arising from the 2008-2015 LVFVDs accrued by Pampa’s Generators as of SE Resolution No. 406/2003 which are not committed to other projects; and (ii) the credits arising from the LVFVDs to be accrued by Pampa’s Generators until December 2015 (included) as “Additional Remuneration” which are allocated to the trust included in the new scheme established for the remuneration of the generation sector provided in SE Resolution No. 95/2013, as amended (see “Item 4. The Argentine Electricity Sector - SE Resolution No. 95/2013, as amended – New price scheme and other modifications to the WEM”). In order to commit the credits specified in (i) and (ii), Pampa’s Generators assigned said credits to CAMMESA.

The amounts arising from the credits specified in (i) and (ii) above shall be transferred to an account administered by CAMMESA. In order to draw such funds CTLL executed a loan agreement with CAMMESA (see “Item 5.- Debt – Generation – Loma de la Lata). As of December 31, 2015, CAMMESA transferred a total amount of Ps. 735.7 million which were applied to the contracts for the installation of the aero-derivative gas-fired turbine.

The remuneration scheme for the Loma de la Lata 2014 Expansion Project includes, a WEM Supply Agreement under SE Resolution No. 220/2007 and the scheme established for the remuneration of the generation sector provided in SE Resolution No. 95/2013, as amended. The portion of the generation capacity to be remunerated under the WEM Supply Agreement shall be equal to the percentage resulting from the sum of: (i) the LVFVDs applied for the previous Loma de la Lata’s project and the CTP Project and (ii) the payments made by Loma de la Lata in cash for the Loma de la Lata 2014 Expansion Project; over the total amount of the cost of the Loma de la Lata 2014 Expansion Project.  Such percentage shall apply over the net generation capacity of the unit.

As of the date of this annual report, Loma de la Lata is negotiating with CAMMESA the WEM Supply Agreement under SE Resolution No. 220/2007.  Therefore, such condition precedent for the execution of the Loma de la Lata 2014 Expansion Project provided in the Specific Conditions has not been met yet.

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. 

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Piedra Buena’s revenues consist of sales of energy and capacity. Total revenues for the year ended December 31, 2015, were Ps. 417 million, for energy sales of 2,739 GWh, 12.9% lower than in 2014. During the 1997-2015 period, the average annual generation has totaled 2,197 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:

	2011	2012	2013	2014	2015
Net Generation (GWh)	3,434	3,265	2,229	3,090	2,737
Energy Purchases (GWh)	718	565	447	55	2
Total Energy Sales (GWh)	4,152	3,829	2,676	3,144	2,739
Average Price (Ps. / MWh)	424	539.80	144.10	129.2	152.2
Average Gross Margin (Ps. / MWh)	28.90	1.80	(12.00)	39.7	41.9

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

As of the date of this annual report, Piedra Buena is not buying natural gas nor fuel oil pursuant to SE Resolution No. 95/2013. Consequently, CAMMESA centralizes the acquisition of fuels for WEM’s generators (for more information please see “Item 4.-Our Business – The Argentine Electric Sector - SE Resolution No. 95/2013, as amended – 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 and firm gas transportation contracts with TGS for up to 3,600 Dam3 per day and the firm gas transportation contract with Pampa Comercializadora S.A.

In order to perform the major maintenance works in Units 29 and 30 scheduled for the years 2015 and 2016, respectively, CPB executed a loan agreement with CAMMESA (see “Item 5. – Debt – Generation – Piedra Buena”).

Our Transmission Business 

Citelec

History

In September 2006, we entered into a stock purchase agreement with Dolphin Opportunity LLC, a related party of the Company, 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., 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.

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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 12,279 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. 

The Company, Grupo Eling S.A. and Enarsa entered into an operating agreement under which each of the Company, Grupo Eling S.A. 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 2015 represented approximately Ps. 30.3million.

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, 2015, were Ps. 1,759.1 million (Ps. 879.6 million on a proportional interest basis), representing 90.4% of Transener’s consolidated net revenues for such period.

We derive a material portion of our transmission revenues from non-regulated transmission activities, including (a) the construction and installation of electrical assets and equipment, (b) non-network line operation and maintenance, (c) the Fourth line’s operation and maintenance, (d) any adjustment by the IVC pursuant to the Definitive Agreement, the Instrumental Agreement and the Renewal Agreement, and (e) other services.      

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.

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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.  On March 12, 2014, the ENRE issued Resolution No. 79/2014, through which it established a new annual rate of Ps. 156.2 million effective as from August 2013, and instructed CAMMESA to make the adjustments necessary fot he retroactive payment (including the corresponding interest).  On April 3, 2014, Transener presented a Motion for Reconsideration of ENRE Resolution No. 79/2014, which was partially accepted by the ENRE. As a consequence, on November 12, 2014, the ENRE issued Resolution No. 332/2014, through which it established a new annual rate of Ps. 158.6 million from August 2013, and instructed CAMMESA to make the adjustments necessary fot he retroactive payment (including the corresponding interest).

                On September 12, 2014, Transener asked the ENRE for a new determination of the Fourth Line’s revenue related to the cost variation from August 2014 to December 19, 2014.

Additionally, Transener requested that the ENRE determine the remuneration corresponding to the Operation and Maintenance of the Fourth Line since December 21, 2014. On August 5, 2015, the ENRE issued Resolution No. 272/2015, which established the remuneration corresponding to the Operation and Maintenance of the Fourth Line from December 21, 2014 and instructed CAMMESA to make the adjustments necessary to implement the retroactive payment of the remuneration set forth in the ENRE Resolution No. 272/2015, including the interest applicable to such remuneration.

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).

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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, 2015 were Ps. 187.7 million (Ps. 93.9 million on a proportional interest basis), representing 9.6% of Transener’s consolidated net revenues for such period.  

Tariffs

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

Transition period rules

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

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

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

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

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Cost increases and the Instrumental Agreements

Transener and Transba requested ENRE to readjust their respective tariffs taking into account the impact of the salary increases resulting from the application of Decrees No. 392/2003, 1347/2003, 2005/2004 and 1295/2005 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) did not match the real cost increase incurred as of 2004, Transener and Transba had 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. 392/2004 and subsequent regulation, and the major operating costs incurred since 2004, Transener and Transba 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 execution of the Definitive Agreements, which led to the initiation of judicial claims by both 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 executed with the Secretariat of Energy and the ENRE, setting forth the following:

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

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

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

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

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

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:

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.

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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, which will be effective until December 31, 2015, and which set forth:

(i)the recognition of receivables by Transener and Transba resulting from cost variations during the December 2010 – December 2012 period, calculated through the IVC of Memorandum of Agreement;

(ii)a mechanism for the payment of outstanding positive balances of Addendum II and those determined in the previous subsection, during the year 2013;

(iii)a procedure for the automatic update, and payment, of resulting cost variations incurred from January 1, 2013 to December 31, 2015; and

(iv)the execution of a new Addendum with CAMMESA including the amount of the generated receivables and the applicable interest until their actual cancellation.

On October 25, 2013, and February 14, 2014, Transba and Transener negotiated the Addenda III.

On September 2, 2014, Transener and Transba executed with CAMMESA the financing agreements for the implementation of the 2013 and 2014 Renewal Agreements (the “New Financing Agreements”).  The New Financing Agreements provided: i) that the Financing Agreements, together with their Addendums I, II and III, were concluded; ii) the granting to Transener and Transba of  new loans in the amount of Ps. 622.2 million and Ps. 240.7 million, respectively, corresponding to receivables acknowledged by the Secretariat of Energy and the ENRE on account of cost variations for the January 2013-May 2014 period; and iii) the assignment as collateral of the receivables recognized on account of higher costs as at May 31, 2014 pursuant to the Renewal Agreement.

Also, on March 17, 2015, Transener and Transba executed with CAMMESA the Addenda IV, setting forth: i) the granting to Transener and Transba of  new loans in the amount of Ps. 563.6 million and Ps. 178.3 million, respectively, corresponding to (a) the outstading amount due pursuant to the Financing Agreement as of January 2015, and (b) receivables acknowledged by the Secretariat of Energy and the ENRE on account of cost variations for the June 2014-November 2014 period; and ii) the assignment as collateral of the receivables recognized on account of higher costs as at November 30, 2014 pursuant to the Renewal Agreement.

In September 2015, Transener and Transba executed with the ENRE and the SE, an Amendment to the Renewal Agreement, setting forth the 2015 year financial - economic projection and investment plan in the amount of Ps. 431.9 million and Ps. 186.6 million for Transener and Transba, respectively, and granting additional non-reimbursable resources for the execution of such investment plan.

On November 25, 2015, Transener and Transba executed with CAMMESA the financing agreements for the implementation of the Amendment to the Renewal Agreement, setting forth: i) the granting to Transener and Transba of  new loans in the amount of Ps. 508,9 million and Ps. 317,6 million, respectively, corresponding to (a) receivables acknowledged by the SE and the ENRE on account of cost variations for the December 2014-May 2015 period; and ii) the additional investments required pursuant to the Amendment to the Renewal Agreement.

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, 2015, through the financing of CAMMESA. Consequently, net revenues amounting to Ps. 1,326.2 million and Ps. 850 million, and interest income amounting to Ps. 176.4 million and Ps. 281.4 million, have been registered by Transener and Transba during the fiscal years ended December 31, 2015 and 2014, respectively.

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

Full Tariff Review (Transener RTI)

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

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. -Risk Factors – Risks related 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”.

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.

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

The 95-year term of the Transener concession is divided into nine management periods.  The first management period, which began in 1993, has a 15-year term, and each subsequent management period lasts ten years.  At least six months prior to the commencement of each ten-year management period, the ENRE is required to call for bids for the purchase of the controlling stake in Transener (represented by Transener’s Class A shares).  The then current owner(s) of the controlling stake in Transener may submit (under seal) their valuation of the controlling stake in Transener and, if their valuation is greater than or equal to the amount of the highest bid submitted by other parties, the owners of such controlling stake will retain ownership of such interest in Transener without making any payment to the Argentine Government.  Consequently, if the owner(s) of the controlling stake in Transener wish to retain control at the end of any management period, they may bid an amount that would ensure their continued control without incurring any additional cost as a result of such bid.  In the event another bid exceeds that of the then current owners of the controlling stake in Transener, the party submitting such bid would receive the controlling stake in consideration for the submitted bid amount, which would be paid to the then current owners of the controlling stake in Transener.  Transener’s rights and obligations under its concession agreements will not be affected by any change in the ownership of the controlling stake.  As of the date of this annual report, the Transener Concession Agreement is in its second 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, 2015, Transener operated and maintained the following assets throughout 22 provinces in Argentina:

        

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As of December 31, 2015, Transba operated and maintained the following assets in the province of Buenos Aires:

     

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.

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

In accordance with the terms of Edenor’s concession, EASA has pledged its 51% stake in Edenor to the Argentine Government to secure the obligations set forth in the concession.  See “Item 4. Our Business – Our Distribution Business - 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 2015.  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, 2015, Edenor served 2,835,229customers.

Merger process

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 (For more information please see “Item 4. Our Business – Asset Sales and Acquisitions”).

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 (the “Adjustement Agreement”).  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.  The following are the key provisions of the Adjustment Agreement, which are described elsewhere in this annual report:

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

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

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·Edenor’s obligation to meet specified more stringent service quality standards than as originally contemplated in its concession;

·a restriction on Edenor’s ability to pay dividends without prior ENRE approval during the period in which Edenor is conducting the RTI;

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

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

·Edenor’s obligation to extend its network to provide service to certain rural areas.

For more information 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.

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.

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

Fines and penalties.  Under the terms of the concession, the ENRE may impose fines and penalties if Edenor fails to comply with its obligations , 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.

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When Edenor entered into the Adjustment Agreement in September 2005, the ENRE approved a payment plan in respect of approximately Ps. 116 million of Edenor’s accrued fines and penalties and agreed, subject to the condition that Edenor meets the quality standards and capital expenditure requirements specified in the Adjustment Agreement, to waive approximately Ps. 58 million of accrued and unpaid fines and penalties. Under such payment plan, the penalties and fines to be paid to users were to be repaid in fourteen semiannual installments, with the first installment due upon the termination of a 180-day grace period beginning on the date the RTI’s resulting tariff structure comes into effect. Because the Adjustment Agreement was not ratified until January 2007, Edenor recalculated the amounts of accrued fines and penalties credited thereof, according to the increase of the VAD charged to customers (including the CMM adjustments which have been transferred to customers for a total amount of Ps.17.2 million) up to the date of their credit to the customers’ accounts. On December 22, 2015, considering the existence of cash flow and the strong possibility that such penalties to be paid to users would not be waived, Edenor decided to make the payment to users in the form of one single credit, which was made to the users’ accounts for an amount Ps.152.2 million in the aggregate. In addition, a total of Ps.33.7 million in the aggregate remains available for those clients which had not an active service as of December 22, 2015.

During 2015, Edenor entered into a settlement agreement with the ENRE (the “ENRE Settlement”), under which Edenor agreed to pay final penalties imposed and which have been juditially challenged by Edenor, with an adverse result, for an amount of Ps. 85.7 million plus interest of Ps. 84.2 million. These fines and penalties were all paid to the Argentine Government and not to users.

In 2015, the fines and penalties imposed on us by the ENRE amounted to Ps. 281.7 million, which represented 7.6% of our energy sales.

As of December 31, 2015, total accrued fines and penalties imposed on us amounted to Ps.1,253.1 million, including Ps.186.3 million under the ENRE settlement, Ps. 364.1 million in penalties accrued but not yet imposed on us and Ps. 702.7 million penalties imposed on us but not yet paid.

Although in Edenor’s opinion, the RTI process will have to factor in a revised analysis of the treatment to be given to the penalties and discounts determined in prior periods and an agreement on quality levels and a new system of penalties and discounts that provides for an adequate transitional period until the tariff schedule resulting from the RTI is fully implemented, recent developments may indicate otherwise.

Such recent developments include verbal exchanges with certain officials of the new administration, and the issuance of the Note by the ENRE on April 15, 2016, establishing that all fines and penalties imposed by the ENRE after April 15, 2016 (whether with respect to events occurring on or after such date or events occurring prior to the date thereof but for which fines or penalties had not been imposed on us by such date, that include a reference to “Note No. 120,151”, must be valued according to the KWh values in effect as of the last date of the semester or period during which the event giving rise to the penalty occurred, including any increases or adjustments applicable to our “remuneration” at such date. In addition, fines and penalties that fall within the purview of the Note will accrue interest from the last date of the semester on which the event giving rise to the penalty occurred until the date they are paid by us. As of the date of this annual report, fines and penalties in an aggregate amount equal to Ps. 757.2 million are subject to the Note. Such amount as adjusted to reflect accrued interest according to the Note would increase by Ps. 129.0 million.

 In Edenor's opinion, any adjustments to its fines and penalties (whether by virtue of the Note or otherwise, and including the accrual of interest as provided in the Note) should not be applicable to it because the delay in imposing such fines and penalties was caused by the Argentine Government and was not within Edenor's control. Additionally. if any adjustments are made applicable to Edenor, Edenor understands the Argentine Government would be binding Edenor to the terms of the Adjustment Agreement without taking into account that it has not recognized certain of Edenor'a rights thereunder, such as Edenor's right to have tariffs adjusted to reflect increases in operation costs that are necessary for adequately providing its services.

On March 28, 2016, Edenor was notified of ENRE Resolution No. 31/2016 pursuant to which it was instructed to compensate the small residential customers (T1R) who had been affected by the power outages occurred during the period between February 12, 2016 and February 18, 2016. The amount of such compensation depends on the duration of each relevant power outages. The total compensation to be paid amounts to Ps. 73 million.

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;

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

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

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

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

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

·Edenor’s regulated distribution margin, which is known as the value‑added for distribution, plus the fixed  and variable charges contemplated under SE Resolution No. 347/2012; and

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

Certain large users are eligible to purchase their energy needs directly from generators in the WEM and acquire from Edenor only the service of delivering that electricity to them.  Edenor’s tariffs for these large users (known as wheeling charges) do not include, therefore, charges for energy purchases.  Accordingly, wheeling charges consist of the fixed charge for recognized energy losses (determined by reference to a fixed percentage of energy and power capacity for each respective voltage level set forth in Edenor’s concession) and Edenor’s distribution margin.  As a result, although the amounts billed to wheeling system customers are relatively lower than those billed to other large users, namely industrial users, the distribution margin on sales to wheeling system customers is similar to that of other large users because Edenor does not incur the corresponding cost of electric power purchases related to those sales.

According to the current regulatory framework, the ENRE is required to adjust the seasonal price charged to distributors in the wholesale electricity market every six months.  However, between January 2005 and November 2008, the ENRE failed to make these adjustments.  In November 2008, the ENRE issued Resolution No. 628/2008, which established the new tariffs applied by Edenor as of October 1, 2008 and modified seasonal prices charged to distributors, including the consumption levels that make up the pricing ladder.  The new pricing ladder sets prices according to the following levels of consumption: bimonthly consumption up to 1,000 kWh; bimonthly consumption greater than 1,000 kWh and less than or equal to 1,400 kWh; bimonthly consumption greater than 1,400 kWh and less than or equal to 2,800 kWh; and bimonthly consumption greater than 2,800 kWh.  In addition, the ENRE authorized Edenor to pass through some regulatory charges associated with the electric power purchases to its customers, excluding residential customers with consumption levels below 1,000 kWh.

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

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

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

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

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

Also on February 13, 2007, the ENRE authorized Edenor to bill our customers (excluding residential customers) the retroactive portion of the 38.3% increase (corresponding to the period from November 2005 to January 2007), which amounted to Ps. 218.6 million and which we have continued to invoice in 55 monthly installments since February 2007.  As of the date of this annual report, Edenor had invoiced the total amount.

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

In July 2008, Edenor obtained an increase of approximately 17.9% in their distribution margin, which they incorporated into that tariff structure. This increase represented the 9.63% CMM increase corresponding to the period from May 2006 to April 2007 and the 7.56% CMM increase corresponding to the period from May 2007 to October 2007. These CMM adjustments were included in their tariff structure as of July 1, 2008 and resulted in an average increase of 10% for customers in the small commercial, medium commercial, industrial and wheeling system categories and in an average increase of 21% for residential customers with bimonthly consumption levels over 650 kWh.  In addition, the ENRE authorized Edenor to be reimbursed for the retroactive portion of the 7.56% CMM increase amounting to Ps. 45.5 million for the period between November 2007 and June 2008, from the PUREE funds.

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Edenor requested several additional increases under the CMM since May 2008, all of which have been recognized by ENRE pursuant to SE Resolution No.250/2013 and SE Resolution No. 32/2015 with retroactive effect from May 2008. However, these increases have not been incorporated into Edenor’s tariff structure in a timely manner.

On May 7, 2013, pursuant to the SE Resolution No. 250/2013, Edenor was authorized to compensate with the CMM recognition, the debt registered under the PUREE for the period from May 2008 through February 28, 2013.

In addition, CAMMESA was instructed to issue sale settlements with maturity dates to be determined for the surplus generated after compensation between the credits of the CMM and the PUREE debts, to partially compensate the debt with the WEM. Edenor was also entitled to deposit the remaining sale settlements with maturity dates to be determined in the trust created pursuant to ENRE’s Resolution No. 347/2012. As of the date of this annual report, all the sale settlements with maturity dates to be determined issued by CAMMESA were offset with PUREE debts or with commercial debt with CAMMESA.

On November 23, 2015, the ENRE issued Resolution No. 347/2012 pursuant to which distribution companies were authorized, as from the issuance thereof, to include a fixed amount for small-demand (T1) customers and a variable amount for medium and large-demand (T2 and T3) customers as an additional charge in their bills, calculated as a percentage of power charges. Such charges, which are clearly indicated in the bills sent to customers, were deposited into a special trust account created by ENRE Resolution No. 347/2012 (namely, the “FOCEDE”) and exclusively used for the execution of distribution infrastructure and corrective maintenance works on the facilities of each of the distribution companies. ENRE Resolution No. 2/2016 partially repealed EMRE Resolution No. 347/2012, discontinuing the FOCEDE and ordering Edenor to open a special bank account with a Central Bank authorized entity where the funds received pursuant to Resolution No. 347/2012 must be deposited.

In March 2015, the SE issued Resolution No. 32/2015 granting Edenor a temporary increase in income through funds provided by CAMMESA, which was applicable retroactively as from February 1, 2015, to pay for costs and investments associated with the regular provision of the public service of distribution of energy on account of the future RTI. Such additional income resulted from the difference between the “theoretical” tariff schedules set forth in such resolution and the tariff schedule in force at each time for each category of user, according to calculations made by the ENRE, which had been reported monthly to the SE and CAMMESA. In this respect, CAMMESA had transferred the funds contributed by the Argentine Government, in accordance with the values reported by the ENRE.

As from February 1, 2015, the PUREE funds were considered as part of Edenor’s income on account of the future RTI. Edenor was entitled to offset the debts for PUREE with claims arising from the calculation of CMM until that date, including the application of interest that could correspond to both concepts. Any amount of PUREE funds in excess of those applied to offset CMM-related claims as described in the previous sentence were to be offset against debts arising from loans granted by CAMMESA in connection with the mandatory salary increases.

Although Edenor submitted to CAMMESA a repayment plan in November 2015, as of the date of this annual report negotiations with CAMMESA continue with respect to a final repayment schedule to cancel the obligations owed to it for the provision of electricity.

On December 16, 2015, the Macri administration declared the state of emergency of the national electricity system that will remain in effect until December 31, 2017. The state of emergency allows the Argentine Government to take actions designed to guarantee the supply of electricity.

In January 2016, the ME&M issued Resolution No. 7/2016, pursuant to which the ENRE implemented a VAD adjustment to the tariff schedule on account of the future RTI in effect as of February 1, 2016, and is expected to take all necessary action to conclude the RTI process by December 31, 2016.

In addition, such resolution: (i) abrogated the PUREE; (ii) repealed SE Resolution No. 32/2015 as from the date the ENRE resolution implementing the new tariff schedule is in force; (iii) discontinued the application of mechanisms that imply the transfer of funds from CAMMESA in the form of loan agreements with CAMMESA; and (iv) ordered the implementation of the actions required to terminate the trusts created pursuant to ENRE Resolution No. 347/2012. Resolution No. 2/2016 of the ENRE partially repealed Resolution No. 347/2012, discontinuing the FOCEDE and ordering Edenor to open a special bank account with a Central Bank authorized entity where the funds received pursuant to Resolution No. 347/2012 must be deposited.

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Pursuant to ME&M Resolution No. 7/2016, the ENRE issued Resolution No. 1/16 establishing a new tariff structure.

The following table sets forth the relative weight of our distribution margin in our average tariffs per category of customer (other than wheeling system, public lighting and shantytown customers) in our concession area at the dates indicated. Although the VAD and electric power purchases per category of customer are the same, we are subject to different taxes in the Province of Buenos Aires and the City of Buenos Aires.

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(1)T1R1 refers to residential customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is less than or equal to 300 kWh.  T1R2 refers to residential customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 300 kWh but less than 650 kWh. TIR3 refers to residential customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 650 kWh but less than 800 kWh.  TIR4 refers to residential customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 800 kWh but less than 900 kWh. TIR5 refers to residential customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 900kWh but less than 1,000 kWh TIR6 refers to residential customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 1,000 kWh  but less than 1,200 kWh. TIR7 refers to residential customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 1,200 kWh but less than 1,400 kWh. TIR8 refers to residential customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 1,400 kWh but less than 2,800 kWh.  TIR9 refers to residential customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 2,800kWh.  T1G1 refers to commercial customers whose peak capacity demand is less than 10kW and whose bimonthly energy demand is less than or equal to 1600 kWh.  T1G2 refers to commercial customers whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 1600 kWh but less than 4,000 kWh. T1G3 refers to commercial customers whose peak capacity demand is greater than 4,000 kWh.  T2 refers to commercial customers whose peak capacity demand is greater than 10 kW but less than 50 KW.  T3 refers to customers whose peak capacity demand is equal to or greater than 50 kW.  The T3 category is applied to high-demand customers according to the voltage (tension) at which each customer is connected.  Low tension is defined as voltage less than or equal to 1 kV and medium tension is defined as voltage greater than 1kV but less than 66 kV.

(2)On November 7, 2011, SE Resolution No. 1301/2011 was enactedc, which established the summer scheduling, eliminating government grants to certain economic activities, which, in accordance with the provisions of the resolution, are in conditions to pay the actual cost that needs to be incurred for being supplied with their demand of electricity. The removal of government grants has been extended to residential customers, who were classified by geographical areas and type of residence. The modification related only to electricity purchase prices in the WEM, for which reason the Company’s VAD (value added for distribution) remained practically unchanged.

(3)On January 29, 2016, the ENRE issued Resolution No. 1/2016 establishing new tariff structure.

Customers.  As of December 31, 2015, Edenor served 2,835,229 customers.  Edenor defines a “customer” as one meter. Edenor classifies its customers pursuant to the following tariff categories:

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·Residential (T1-R1 to T1-R7): residential customers whose peak capacity demand is less than 10kW.  In 2015, this category accounted for approximately 43% of Edenor’s electricity sales.

·Small commercial (T1-G1 and T1-G3): commercial customers whose peak capacity demand is less than 10kW.  In 2015, this category accounted for approximately 8% of Edenor’s electricity sales.

·Medium commercial (T2): customers whose peak capacity demand is equal to or greater than 10kW but less than 50kW.  In 2015, this category accounted for approximately 8% of Edenor’s electricity sales.

·Industrial (T3): industrial customers whose peak capacity demand is equal to or greater than 50kW.  In 2015, this category accounted for approximately 17% of Edenor’s electricity sales.  This category does not include customers who purchase their electricity requirements directly through the wholesale electricity market under the wheeling system.

·Wheeling System: large users who purchase their electricity requirements directly from generation or broker companies through the wholesale electricity market.  In 2015, the total number of such large users was 708, and this category represented approximately 19% of our electricity sales.

·Others: public lighting (T1-PL) and shantytown customers whose peak capacity demand is less than 10kW.  In 2015, this category accounted for approximately 5% of Edenor’s electricity sales. 

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

Shantytowns.  In accordance with the terms of its concession and given the nature of public service that the distribution of electricity is granted under Argentine law, Edenor is required to supply electricity to all users whithin the concession area, including low-income areas and shantytowns located within its service area.  In October 2003, Edenor, Edesur and Edelap entered into a framework agreement with the Argentine Government and the Province of Buenos Aires to regulate their supply to low-income areas and shantytowns.  Under this agreement, Edenor has the right to receive compensation for the services provided to to shantytowns from funds collected from residents of each relevant shantytown, the Municipality in which it is located and, if there is a shortfall, by a special fund sponsored by the Argentine Government and the Government of the Province of Buenos Aires.  The Argentine Government contributes an amount equal to 21%, and the Province of Buenos Aires 15.5%, of such compensation, net of taxes, paid by those customers with payment problems and meter irregularities that is transfer to distributors as compensation. 

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

On July 22, 2011, Edenor, together with Edesur and Edelap, entered into an Addendum with the Argentine Government and the Government of the Province of Buenos Aires, to extend the Amended 2003 Framework Agreement for a term of four years.  Such extension was approved on September 21, 2012 by Resolution No. 248/2012 issued by the ENRE and ratified by the Ministry of Federal Planning, Public Investment and Services through Resolution No. 247/2012.  As of December 31, 2014, the Amended 2003 Framework Agreement expired. As of the date of this annual report negotiations with the Argentine Government and the Government of the Province of Buenos Aires to enter into a new agreement are ongoing.

At December 31, 2015, 2014 and 2013, receivable balances with the Argentine Government and the Government of the Province of Buenos Aires amounted to Ps. 75.8 million, Ps. 75.8 million and Ps. 56.9 million, respectively. Due to the expiration of the Agreement, during the fiscal year 2015, Edenor has not recorded revenue for Ps. 32.4 million.

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

The following table illustrates Edenor’s estimation of the approximate breakdown between technical and non-technical energy losses experienced in its service area since 2006. Edenor believes that non-technical losses could increase in 2016 following the establishment of the new tariff structure pursuant to Resolution No 1/16 of the ENRE.

Oil and Gas

Petrolera Pampa

On January 21, 2009, we constituted Petrolera Pampa in order to supply our thermal plants.  The Gas Plus Program, which was promoted by the government to attract investments,was a motivation to follow this path.  The first agreements were made through partnerships in projects with proved gasreservesto be developed by major oil and gas companies like Ysur (formerly Apache) and Petrobras. The next step for the company was to negotiate agreements that involve potential oil and gas production with Petrolera Pampa as operator.  In 2013, we executed an investment agreement with YPF, by which Petrolera Pampa has committed to invest U.S.$151.5 million in exchange for 50% of the hydrocarbons production from the Rincón del Mangrullo block (the “Block”), located in the province of Neuquén. For further information please see “Petrolera Pampa’s Projects – Investment Agreement with YPF”. 

                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 in the Buenos Aires Stock Market, 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.

As of the date of this annual report, we directly and indirectly control 49.6% of Petrolera Pampa’s capital stock. 

Introduction to the Hydrocarbon Market - Market De-regulation

Until the early 1990s, the Argentine Government ran most hydrocarbon-related activities, including exploration, production and transportation. Despite the fact that the Ley de Hidrocarburos (the“Hydrocarbons Law”), which was passed in 1967, allowed the government to grant exploration permits and concessions to the private sector, this power was rarely exercised. Prior to 1989, private sector companies were engaged in exploitation activities through services agreements with YPF. The oil thus extracted was delivered to YPF, which would then allocate it to refineries. Oil prices were fixed by the Argentine Government at levels that were generally significantly below international prices.

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In 1989, with the enactment of the Ley de Reforma del Estado y Emergencia Económica (Law for the Reform of the State and Economic Emergency), the hydrocarbon sector was de-regulated.  The new regulatory framework included the following: certain exploitation concessions were to be awarded through a bidding process; partnering agreements could be made with YPF to explore and exploit certain productive areas; starting in 1991, official prices for crude and refined products would be eliminated; and starting in 1994, the price of gas at the wellhead would be de-regulated.  Another development was the creation of a regulatory entity vested with powers to enforce the newly-established framework, the ENARGAS.

The reform of the sector led to the free establishment of prices and a more efficient market, as a result of the participation of private sector players and competition.  Total gas output rose by 83% in the period from 1992 to 2002, and oil output rose by 37% during the same period.  Gas reserves increased by 23% and oil reserves increased by 40% during the same period.

The Ley de Emergencia Pública(Public Emergency Law), which was passed in 2002, introduced changes to the dynamics of the hydrocarbon sector.  Some of the provisions under that law include withholdings on exports of liquid hydrocarbons and their by-products, limits on price increases in the gas market and certain restrictions on exports.

As it relates to jurisdiction matters, it is important to clarify that with the enactment of the Law No. 26,197 the“Hydrocarbons Short Law”(Ley Corta de Hidrocarburos), in 2007, the Argentine provinces received ownership rights over the reserves of crude oil and gas situated within their territories, and the provinces themselves were empowered to grant concessions to private companies.

In July 2012, the Argentine Government issued Decree No. 1277/2012 through which it regulated Law No. 26,741, and repealed those provisions of Decrees No. 1055/89, 1212/89 and 1589/89 which provided: (i) the right to dispose of hydrocarbon production (both placed on the domestic market and for export), (ii) free pricing, and (iii) exemption from any duty, law and/or retention on exports and imports hydrocarbons. In turn, it created the National Register of Hydrocarbon Investments wherein Hydrocarbon sector companies must register and the Committee on Strategic Planning and Coordination of the National Investment Plan for Hydrocarbons, whose main role will be to carry out the National Investment Plan for Hydrocarbon (“Plan Nacional de Inversiones Hidrocarburiferas”), for which companies must timely provide to the Committee the technical, quantitative and/or economic information that is requested, is necessary to evaluate the performance of the sector. Companies must also submit an Annual Investment Plan conforming to the National Investment Plan for Hydrocarbons. The Decree also authorizes the Commission to publish reference prices for each of the components of costs and sales, and reference prices for fuel, which is intended to allow coverage of production costs attributable to the activity while obtaining a reasonable profit margin. The Commission may apply different types of sanctions for noncompliance.

On October 31, 2014, the Argentine Congress enacted Law No. 27,007, which amended the Hydrocarbons Law in certain aspects mainly relating to the exploration and production of unconventional hydrocarbons (which were not regulated in the previous Law), the extension of the concessions and royalties rates, as follows:

·Regarding exploration permits, the term of permits for conventional exploration is divided into 2 periods of up to 3 years each plus a discretionary extension of up to 5 years.  Thus, the maximum possible duration of exploration permits is reduced from 14 to 11 years.

·For unconventional exploration, the term of permits is divided into two 4-year terms, plus a discretionary extension of up to 5 years, providing for a maximum term of 13 years. In the case of off shore permits, the term is divided in two periods of up to 3 years (with a discretional extension of 1 year each period) and a discretional extension for up to 5 year, providing for a maximum term of 13 years.

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·Regarding exploitation concession, the term of conventional production concessions has been maintained in 25 years. For unconventional exploitations, a 35-year term is provided, including an initial pilot plan of up to 5 years. For offshore production, concessions will be granted for periods of up to 10 years.  Under the previous Hydrocarbons Law regime, the concessions could be extended only once for a 10-year term.  Law No. 27,007 establishes successive extensions to conventional and unconventional concessions for 10-year periods. Even the concessions which are currently in force and those which have already been extended once, can be extended again.

·In respect of the reservation of areas and the carry method, Law No. 27,007 eliminates the possibility for the Federal Government and the Provinces to reserve areas for the exploitation by public entities or state-owned companies as from the date in which Law No. 27,007 entered into force and effect. However, contracts already executed by said provincial entities or companies for the exploration and development of reserved areas continue to be subject to the regulations in force prior ro Law No. 27,007.

·Regarding exploration permits and production concessions, Law No. 27,007 updates the values of the applicable rights.  In the case of exploration permits, it establishes the possibility of compensating up to 90% with investments in exploration during the second period of the term and of the extension, when applicable.

·Regarding royalties, the general 12% rate provided in the Hydrocarbons Law is maintained. As in the previous law, the possibility of reducing the rate in exceptional cases up to 5% is also maintained, as well as the possibility of increasing it 3% upon successive extensions. It also introduces a maximum limit to such rate in all cases of 18%.  It also provides the possibility for the grantor to apply a reduced rate of up to 50% for projects of (i) production in which enhanced or impoved oil recovery techniques are applied, (ii) for extra-heavy oil exploitations and (iii) for offshore explotaitions.

Law No. 27,007 provides that the National Executive Branch shall include in the Promotional Investment Regime established by Decree No. 929/2013 the direct investment projects that contemplate investments for an amount of U.S.$ 250 million in a 3-year period. Currently, the benefits under this regime apply to projects for amounts higher than U.S.$ 1,000 million in a 5-years period.

The benefits under this promotional regime will be enjoyed after the third year and shall apply to 20% of the production of the project, in the case of on shore projects –whether conventional or unconventional- and to 60%, in the case of offshore projects. To qualify as an off shore project, the wells’ depth measured between the surface and the seabed must be of at least 90 meters.

Law No. 27,007 also provides two contributions payable to the Provinces in connection with the projects subject to this promotional regime: (i) 2.5% of the initial investment to develop corporate social responsibility projects, payable by the owner of the project and (ii) a contribution, which amount shall be determined by the Commission created by Decree No. 1277/2012 considering the size and scope of the project, to develop infrastructure projects in the relevant Province and payable by the Federal Government.

Finally, Law No. 27,007 provides that the Federal Government and the provinces will promote the adoption of uniform fiscal legislation to foster hydrocarbon activities.

On January 4, 2016, the Argentine Government issued Decree No. 272/15, which dissolved the Hydrocarbons Commission created by Decree No. 1277/12 and transferred the duties and authority of the former Hydrocarbons Commission to the ME&M. 

Gas Market

Various reforms of the gas market aim to regulate the supply of gas to ensure that priority demand (i.e., households and small retailers) is met.  This scheme is known as the Producers’ Agreement. In this respect, demand is divided into the following segments:

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·Households and small retailers (“priority demand”)

·Compressed natural gas

·Industrial/ power plants

·Exports

Each segment pays a different price for gas, with the industrial and the export segments being the only segments that admit the free establishment of prices.  The new regulatory structure, which was established by Resolution No. 208/2004, Resolution No. 599/2007 and Resolution No. 1070/2010, among others, set forth that each producer must maintain sales of gas to each sector at the same levels as in 2006, and if they do not on grounds of decreased output, there will be a re-allocation of their gas in such a manner as to ensure that priority demand should always be met.  The prices in local currency of the regulated segments, except for the priority demand segment, underwent slight increases in the past years, in order to gradually move them nearer the unregulated price, which is much higher than the present-day prices in the rest of the sectors.

The rate of growth in investments in recent years was not the same as that experienced in the 1990s. As a result, output could not keep up with demand and, therefore, exports were reduced to a minimum, and in winter time, the industrial sector is sporadically subject to interruptions in supply.  This circumstance, compounded by a decline in the volume of reserves, resulted in a strong decline in the reserves/production ratio, down from 21.6 years in 1992 to less than 10 years in 2010, the last year for which this information is available.

In addition, in 2007, through the state-run energy company ENARSA, the government started to import gas from Bolivia and to request shipments of liquefied natural gas tankers to meet the system’s minimum demand levels, replacing part of the gas used by power plants with alternative fossil fuels such as diesel oil and fuel oil. The above-mentioned gas imports are financed through a trust that is funded through a specific charge in the bills of non-priority users.

In view of this trend, the government decided to introduce new resolutions seeking to incentivize investment and production. The SE Resolution No. 24/2008 (subsequently amended by SE Resolution No. 1031/2008) instituted the Gas Plus Program. The main incentive to gas producers is that gas extracted within the framework of the program can be freely disposed and commercialized. To qualify for the program producers are required to submit a project of investments in new gas blocks, in blocks that have not been in production since 2004 or in blocks that are geologically complex (compact sand or with low permeability). In addition, to be eligible for this program –unless the applicant is a new company– the firm must be in compliance with its output quotas as established in the Producers’ Agreement.

Petrolera Pampa was organized in 2009 with a view to taking advantage of the benefits offered by the Gas Plus Program.

In February 2013, the Commission’s Resolution No. 1/2013 was published, creating the Encouragement Program for Excess Injection of Natural Gas (the Programa de Estímulo a la Inyección Excedente de Gas Natural or “Encouragement Program”) whose objective is to evaluate and approve projects that contribute to national self-sufficiency in hydrocarbons through increases in gas production and injection into the domestic market, and projects that generate higher levels of activity, investment and employment in the sector.

Companies which participate in the Encouragement Program agree to a minimum injection volume (the “Base Volume”) to be sold at a fixed price (the “Base Price”) and can expect to receive U.S.$7.5/MMBTU for any injection volume in excess of the Base Volume (the “Excess Injection”).  The Argentine Government undertakes to pay a monthly compensation for: (i) any difference that between U.S.$7.5 /MMBTU and the price actually received from the sale of the Excess Injection and (ii) any difference between the Base Price and the price actually received from the sale of the Injection Base.

Petrolera Pampa’s project was approved under the Encouragement Program and became effective on March 2013.

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Before the Hydrocarbons Commission was dissolved, it passed two other resolutions creating the “Stimulus Program for Companies with low Injection of Natural Gas” (Resolution No. 60/2013) and the “Stimulus Program for Companies without Injection of Natural Gas” (Resolution No. 185/2015), which provided the same benefits as the Natural Gas Stimulus Program. Petrolera Pampa does not participate in these programs.

In July 2015, the Hydrocarbons Commission issued Resolution No. 123/2015, which created the “Areas and Participation Acquisition Rules” under the Natural Gas Stimulus Program and specified the requirements of the presentation that must be filed by all companies that acquire any participation in hydrocarbon areas. 

Crude Oil Market

Also seeking to encourage investment and production, several resolutions have been issued relating to the crude oil market.  The most important, Resolution 394/2007, which imposes further restrictions on exports of crude by fixing their price, had the effect of leaving producers indifferent when deciding between serving the local or the international market as the state would capture any extraordinary revenue that the producer could earn on exports.

The production of crude oil has shown a downward trend in recent years. Therefore, as was the case in the gas market, the government started a search for the tools and regulations that could serve to again find the path to growth.  The Petróleo PlusProgram (Resolution No. 1312/2008) was created with that objective.

According to the Petróleo PlusProgram, oil producers able to prove an increase in their production of oil and the replenishment of their proven reserves will be entitled to a series of tax credits that they may apply to the payment of export duties on their oil, liquefied petroleum gas and other by-products that are due under Resolution No.394/2007. The Petróleo Plus program came into force on December 1, 2008, with retroactive effect to October 1, 2008.  These tax credit certificates issued by the Secretariat of Energy are transferable.

In February 2012, the Petróleo Plus Program was suspended for companies that produce more than 1,300 m3/day of oil due to the modification of the market conditions under which such program was initially created, by giving compensation to certain companies to improve the final price of exported oil. This compensation was eliminated by the Ministry of Economy’s Resolution No. 1/2013 mentioned below. The Secretariat of Energy through SE Resolution No. 438/2012, granted to companies that export oil and produce less than 1,300 m3/day a compensation of 28 U.S.$ / bbl.

On January 3, 2013, the Ministry of Economy issued Resolution No. 1/2013 which raised the cutoff values of Resolution No. 394/2007 from U.S.$ 42/bbl to U.S.$ 70/ bbl, thus increasing income accruing to the oil exporters.

On December 29, 2014, the Ministry of Economy issued Resolution No. 1,077/2014 which revoked Resolution No. 394/2007 and established new export tax rates which are linked to the international price of crude oil to be determined from monthly Brent reference value minus eight dollar per barrel (8.0 US $ / Bbl). The new regime set as the cutoff value the amount of U.S.$ 71 / Bbl.  If the international price of oil does not exceed U.S.$ 71 / Bbl, the producer shall pay export duties of 1% of that value.  Above U.S.$ 80 (which yield an international price of U.S.$ 72 / Bbl) variable deductions will be settled.

In February, 2015, the Commission’s Resolution No. 14/2015 was published, creating the Programa de Estímulo a la Produccion de Petroleo (the “Oil Encouragement Program”).  Companies which participate in the Oil Encouragement Program, agree to a minimum production (the “Base Production”) and can expect to receive U.S.$ 3/Bbl or U.S.$ 2/Bbl (depending if it is for local market or for export) for any Bbl in excess of the Base Production up to a maximum price per Bbl of 70 U.S.$ /Bbl for Escalante oil and 84 U.S.$/Bbl for Medanito oil.

On July 13, 2015, the Argentine Government issued Decree No. 1330/2015, which terminated the Petróleo Plus Program and established a mechanism to pay back the tax credits of such program.

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Petrolera Pampa’s Projects

Investment Agreement with YPF

On November 6, 2013, Petrolera Pampa entered into an agreement (“YPF Agreement”) through which Petrolera Pampa committed to invest U.S.$151.5 million in exchange for a 50% interest (the “Assigned Share”) in the hydrocarbon production of the Rincón del Mangrullo block (the “RDM Block”), which is located in the province of Neuquén, and comprises the formations up to and including the Mulichinco formation.  The Assigned Share represents 50% of the rights and duties relating to the production of hydrocarbons in the RDM Block, except for certain existing wells that were previously drilled by YPF and specific wells that were to be drilled at YPF’s sole cost and expense and owned by YPF.  Production in the RDM Block began in July 2014.  The RDM Block’s concession expires in 2022.  YPF, as operator of this block, has agreed to use its best efforts to obtain an extension of the concession beyond 2022, which must be granted by the province of Neuquén.

The YPF Agreement had two initial investments phases:

• Phase one:

§Petrolera Pampa committed to invest U.S.$80.0 million in the drilling, completion and commissioning of approximately 17 wells in the western RDM Block during this phase, in addition to U.S.$1.5 million in the completion of three-dimensional seismic surveys covering approximately 40 square kilometers.

§YPF committed to the drilling, completion and commissioning of 17 additional wells in the eastern RDM Block.  YPF also committed to build a pipeline and all necessary facilities to transport the gas produced in this block.  The pipeline covers approximately 55 kilometers and connects to the trunk pipeline system.  Petrolera Pampa has committed to pay fees for the use of the pipeline and facilities.

§Phase one of this project was completed in October 2014.

Under the terms of the YPF Agreement, Petrolera Pampa had the option, but were not required, to continue with phase two of the project.  Upon completion of phase one, in October 2014, Petrolera Pampa accepted the option to complete phase two of the project. 

• Phase two:

§Petrolera Pampa committed to invest U.S.$70.0 million in the drilling, completion and commissioning of approximately 15 wells anywhere in the RDM Block.

§Phase two of this project was completed in May 2015. 

In accordance with the YPF Agreement, Petrolera Pampa has a 50% interest in the hydrocarbon production of the wells drilled during phases one and two, while YPF has the remaining 50% interest.  YPF also has a 100% stake in certain wells that were drilled prior to the date of the YPF Agreement, in addition to the wells drilled at its sole cost and expense (17 of such YPF-owned wells were completed during phase one).

Once phases one and two were completed on schedule, Petrolera Pampa and YPF had the option to continue jointly developing the RDM Block until the end of the concession period in 2022, or as further extended.  In May 2015, Petrolera Pampa and YPF agreed to extend the drilling program beyond phase two with the drilling of 35 additional wells, representing an additional investment by us of approximately U.S.$70.0 million.  As a result, during the year ended December 31, 2015, a total of 50 wells (consisting of the 15 wells drilled during phase two and 35 additional wells) were drilled in connection with the YPF Agreement.  In accordance with the terms of the YPF Agreement, all hydrocarbon production and the cost of wells drilled after the completion of phases one and two are allocated to Petrolera Pampa and YPF in accordance with our respective interests (50% each).  In addition, all operating costs, including lifting and transportation costs, royalties of 12% and surface rights, are borne proportionally based on Petrolera Pampa’s respective 50% interests in the joint venture.

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YPF Addendum

On May 26, 2015, Petrolera Pampa entered into the Addendum to modify certain terms and conditions of the YPF Agreement and increase Petrolera Pampa’s investment commitments.  The principal changes to the YPF Agreement, which took effect retroactively as from January 1, 2015, were as follows:

·All formations covered by the RDM Block’s concession were included in the YPF Agreement, excluding only the Vaca Muerta and Quintuco formations.

·Petrolera Pampa committed to jointly invest with YPF to expand existing evacuation and processing facilities in the RDM Block.  Petrolera Pampa’s total investment in these facilities is expected to reach approximately U.S.$65.0 million.  In exchange, Petrolera Pampa acquired (retroactively, effective as from January 1, 2015) a 50% right over the hydrocarbon production of all wells in the RDM Block, including the wells that are wholly owned by YPF. 

·Petrolera Pampa committed to invest in exploratory activities in the Lajas formation, which forms part of the RDM Block. 

·For the period 2016-2017, Petrolera Pampa committed to invest an additional U.S.$22.5 million, which will be used for well drilling in the Mulichinco formation and/or additional investments to improve the evacuation and processing facilities in the RDM Block.

The first well in the Lajas formation was drilled but has not yet been completed as of the date of this annual report.  It has not yet been determined whether this well is productive or dry.

As a result of the changes implemented through the Addendum, Petrolera Pampa’s average natural gas production in the RDM Block increased by 300,000 m3/d.  In addition, Petrolera Pampa retroactively recognized 63.7 million m³ of natural gas and 1,820 m³ of oil for the period between January 1, 2015 and the date of the Addendum, for which Petrolera Pampa expects to receive compensation by April 2016.  Under the terms of the Addendum, YPF is to assign to Petrolera Pampa, during the period between July 2015 and April 2016, a total of 63.7 million m³ of natural gas and 1,820 m³ of oil from its interest in the total hydrocarbon production of the RDM block.  Accordingly, during this period Petrolera Pampa expects to sell more than 50% of the total hydrocarbon production of the RDM Block.  As of December 31, 2015, we received compensation for 41 million m³ of natural gas, representing revenues totaling approximately U.S.$64.5 million.

In connection with the YPF Agreement and its Addendum, Petrolera Pampa has committed to invest a total of approximately U.S.$350.0 million for the period 2014-2017.  As of December 31, 2015, investments made under this agreement amounted to approximately U.S.$ 218 million.

As of December 31, 2015, natural gas production under the YPF Agreement amounted to approximately 2,100 thousand m³ per day (including 300,000 m³ in the form of compensation), representing 83% of Petrolera Pampa’s aggregate volume of natural gas production for such month. 

Facilities in the RDM Block

As of the date of this annual report, the evacuation and processing facilities located in the RDM Block have a total maximum processing capacity of 3,300,000 m³/d of natural gas.  In connection with the YPF Agreement and its Addendum, Petrolera Pampa is investing in a new processing plant and compression facilities in the RDM Block that are expected to increase the block’s total production capacity to 4,000,000 m³/d.

The pipeline that connects the field to the trunk pipeline in Loma la Lata has a total transportation capacity of approximately 9,000,000 m³/d.

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Investment Agreements with Petrobras Argentina

In each of 2010 and 2013, Petrolera Pampa entered into investment agreements with Petrobras Argentina (“Petrobras I” and “Petrobras II,” as described below) relating to the El Mangrullo block, for which Petrobras Argentina is the operator.  Accordingly, Petrolera Pampa acquired 43% of the right to freely dispose of the hydrocarbon production at the wellhead and to commercialize and process the hydrocarbons obtained from certain wells to be drilled in this block, subject to the terms of each of these agreements.  The hydrocarbon production resulting from Petrobras I and II may be sold under the Gas Plus Program and is subject to 14% royalties.  The concession for the El Mangrullo block expires in 2025.

Petrobras I

On December 7, 2010, Petrolera Pampa entered into our first investment agreement with Petrobras Argentina (“Petrobras I”) relating to the El Mangrullo block.  Under the terms of this agreement, Petrolera Pampa committed to an initial investment of the lower of (i) U.S.$16.0 million and (ii) the amount required for the drilling and termination of four wells.  This agreement established an investment period of four years, during which additional drilling investments were required in order to maintain a minimum daily production level of 400,000 m³ of natural gas (the “Daily Target”).  After Petrolera Pampa made its initial investment of U.S.$16.0 million, Petrolera Pampa was responsible for 43% of any additional investments required to maintain the Daily Target for four years, while Petrobras Argentina was responsible for the remaining 57% of such investments. 

To maintain the Daily Target level for the four-year period, nine wells were expected to be drilled, representing a total investment of U.S.$24.0 million for Petrolera Pampa (U.S.$16.0 million for the first four wells and U.S.$8.0 million for the remainder).  However, the natural gas production of only five wells was sufficient to satisfy the Daily Target level during the four-year period, which ended in October 2015.  As of the date of this annual report, Petrolera Pampa continues to be entitled to its proportionate share of the hydrocarbon production from the wells drilled under Petrobras I until the end of the concession period or the end of the useful life of such wells, whichever occurs first.  As of December 31, 2015, Petrolera Pampa’s total investments under this agreement amounted to approximately U.S.$21.0 million and gas production reached 184,000 m³ per day.

Petrobras II

On February 7, 2013, Petrolera Pampa entered into our second investment agreement with Petrobras Argentina (“Petrobras II”) relating to the El Mangrullo block.  Under the terms of this agreement, Petrolera Pampa committed to an initial investment of the lower of (i) U.S.$22.0 million and (ii) the amount required for the drilling and termination of four wells.  Petrolera Pampa is responsible for 47% of any additional investments required to maintain the Daily Target during a four-year period, which will end in 2017, while Petrobras Argentina is responsible for the remainder.  To meet the Daily Target, nine wells are expected to be drilled, representing a total investment of U.S.$33.0 million for Petrolera Pampa.  After the four-year period is completed, Petrolera Pampa will continue to be entitled to its proportionate share of production from the wells drilled under Petrobras II until the end of the concession period or the end of the useful life of such wells, whichever occurs first. 

As of December 31, 2015, six wells had been drilled in connection with this agreement (five of which are productive and one of which is dry), representing an aggregate investment by us of approximately U.S.$29.3 million, and gas production reached 167,000 m³ per day.  As of the date of this annual report, the Daily Target has been met since July 2013. 

Investment Agreement with Ysur (formerly Apache)

On December 1, 2010, Petrolera Pampa entered into an investment agreement with Ysur (formerly Apache) to jointly engage in the development and exploitation of unconventional gas in the Anticlinal Campamento and Estación Fernández Oro blocks.  Ysur is the operator of these blocks, which are located in the provinces of Neuquén and Río Negro, respectively. 

Under the terms of this agreement, Petrolera Pampa had a 15% share in the committed investment (initially estimated at U.S.$20.0 million) and the operating expenses incurred in developing such production, through which Petrolera Pampa has obtained a proportional share of the sale of such production.  The royalties for Anticlinal Campamento and Estación Fernández Oro blocks have been set at 15%.

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Petrolera Pampa continues to be entitled to the proportionate share of production from the 22 wells drilled under the agreement until the end of the concession term in 2026 or the end of the useful life of these wells, whichever occurs first.  As of December 31, 2015, gas production reached 58,000 m³ per day.  

Agreement with Rovella Carranza

In September 2010, we entered into an agreement with Rovella Carranza S.A. (“Rovella Carranza”) through which Petrolera Pampa agreed to provide hydrocarbon exploration, development and production services in the Senillosa exploration block in exchange for a 50% share of the hydrocarbon production in this block.  Of the remaining 50% of the hydrocarbon production in this block, Rovella Carranza is entitled to a 35% share, while G&P, the concessionaire of this block, has a 15% share.  Under the terms of this agreement, Petrolera Pampa is the operator of the Senillosa block.  As of December 31, 2015, Petrolera Pampa had made investments totaling approximately U.S.$12.5 million.  In December 2015, average daily production of this block reached 10,000 m³, representing less than 1% of Petrolera Pampa’s aggregate volume of daily hydrocarbon production.

Caracol Norte Block Agreement

On May 19, 2011, Petrolera Pampa entered into an agreement with Rovella Energía S.A. (“Rovella Energía”) and G&P (the “Caracol Norte Investment Agreement”), through which Petrolera Pampa agreed to provide, as operator, hydrocarbon exploration, development and production services in the Caracol Norte block in exchange for a 60% share of all hydrocarbon production in the block.  Petrolera Pampa committed to an initial investment of U.S.$3.7 million. 

After carrying out preliminary activities in this block, Petrolera Pampa decided not to make any further investments.  Accordingly, on June 4, 2015, Petrolera Pampa and Rovella Energía agreed to transfer our rights and obligations under the Caracol Norte Investment Agreement to Petroleos Sudamericanos SA, Homaq SA and JCR S.A.  In accordance with Petrolera Pampa’s proportionate interest in the investment agreement, it expects to receive U.S.$133,000 from this sale once certain conditions precedent are satisfied.  As of the date of this annual report, the completion of this transfer remains subject to environmental authorization and the issuance of a provincial decree.

Oil and Gas Reserves and Production

Overview

Proved oil and natural gas reserves are those estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be economically producible from a given date forward, from known reservoirs and under existing economic conditions, operating methods and government regulations.  Under Law No. 26,197, the Argentine provinces own the hydrocarbon reserves located within their territories.  Pursuant to concessions granted by Argentine provinces to Petrolera Pampa and its joint venture partners, Petrolera Pampa has the right to extract, but not own, certain oil and gas reserves and to sell the resulting production.  As of the date of this annual report, Petrolera Pampa’s exploration and development activities are limited to reserves located in Argentina.

Petrolera Pampa seeks to identify new oil and gas reservoirs through joint venture agreements with the aim of increasing the future replacement rate of proved reserves.  From 2011 to 2015, Petrolera Pampa and its partners completed the drilling of 121 exploration and development wells.  During 2015, Petrolera Pampa average success rate for development wells was 97%. 

Internal controls over reserves and reserves audits

Petrolera Pampa maintains an internal staff of petroleum engineers and geosciences professionals who work closely with the Independent Reserves Engineers Firm, to ensure the integrity, accuracy and timeliness of data furnished to its Independent Reserves Engineers Firm in their estimation process and who have knowledge of the specific properties under evaluation.  Petrolera Pampa’s Director of Geology Development is primarily responsible for overseeing the preparation of Petrolera Pampa’s reserves estimates and for the internal control over its reserves estimation, generation and management and acquisition and divestiture opportunities evaluation. See “Management.”

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In order to ensure the quality and consistency of Petrolera Pampa’s reserves estimates and reserves disclosures, Petrolera Pampa maintains and complies with a reserves process that satisfies the following key control objectives:

·estimates are prepared using generally accepted practices and methodologies; 

·estimates are prepared objectively and free of bias; 

·estimates and changes therein are prepared on a timely basis; 

·estimates and changes therein are properly supported and approved; and 

·estimates and related disclosures are prepared in accordance with regulatory requirements.

Throughout each fiscal year, Petrolera Pampa’s technical team meets with the Independent Reserves Engineers Firm, who are provided with full access to complete and accurate information pertaining to the properties to be evaluated and all applicable personnel.  This independent assessment of the internally-generated reserves estimates is beneficial in ensuring that interpretations and judgments are reasonable and that the estimates are free of preparer and management bias.  The audit conducted by the Independent Reserves Engineers Firm consisted primarily of:  (1)analysis of historical static and dynamic reservoir data provided by Petrolera Pampa; (2) construction or updating of the Independent Reserves Engineers Firm’s own static and dynamic reservoir characterization models of Petrolera Pampa’s oil fields; (3) economic analysis of selected fields; and (4) a review of Petrolera Pampa’s production forecasts and reserves estimates.

Independent Reserves Engineers Firm

Reserves estimates as of December 31, 2015, for Argentina included in this annual report are based on the Reserves Report prepared by the Independent Reserves Engineers Firm, dated as of March 4, 2016. The Reserves Report, a copy of which has been filed as an exhibit to this annual report, was prepared in accordance with SEC rules, regulations, definitions and guidelines at our request in order to estimate reserves and for the areas and period indicated therein.

The Independent Reserves Engineers Firm, a Dallas corporation with offices in Dallas and Houston, has been providing consulting services to the oil and gas industry for more than 55 years. The firm has more than 155 professionals, including engineers, geologists, geophysicists, petrophysicists and economists that are engaged in the appraisal of oil and gas properties, the evaluation of hydrocarbon and other mineral prospects, basin evaluations, comprehensive field studies and equity studies related to the domestic and international energy industry. The Independent Reserves Engineers Firm restricts its activities exclusively to consultation and does not accept contingency fees, nor does it own operating interests in any oil, gas or mineral properties, or securities or notes of its clients. The firm subscribes to a code of professional conduct, and its employees actively support their related technical and professional societies. The firm is a Texas Registered Engineering Firm.

The Reserves Report covered 100% of our total reserves. In connection with the preparation of the Reserves Report, the Independent Reserves Engineers Firm prepared its own estimates of our proved reserves. In the process of the reserves evaluation, the Independent Reserves Engineers Firmdid not independently verify the accuracy and completeness of information and data furnished by us with respect to ownership interests, oil and gas production, well test data, historical costs of operation and development, product prices, or any agreements relating to current and future operations of the fields and sales of production. However, if in the course of the examination something came to the attention of the Independent Reserves Engineers Firm that brought into question the validity or sufficiency of any such information or data, the Independent Reserves Engineers Firm did not rely on such information or data until it had satisfactorily resolved its questions relating thereto or had independently verified such information or data. the Independent Reserves Engineers Firm independently prepared reserves estimates to conform to the guidelines of the SEC, including the criteria of “reasonable certainty,” as it pertains to expectations about the recoverability of reserves in future years, under existing economic and operating conditions, consistent with the definition of SEC  Regulation S-X Section 210.4-10(a). the Independent Reserves Engineers Firm issued the Reserves Report based upon its evaluation. The Independent Reserves Engineers Firm’s primary economic assumptions in estimates included oil and gas sales prices determined according to SEC guidelines, future expenditures and other economic assumptions (including interests, royalties and taxes) as provided by us. The assumptions, data, methods and procedures used, including the percentage of our total reserves reviewed in connection with the preparation of the Reserves Report were appropriate for the purpose served by such report, and the Independent Reserves Engineers Firm used all methods and procedures as it considered necessary under the circumstances to prepare such reports.

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However, uncertainties are inherent in estimating quantities of reserves, including many factors beyond our and our independent reserves engineers’ control. Reserves engineering is a subjective process of estimating subsurface accumulations of oil and natural gas that cannot be measured in an exact manner, and the accuracy of any reserves estimate is a function of the quality of available data and its interpretation. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors such as the results of drilling, testing and production subsequent to the date of an estimate, economic factors such as changes in product prices or development and production expenses, and regulatory factors, such as royalties, development and environmental permitting and concession terms, may require revision of such estimates. Our operations may also be affected by unanticipated changes in regulations concerning the oil and gas industry in the countries in which we operate, which may impact our ability to recover the estimated reserves. Accordingly, oil and natural gas quantities ultimately recovered will vary from reserves estimates.

Technology used in reserves estimation

According to SEC guidelines, proved reserves are those quantities of oil and gas which, by analysis of geoscience and engineering data, can be estimated with “reasonable certainty” to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation.

The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. The term “reasonable certainty” implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. Reasonable certainty can be established using techniques that have been proved effective by actual production from projects in the same reservoir or an analogous reservoir or by other evidence using reliable technology that establishes reasonable certainty. Reliable technology is a grouping of one or more technologies (including computational methods) that have been field tested and have been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

There are various generally accepted methodologies for estimating reserves including volumetrics, decline analysis, material balance, simulation models and analogies. Estimates may be prepared using either deterministic methods. The particular method chosen should be based on the evaluator’s professional judgment as being the most appropriate, given the geological nature of the property, the extent of its operating history and the quality of available information. It may be appropriate to employ several methods in reaching an estimate for the property.

Estimates must be prepared using all available information (open and cased hole logs, core analyses, geologic maps, seismic interpretation, production/injection data and pressure test analysis). Supporting data, such as working interest, royalties and operating costs, must be maintained and updated when such information changes materially.

Petrolera Pampa’s estimated proved reserves as of December 31, 2015 are based on estimates generated through the integration of available and appropriate data, utilizing well-established technologies that have been demonstrated in the field to yield repeatable and consistent results.  Data used in these integrated assessments include information obtained directly from the subsurface via wellbore, such as well logs, reservoir core samples, fluid samples, static and dynamic pressure information, production test data, and surveillance and performance information.  The data utilized also include subsurface information obtained through indirect measurements, including high quality 2-D and 3-D seismic data, calibrated with available well control.  Where applicable, geological outcrop information was also utilized.  The tools used to interpret and integrate all this data included both proprietary and commercial software for reservoir modeling, simulation and data analysis.  In some circumstances, where appropriate analog reservoir models are available, reservoir parameters from these analog models were used to increase the reliability of Petrolera Pampa’s reserves estimates.

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Reserves

Prior to 2015, Petrolera Pampa did not have any third-party reserves certification reports because such reports were not required under any reporting requirements to which Petrolera Pampa is subject. Accordingly, the information underlying such third-party reports and certain of the información specified under the requirements for disclosure by registrants engaged in oil and gas producing activities under Subpart 1200 of Regulation S-K were not prepared for periods prior to December 31, 2015.. As a result, Petrolera Pampa is unable to provide comparisons between information on the values of reserves in 2015 with values from years prior to 2015.

The following table sets forth Petrolera Pampa’s oil and natural gas net proved reserves as of December 31, 2015, which are based on the Independent Reserves Engineers’ Reserves Report.

Summary of Oil and Gas⁽¹⁾ Proved Reserves as of December 31, 2015
Based on Average Fiscal Year Prices

	Crude Oil and Condensates(2)	Natural Gas(2)
	(in thousands of barrels)	(in millions of cubic feet)
Proved developed and undeveloped reserves
Proved developed reserves	357.6	81,894.5
Proved undeveloped reserves	25.0	22,309.2
Total proved reserves	382.6	104,203.6

Note:   Numbers may not total due to rounding.

(1)      Petrolera Pampa does not currently produce synthetic oil or synthetic gas, or other natural resources from which synthetic oil or synthetic gas can be produced.

(2)      Natural Gas reserves include the fraction of liquefiable hydrocarbons recoverable in natural gas processing plants located at fields.

Source:  Petrolera Pampa.

Proved Undeveloped Reserves

As of December 31, 2015, our total proved undeveloped reserves of crude oil and condensates amounted to 25 thousand of barrels and our total proved undeveloped reserves of natural gas amounted to 22,309.2 millions of cubic feet. Prior to 2015, we were not required to prepare and disclose reserves data in accordance with the requirements of Subpart 1200 of Regulation S-K. As a result, our internal estimates of reserves data prior to 2015 are not comparable with the information on the values of reserves in 2015. Due to the lack of comparability between our internal data relating to reserves as of January 1 and December 31, 2015, we are unable to determine whether there were material changes in our proved undeveloped reserves during that period. During 2015, we incurred approximately U.S.$172 million in capital expenditures to convert proved undeveloped reserves to proved developed reserves, of which approximately U.S.$165.8. million, U.S.$6.0 million and U.S.$0.3 million were made in the Rincón del Mangrullo Block, El Mangrullo block and Senillosa block, respectively.

Oil and gas production, production prices and production costs

The following table sets forth certain information on Petrolera Pampa’s production of oil and natural gas, segmented by investment agreement, for each of the years ended December 31, 2015, 2014 and 2013.

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Drilling activities

The following table shows the number of wells drilled by Petrolera Pampa or its consortiums in which we had a working interest, segmented by investment agreement, for each of the years ended December 31, 2015, 2014 and 2013.  All of Petrolera Pampa’s drilling activity occurred in Argentine territory.

	As of year ended December 31,
	2015						2014						2013
	YPF (*)	Petrobras I	Petrobras II	Ysur	Senillosa	Total Petrolera	YPF	Petrobras I	Petrobras II	Ysur	Senillosa	Total Petrolera	YPF	Petrobras I	Petrobras II	Ysur	Senillosa	Total Petrolera
Exploratory Wells
Oil Productive						0						0						0
Gas Productive						0						0					1	1
Subtotal Productive	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	1	1
Dry						0						0					2	2
Total Exploratory Wells	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	0	3	3
Development Wells
Oil Productive						0						0						0
Gas Productive	64		1			65	14		2			16		1	2	3		6
Subtotal Productive	64	0	1	0	0	65	14	0	2	0	0	16	0	1	2	3	0	6
Dry	1		1			2						0						0
Total Development Wells	65	0	2	0	0	67	14	0	2	0	0	16	0	1	2	3	0	6

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(*) Three additional wells have been drilled during 2015 and are under analysis.

Developed and undeveloped acreage

The following table sets forth Petrolera Pampa’s total gross and net developed and undeveloped acreage in Argentina as of December 31, 2015.

	Acreage (1)
	Argentina
	Crude Oil and Condensates	Natural Gas
Total developed acreage
Gross	0	28,203
Net	0	13,312
Total undeveloped acreage
Gross	0	7,413
Net	0	3,655
Total developed and undeveloped acreage
Gross	0	35,616
Net	0	16,966
(1) Defined as acreage assignable to productive wells. Net acreage based on our working interest.

Productive wells

The following table sets forth Petrolera Pampa’s total gross productive wells, segmented by investment agreement, as of December 31, 2015.  Productive wells consist of producing wells and wells capable of production, including natural gas wells awaiting pipeline connections to commence deliveries and oil wells awaiting connection to production facilities.  Gross wells are the total number of producing wells in which Petrolera Pampa has an interest.

	Productive Wells
	YPF	Petrobras I	Petrobras II	Ysur	Senillosa	Total Petrolera
Oil Wells	0	0	0	0	0	0
Gas Wells	78	5	5	22	2	112

Present activities

The following table shows the number of wells, segmented by investment agreement, that are in the process of being drilled or are in active completion stages as of December 31, 2015.  All of Petrolera Pampa present activities are carried out in Argentine territory.

	Wells in process of being drilled or in active completion
	YPF	Petrobras I	Petrobras II	Ysur	Senillosa	Total Petrolera
Oil Wells	0	0	0	0	0	0
Gas Wells	16	0	0	0	0	16

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During 2015, the first well in the Lajas formation was drilled but has not yet been completed.  As of the date of this annual report, preliminary results cannot assure whether this well is productive or dry.

Delivery commitments

Certain of Petrolera Pampa’s contracts specify the delivery of determinable quantities of natural gas in the near future.  As of December 31, 2015, Petrolera Pampa is contractually committed to deliver approximately 1,700,000 m³ per day in the future (80% expiring in 2016). According to Petrolera Pampa’s estimates, as of December 31, 2015, our contractual delivery commitments for the next three years could be met with Petrolera Pampa’s own production and, if necessary, with purchases from third parties.

Due to market conditions in Argentina, most natural gas producers enter into contracts for the production and sale of natural gas within one year of expected production.  Almost all of the contracts under which Petrolera Pampa has natural gas delivery commitments expire during 2016 (with only two contracts for a total amount of 350,000 m³ per day expiring in 2017).  We expect to renew our existing contracts and enter into new contracts with similar terms in the future.

With respect to crude oil, Petrolera Pampa sells substantially all of its production to small refineries or to its joint venture partners.  As of December 31, 2015, Petrolera Pampa is not contractually committed to deliver material quantities of crude oil to third parties in the future.

Other Projects

As of the date of this annual report, Petrolera Pampa is negotiating new agreements for the exploitation and exploration of hydrocarbons in Argentina.

TGS

The Company owns 100% of the shares of PEPCA S.A. (“PEPCA”), which in turn owns 10% in CIESA, which in turn owns 51% of TGS.  Also, the Company holds, through PISA, the character of “Beneficiario” and “Fideicomisario” under the MSA Trust, owner of 40% of the capital stock of CIESA (See “CIESA Transaction” below).  Therefore, given that the stake in such company constitutes an interest in an associate, it is measured under the equity method of accounting for the 10% of CIESA and under the fair market value method for the 40% of the MSA Trust, in the Consolidated Financial Statements.  TGS is the largest gas transportation company in Argentina, and it operates the most extensive gas pipeline system in Latin America.  In addition, it is leader in the production and sale of natural gas liquids (NGLs) for the domestic and export markets.  It carries out this business from the General Cerri Complex, located in Bahía Blanca, Province of Buenos Aires.  Moreover, TGS provides natural gas integral solutions, and since 1998 it has entered the telecommunications business through its subsidiary company Telcosur S.A.

Since 2011, the Company is entitled to the following rights, among others:

-Appointment of one director in CIESA and TGS;

-Appointment of the Vice Chairman in CIESA and TGS;

-First refusal right in CIESA; and

-Approval of CIESA’s and TGS’ annual budget.

The following table summarizes TGS’ main technical and financial indicators:

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	2014	2015
Technical Information
Gas Transportation
Average firm capacity purchases (in million m3 per day)	80.4	80.6
Average deliveries (in million m3 per day)	65.4	66.0
Production and selling of liquids
Total liquid production (in thousand tons)	969.9	924.2
Gas processing capacity (in million m3 per day)	46.0	46.0
Storage capacity (in tons)	54,840	54,840
Financial Information*
Revenues	4,304.0	4,226.6
Fiscal year’s results	105.0	(172.1)
Net cash flow provided by operating activities	1,019.0	489.3
Net cash flow used in investment activities	(194.4)	(250.5)
Net cash flow (used) generated in financing activities	(982.4)	(294.6)
Current Assets	1,959.0	2,230.2
Non-Current Assets	4,215.5	4,416.4
Total Assets	6,174.4	6,646.6
Current Liabilities	1,251.8	1,320.6
Non-current Liabilities	3,055.1	3,630.6
Total Liabilities	4,306.9	4,951.1
Shareholders’ Equity	1,867.5	1,695.4

* Consolidated Financial Statements, figures in million pesos.

** Amounts show continuous operations only.

CIESA Transaction

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

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

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

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

In the Company’s opinion, the abovementioned transaction was tacitly approved by the Argentine Antitrust Commision. The grounds for deeming the transaction approved are that (i) as of December 2011 there was a positive ruling from said commission recommending the Secretary of Interior Commerce to approve the Company’s purchase of 40% of the capital stock and votes in CIESA, and (ii) since such ruling, the commission has not issued any resolution advising on the contrary. Accordingly, the Company believes that the terms and conditions of the Restructuring Agreement have been met and therefore it believes that it would be in a legal and factual position to assume the right to co-control CIESA, and indirectly TGS. As of the date of this annual report, the board of directors of the Company is evaluating the legal and factual implications and other courses of action without having yet made a decision.

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

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

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

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

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

On October 7, 2015, pursuant to the occurrence of certain events relating to an increase in TGS’s tariff that was a condition under a loan granted from TGS to the Company for U.S.$ 26 million, the Company assigned to TGS, all its rights and obligations under the ICSID Claim to to cancel the amounts owed under the loan. For further information regarding the loan granted by TGS to the Company, please see “Item 5 – Operating and Financial Review and Prospects - Debt.”

Description of Business Segments

Regulated Segment: Gas Transportation

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In 2015, revenues from the gas transportation increased by Ps.269.9 million to Ps.1,014.0 million, from Ps.744.1 million in 2014. This rise was a result of a 44.3% increase in the natural gas transportation service and a 73.2% increase in the Single Access Chart (“CAU”) passed by Resolution No. 3,347/2015 under the transitory agreement set out in Executive Order No. 1,918/2009.

Such increases, which had a minimum impact on end users, were insufficient to offset sustained operating cost increases following the passing and enactment of Public Emergency and Exchange Rate Regime Reform Act No. 25,561 in January 2002, the operation of which was later extended on several occasions.

In September 2015, after the occurrence of the condition provided in the loan agreement granted by TGS to the Company which triggered its mandatory prepayment, the Company assigned to, and TGS acquired, all rights in the Arbitration Proceeding, including the right to suspend and waive its rights thereunder. The exercise of the Arbitration Proceeding’s rights will allow TGS to continue with the tariff renegotiation process and to fulfill the conditions necessary for the execution and implementation of the Comprehensive Agreement. As a result, in October 2015, TGS signed the new text of the Comprehensive Agreement, thus amending the agreement entered into in October 2011 and updating it in compliance with ENARGAS Resolutions No. 2,852/14 and 3,347/15.

However, the constant increase in operating costs necessary to provide a reliable transportation system and the failure to update tariffs resulted in the substantial deterioration of operating results in this segment. TGS intends to continue taking necessary steps to obtain a proper and fair tariff update so that revenues become consistent with cost increases, ensuring the provisions of the service.

In 2015, the daily average quantity of natural gas introduced into the gas pipeline system operated by TGS was higher than in 2014. During the winter of 2015, the TGS gas pipeline system was fairly responsive to meeting demand, but the regulatory authority continued restricting the supply of natural gas to the industrial market in order to reallocate gas to so-called priority users, mainly residential, commercial, and compressed natural gas (“CNG”) users. Imposed restrictions affected both direct carriers that maintain natural gas transportation service agreements with TGS and grid-connected industries within the country’s distribution zones and nearby gas field areas. However, these industrial restrictions were lower as a result of a decrease in residential consumption due to higher ambient temperatures compared to the previous year.

Regarding gas pipeline system expansions, progress was made in the development of the natural gas transportation capacity expansion works commenced in 2006, which will allow for transportation of a total incremental volume of 10.7 million m3 a day, of which 8.7 million m3/d are enabled and supported by currently effective firm gas transportation contracts. For the provision of enabled transportation services, TGS receives a monthly CAU, which has remained unchanged since its creation in 2005. These expansion works —planned in successive commissioning stages— are developed and funded under the Gas Trust Program, with cash contributions by third-party investors, gas producers, and carriers awarded with the incremental transportation capacity bidding process, with a structure contemplating recovery through revenues from specific fiduciary fees, paid by all transportation company carriers and distribution company users who have entered into firm service agreements. During the development of expansion works, TGS undertakes the role of Project Technical Manager for the works to be executed on its gas pipeline system.

Non-Regulated Segment: Production and Marketing of Gas Liquids

Unlike the gas transportation business, the production and sale of gas liquids is not regulated by ENARGAS.

In 2015, this segment’s revenues accounted for 69% of TGS total revenues, which have decreased by Ps.335.5 million this year, from Ps.3,243.3 million recorded in 2014 to Ps.2,907.8 million in 2015.

Gas liquids production and selling activities are conducted at the Cerri Complex, located close to Bahía Blanca, which is supplied by all of TGS’ main gas pipelines. Ethane, propane, butane and natural gasoline are recovered at such industrial complex. TGS sells these liquids to both domestic and foreign markets. On the domestic market, propane and butane are sold to fractionation companies. On the foreign market, the sale of these products and natural gasoline is made at current international market prices. Ethane is sold to Polisur at a price mutually agreed by the parties.

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In 2015, the production of liquids decreased by 45,744 tons, or 4.7%, mainly as a result of the lower number of tons of ethane purchased by Polisur. In 2015, sales increased by 26,172 tons, compared to 313,269 tons in 2014, to 339,441 tons.

Faced with the decline in international reference prices for natural gas liquids, on December 31, 2014 the Ministry of Economy issued Resolution No. 1,077/2014, which amended the system applicable to withholding taxes on natural gasoline to reduce the impact of the decline in international reference prices for natural gas. For natural gas liquids, different withholding rates were based on the international reference price (defined as the reference Brent oil price minus U.S.$ 8 per barrel or “PI”). When the PI is lower than U.S.$ 71 per barrel, the withholding rate will be 1%, and when the PI is equal to or higher than this amount, the rate will be assessed based on the following formula: (PI – 70) / 70 x 100 (the actual rate being applicable on the PI exceeding U.S.$ 70/ton).

Additionally, the Ministry of Economy issued Resolution No. 60/2015, which provides that: (i) if the liquefied petroleum gas (“LPG”) product’s international price informed on a daily basis by the SE falls below the reference price (U.S.$.464/ton for propane/U.S.$.478/ton for butane), the witholding rate will be 1%; and (ii) if such international price is higher than the reference price, the producer will only be authorized to receive the maximum amount set forth in Resolution No. 60/15 (U.S.$.460/ton for propane/U.S.$.473/ton for butane), and the balance will be paid as withholding taxes.

In 2015, TGS continued participating in the program for the supply of butane for gas containers at subsidized prices. In 2015, such resolution was amended by Executive Order No. 470/2015 and regulated through SEE Resolution No. 49/2015 and No. 70/15. Through such regulations, the National Government created a program called “Houses with Carafes” (the “New Stabilization Program”) replacing the Prices Stabilization Agreement entered into in 2008 between producers and the SE (the “2008 Stabilization Agreement”). Although these regulations increased the price and the participation allocated to the supply of the product to the domestic market, such regulations oblige TGS to produce and market the LPG volumes required by the SEE at lower-than-market prices. As a result, production costs are not met and operating margins are negative. Throughout 2015, TGS filed claims aimed to safeguard its rights and ameliorate losses generated by the supply of LPG.

Several positive modifications were introduced to the internal prices regime for the commercialization of LPG to customers not covered by the New Stabilization Program. On March 16, 2015, SE Resolution No. 36/2015 was passed, pursuant to which the prices for the sale of LPG in the domestic market were made equivalent to export prices effective as of April 1, 2015.

There was an increase in the sales price of ethane to Polisur to reflect the natural gas cost increases. However, the volume of ethane sold during the summer periods lowered for commercial reasons beyond TGS’ control. On December 31, 2015, the agreement with Polisur (TGS’s only customer purchasing ethane) expired. As a result, TGS is currently negotiating the terms and conditions for the new agreement extending it to guarantee the profitability of the supply of this product within the current business context. Meanwhile, TGS will continue selling ethane to Polisur under the terms mutually agreed for each specific product delivery.

The decrease in international reference prices, together with the current issues described above, have contributed to a decrease in the operating margins with which TGS operates in this segment. The situation could be improved by implementating several measures to increase the recovery of natural gas liquids at the Cerri Complex and renegotiating natural gas supply agreements aimed at guaranteeing the supply of gas at reasonable prices, which resulted in a 6% decrease in gas purchase prices in comparison to 2014.

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Sales of Gas Liquids by Destination Market

In Thousands of Tons, 2010-2015

 

Source: TGS.

Non-Regulated Segment: Other Services

The Other Services segment is not regulated by ENARGAS. TGS provides so-called ‘midstream’ services, which mainly consist of treatment, impurity separation and gas compression. It may also include gas extraction and transportation at gas fields, construction services, inspection and maintenance of compression plants and gas pipelines, and steam generation services for the production of electricity. This business segment also includes revenues from telecommunication services provided through the subsidiary Telcosur S.A. (“Telcosur”).

This segment represented 7% of TGS’ total income in 2015. During 2015, even though there was a decrease in revenues for compression and treatment services upon the expiration of certain contracts, the impact was wholly offset by the generation of new business associated with engineering, construction, and operation and maintenance services for natural gas facilities. TGS also continued providing management services for the execution of the extension works begun in 2006 under the Financial Trusts Program.

Regarding telecommunication services provided by Telcosur, during 2015 its business consolidation strategy was reinforced through the renewal of transmission capacity agreements and the execution of new agreements with carrier and corporate customers.

Capital Expenditures  

For a discussion of our capital expenditures, see “Item 5.  Operating and Financial Review and Prospects—Capital Expenditures.”

Property, Plant and Equipment   

We maintain our headquarters at Ortiz de Ocampo 3302, Building #4, City of Buenos Aires, Argentina (C1425DSR).  For lease of the office space, our payments averaged U.S. $83,451 per month in 2015 (approximately U.S. $25.6 per m2).  For building expenses, our monthly payments in 2015 averaged approximately Ps 140,631.  We moved to this brand-new single location in the Barrio Parque area of the City of Buenos Aires during the second half of 2009.

The following table sets forth our total property, plant and equipment for the periods indicated:

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Insurance 

In our generation business, we carry full insurance for each of our generation assets, including business interruption and general liability insurance.  The total generation assets covered under these policies are valued at U.S. $2,296 million.  In our transmission business we are insured for damage to property including damages due to electrical malfunction, tornados, hurricanes and earthquakes for losses up to U.S.$2,042.4 million for Transener and U.S.$472.3 million for Transba.  As is standard in the electricity transmission sector, electricity towers and transmission lines are not covered by these policies, nor is the loss of our concession.  However, Transba has insured its towers and transmission lines for up to U.S. $1 million.  In our distribution business, our physical assets are insured for up to U.S. $1,299.5 million; however, we do not carry insurance coverage for losses caused by network or business interruption, including loss of our concession.

Asset Sales and Acquisitions

Spin-off Process – EMDERSA

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

The Spin-off Process has also been approved by the CNV and registered with the IGJ, together with the registration of the three new companies. On November 8, 2012, the new companies were authorized by the National Securities Commission to go public, and they obtained admission to listing on the BCBA.

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 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. In November 2015, we began to pay the installments in accordance with the agreed schedule.

AESEBA and EDEN Sale

On February 27, 2013, Edenor’s Board of Directors unanimously approved an offer sent by Servicios Eléctricos Norte BA S.L. (the “Buyer”) for (i) the acquisition of the shares representing 100% of the capital stock and voting rights of AESEBA, an electric utility company, which owns 90% of the outstanding capital stock of Empresa Distribuidora de Energía Norte S.A. (“EDEN”), an electricity distribution company holding the concession area in the north region of the Province of Buenos Aires; and (ii) the assignment of certain credits that EASA (the controlling company of Edenor) had with EDEN. The price offered by the Buyer has been paid through the assignment to Edenor of certain rights under a trust established for purposes of the transaction to receive debt securities of Edenor, in an amount equivalent, as of the date of the acceptance of the offer, to U.S.$85 million face value, which are to be cancelled by Edenor as such bonds are released to it in accordance with the terms and conditions of the trust. As part of the transaction, and in order to guarantee the obtention of funds necessary to acquire the Edenor bonds to be received by such company, U.S.$8.5 million of Argentine sovereign debt bonds multiplied by a certain factor was to be deposited into the trust on or before April 30, 2013.  As collateral for the portion of the price to be paid at that later date, the Buyer granted a pledge over 30% of the shares of AESEBA. On April 5, 2013 the transaction was settled in accordance with the terms described above. At the closing of the transaction, Edenor received the rights as beneficiary under the Trust. With the proceeds of the liquidation of the bonds received the Trust will purchase Edenor Class 9 and Class 7 Corporate Notes due in 2022 and 2017, respectively. As of the date of this annual report, the Trust has purchased the totality of Edenor corporate Notes due in 2017 and 2022 indicated in the respective trust agreement for U.S.$.10 million and U.S.$.68 million of nominal value, respectively. On March 27, 2014, these Corporate Notes were cancelled. Finally, on April 5, 2014 the Trust was terminated and liquidated.

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THE ARGENTINE ELECTRICITY SECTOR

History  

Electricity was first made available in Argentina in 1887 with the first public street lighting in Buenos Aires.  The Argentine Government’s involvement in the electricity sector began in 1946 with the creation of the Dirección General de Centrales Eléctricas del Estado (General Directorate of Electric Power Plants of the State) to construct and operate electricity generation plants.  In 1947, the Argentine Government created Agua y Energía Eléctrica S.A. (Water and Electricity, or “AyEE”) to develop a system of hydroelectric generation, transmission and distribution for Argentina.

In 1961, the Argentine Government granted a concession to Compañía Italo Argentina de Electricidad (Italian‑Argentine Electricity Company, or “CIADE”) for the distribution of electricity in a part of the City of Buenos Aires.  In 1962, the Argentine Government granted a concession formerly held by the Compañía Argentina de Electricidad (Argentine Electricity Company, or “CADE”) to Servicios Eléctricos del Gran Buenos Aires (Electricity Services of Greater Buenos Aires, or “SEGBA”) for the generation and distribution of electricity to parts of Buenos Aires.  In 1967, the Argentine Government granted a concession to Hidroeléctrica Norpatagónica S.A. (Hidronor) to build and operate a series of hydroelectric generation facilities.  In 1978, CIADE transferred all of its assets to the Argentine Government, following which CIADE’s business became government‑owned and operated.

By 1990, virtually all of the electricity supply in Argentina was controlled by the public sector (97% of total generation).  The Argentine Government had assumed responsibility for the regulation of the industry at the national level and controlled all of the national electricity companies, AyEE, SEGBA and Hidronor.  The Argentine Government also represented Argentine interests in generation facilities developed or operated jointly with Uruguay, Paraguay and Brazil.  In addition, several of the Argentine provinces operated their own electricity companies.  Inefficient management and inadequate capital spending, which prevailed under national and provincial government control, were in large measure responsible for the deterioration of physical equipment, decline in quality of service and proliferation of financial losses that occurred during this period.

In 1991, as part of the economic plan adopted by former President Carlos Menem, the Argentine Government undertook an extensive privatization program of all major state‑owned industries, including within the electricity generation, transmission and distribution sectors.  In 1992, the Argentine Congress adopted Law No. 24,065, the Electricity Regulation Framework (a supplement to Law No. 15,336, Federal Electricity Law, and its Administrative Order No. 1,398/92), which was the keystone for the reform and privatization of the sector.  The goal of the law was to modernize the electricity sector by promoting efficiency, competition, improved service and private investment.  It restructured and reorganized the sector, and provided for the privatization of virtually all business activities that had been carried out by Argentine state-owned enterprises.  The law established the basis for the ENRE and other institutional authorities in the sector, the administration of the wholesale electricity market, or WEM, pricing at the spot, tariff-setting in regulated areas and for evaluating assets to be privatized.  This law also had a profound, albeit indirect, impact at the provincial level, as virtually all of the provinces followed the regulatory and institutional guidelines of this law.  Finally, this law, which continues to provide the framework for regulation of the electricity sector since the privatization of this sector, divided generation, transmission and distribution of electricity into separate businesses, each subject to segment-specific regulation.

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Under Law No. 24,065, distribution and transmission activities are considered public services and defined as natural monopolies.  These activities are completely regulated by the government and require a concession.  Although the concessions granted to distributors do not impose specific investment parameters, distributors are obligated to connect new customers and meet any increased demand.  The expansion of existing transmission facilities by the respective concessionaires is not restricted.  In contrast, generation, although regulated by the government, is not deemed a monopoly activity and is subject to free competition by new market entrants. 

Operation of hydroelectric power plants requires a concession from the government and a concession or permission for using the natural resources from the respective provincial government.  New generation projects do not require concessions but must be registered with the Secretariat of Energy.

Many of the provincial governments, following the privatization path in the sector, have established their own politically and financially independent regulatory bodies at the provincial level.  Local distribution in the provinces (except the City of Buenos Aires and certain areas of the Province of Buenos Aires that were served by SEGBA and today are served by Edenor and EDESUR) is regulated by each province. Previously, the utilities themselves had played a major role in making sector policies and setting tariffs for the provinces.

At the end of 2001 and beginning of 2002, Argentina experienced an unprecedented crisis that virtually paralyzed the country’s economy through most of 2002 and led to radical changes in government policies.  See “Item 5.  Operating and Financial Review and Prospects—Factors Affecting our Results of Operations—Argentine economic conditions and inflation.” The crisis and the government’s policies during this period severely affected the electricity sector.  Pursuant to the Public Emergency Law, the Argentine Government, among other measures:

·converted electricity prices and transmission and distribution tariffs from their original U.S. Dollar values to Pesos at a rate of Ps. 1.00 per U.S. $1.00;

·froze all regulated transmission and distribution tariffs, revoked all price adjustment provisions and inflation indexation mechanisms in public utility concessions (including electricity transmission and distribution concessions), and empowered the Executive Branch to conduct a renegotiation of these concessions, including the tariffs for electricity transmission and distribution services; and

·required that spot prices on the wholesale electricity market be calculated based on the price of natural gas (which is also regulated by the Argentine Government), regardless of the alternative fuels actually used in generation activities, even if gas is unavailable.

These measures created a huge structural deficit in the operation of the wholesale electricity market and, combined with the devaluation of the Peso and high rates of inflation, had a severe effect on the electricity sector in Argentina, as electricity companies experienced a decline in revenues in real terms and a deterioration of their operating performance and financial condition.  Most electricity companies had also incurred large amounts of foreign currency indebtedness under the Convertibility regime.  Following the elimination of the Convertibility regime and the resulting devaluation of the Peso, the debt service burden of these companies increased sharply, leading many of these companies to suspend payments on their foreign currency debt in 2002.  This situation caused many Argentine electricity generators, transmission companies and distributors to defer further investments in their networks.  As a result, Argentine electricity market participants, particularly generators, are currently operating at near full capacity, which could lead to insufficient supply to meet a growing national energy demand.  In addition, the economic crisis and the resulting emergency measures had a material adverse effect on other energy sectors, including oil and gas companies, which has led to a significant reduction in natural gas supplies to generation companies that use this commodity in their generation activities.

To address the electricity crisis, in December 2004 the Argentine Government adopted new rules to readapt or readjust the marketplace, but these rules were not to come into effect until the construction of two new 800 MW combined cycle generators were completed.  These generators commenced operations at full capacity in the first half of 2010.  The costs of construction were primarily financed with net revenues of generators derived from energy sales in the spot market, with special charges to non-residential consumers per MWh of energy billed and with specific charges from CAMMESA applicable to large users that were deposited in the FONINVEMEM. See “Regulatory and Legal Framework—FONINVEMEM.”

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The construction of these new generators reflects a recent trend by the Argentine Government to take a more active role in promoting energy investments in Argentina.  An example of this is the creation of Energía Argentina S.A. (ENARSA) (Law 25,943) with the purpose of developing almost every activity in the energy sector, from the exploration and exploitation of hydrocarbons, the transport and distribution of natural gas, to the generation, transmission and distribution of energy.  In addition to these projects, in April 2006 the Argentine Congress enacted a law that authorized the Executive Branch to create a special fund to finance infrastructure improvements in the Argentine energy sector through the expansion of generation, distribution and transmission infrastructure relating to natural gas, propane and electricity.  The special fund would obtain funds through cargos específicos (specific charges) passed on to customers as an itemization on their energy bills.

In September 2006 the Argentine Government, in an effort to respond to the sustained increase in energy demand following Argentina’s economic recovery after the crisis, adopted new measures that seek to ensure that energy available in the market is used primarily to service residential users and industrial and commercial users whose energy demand is at or below 300 kW and do not have access to other viable energy alternatives.  In addition, these measures seek to create incentives for generation plants to meet increasing energy needs by allowing them to sell new energy generation into the Energía Plus (Energy Plus) program.  The maximum price to be charged for each project that seeks to sell energy under the Energy Plus Program should be approved by the Federal Planning, Public Investment and Service Ministry. See “Regulatory and Legal Framework—Energía Plus.” 

Continuing with the trend to encourage the installation of new generation, the Secretariat of Energy by means of its SE Resolution No. 220/2007 and modifications thereto, allowed CAMMESA to execute WEM Supply Agreements with a generator agent of the WEM. The values to be paid by CAMMESA in consideration for the capacity and the energy supplied by the generator must be approved by the Secretariat of Energy. The generator shall guarantee certain availability of the generation units (established as a percentage), and if it fails to do so, penalties apply. 

In 2008, the Secretariat of Energy allowed CAMMESA to execute WEM Supply Agreements with generators the intention of which is to execute plans to repair and/or repower their generating equipment, and for the cost which would exceed 50% of the revenues that they expect to receive on the sales to the spot market. 

Since 2013, the Secretariat of Energy introduced material changes to the structure and operation of the WEM (see “Item 4. – The Argentine Electricity Sector - SE Resolution No. 95/2013, as amended – New price scheme and other modifications to the WEM”).

On December 17, 2015, the Argentine Government issued Decree No. 134/15, declaring the emergency of the National Electricity Sector until December 31, 2017, and instructing the ME&M to adopt any measure the ME&M deems necessary regarding the generation, transmission and distribution segments, to adjust the quality, and guarantee the provision of, electricity.

The ME&M, issued Resolution No. 7/2016 pursuant to which it instructed the ENRE to, among others, (i) adjust the VAD using the transitional tariff regime included in Adjustment Agreement (ii) implement a social tariff regime and a reduction of such WEM prices for certain consumers, and (iii) effect a revision of the RTI that has to be implemented before December 31, 2016. Also the Resolution No. 7/2016 derogated the PUREE and SE Resolution No. 32/2015.

ENRE’s Resolutions No. 1/2016 and 2/2016 approved Edenor’s and Edesur’s new tariffs and intended to terminate the trust created for controlling the funds collected for the construction of distribution works.

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The Wholesale Electricity Market 

Transactions among different participants in the electricity industry take place through the wholesale electricity market, or WEM, which was organized concurrently with the privatization process as a competitive market in which generators, distributors and certain large users of electricity could buy and sell electricity at prices determined by supply and demand, and were allowed to enter into long-term electricity supply contracts.  The WEM consists of:

·a term market where quantities, prices and contractual conditions are agreed upon directly between sellers and buyers (after the enactment of SE Resolution No. 95/2013, this was limited to the Energy Plus market);

·a spot market where prices are established on an hourly basis as a function of economic production cost; and

·a stabilized pricing system of spot prices, which we refer to as the seasonal price, set on a semi-annual basis and designed to mitigate the volatility of spot prices for purchases of electricity by distributors.

The following chart shows the relationships among the various actors in the WEM:

 

CAMMESA

The creation of the WEM made it necessary to create an entity in charge of the management of the WEM and the dispatch of electricity into the NIS.  The duties were entrusted to CAMMESA, a private company created for this purpose.

CAMMESA is in charge of:

·the dispatch of electricity into the NIS, maximizing the NIS’s safety and the quality of electricity supplied and minimizing wholesale prices in the spot market;

·planning energy capacity needs and optimizing energy use in accordance with the rules set forth from time to time by the Secretariat of Energy;

·monitoring the operation of the term market and administering the technical dispatch of electricity under agreements entered into in that market;

·acting as agent of the various WEM agents and carrying out the duties entrusted to it in connection with the electricity industry, including billing and collecting payments for transactions between WEM agents (upon enactment of SE Resolution No. 95/2013, this was limited to the contracts then in force and, thereafter, to those contracts executed under Energy Plus Program);

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·purchasing and/or selling electric power from abroad or to other countries by performing the relevant import/export transactions; 

·purchasing and administrating of fuels for the WEM generators (according to section 8 of SE Resolution No.95/2013 and section 4 of SE Resolution No. 529/2014); and

·providing consulting and other related services. 

Five groups of entities each hold 20% of the capital stock of CAMMESA.  The five groups are the Argentine Government, the associations that represent the generation companies, transmission companies, distribution companies and large users.

CAMMESA is managed by a board formed by representatives of its shareholders.  The board of CAMMESA is composed of ten regular and ten alternate directors.  Each of the associations that represent generation companies, transmission companies, distribution companies and large users are entitled to appoint two regular and two alternate directors of CAMMESA.  The other directors of CAMMESA are the Under Secretariat of Electric Energy, who is the board chairman in virtue of the delegation of the Minister of Federal Planning, Public Investment and Services, and an independent member, who acts as vice chairman.  The decisions adopted by the board of directors require the affirmative vote of the board chairman.  CAMMESA’s operating costs are financed through mandatory contributions by the WEM agents.

Key Participants

Generators

Generators are companies with electricity generating plants that sell output either partially or wholly through the NIS.  Generators are subjected to the scheduling and dispatch rules set out in the regulations and managed by CAMMESA.  Privately owned generators may also enter into direct contracts with distributors or large users.  However this possibility was suspended by SE Resolution No. 95/2013.  As of December 31, 2015, Argentina had a nominal installed capacity as reported by CAMMESA of approximately 33,493 MW.  In 2015, thermal generation generated 86,482 GWh (64%), hidroelectrical energy generated 40,888 GWh (30%) , the nuclear energy generated 6,519 GWh (5%) and the fotovatic and eolic energy generated 608 GWh. In 2015, imports amounted to 1,655 GWh and exports to 53GWh.

The following table sets forth the primary participants in the Argentine electricity generation sector as of December 31, 2015, including the total capacity of each: 

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Source: CAMMESA

Transmitters

Transmission companies hold a concession to transmit electric energy from the bulk supply point to electricity distributors.  The transmission activity in Argentina is subdivided into two systems: the High Voltage Transmission System (STEEAT), which operates at 500 kV and transports electricity between regions, and the regional distribution system (STEEDT) which operates at 132/220 kV and connects generators, distributors and large users within the same region.  Transener is the only company in charge of the STEEAT, and six regional companies operate within the STEEDT (Litsa, Transnoa, Transnea, Transpa, Transba and Distrocuyo).  In addition to these companies, there are also independent transmission companies that operate under a technical license provided by the STEEAT or STEEDT companies.

Transmission and distribution services are carried out through concessions.  These concessions are re-distributed periodically based on a re-bidding process.  Transmission companies are responsible for the operation and maintenance of their networks, but not for the expansion of the system.  The transmission concessions operate under the technical, safety and reliability standards established by the ENRE.  Penalties are applied whenever a transmission concessionaire fails to meet these criteria, particularly those regarding outages and grid downtime.  Generators can only build lines to connect to the grid, or directly to customers.  Users pay for new transmission capacity undertaken by them or on their behalf.  A public hearing process for these projects is conducted by the ENRE, which issues a “Certificate of Public Convenience and Necessity.”  Transmission or distribution networks connected to an integrated system must provide open access to third parties under a regulated toll system unless there is a capacity constraint.

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Distributors

Distributors are companies holding a concession to distribute electricity to consumers.  Distributors are required to supply any and all demand of electricity in their exclusive areas of concession, at prices (tariffs) and conditions set in regulation.  Penalties for non-supply are included in the concessions agreements.  The three distribution companies divested from SEGBA (Edenor, Edesur and Edelap) represent more than 45% of the electricity market in Argentina.  Only a few distribution companies (i.e.,Empresa Provincial de Energía de Córdoba, Empresa de Energía de Santa Fé and Energía de Misiones) remain in the hands of the provincial governments and cooperatives.  Edelap has been transferred to the jurisdiction of the Province of Buenos Aires.

The Organismo de Control de Energía Eléctria de la Provincia de Buenos Aires (“OCEBA”) monitors compliance by Buenos Aires Province distributors, including Eden, Edes and Edea as well as the municipal distributors with the provisions of their respective concession agreements.  We and Edesur are the largest distribution companies and, together with Edelap, originally comprised SEGBA, which was divided into three distribution companies at the time of its privatization in 1992.

Concessions were issued for distribution and retail sale, with specific terms for the concessionaire stated in the contract.  The concession periods are divided into “management periods” that allow the concessionaire to give up the concession at certain intervals.

Large users

The wholesale electricity market classifies large users of energy into three categories: (1) GUMAs, (2) GUMEs and, (3) GUPAs.

Each of these categories of users has different requirements with respect to purchases of their energy demand.  For example, GUMAs are required to purchase 50% of their demand through supply contracts and the remainder in the spot market, while GUMEs and GUPAs are required to purchase all of their demand through supply contracts.

Regulatory and Legal Framework 

Role of the government

During the 1990s, the Argentine Government restricted its participation in the electricity market to regulatory oversight and policy-making activities.  These activities were assigned to agencies that have a close working relationship with one another and occasionally even overlap in their responsibilities.  The Argentine Government has limited its holding in the commercial sector to the operation of the international hydropower projects and to the nuclear power plants.  Provincial authorities followed the Argentine Government by divesting of commercial interests and creating separate policy-making and regulatory entities for the provincial sector.

However such policies have been left aside upon the economic crisis of 2001. Pursuant to the Public Emergency Law, the Argentine Government has intervened in the utilities sector, including in the activities of electricity transmission and distribution. In fact, the concessions that had been granted years before were subject to a renegotiation process that, in many cases, is still in progress.

In connection with the generation sector, the Argentine Government adopted several measures that affected the commercialization of capacity and energy in the WEM (such as SE Resolution No. 95/2013 and its amendments).

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Entities and jurisdiction

The new Argentine Government, elected on November 22, 2015, effected changes in its internal organization, pursuant to which, among other measures, it created the ME&M and replaced the Secretariat of Energy with the Secretariat of Electric Energy (“SEE”) and other secretariats.  The SEE is the principal national regulatory authority for the electricity sector.  The Federal Board of Electric Energy, composed of representatives from each of Argentina’s 24 provinces (including the City of Buenos Aires), advises the SEE and the ME&M on policies related to the coordination and harmonization of these policies.  The Secretariat of Energy is also in charge of overseeing the electricity sector and proposing any changes needed in the market.

The ENRE is an autonomous supervisory body that operates under the ME&M.  The ENRE supervises the compliance of regulated transmission and distribution entities with established laws, regulations and operating criteria, including quality of service and environmental standards and guidelines against monopolistic behavior in the market.  The ENRE also undertakes or resolves disputes among the different players of the sector and protects consumer interests.  According to Law No. 24,065, the board of the ENRE is composed of five members, selected through a competitive process, after which the Executive Branch and the Federal Board of Electric Energy nominate them for the approval by the Congress.  At least a portion of the ENRE’s budgetary requirements is funded through fees from sector enterprises, and its professional staff is competitively hired.

In addition, the OCEBA is the regulator for Eden. The OCEBA exercises control and supervision over, and regulatory and judicial activities related to electric power by Buenos Aires Province distributors, including Eden, Edes and Edea as well as the municipal distributors (also known as “cooperatives”).  It was created as a result of the privatization process and the concession of public services and activities of general interest.

Limits and restrictions

To preserve competition in the electricity market, participants in the electricity sector are subject to vertical and horizontal restrictions, depending on the market segment in which they operate.

Vertical restrictions

The vertical restrictions apply to companies that intend to participate simultaneously in different sub-sectors of the electricity market.  These vertical restrictions were imposed by Law No. 24,065, and apply differently depending on each sub-sector as follows:

Generators

·Under Section 31 of Law No. 24,065, neither a generation company, nor any of its controlled companies or its controlling company, can be an owner or a majority shareholder of a transmitter company or the controlling entity of a transmitter company; and

·Under Section 9 of Decree No. 1,398/1992, since a distribution company cannot own generation units, a holder of generation units cannot own distributions concessions.  However, the shareholders of the electricity generator may own an entity that holds distribution units, either by themselves or through any other entity created with the purpose of owning or controlling distribution units.

Transmitters

·Under Section 31 of Law No. 24,065, neither a transmission company nor any of its controlled companies or its controlling entity, can be owner or majority shareholder or the controlling company of a generation company;

·Under Section 31 of Law No. 24,065, neither a transmission company nor any of its controlled companies nor its controlling company, can be owner or majority shareholder or the controlling company of a distribution company; and

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·Under Section 30 of Law No. 24,065, transmission companies cannot buy or sell electric energy.

Distributors

·Under provision 31 of Law No. 24,065, neither a distribution company, nor any of its controlled companies or its controlling company, can be owner or majority shareholder or the controlling company of a transmission company; and

·Under Section 9 of Decree No. 1,398/1992, a distribution company cannot own generation units.  However, the shareholders of the electricity distributor may own generation units, either by themselves or through any other entity created with the purpose of owning or controlling generation units.

Definition of control

The term “control” referred to in Section 31 of Law No. 24,065 (which establishes vertical restrictions), is not defined in the Electricity Regulation Framework.  Section 33 of the Argentine Companies Law states that “companies are considered as controlled by others when the holding company, either directly or through another company: (1) holds an interest, under any circumstance, that grants the necessary votes to control the corporate will in board meetings or ordinary shareholders’ meetings; or (2) exercises a dominant influence as a consequence of holding shares, quotas or equity interest or due to special linkage between the companies.”  We cannot assure you, however, that the electricity regulators will apply this standard of control in implementing the restrictions described above.

The regulatory framework outlined above prohibits the concurrent ownership or control of (1) generation and transmission companies, and (2) distribution and transmission companies.  Although we are a fully integrated electricity company engaged in the generation, transmission and distribution of electricity in Argentina, we are in compliance with these legal restrictions, as we do not hold a controlling interest, either directly or indirectly, in Transener.

Horizontal restrictions

In addition to the vertical restrictions described above, distribution and transmission companies are subject to horizontal restrictions, as described below.

Transmitters

·According to Section 32 of Law No. 24,065, two or more transmission companies can merge or be part of a same economic group only if they obtain an express approval from the ENRE.  Such approval is also necessary when a transmission company intends to acquire shares of another electricity transmission company;

·Pursuant to the concession agreements that govern the services rendered by private companies operating transmission lines above 132Kw and below 140Kw, the service is rendered by the concessionaire on an exclusive basis over certain areas indicated in the concession agreement; and

·Pursuant to the concession agreements that govern the services rendered by the private company operating the high-tension transmission services equal to or higher than 220Kw, the company must render the service on an exclusive basis and is entitled to render the service throughout the entire country, without territorial limitations.

Distributors

·Two or more distribution companies can merge or be part of a same economic group only if they obtain an express approval from the ENRE.  Such approval is necessary when a distribution company intends to acquire shares of another electricity transmission or distribution company; and

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·Pursuant to the concession agreements that govern the services rendered by private companies operating distribution networks, the service is rendered by the concessionaire on an exclusive basis over certain areas indicated in the concession agreement.

Electricity Prices 

Spot prices

The emergency regulations enacted after the Argentine crisis in 2001 had a significant impact on energy prices.  Among the measures implemented pursuant to the emergency regulations were the pesification of prices in the wholesale electricity market, known as the spot market, and the requirement that all spot prices be calculated based on the price of natural gas, even in circumstances where alternative fuel such as diesel is purchased to meet demand due to the lack of supply of natural gas.

Prior to the crisis, energy prices in the spot market were set by CAMMESA, which determined the price charged by generators for energy sold in the spot market of the wholesale electricity market on an hourly basis.  The spot price reflected supply and demand in the wholesale electricity market at any given time, which CAMMESA determined using different supply and demand scenarios that dispatched the optimum amount of available supply, taking into account the restrictions of the transmission grid, in such a way as to meet demand requirements while seeking to minimize the production cost and the cost associated with reducing risk of system failure.  The spot price set by CAMMESA compensated generators according to the cost of the next unit to be dispatched as measured at the Ezeiza 500 kV substation, which is the system’s load center and is in close proximity to the City of Buenos Aires.  Dispatch order was determined by plant efficiency and the marginal cost of providing energy.  In determining the spot price, CAMMESA also would consider the different costs incurred by generators outside the province of Buenos Aires.

In addition to energy payments for actual output at the prevailing spot market prices, generators would receive compensation for capacity placed at the disposal of the spot market, including stand-by capacity, additional stand-by capacity (for system capacity shortages) and ancillary services (such as frequency regulation and voltage control).  Capacity payments were originally established and set in U.S. Dollars to allow generators to cover their foreign‑denominated costs that were not covered by the spot price.  However, in 2002, the Argentine Government set capacity payments in reference to the Peso thereby limiting the purpose for which capacity payments were established.

In 2003, the Secretariat of Energy adopted a resolution that set the spot price in the WEM based on the cost of natural gas as declared by gas-fired power stations, even if gas was not available to these power stations. This pricing policy, which continues to govern the establishment of prices in the spot market, does not depend on the marginal cost of the last power station dispatched.  Rather, the spot price as recognized is equal to the marginal cost of the last gas-fired power station dispatched, regardless of whether that station has gas availability.  As a result, if the power station dispatched last is fuel-oil-fed, the remaining power stations dispatched are not granted recognition of that fuel-oil-fed power station’s cut-off price.  Rather, the remaining power stations are granted recognition for the cost that would have resulted if natural gas had been available and utilized.

In 2008, as was the case in 2007, despite an initiative, known as the Proyecto de Inyección Adicional Permanente (The Permanent Additional Injection Project, IAP Project), of the Sub Secretaría de Combustibles (Under-Secretariat of Fuels) to increase the volume of gas channeled into electricity generation, the supply of gas was insufficient to meet electricity generation needs. Consequently, in 2008, the use of liquid fuels in the generation of electricity increased.  The Argentine electricity sector consumed more gas oil and fuel oil in 2008 (718,000 tons and 2.3 million tons, respectively) than in any prior year.  The high demand for gas, coupled with record high nominal oil prices in the international market, resulted in an increase in the costs of producing energy in 2008. 

The regulatory framework governing payment for generation capacity continued to be the same that governed in 2002, with generators receiving compensation for available capacity at Ps. 12 per MW until December 2010.  On November 25, 2010, the Secretariat of Energy entered into an agreement with all private generators in order to increase the installed capacity during 2011 (see “Price Scheme – 2008-2011 Agreement” below).  The agreement provides that the government will recognize from Ps. 35 per MW-hrp (hrp stands for hours in which capacity is being paid) to Ps. 42 per MW-hrp depending on the technology of the unit and its capacity, to generators that present projects to increase capacity and can provide capacity with adequate availability, as defined in the agreement.  Furthermore, the remuneration to cover operation and maintenance costs will also increase from Ps. 7.96 per MWh to Ps. 11.96 per MWh for natural gas generation and from Ps. 12.96 per MWh to Ps. 20.96 per MWh for alternative fuel generation (liquid fuels).  In addition, all hydroelectric units with an installed capacity less than 250 MW will receive their energy spot markets sales according to the priority provided in subsection e), section 4 of SE Resolution No. 406/2003.

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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 the case that fuel oil was produced with crude oil purchased by refineries, the price for that fuel oil should be lesser of the price based on a weekly average of 10 listed prices, less a differential of U.S. $2.50/barrel, and the price of Escalante crude oil for the domestic 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. This price recognition mechanism was in force until December 2011, from which point onward it returned to the mechanism established in 2008.

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 the main suppliers for 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.

On March 26, 2013, the Secretariat of Energy issued SE Resolution No. 95/2013, appointing CAMMESA to centralize the acquisition and distribution of the fuels needed for electricity generation and establishing a new remuneration scheme for generators, which was later amended by SE Resolution No. 529/2014, 482/2015 and 22/2016 (see “Item 4. – The Argentine Electricity Sector - SE Resolution No. 95/2013, as amended- New Price Scheme and other modifications to the WEM” below).

Seasonal prices

The emergency regulations also made significant changes to the seasonal prices charged to distributors in the wholesale electricity market, including the implementation of a cap (which varies depending on the category of customer) on the cost of electricity charged by CAMMESA to distributors at a price significantly below the spot price charged by generators.  These prices did not change from January 2005 until November 2008.  See “Item 5. Operating and Financial Review and Prospects—Electricity Prices and Tariffs.”

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Prior to implementation of the emergency regulations, seasonal prices were regulated by CAMMESA as follows:

·prices charged by CAMMESA to distributors changed only twice per year (in summer and winter), with interim quarterly revisions in case of significant changes in the spot energy price, despite prices charged by generators in the wholesale electricity market fluctuating constantly;

·prices were determined by CAMMESA based on the average cost of providing one MWh of additional energy (its marginal cost), as well as the costs associated with the failure of the system and several other factors; and

·CAMMESA would use seasonal database and optimization models in determining the seasonal prices and would consider both anticipated energy supplies and demand as follows:

¾in determining supply, CAMMESA would consider energy supplies provided by generators based on their expected availability, committed imports of electricity and the availability declared by generators; and

¾in determining demand, CAMMESA included the requirements of distributors and large users purchasing in the wholesale electricity market as well as committed exports.

On January 25, 2016, the ME&M issued Resolution No.6/2016, approving the seasonal WEM prices for each category of users for the period from February 2016 through April 2016. Such resolution readjusted the seasonal prices set forth in the regulatory framework. Energy prices in the spot market had been set by CAMMESA, which determined the price charged by generators for energy sold in the spot market of the wholesale electricity market on an hourly basis. The WEM prices resulted in the elimination of most energy subsidies and a substantial increase in electricity rates for individuals. Resolution No. 6/2016 introduced different prices depending on customers’ categories. Such resolution also contemplates a social tariff for residential customers who comply with certain consumption requirements, which includes a full exemption for monthly consumptions below or equal to 150 Kwh and preferential tariffs for customers who exceed such consumption level but achieve a monthly consumption lower than that of the same period in the immediately preceding year. This resolution also establishes tariff benefits addressed to residential customers for reducing their consumption.

Stabilization fund

The stabilization fund, managed by CAMMESA, was created to absorb the difference between purchases by distributors at seasonal prices and payments to generators for energy sales at the spot price.  When the spot price was lower than the seasonal price, the stabilization fund increased, and when the spot price was higher than the seasonal price, the stabilization fund decreased.  The outstanding balance of this fund at any given time reflected the accumulation of differences between the seasonal price and the hourly energy price in the spot market.  The stabilization fund was required to maintain a minimum amount to cover payments to generators if prices in the spot market during the quarter exceeded the seasonal price.

Billing of all wholesale electricity market transactions is performed monthly through CAMMESA, which acts as the clearing agent for all purchases between participants in the market.  Payments are made approximately 40 days after the end of each month. However, due to the default of the other WEM’s agents –mainly distributors- during 2013 such payment period increased to an average of 90 days.

The stabilization fund was adversely affected as a result of the modifications to the spot price and the seasonal price made by the emergency regulations, pursuant to which seasonal prices were set below spot prices resulting in large deficits in the stabilization fund.  As of December 31, 2015, the stabilization fund balance was approximately Ps. 26,376 million.  This deficit has been financed by the Argentine Government through loans to CAMMESA, FONINVEMEM funds, and through another specific agreements between the Secretariat of Energy and the generators, but these actions continue to be insufficient to cover the differences between the spot price and the seasonal price.

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Term market

Generators may also enter into agreements in the term market to supply energy and capacity to distributors and large users.  Distributors are able to purchase energy through agreements in the term market instead of purchasing energy in the spot market.  Term agreements typically stipulate a price based on the spot price plus a margin.  Prices in the term market have sometimes been lower than the seasonal price that distributors are required to pay in the spot market.  However, as a result of the emergency regulations, prices in the term market are currently higher than seasonal prices, particularly with respect to residential tariffs, making it unattractive to distributors to purchase energy under term contracts while prices remain at their current levels.

The term market was suspended by SE Resolution No. 95/2013 (see “Item 4. – The Argentine Electricity Sector - SE Resolution No. 95/2013, as amended- New Price Scheme and other modifications to the WEM” below).

FONINVEMEM

In 2004, the Argentine Government, seeking to increase thermal generation capacity, created a fund called FONINVEMEM to be administered by CAMMESA and to provide funds for investment in thermal generation.  To provide capital for the FONINVEMEM, the Secretariat of Energy invited all WEM participants holding interest-bearing receivable credits against CAMMESA, also known as LVFVDs (Sales Settlements with Due Date to be Determined), that originated from January 2004 to December 2006 to contribute these credits to the FONINVEMEM.  In exchange, generators were entitled to participate in the construction of two new 800 MW combined cycle generators to be financed with funds from the FONINVEMEM.  Consequently, on December 13, 2005, the generating companies “Sociedad Termoeléctrica Manuel Belgrano S.A.” and “Sociedad Termoeléctrica José de San Martín S.A.” were created.  Generators that opted to participate in these projects received ten-year take-or-pay supply contracts of electricity and an equity interest in the two new power projects, which were scheduled to commence operations at full capacity in the first half of 2010.  As of the date of this annual report, both combined cycle generators had started operations as closed-cycle generations units.  In addition, the Argentine Government required generators to contribute 65% of their profits (in the case of hydroelectric generators) or variable margins (in the case of thermal generators) to the FONINVEMEM, to be repaid in 120 installments or, at each generator’s option, capitalized in the new power projects.  However, because total investment in these two projects was expected to exceed available financing from the FONINVEMEM, in 2005 the Argentine Government created special charges to non-residential consumers per MWh of energy billed and specific charges applicable to large users, in each case to be deposited in the FONINVEMEM. Our outstanding balance for LVFVDs related to the years 2004 through 2006 under FONINVEMEM, plus accrued interest as of December 31, 2015, net of the realized collections if applicable and at its book value, add up to approximately Ps. 46.9 million.  Since March 2010, CAMMESA has started paying the corresponding installments as stated in the FONINVEMEM conditions.  Therefore, as of that month, we started collecting the first installment payments related to receivables of our hydroelectric units, Piedra Buena and Güemes.

In 2007, the Argentine Government amended the terms of the FONINVEMEM by reducing mandatory contributions from generators to 50% of profits or variable margins.  Repayment of these contributions will also be made in 120 installments at LIBOR plus 1% margin.  However, generators will no longer be permitted to capitalize their contributions.  In addition, on May 31, 2007, the Secretariat of Energy offered generators the opportunity to allocate credits contributed to the FONINVEMEN in 2007 to new electricity investments, so long as these investments were at least four times higher than the amount of the credits.  In addition, the following conditions must be met:

·the investment project had to consist of the construction of a new generation plant or the installation of a new generation unit in an existing plant, or must involve an increase in the height of hydroelectric plants that produces an increase in generation;

·the reserved energy and capacity may be sold in the term market (including Energía Plus), and no exports are allowed during the first ten years;

·the project had to be submitted within 45 days from the date of publication of the resolution of the Secretariat of Energy approving this regime; and

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·the construction must have commenced before March 2008.

In accordance with this resolution, we submitted all of our installed capacity expansion projects against our FONINVEMEN credits for 2007.  These projects include HINISA, HIDISA, Piedra Buena, Güemes and Loma de la Lata, for an aggregate amount of approximately U.S. $13 million as of December 2007.  On June 20, 2008 the Secretariat of Energy verified the Company’s proposal and instructed CAMMESA to pay the 2007 LVFVDs, which as of December 31, 2008, had been duly collected. 

In 2012 and 2013 the Secretariat of Energy (pursuant to SE Resolution No. 1261/2012 and Note No. 5568/13) approved the works in order to accomplish an increase in the total capacity of Termoeléctrica Manuel Belgrano and Termoeléctrica José de San Martín and to undertake the aforementioned, instructed CAMMESA to request the shareholders of Termoeléctrica Manuel Belgrano and Termoeléctrica José de San Martín to allocate a portion of their LVFVD accrued during 2008-2011 not used in other projects for this purpose.

HIDISA, HINISA, CPB and CTG adhere to such request, which resulted in the partial termination of certain assignments executed with CTLL for the allocation of such LVFVDs to the CTLL Project. For more information please see “Item4. - Our Business – Generation Business – Loma de la Lata – Loma de la Lata’s 2014 Expansion Project.”

The LVFVD allocated to the expansion of Termoeléctrica Manuel Belgrano and Termoeléctrica José de San Martín will be repaid pursuant to the scheme governing repayment of original investments in these power plants, converted into Dollars at the rate established by the BCRA (”Tipo de Cambio de Referencia Comunicación A 3500 (Mayorista)”) on the date of the effective payment to the contractors of the works. As of the date of this annual report, CAMMESA repaid some of the LVFVD’s allocated to such projects.

As of the date of this annual report, Termoeléctrica Manuel Belgrano and Termoeléctrica José de San Martín executed the amendments to their WEM Supply Agreement.

WEM Supply Agreements under SE Resolution No. 220/2007

Aiming to modify the market conditions allowing for new investments to increase the generation offer, the Secretariat of Energy passed Resolution No. 220/2007, which empowers CAMMESA to enter into “WEM Supply Agreements” with WEM generating agents for the energy produced with new generation equipment. They will be long-term agreements, and the values to be paid by CAMMESA in consideration of the capacity and the energy supplied by the generator must be approved by the Secretariat of Energy. The generator shall guarantee certain availability of the generation units (established as a percentage), and if it fails to do so, penalties apply.

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 begins, and depended upon the amount of credits, from Loma de la Lata or third parties, arising from Resolution No.406/2003 of the Secretariat of Energy, that are allocated to the expansion project.  The agreement sets a capacity payment of U.S.$ 33.383 per MW-month and an energy payment of U.S.$ 4 per MWh. The term of the agreement is 10 years from the date on which commercial operation begins. 

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. Altought the original term of this Amendment expired in October 2014, through the execution of the Specific Conditions, such term was extended until 2021.

On July 15, 2011, as a result of the commitments included in the Complementary Agreement, EGSSA (now merged into CTG. Please see “Item 4. - Our Business – Our Generation Business – Güemes - History”) entered into a WEM Supply Agreement under SE Resolution No. 220/2007 with CAMMESA, to sell to CAMMESA Central Térmica Piquirenda’s total capacity. The agreement sets a capacity payment for each of the two stages of the project of U.S.$ 14,760 per MW-month and U.S.$ 14,525 per MW-month, respectively. The term of the agreement is 10 years from the date in which commercial operation of each stage begins.

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In both cases—Loma de la Lata and EGSSA (now merged into CTG. Please see “Item 4.-Our Business – Our Generation Business – Güemes - History”)—the generator guarantees a certain availability of the units involved in the agreement. If the units do not meet such minimum availability, CAMMESA may apply penalties which are discounted from the revenues to be paid for the capacity and energy sold under the agreements.

WEM Supply Agreements under SE Resolution No. 724/2008

On July 24, 2008, the Secretariat of Energy issued Resolution No. 724/2008 authorizing the execution of WEM committed supply agreements with generation agents, related to the repair and/or repowering of generation units and/or related equipment.  This Resolution applies to those WEM generation agents filing plans to repair and/or repower their generating equipment and for which costs would exceed 50% of the revenues that they expect to receive on the spot market.  Pursuant to the terms of the Resolution, the Secretariat of Energy evaluates the proposals filed by generation agents and determines which ones are eligible to enter a committed supply agreement.  The Secretariat of Energy also determines whether the generation agent is eligible to receive financing for the difference between the costs of repairs and the compensation to be received under the proposed agreement.  Under this Resolution, Loma de la Lata has signed agreements that permit it to recover receivables from CAMMESA up to 50% of the cost of any repairs or repowering of generation units and related equipment.  Under such agreements, in connection with Loma de la Lata’s expansion project, the generation subsidiaries have assigned to this project their consolidated receivables accrued from 2008 and 2010. In addition under such agreements Loma de la Lata has issued several credit assignment agreements with other WEM generators (related companies and third parties) in connection with their LVFVDs accumulated between January 1, 2008 and December 31, 2010 by virtue of Subsection c) of SE Resolution No. 406/2003, as well as the LVFVDs accumulated for the Procedure to Dispatch Natural Gas for the Generation of Electricity. Said assignment may be total and/or partial depending on CAMMESA’s cash and cash equivalents.  Such agreements establish the terms and conditions of each assignment, which will be carried out fully or partially as CAMMESA settles the respective receivables, upon which Loma de la Lata will settle the unpaid amounts to the counterparties, according to the conditions established in every agreement.

CAMMESA had partially cancelled the LVFVDs allocated in Loma de la Lata’s WEM Supply Agreement under SE Resolution No. 724/2008. Upon such breach, Loma de la Lata had filed the appropriate administrative remedy in order to safeguard its rights, and seeking the total cancellation of such LVFVD. As of the date of this annual report, CTLL had filed a claim against the Argentine Government seeking the cancellation of such LVFVD (see “Item 8. Legal Proceedings”).

Price Scheme – 2008-2011 Agreement

On November 25, 2010, the Secretariat of Energy entered into the 2008-2011 Agreement with all private generators in order to increase the installed capacity during 2011—by the cancellation of the LVFVD accrued by the generators between 2008 and 2011—and to establish a new scheme for the remuneration of generators’ sales in the spot market. In addition, according to the 2008-2011 Agreement, all hydroelectric units with an installed capacity of less than 250 MW will receive their energy spot markets sales according to the priority provided in subsection e), section 4 of SE Resolution No. 406/2003.

In order to increase the total installed capacity in the WEM, the 2008-2011 Agreement established a financial scheme that comprises the amounts charged to end-users by means of the “Cargo Transitorio para la Conformación del Fondo Acuerdo 2008-2011” and the amounts derived from the repayment of the contributions made according to section 4.d.2 of the “Acuerdo Definitivo para la Gestión y Operación de los Proyectos para la Readaptación del MEM en el marco de la Resolución SE 1.427/04.” The generator should be in charge of the execution of the works for the installation of the new facilities.

The LVFVD accrued by the generators between 2008 and 2011 shall be cancelled by WEM Supply Agreements to be executed with the generators for the new generation facilities. Repayment of the LVFVD will be made in 120 installments at LIBOR plus 5% margin.

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The 2008-2011 Agreement provides that the government will recognize from Ps. 35 per MW-hrp (hrp stands for hours in which capacity is being paid) to Ps. 42 per MW-hrp depending on the technology of the unit and its capacity, to generators that can meet the availability objective, as defined in the 2008-2011 Agreement.

Furthermore, the remuneration to cover operation and maintenance costs will also increase from Ps. 7.96 per MWh to Ps. 11.96 per MWh for natural gas generation and from Ps. 12.96 per MWh to Ps. 20.96 per MWh for alternative fuel generation (liquid fuels). 

The above mentioned remunerations should have been recognized and paid upon the execution of the 2008-2011 Agreement. However, by means of Note No. 924/11, the Secretariat of Energy instructed CAMMESA to consider such remunerations as LVFVD until the execution of the complementary agreements to the 2008-2011 Agreement.

According to section 8 of the 2008-2011 Agreement, its implementation required the execution of complementary agreements between the Secretariat of Energy and the generators. On April 1, 2011, the Company and the Pampa Generators―executed the “Acuerdo para el Aumento de la Disponibilidad de Generación Térmica” (“Complementary Agreement”) with the Secretariat of Energy.

In the Complementary Agreement, the Pampa Generators committed themselves to construct the Project CTP. The project will comprise two stages of 30 MW and 15 MW, respectively. The Secretariat of Energy committed itself to instruct CAMMESA to pay the LVFVD accrued by the Pampa Generators between 2008 and 2011—not included in a WEM Supply Agreement under SE Resolution No. 724/2008—up to an amount equal to the 30% of the investments on the Project. The first stage of the Project CTP was concluded as scheduled. Pursuant to the Specific Conditions,the second stage of Project CTP shall not be executed. Instead, the engines that amounted to the 15 MW under the secong stage of Project CTP shall be installed in Loma de la Lata (See “Item 4. – Our Business – Our Generation Business – Loma de la Lata’s 2014 Expansion Project”).

On October 17, 2011, CAMMESA sent a brief to the Secretariat of Energy in relation to the first stage of the Project, concluding that the maximum value to be recognized in favor of the Pampa Generators according to the Complementary Agreement amounted to U.S.$ 8,083,799.  However, as of the date of this annual report, the LVFVD has not been cancelled.  The Pampa Generators have filed the appropriate administrative remedies (see “Item 8. Legal Proceedings”)”. The outstanding balance of 2008, 2009, 2010 and 2011 LVFVD, plus interest accrued, at its book value, added up to approximately Ps. 480.1 million as of December 31, 2015.

On January 24, 2011, the Secretariat of Energy instructed CAMMESA (by SE Note No. 495/2011) to suspend the recognition of the remunerations included in the 2008-2011 Agreement. Such instruction was confirmed by SE Note No. 1269/12 and by other communications by means of which the Secretariat of Energy answered the Pampa Generators’ claims to such instructions.

Such instructions constitute a breach of the commitments made by the Secretariat of Energy in the 2008-2011 Agreement. While the Pampa Generators have filed the appropriate administrative remedies (see “Item 8. Legal Proceedings”) in order to be entitled to participate in the new remuneration scheme established by SE Resolution No. 95/2013, the Pampa Generators were forced to desist from pursuing such remedies.

Energía Plus

In September 2006, the Secretariat of Energy issued Resolution No. 1281/2006 in an effort to respond to the sustained increase in energy demand following Argentina’s economic recovery after the crisis.  This resolution seeks to create incentives for energy generation plants in order to meet increasing energy needs.  The resolution’s principal objective is to ensure that energy available in the market is used primarily to service residential users and industrial and commercial users whose energy demand is at or below 300 kW and who do not have access to other viable energy alternatives.  To achieve this, the resolution provides that:

·large users in the wholesale electricity market and large customers of distribution companies (in both cases above 300 kilowatts), will be authorized to secure energy supply up to their “base demand” (equal to their demand in 2005) by entering into term contracts; and

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·large users in the wholesale electricity market and large customers of distribution companies (in both cases above 300 kilowatts) must satisfy any consumption in excess of their base demand with energy from the Energía Plus system at prices that should be approved by the Ministerio de Planificación Federal, Inversión Pública y Servicios (Ministry of Federal Planning, Public Investment and Services).  The Energía Plus system consists of the supply of additional energy generation from new generation and/or generating agents, co-generators or auto-generators that are not agents of the electricity market or who as of the date of the resolution were not part of the WEM. 

The resolution also established the price large users are required to pay for excess demand, if not previously contracted under Energía Plus, which a price closer to the marginal cost of operations.  This marginal cost is equal to the generation cost of the last generation unit transmitted to supply the incremental demand for electricity at any given time.  The Secretariat of Energy established certain temporary price caps to be paid by large users for any excess demand (as of the date of this annual report, Ps. 550 per MWh for GUDIs and Ps. 450 per MWh for GUMEs and GUMAs).  Additionally, generators must grant the supply of energy to the customers even if they cannot generate the energy at their plants.

For information about our projects aimed at taking advantage of the Energía Plus plan.  See “Item 4. —Our Business—Our Generation Business.”

Procedure for the Dispatch of Natural Gas for Power Generation

On October 7, 2009, SE Note No. 6866/09, instructed CAMMESA to convene the WEM’s generators to adhere to the “Procedure for the Dispatch of Natural Gas for Power Generation” (hereinafter the “Procedure”).

The Procedure provides that, in the event that the natural gas system is affected by operational restrictions, the natural gas and the transport that each generator has acquired will be assigned to CAMMESA and in turn redistributed by CAMMESA in order to maximize the generation capacity. In consideration for such assignment in favor of CAMMESA, the generator will be entitled to collect the highest value between the positive difference between the Spot Price and the Variable Production Cost (“VPC”) (calculated with natural gas) and 2.50U. S.$./MWh. If the unit was on service, such value would be calculated over the maximum value between the energy delivered and the energy that would have been delivered if the unit VPC was inferior to the WEM’s Marginal Operational Cost. If the unit was out of service, the above mentioned value would be calculated over the energy that would have been delivered if such unit had had natural gas and had assigned such gas to CAMMESA (the unit VPC must be inferior to the WEM’s Marginal Operational Cost).

The original duration of the Procedure included the winters of 2009, 2010 and 2011. However, through Note No. 6169/10, the Secretariat of Energy instructed CAMMESA to convene the WEM’s generators to adhere to the application of the Procedure from October 2010 to May 2011 and from September to December of 2011. In virtue of the large number of generators that adhered, through Note No.6503/10, the Secretariat of Energy instructed CAMMESA to apply the Procedure during the above mentioned periods.

On November 16, 2010, through Notes No.7584/2010 and 7585/2010, the Secretariat of Energy instructed CAMMESA to convene the WEM’s generators to adhere to the assignment mechanism provided in such Resolution. In both cases the generator that adheres to the cited mechanisms, accepts to assign in favor of CAMMESA the natural gas and transport acquired in order to maximize the generation capacity. While the mechanism established in Note No.7584/10 of the Secretariat of Energy was directed to the generators included under the “Energía Plus” program, the mechanism provided in Note No.7585/10 was directed to generators that had acquired its provision of natural gas under “Gas Plus” program.

The assignment of natural gas volumes acquired by the generators that adhere to the above mentioned mechanism shall not affect the support of its contracts in the WEM or those executed under the regime established in SE Resolution No. 220/2007.

According to Note No.7585/10 of the Secretariat of Energy, such assignment shall not affect the remuneration earned for the capacity provided, the recognition of the costs associated to said fuel and the overruns associated to them, nor the amounts due in virtue of the application of Subsection c), Section 4 of SE Resolution No. 406/2003, in respect of those that would have been due to the assignor.

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The mechanisms approved by Notes No. 7584/2010 and 7585/2010 of the Secretariat of Energy were to be applied up to December 31, 2011. However, through Note No. 8692/2011, the Secretariat of Energy instructed CAMMESA to convene the WEM’s generator for their adherence to the application of the mechanism approved by Notes No. 6866/2009, 7584/2010 and 7585/2010 during 2012. Considering the high degree of adherence, the Secretariat of Energy, through Note No. 187/2011, instructed CAMMESA to continue with the application of such mechanism during 2012.

In November 2012, the Secretariat of Energy (by SE Note No. 7469/12) extended the application of the above mentioned schemes until April 31, 2013.  In April 2013, under the modifications implemented by the SE Resolution No. 95/2013, the Secretariat of Energy (by SE Note No. 2053/13) extended the application of the abovementioned schemes indefinitely. This extension will apply to adhering agents not expressing their rejection.

Natural Gas Supply under the Gas Plus Program

By means of SE Notes No. 3456/2012 and 4377/2012, 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. In this sense it addressed two cases as follows:

(i) With regard to the first case, the Secretariat of Energy established that, provided that the Gas Plus price agreed between the producer and the generator, is not higher than the one recognized by CAMMESA, the volumes must be accepted by CAMMESA.

(ii) With regard to the second case, as the contract price is, in general, equal to the maximum prices approved for the Gas Plus Program, in order to avoid “unintended results that can generate distortions,” the contract price should be equal to the value that CAMMESA recognizes, or the maximum value, whichever is the lesser.

Moreover, the Secretariat of Energy established that “in such cases” CAMMESA will have priority to contract the volume directly with the producer.

Additionally, the Secretariat of Energy stipulated that the highest value that CAMMESA shall recognize is U.S.$ 5.20/MMBTU and this is the value that shall be applied for “any other case that does not fit the characteristics indicated.”

CAMMESA, through Note No. B-73079-1, sent a copy to the generators of the above mentioned note and included its interpretation of Note No. 3456/12’s provisions. CAMMESA understood that the maximum price to recognize shall be U.S.$ 5.20/MMBTU and that for those proposals to work together with the mechanism that was set up by SE Note No. 7585/11 (which has thus far not expressly been approved), the generator must inform the corresponding producer of the provisions of the note in order to make the direct offer to CAMMESA of the volumes previously agreed with the generator. CAMMESA does not distinguish the priority to buy between cases (i) and (ii).

Asociación de Generadores de Energía Eléctrica de la República Argentina (“AGEERA”) sent a note to the Secretariat of Energy with some considerations, with the purpose of requesting that the Secretariat of Energy clarify the concepts included by CAMMESA in Note No. B-73079-1.

The Secretariat of Energy, by means of Note No. 4377/12, instructed CAMMESA to consider, in the case indicated in (i) above, those generating units under WEM Supply Agreements under SE Resolution No. 220/2007, including within this category the units of Loma de la Lata and EGSSA (now merged into CTG. Please see “Item 4. – Our Business – Our Generation Business – Güemes – History”), both Pampa subsidiaries.

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In September 2015, CAMMESA informed Loma de la Lata that, in accordance with SE Resolution No. 529/14, that after the first automatic renewal of the term of the natural gas supply agreements, CAMMESA will no longer acknowledge (i) any further automatic renewals of such agreements, and (ii) recognize the costs associated to such supply, including the additional 10% of such costs  established in the “Convenio Marco para el Cierre del Ciclo Combinado de Loma de la Lata”.

As a consequence thereof: (i) on September 3, 2015 Loma de la Lata declared the force majeure of the Natural Gas Agreement with Pan American Energy LLC Argentine branch, resulting in the suspension of the obligations of Loma de Lata thereunder, and filed claims against CAMMESA in connection with such agreement; and (ii) on January 1, 2016, declared the force majeure of the Natural Gas Agreement with Petrolera Pampa, resulting in the suspension of the obligations of Loma de Lata thereunder, and filed claims against CAMMESA in connection with such agreement.  As of the date of this annual report, the administrative claims filed by Loma de la Lata against CAMMESA are still pending.

SE Resolution No. 95/2013, as amended– New price scheme and other modifications to the WEM

New Price scheme for generation

SE Resolution No. 95/2013 established a new general price scheme for the whole generation sector (generators, autogenerators and cogenerators) excluding: (i) binational hydroelectric plants and nuclear plants; and (ii) the capacity and energy included in specific contracts with a differential price scheme under SE Resolutions No. 1193/2005, 1281/2006, 220/2007, 1836/2007, 200/2009, 712/2009, 762/2009, 108/2011 and 137/2011 (hereinafter, the “Comprised Generators”).

The new price scheme shall be applicable as of the economic transactions recorded during February 2013. However, the effective application to each generator agent requires that such agent desist from any and all administrative or judicial procedures initiated against the Argentine Government, the Secretariat of Energy and/or CAMMESA in relation to the 2008-2011 Agreement and/or the application of SE Resolution No. 406/2003. Moreover, such agent shall renounce any right to initiate or promote any administrative or judicial procedure against the Argentine Government, the Secretariat of Energy and/or CAMMESA in relation to the 2008-2011 Agreement and/or the application of SE Resolution No. 406/2003.

Any Comprised Generator that does not fulfill the requirements to desist from and renounce to, any right with respect to such actions, shall not be entitled to participate in the new price scheme.

The price scheme established by SE Resolution No. 95/2013 was amended by SE Resolutions No. 529/2014, 482/2015 and 22/2016. SE Resolution 482/2015 provides for: i) the retroactive adjustment of prices from February 2015, ii) the modification of the calculation of the variable transport fees for hydroelectric and renewable generators, iii) the creation of a new remuneration named “Additional Resources for Investments FONINVEMEM 2015-2018”; iv) the creation of a new remuneration named “Additional Remuneration FONINVEMEM 2015-2018” applicable to the units to be installed under the FONINVEMEM 2015-2018; v) the creation of an additional efficiency and production remuneration; and vi) the modification of the calculation of the Fixed Cost Remuneration and the Additional Maintenance Remuneration. SEE Resolution No. 22/2016 established adjustments to the remuneration with the aim of temporarily supporting the operation and maintenance of the generation plants until the entry into force of regulatory measures currently being considered by the National Government.

The price scheme under SE Resolution 95/2013, as amended by SE Resolution No. 529/2014, SE Resolution No. 482/2015 and SEE Resolution No. 22/2016, is described below:

i)Fixed Costs Remuneration: it remunerates for the Potencia Puesta a Disposición (available capacity or “PPAD”) in the hours in which such capacity is remunerated (“hrp”).

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a)thermic (TG, TV, CC) units, according to the parameters defined in the resolution and the following remuneration;

Technology and Scale	Ps/MW-Hrp
Gas Turbine Unit with a capacity = 50 MW	152.3
Gas Turbine Unit with a capacity > 50 MW	108.8
Steam Turbine Unit with a capacity = 100 MW	180.9
Steam Turbine Unit with a capacity > 100 MW	129.2
Combined Cycle Units with a capacity = 150 MW	101.2
Combined Cycle Units with a capacity > 150 MW	84.3
Hydroelectric Unit with a capacity = 50 MW	299.2
Hydroelectric Unit with a capacity between 50MW and = 120 MW	227.5
Hydroelectric Unit with a capacity between 120 MW and 300 MW	107.8
Hydroelectric Unit with a capacity > 300 MW	59.8
Internal combustion motors	180.9
Wind farms	---
Solar Photovaltaic Power Plants	---
Biomass and Biogas – Solid Urban Waste Power Plants	---

The calculation of the remuneration is variable according to the Actual Availability (AA), Target Availability (TA), the Average Historic Availability (AHA) and the season of the year. The formula defines a base percentage to be applied to the Fixed Costs Remuneration according to the following values:

Combined Cycle Units	June – July – August December – January – February	March – April – May September – October - November
AA > 95%	110%	100%
85% < AA = 95%	105%	100%
75% < AA = 85%	85%	85%
AA = 75%	70%	70%

Steam-Gas Turbine Units	June – July – August December – January - February	March – April – May September – October - November
AA > 90%	110%	100%
80% < AA = 90%	105%	100%
70% < AA = 80%	85%	85%
AA =70%	70%	70%

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Internal Combustion Motors	June – July – August December – January - February	March – April – May September – October - November
AA > 90%	110%	100%
80% < AA = 90%	105%	100%
70% < AA = 80%	85%	85%
AA =70%	70%	70%

Fifty percent (50%) of the difference between the AA and the AHA of each generator shall be added or subtracted to the base percentage, with a minimum of 70% and a maximum of 100% or 110% according to the season of the year.

Resolution SEE No. 22/2016 established a 20% increase in the Fixed Costs Remuneration of hydroelectric generators which operate and maintain infrastructure used for controlling watercourses (such as dams), with no hydroelectric power plant directly associated to them. HINISA shall be entitled to collect this increase for its Valle Grande facilities.

ii)Variable Costs Remuneration: the SE Resolution No. 95/2013, as amended, established a new remuneration that replaced the Variable Maintenance Costs (“Costos Variables de Mantenimiento”) and Other Non-Fuel Variable Costs (“Otros Costos Variables No Combustibles”). These are calculated taking into the account the energy generated with each kind of fuel and on a monthly basis.

Technology and Scale	Fueled with (Pesos / MWh):
	Natural Gas	Liquid Fuels	Coal	Biofuels
Gas Turbine Unit with a capacity = 50 MW	46.3	81.1	-	154.3
Gas Turbine Unit with a capacity > 50 MW	46.3	81.1	-	154.3
Steam Turbine Unit with a capacity = 100 MW	46.3	81.1	139.0	154.3
Steam Turbine Unit with a capacity > 100 MW	46.3	81.1	139.0	154.3
Combined Cycle Units with a capacity = 150 MW	46.3	81.1	-	154.3
Combined Cycle Units with a capacity > 150 MW	46.3	81.1	-	154.3
Hydroelectric Unit with a capacity =50 MW	36.7
Hydroelectric Unit with a capacity between 50MW and =120MW	36.7
Hydroelectric Unit with a capacity between 120MW and 300 MW	36.7
Hydroelectric Unit with a capacity >300MW	36.7
Internal combustion motors	74.1	111.2	---	148.3
Wind farms	112.0
Solar Photovaltaic Power Plant	126.0
Biomass and Biogas – Solid Urban Waste	Equal to the applicable thermal technology and scale provided above

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Resolution SEE No. 22/2016 modified the basis for the calculation of the Variable Costs Remuneration for pump hydroelectric power plants. Such remuneration shall consider both the energy generated by the power plant and the energy consumed for pumping. This modification shall benefit HIDISA’s Los Reyunos power plant.

iii)Additional Remuneration: applicable to the Comprised Generators. Part of the remuneration shall be directed to “new infrastructure projects in the Energy Sector,” which are still to be defined by the Secretariat of Electric Energy, through a trust.

Technology and Scale	Destined to:
	Generator Pesos / MWh	Trust Pesos / MWh
Gas Turbine Unit with a capacity = 50 MW	13.7	5.9
Gas Turbine Unit with a capacity > 50 MW	11.7	7.8
Steam Turbine Unit with a capacity = 100 MW	13.7	5.9
Steam Turbine Unit with a capacity > 100 MW	11.7	7.8
Combined Cycle Units with a capacity = 150 MW	13.7	5.9
Combined Cycle Units with a capacity > 150 MW	11.7	7.8
Hydroelectric Unit with a capacity =50MW	84.2	14.9
Hydroelectric Unit with a capacity between 50MW and = 120 MW	84.2	14.9
Hydroelectric Unit with a capacity between 120 MW y 300 MW	59.4	39.6
Hydroelectric Unit with a capacity > 300 MW	54.0	36.0
Internal combustion motors	13.7	5.90
Wind farms	---------------
Solar Photovaltaic Power Plant	---------------
Biomass and Biogas – Solid Urban Waste Power Plants	---------------

iv)Additional Maintenance Remuneration: applicable since February 2014 and calculated taking into the account the energy generated on a monthly basis. Such credits shall be liquidated as LVFVDs and shall be applied exclusively for the execution of major maintenance works approved by the SEE. SEE Resolution No. 482/2015 and SEE Resolution No. 22/2016 updated the values and included hydroelectric generators.

Technology and Scale	Pesos/MWh
Gas Turbine Unit with a capacity = 50 MW	45.1
Gas Turbine Unit with a capacity > 50 MW	45.1
Steam Turbine Unit with a capacity = 100 MW	45.1
Steam Turbine Unit with a capacity > 100 MW	45.1
Combined Cycle Units with a capacity = 150 MW	39.5
Combined Cycle Units with a capacity > 150 MW	39.5
Hydroelectric Unit with a capacity = 50MW	16
Hydroelectric Unit with a capacity between 50 MW and =120 MW	16
Hydroelectric Unit with a capacity between 120 MM and 300 MW	16
Hydroelectric Unit with a capacity > 300 MW	16
Internal combustion mototrs	45.1
Wind farms	------
Solar Photovaltaic Power Plant	------
Biomass and Biogas – Solid Urban Waste Power Plants	------

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Additionally, SE Resolution No. 482/15 provided that the Additional Maintenance Remuneration shall be calculated taking into consideration (i) the accumulated energy generated in the preceeding year and (ii) the number of times that the applicable units starts as per the request of CAMMESA.

v) Production and Efficiency Incentives

These are  comprised of an increase in the Variable Costs Remuneration as of the fulfillment of certain conditions, as set forth below.

The “Production” incentive consists of a 10% and 15% increase in the Variable Costs Remuneration of thermal units operating with liquid fuel or coal, respectively, when their aggregate production in the calendar year exceeds 25% to 50%, respectively, of their production capacity with liquid fuel or coal, as applicable.

The “Efficiency” incentive consists of the acknowledgment of an Additional Remuneration equal to the Variable Costs Remuneration for the porcentual difference between the real fuel consumption and the referenced fuel consumption defined for each type of technology and fuel set forth in SEE Resolution No. 482/2015. The comparison shall be quarterly. Variable Costs Remuneration shall not be affected when the real fuel consumption is higher than the reference fuel consumption.

The reference fuel consumption values are:

Technology	Natural Gas	Alternatives (FO/GO/Coal)
	Kcal/kWh	Kcal/kWh
Gas Turbine	2,400	2,600
Steam Turbine	2,600	2,600
Internal Combustion Motors	2,150	2,300
Combined Cycles (GT > 180 MW)	1,680	1,820
Other Combined Cycles	1,880	2,000

vi)Additional Resources for Investments FONINVEMEM 2015-2018

As established in the 2015-2018 Generators Agreement (see “2015-2018 Generators Agreement” below), these resources will be applied pursuant to the FONINVEMEM 2015-2018 by generators that have a new generation project approved by the SEE, to the works that will be executed under such projects. SEE Resolution No. 482/2015 provides that these resources are not a right vested to generators. Such resources cannot be construed as a right, therefore if any generator breaches the specific terms and conditions applicable to the project that they would undertake, the SEE can transfer such resources allocated to such generator to another generator.

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Technology and Scale	Pesos/MWh
Gas Turbine Unit with a capacity = 50 MW	15.8
Gas Turbine Unit with a capacity > 50 MW	15.8
Steam Turbine Unit with a capacity = 100 MW	15.8
Steam Turbine Unit with a capacity > 100 MW	15.8
Combined Cycle Units with a capacity = 150 MW	15.8
Combined Cycle Units with a capacity > 150 MW	15.8
Hydroelectric Unit with a capacity = 50 MW	6.3
Hydroelectric Unit with a capacity between 50 MW and =120 MW	6.3
Hydroelectric Unit with a capacity between 120 MW y 300 MW	6.3
Hydroelectric Unit with a capacity > 300 MW	6.3
Internal combustion motors	15.8
Wind farms	-----------
Solar Photovoltaic Power Plant	-----------
Biomass and Biogas – Solid Urban Waste Power Plants	-----------

vii)Additional Remuneration FONINVEMEM 2015-2018

It is comprised of an additiona remuneration for the units to be installed under the 2015-2018 Generators Agreement and FONINVEMEM 2015-2018 equal to 50% of the Additional Remuneration allocated to each generator. The Additional Remuneration FONINVEMEM 2015-2018 shall apply for up to 10 years from the commercial operation of the generation unit.

The sum of the concepts detailed above constitutes the total remuneration to be liquidated in favor of the Comprised Generators, deducting there from the energy and capacity included in term contracts or in other agreements, which are valued according to the corresponding Market Price, and any other charge or service to be charged to the generator.

In order to qualify for the foregoing remuneration, each Comprised Generator shall present, for each month, an affidavit with the corresponding backup documents, including the amounts invoiced for its sales in the Term Market (except for the earnings derived from the contracts excluded under section 1 of SE Resolution No. 95/2013), the result of which shall be compared to deductions made by CAMMESA. In case of discrepancies in favor of the generator, CAMMESA shall invoice to the generator the difference.

Payment Priority

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SE Resolution No. 95/2013 excludes the application of SE Resolution No. 406/2003 to the new price scheme defined therein. It establishes two priorities. The first one includes the Fixed Costs Remuneration, the Variable Costs Remuneration and the recognition of fuel costs. The second order of priority includes the Additional Remuneration. Notwithstanding the foregoing, CAMMESA shall − according to the instructions of the Secretariat of Energy – make such priority order compatible with the one in force at the date of its publication, i.e. the criteria defined in SE Resolution No. 406/2003. Additionally, it was established that the Fixed Costs Remuneration, the Variable Costs Remuneration and the Additional Payment accrued directly by the generator and the recognition of costs of fuels, shall be paid with the priority defined in subsection e) of section 4 of Resolution No. 406/2003 of the Secretariat of Energy.

The remuneration of certain services provided by the generators to the WEM accrue with the priority established in subsection d) of section 4 of SE Resolution No. 406/2003, while the Additional Payment destined to the abovementioned trust accrue with the priority established in subsection c).

In Note No. 4858/13 CAMMESA was instructed to implement a priority payment mechanism in order to maintain a similar liquidity in relation to generators’ collections before the entry into force of SE Resolution No. 95/2013. To that extent:

i.CAMMESA shall collect payments from WEM Large Users; and

ii.CAMMESA shall use such funds to pay, in the first place, the Fixed Cost Remuneration, then the Variable Cost Remuneration and, finally, the Additional Payment destined directly to generators. The distribution shall be made in proportion to the relative participation of each generator in each category.

Recognition of fuels costs

SE Resolution No. 95/2013 appointed CAMMESA to centralize the acquisition and dispatch of fuels for generation. Generators cannot renew or extend the contracts with their providers. However, until the termination of such agreements, CAMMESA will continue to recognize such costs at the reference price, the associated freight, the costs associated with the transport and distribution of natural gas and the corresponding fees and taxes. For such costs to be recognized, two conditions must be met: (i) the costs to be recognized should represent concepts recognized by CAMMESA as of the publication of the resolution; and (ii) the costs should be derived from agreements executed before the entry into force of the resolution.

SE Resolution No. 529/2014 extended the centralization of the acquisition and dispatch of fuel for generation to the generators, cogenerators and autogenerators included under SE Resolutions Nos. 1193/2005, 220/2007, 1836/2007, 200/2009, 712/2009, 762/2009, 108/2011 and 137/2011.  For revenue calculation purposes, the generator’s availability shall be considered independently from the availability of fuels.

The only generators that may contract fuel supply are those contemplated under SE Resolution No. 1281/2006 or those that didn’t adhere to the SE Resolution No. 95/2013, as amended.

Trust for the execution of projects in the electricity sector

As described above, part of the Additional Remuneration shall be transferred to a trust for the execution of works in the electricity sector.

Additionally, SE Resolution No. 95/2013 sets forth that the Secretariat of Energy will define the mechanism under which the LVFVDs issued by CAMMESA pursuant to SE Resolution No. 406/2003 should be destined to the such trust when they are not comprised within either (i) general or specific agreements entered into with the Secretariat of Energy; (ii) provisions aimed at the execution of investment works; or (iii) existing equipment maintenance tasks.

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As of September 2013, CAMMESA began the recognition of such remuneration as LVFVDs. As of the date of this annual report, the SEE has not established the necessary mechanisms in order to create the trust but permitted the application of such LVFVD to a specific project (See. “Item 4 – Our Business – Our Generation Business – Loma de la Lata - Loma de la Lata’s 2014 Expansion Project”).

Term Market Suspension

The Secretariat of Energy suspended the incorporation, extension or renewal of the contracts in the Term Market, excluding the contracts executed under the resolutions and the special regime cited in article 1 of SE Resolution No. 95/2013. Notwithstanding the foregoing, the Term Market contracts in force as of the date of the resolution shall remain in force and be administered by CAMMESA until their termination. Upon their termination, the Large Users shall contract for their supply directly from CAMMESA under the conditions to be determined by the Secretariat of Energy.

Royalties

The new price scheme defined in SE Resolution No. 95/2013 shall not be applicable for the calculation and payment of the royalties to be paid under Laws No. 15,336 and 23,164.

Application criteria

The Secretariat of Energy issued several notes in order to establish the criteria for the application of the changes included in SE Resolution No. 95/2013.

In Note No. 2053/13, the Secretariat of Energy defined the criteria for the application of the new price scheme. Such new regime shall be applied by CAMMESA from February 2013 or from the date that is up to three months  prior to the reception by the Secretariat of Energy of the withdrawal of any claim regarding de 2008-2011 Agreement or SE Resolution 406/2003, against the Argentine Government, the Secretariat of Energy and/or CAMMESA.

In Notes No. 2053/13, 3229/13 and 3902/13, the Secretariat or Energy regulated the contracts to be executed between WEM Large Users and CAMMESA.

On the other hand, the Secretariat of Energy instructed CAMMESA to classify WEM generation units in those categories established in SE Resolution No. 95/2013. CTLL, CTG, CPB, HIDISA and HINISA units were classified as:

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Power Plant	Generating Unit	Technology	Capacity
	GUEMTV11	TV	<100 MW
	GUEMTV12	TV	<100 MW
CTG
	GUEMTV13	TV	>100 MW
	GUEMTG01	TG	>50 MW
	BBLATV29	TV	>100 MW
CPB
	BBLATV30	TV	>100 MW
	LDLATG01	TG	>100 MW
CTLL	LDLATG02	TG	>100 MW
	LDLATG03	TG	>100 MW
	ADTOHI	HI	Between 120 MW and 300 MW
HIDISA	LREYHB	HI	Between 120 MW and 300 MW
	ETIGHI	HI	< 120 MW
	NIH1HI	HI	Between 120 MW and 300 MW
HINISA	NIH2HI	HI	Between 120 MW and 300 MW
	NIH3HI	HI	Between 120 MW and 300 MW

In such context, CPB, CTLL, CTG, HIDISA and HINISA withdrew the claims initiated in relation to the breach of the 2008-2011 Agreement and refrained from filing new claims in connection with such breach and/or in relation to SE Resolution No. 406/2003. Thus, such generators were entitled to participate in the remuneration scheme established in SE Resolution No. 95/2013. In the case of CPB, CTLL and CTG, the new scheme applied beginning February 2013, while in the case of HIDSA and HINISA (at their own request) the new scheme was applied beginning November 2013.

Generators dispatch

In Note No. 5129/13, the Secretariat of Energy instructed CAMMESA to optimize the use of fuels and the dispatch of WEM generators.CAMMESA must order the dispatch according the actual costs according to the available fuels and it actual supply cost. Such changes may vary the dispatch of our generator.

2015-2018 Generators Agreement

In July 2015 CTLL, CPB, CTG, HIDISA and HINISA executed the “Acuerdo para la Gestión y Operación de Proyectos, Aumento de la Disponibilidad de Generación Térmica y Adaptación de la Remuneración de la Generación 2015-2018”(the “2015-2018 Generators Agreement”) proposed by the Argentine Government to increase the WEM generation capacity through the construction of new capacity expansion project financed by: i) LVFVD arising from SE Resolution No. 406/2003 which were not applied for the financing of other projects; ii) the Additional Remuneration destined to the trust as set forth in SE Resolution No. 95/2013; iii) Additional Resources for Investments FONINVEMEM 2015-2018 (items (i) to (iii) as the “Comitted Receivables”), and iv) additional funding either by the National Government or by the generators.

Any additional funding in excess of the Comitted Receivables shall be repaid with the energy price and capacity under a WEM Supply Contract which shall cover the percentage of the capacity of the new power generation unit equivalent to the percentage that such additional funding represent over the total investment in the project. The percentage equivalent to the committed receivables shall be repaid by the remuneration scheme established by SE Resolution No. 95/2013 as amended.

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The Argentine Government shall have a participation in the voting capital stock of the companies that will execute the new projects equivalent to the funds that it distributes.

During the second half of 2015, CTLL, CPB, CTG, HIDISA and HINISA, negotiated with the Argentine Government the execution of the required specific agreements in order to perform new generation projects which included an expansion of Loma de la Lata capacity and the construction of wind farms that, as of the date of this annual report weren’t agreed.

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Item 4A.  Unresolved Staff Comments

Not applicable.

Item 5.   Operating and Financial Review and Prospects

This section contains forward-looking statements that involve risks and uncertainties.  Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Forward-Looking Statements,” and “Item 3.  Key Information—Risk Factors” and the matters set forth in this annual report generally.

The following discussion is based on, and should be read in conjunction with our Consolidated Financial Statements and related notes contained in this annual report, as well as “Item 3.  Key Information—Selected Financial Data.”

Overview 

We acquired all of our principal generation, transmission and distribution assets commencing in the second half of 2006 and, in each case, after Messrs. Damián Mindlin, Gustavo Mariani, and Ricardo Torres acquired a majority stake in us in November 2005.  At the time of our acquisition by these individuals, 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.  Since November 2005, our business activities consist principally in identifying and executing investments in the Argentine electricity sector.  As a result of the acquisitions we have consummated since the second half of 2006, we have become the largest fully integrated electricity company in Argentina. 

Below is a summary of our principal generation, transmission and distribution assets, as of the date of this annual report, including the respective acquisition date and price for each asset:

·Generation: 

-90.3% of the capital stock of Nihuiles and 91.6% of the capital stock of Diamante (each a holding company that owns a majority interest in HINISA and HIDISA, respectively, each a hydroelectric power generation company), acquired for a combined purchase price of approximately U.S. $55.7 million, of which U.S. $50.8 million were paid at closing on October 18, 2006 and U.S. $4.9 million (plus interest) were paid on March 7, 2012.  On January 8 and 9, 2008, we acquired for Ps. 3.4 million the shares previously held by HIDISA’s Employee Participation Program, representing 2% of the capital stock of HIDISA.  Following such acquisition, all Class C shares of HIDISA were converted to Class B shares, which are freely transferable to third parties.  Therefore, we currently control indirectly, 61% 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, as a result we now indirectly own 52.04% of the shares and votes of HINISA;

-100% of the capital stock of IPB which, in turn, holds 100% of the capital stock of Piedra Buena, a thermal generation plant located at Ingeniero White, Bahia Blanca in the Province of Buenos Aires, acquired on August 3, 2007, for a total purchase price of U.S. $85.0 million;

-100% of the capital stock of Loma de la Lata was merged with Powerco (See “Item 4. Our Business – Our Generation Business – Loma de la Lata - History”) formerly owner of 15.48% of the voting capital stock of Güemes; we acquired an indirect stake in Powerco through the acquisition of 100% of Pampa Inversiones’ capital stock (which was at that time known as Dilurey and held 90% of Powerco’s capital stock) and a direct 8% stake in Powerco on January 4, 2007 for a total purchase price of U.S. $16.7 million and the remaining 2% of Powerco’s capital stock on August 24, 2007 for U.S. $460,000 pursuant to an option agreement between us and Güemes’ former chief executive officer. Also, Loma de la Lata, which owns the thermal generation plant located at Loma de la Lata in the Province of Neuquén, which was acquired from Central Puerto on May 17, 2007 for a purchase price of U.S. $60 million (Loma de la Lata also holds 62,157,407 ordinary shares of Güemes, representing 64.25% of Güemes’ voting capital stock); and

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-90.43% of the capital stock of CTG, which owns (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 Martín, in the Province of Salta, which we acquired in March 2011.

·Transmission: 100% of the capital stock of Transelec, which holds 50% of the capital stock of Citelec, the owner of 52.65% of the capital stock of Transener (the largest electricity transmission company in Argentina).  We acquired from Dolphin Opportunity LLC on September 15, 2006, 89.76% of Transelec’s capital stock for a purchase price of U.S. $48.5 million; the remaining 10.24% of Transelec’s capital stock was collectively held by Messrs. Marcelo Mindlin, Damián Mindlin and Gustavo Mariani, who had a right to sell those shares to us after January 1, 2008.  This right was exercised on January 2, 2008 for a total purchase price of Ps. 38.8 million (U.S. $12.3 million).

·Distribution: 100% of the capital stock of IEASA, which holds 100% of the capital stock of EASA, the owner of 51% of the capital stock of Edenor (the largest electricity distribution company in Argentina), acquired on September 28, 2007 from the former indirect shareholders of EASA in exchange for 480,194,242 shares of our common stock (of which 436,745,975 were issued in the form of Global Depositary Receipts (“GDSs”). 

·Oil and Gas: 49.6% of the capital stock of Petrolera Pampa.

In addition to our principal businesses, below is a summary of certain non-electricity assets and investments we hold in our holding and others segments, directly or indirectly, including the respective acquisition date and price for each asset:

·Beneficiary and trustee under the Trust Agreement dated August 29, 2005, pursuant to which The Royal Bank of Scotland, Argentina branch, holds in trust 40% of CIESA shares See “Item 4. – Our Business – Oil and Gas – CIESA Transaction”.

·On April 8, 2011, we acquired 100% of the shares issued by PEPCA, a company which owns 10% of the share capital of CIESA, for a total purchase price of U.S. $29 million.

·100% of the capital stock of Bodega Loma la Lata S.A. 

·100% of the capital stock of Greenwind S.A. 

Sources of Revenues

Generation

Our generation operations derive revenues from the sale of electricity in the spot market and under term contracts, including Energía Plus contracts and contracts under SE Resolution No. 220/2007.  See “Item 4.—The Argentine Electricity Sector—Energía Plus.”

Distribution

Our distribution operations generate revenues mainly from energy sales to users in our distribution service area.  Energy sales reflect the distribution tariffs Edenor charges its customers (valued on the basis of applicable tariffs and the charges resulting from the application of SE Resolution No. 347/2012).  In addition, our distribution revenues include connection and reconnection charges and leases of poles and other network equipment.

Revenue from electricity provided by Edenor to low-income area and shantytowns is recognized to the extent that the framework agreement has been renewed for the period in which the service was rendered.

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Oil & Gas

Our oil and gas operations derive revenues from the sale of natural gas, through term contracts under the Gas Plus Regime or to industrial clients at similar prices. Additionally, our oil production is sold to our partners with which we are associated in areas of production.

Factors Affecting Our Results of Operations

Our results of operations are principally affected by economic conditions and inflation in Argentina, changes in prices for our electricity sold and in our regulated transmission and distribution tariffs, fluctuations in demand for electricity in Argentina and our costs of sales and operating expenses.

Argentine Economic Conditions and Inflation

Because substantially all of our operations, facilities and customers are located in Argentina, we are affected by general economic conditions in the country.  In particular, the general performance of the Argentine economy affects demand for electricity, and inflation and fluctuations in currency exchange rates affect our costs and our margins. Inflation primarily affects our business by increasing operating costs, while at the same time reducing our revenues in real terms.

In December 2001, Argentina experienced an unprecedented crisis that virtually paralyzed the country’s economy through most of 2002 and led to radical changes in government policies. The crisis and the Argentine Government’s policies during this period severely affected the electricity sector, as described below. Although over the following years the Argentine economy has recovered significantly from the crisis, and the business and political environment has been largely stabilized, the Argentine Government has only recently begun to address the difficulties experienced by the Argentine electricity sector as a result of the crisis and its aftermath. However, we believe that the current recovery and the recent measures adopted by the Macri administration in favor of the electricity sector, such as establishing incentives for the construction of additional generation facilities and the creation of trust funds to further enhance generation, transmission and distribution of electricity throughout the country, have set the stage for growth opportunities in our industry.

The following table sets forth key economic indicators in Argentina during the years indicated:

Sources: INDEC; Central Bank; Ministry of Economy and Production.
* Includes hold-outs ** The CPI for 2015 was calculated for the ten-month period ended October 31, 2015. In November 2015, the INDEC suspended the publication of the CPI and the WPI.

Following years of hyperinflation and economic recession, in 1991 the Argentine Government adopted an economic program that sought to liberalize the economy and impose monetary discipline. The economic program, which came to be known as the Convertibility Regime, was centered on the Convertibility Law of 1991 and a number of measures intended to liberalize the economy, including the privatization of a significant number of public sector companies (including certain of our subsidiaries and jointly controlled companies). The Convertibility Law established a fixed exchange rate based on what is generally known as a currency board. The goal of this system was to stabilize the inflation rate by requiring that Argentina’s monetary base be fully backed by the Central Bank’s gross international reserves. This restrained the Central Bank’s ability to effect changes in the monetary supply by issuing additional Pesos and fixed the exchange rate of the Peso and the U.S. Dollar at Ps. 1.00 to U.S.$1.00.

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The Convertibility Regime temporarily achieved price stability, increased the efficiency and productivity of the Argentine economy and attracted significant foreign investment to Argentina. At the same time, Argentina’s monetary policy was tied to the flow of foreign capital into the Argentine economy, which increased the vulnerability of the economy to external shocks and led to increased reliance on the services sector of the economy, with the manufacturing, agricultural and industrial sectors lagging behind due to the relative high cost of Peso-denominated products in international markets as a result of the Peso’s peg to the U.S. Dollar. In addition, related measures restricted the Central Bank’s ability to provide credit, particularly to the public sector.

Following the enactment of the Convertibility Law, inflation declined steadily and the economy experienced growth through most of the period from 1991 through 1997. This growth slowed from 1998 on, however, as a result of the Asian financial crisis in 1997, the Russian financial crisis in 1998 and the devaluation of Brazil’s currency in 1999, which led to the widespread withdrawal of investors’ funds from emerging markets, increased interest rates and a decline in exports to Brazil, Argentina’s principal export market at the time.  According to INDEC, in the fourth quarter of 1998, the Argentine economy entered into a recession that caused the gross domestic product to decrease by 3.4% in 1999, 0.8% in 2000 and 4.4% in 2001. In the second half of 2001, Argentina’s recession worsened significantly, precipitating a political and economic crisis at the end of 2001.

2001 Economic Crisis

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 without prior approval by the Central Bank, some of which are still in effect. On December 21, 2001, the Central Bank decided to close the foreign exchange market, which amounted to a de facto devaluation of the Peso. On December 24, 2001, the Argentine Government suspended payment on most of Argentina’s foreign debt.

The economic crisis led to an unprecedented social and political crisis, including the resignation of President Fernando De la Rúa and his entire administration in December 2001. After a series of interim governments, in January 2002 the Argentine congress appointed Senator Eduardo Duhalde, a former vicepresident and former governor of the Province of Buenos Aires, to complete De la Rúa’s term through December 2003.

On January 6, 2002, the Argentine congress enacted the Public Emergency Law, which introduced dramatic changes to Argentina’s economic model, empowered the Argentine Government to implement, among other things, additional monetary, financial and foreign exchange measures to overcome the economic crisis in the short term and brought to an end the Convertibility Regime, including the fixed parity of the U.S. Dollar and the Peso. Following the adoption of the Public Emergency Law, the Peso devalued dramatically, reaching its lowest level on June 25, 2002, at which time it had devalued from Ps. 1.00 to Ps. 3.90 per U.S. Dollar according to Banco Nación. The devaluation of the Peso had a substantial negative effect on the Argentine economy and on the financial condition of individuals and businesses. The devaluation caused many Argentine businesses (including us) to default on their foreign currency debt obligations, significantly reduced real wages and crippled businesses that depended on domestic demand, such as public utilities and the financial services industry. The devaluation of the Peso created pressure on the domestic pricing system and triggered very high rates of inflation. According to INDEC, during 2002 the Argentine WPI increased by approximately 118% and the Argentine CPI rose approximately 41%.

Following the adoption of the Public Emergency Law, the Argentine Government implemented measures, whether by executive decree, Central Bank regulation or federal legislation, attempting to address the effects of the collapse of the Convertibility Regime, recover access to financial markets, reduce government spending, restore liquidity to the financial system, reduce unemployment and generally stimulate the economy.

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Pursuant to the Public Emergency Law, the Argentine Government, among other measures:

·converted public utility tariffs from their original U.S. Dollar values to Pesos at a rate of Ps. 1.00 per U.S. $1.00;

·froze all regulated distribution margins relating to the provision of public utility services (including electricity distribution services);

·revoked all price adjustment provisions and inflation indexation mechanisms in public utility concessions (including our concession); and

·empowered the Argentine Executive Branch to conduct a renegotiation of public utility contracts (including our concession) and the tariffs set therein (including our tariffs).

These measures, combined with the devaluation of the Peso and high rates of inflation, had a severe effect on public utility companies in Argentina (including us). Because public utility companies were no longer able to increase tariffs at a rate consistent with the increased costs they were incurring, increases in the rate of inflation led to decreases in their revenues in real terms and a deterioration of their operating performance and financial condition.  Most public utility companies had also incurred large amounts of foreign currency indebtedness to finance the capital improvement and expenditure programs. At the time of these privatizations, the capital structures of each privatized company were determined taking into account the Convertibility Regime and included material levels of U.S. Dollar‑denominated debt. Following the elimination of the Convertibility regime and the resulting devaluation of the Peso, the debt service burden of these utility companies significantly increased, which when combined with the margin freeze and conversion of tariffs from U.S. Dollars to Pesos, led many of these utility companies (including us) to suspend payments on their foreign currency debt in 2002.

Economic Recovery and Outlook

Beginning in the second half of 2002, Argentina experienced economic growth driven primarily by exports and import‑substitution, both facilitated by the lasting effect of the devaluation of the Peso in January 2002. While this devaluation had significant adverse consequences, it also fostered a reactivation of domestic production in Argentina as the sharp decline in the Peso’s value against foreign currencies made Argentine products relatively inexpensive in the export markets. At the same time, the cost of imported goods increased significantly due to the lower value of the Peso, forcing Argentine consumers to substitute their purchase of foreign goods with domestic products, substantially boosting domestic demand for domestic products.

In April 2003, Dr. Néstor Kirchner, the former governor of the province of Santa Cruz, was elected as president for a four-year term, and he took office in May 2003. During 2003, Argentina moved towards normalizing its relationship with the IMF, withdrew all the national and provincial governments’ quasi‑money securities from circulation and eliminated all deposit restrictions. The trade balance experienced a sustained surplus, aided by the rise in commodity prices and export volumes.  At the same time, social indicators improved, with the unemployment rate decreasing to 17.3%, and real wages began to recover according to INDEC. In June 2005, the Argentine Government completed a restructuring of Argentina’s public external debt, which had been in default since December 2001.  Argentina reduced its outstanding principal amount of public debt from U.S. $191.3 billion to U.S. $129.2 billion and extended payment terms. In April 2010, the Argentine Government launched a new exchange offer for the outstanding sovereign bonds that did not participate in the 2005 restructuring. On January 3, 2006, Argentina completed an early repayment of all of its outstanding indebtedness with the IMF, for an amount totaling approximately U.S. $10.0 billion owing under credit lines.

From 2003 to 2007, the economy continued recovering from the 2001 economic crisis.  The economy grew by 8.8% in 2003, 9.0% in 2004, 9.2% in 2005, 8.5% in 2006 and 8.7% in 2007, led by domestic demand and exports.  From a demand perspective, private sector spending was accompanied by a combination of liberal monetary and conservative fiscal policies. Growth in spending, however, consistently exceeded the rate of increase in revenue and nominal GDP growth. From a supply perspective, the trade sector benefited from a depressed real exchange rate, which was supported by the intervention of the Central Bank in the foreign exchange market.  Real exports improved, in part due to growth in Brazil, and the current account improved significantly, registering surpluses in 2004, 2005, 2006 and 2007.

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On December 10, 2007, Cristina Fernández de Kirchner, wife of the ex-President Dr. Néstor Kirchner, was inaugurated as President of Argentina for a four-year term.

Argentina’s economy grew by 7% in 2008, 19.5% less than in 2007. According to the INDEC, growth was negative in both the first and the fourth quarter of 2008 (-0.3% for both periods) as compared to the same periods in 2007, without adjusting for seasonality. This negative growth is primarily attributable to the conflict between the Argentine Government and farmers in early 2008 and the global financial crisis, which deepened in the second half of 2008.

The agricultural sector was particularly hard hit in 2008 as a result of the decrease in commodities prices as well as a significant drought.  A decline in the agricultural sector had adverse ramifications for the entire economy due to the significant role that sector plays in the Argentine economy.

At the end of 2008, the Argentine Government enacted a series of measures aimed at counteracting the decline in the level of economic activity, including special tax rates and less stringent foreign exchange restrictions in connection with the repatriation and national investment of capital previously deposited abroad by Argentine nationals, extensions in the payment terms for overdue taxes and social security taxes, reductions in payroll tax rates for companies that increase their headcounts, creation of the Ministerio de Producción (Ministry of Production), announcements regarding the construction of new public works, consumer loans for the acquisition of durable goods and loans to finance exports and working capital for industrial companies, as well as various agricultural and livestock programs, all aimed at minimizing lay-offs during the current global financial crisis. The effectiveness of these measures will depend on the Argentine Government’s ability to fund them without reducing the amount of funding for other budgeted activities as well as the degree of confidence they create in the overall stability of the Argentine economy. 

In 2009, after six years of robust and continuous growth, the Argentine economy, according to official indicators, grew by only 0.1%, and according to private indicators, contracted by 3.5%. The Central Bank, reacting to local uncertainty and a bleak global economic environment, adopted policies aimed at avoiding a financial collapse.  Specifically, the Central Bank sought to stabilize the exchange market. Although interest rates increased periodically during the course of the year, the exchange market remained relatively stable throughout. 

According to official indicators, in 2011, real GDP in Argentina grew by approximately 8.4%, furthering the growth trend showed in 2010. The four most important factors behind the economic recovery are the following:

·the agricultural boom, with a record harvest (especially soybeans);

·a favorable international context (with Brazil growing at a 2.7% rate in 2011, which had a positive effect on the local industrial sector, and China pushing the demand for commodities in an environment of high prices);

·a climate of financial stability prevented major shocks in the short term, primarily due to an oversupply of private dollars and a reduced probability of sovereign default in the short term; and

·an expansionary economic policy program (fiscal, monetary and income).

In 2012, according to the official information created and disseminated by the INDEC, the economy expanded 0.8%.  Although the real GDP continued growing during that year, there was a marked deceleration with respect to the growth rate registered in 2011. 

According to official indicators, Argentina’s real GDP grew around 2.9% in 2013, compared to 0.8% in 2012.

The increase in the agricultural harvest (the agricultural production during the season 2012/13 was approximately 11% higher than the one registered for the previous season), in a context where international prices of commodities remained high, with greater financial stability in global markets (resulting from a more stable situation in Europe and a strengthened, though slow, growth in the United States). These were the main factors behind the accelerated rate of the economic growth during 2013.

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According to official indicators (data published by INDEC), in 2014, the economic activity grew by approximately 0.2%, compared to 2.9% in 2013.

Private consumption contracted by 0.8% in 2014.  The weakening of the internal demand was the main factor in the contraction of the economy and can be explained in part by an increase in internal prices due to the financing of the fiscal imbalance by Central Bank to Treasury. In 2014, the public accounts contracted 1.2% of GDP compared to a contraction of 0.6% in 2013. The weaker performance of the private sector was mainly due to an increase in prices, the depreciation of the Peso a slowdown in credit extended to the private sector and a greater propensity in customers for saving in times of uncertainty.

Regarding the internal market, in January 2014, the Peso lost approximately 19% of its value with respect to the US Dollar. During the following month of 2014, the US Dollar remained relatively stable.

During 2015, the economy registered a positive growth, of approximately 2.5%. The level of activity was driven by the effect that the summer crop had on GDP growth in the second and third quarter, while during the last months of the year the economy showed a more moderate expansion. 

In terms of supply, industrial production continued showing a poor performance, the exchange rate lag, restrictions to import intermediate goods, the deceleration of the main Argentine commercial partners’ growth and a weak domestic and external demand impacted on the performance of the manufacturing activity. In terms of expenses, consumption showed a good performance even though consumers continued acting with caution. 

With reference to inflationary issues, a significant deceleration in the increase of prices was observed during the first half of 2015, related with the high 2014 baseline. Throughout the last months of the year, retail prices relatively picked up although the average growth rate was lower than that of the previous year.   

In January 2016, the new INDEC authorities appointed by the Macri administration announced the discontinuation of the methodology used by the Fernandez de Kirchner administration to measure inflation and declared a state of administrative emergency in the national statistics system, suspending the publication of all indices until the INDEC is able to calculate such indices based on accurate official data. See “Item 3. Key Information—Risk factors—Risks Relating to Our Business—The impact of the recent congressional and presidential elections on the future economic and political environment of Argentina is uncertain, but likely to be material.”

On December 17, 2015, the Peso depreciated approximately 36% against the U.S. Dollar following the announcement of the lifting of a significant portion of exchange restrictions (See “—Risk Factors—Factors Relating to Argentina—Fluctuations in the value of the Peso could adversely affect the Argentine economy, and consequently, our results of operations or financial condition”), which caused the Peso to U.S. Dollar exchange rate to reach Ps.13.40 to U.S.$1.00.                     .                                                                                       

Outlook for 2016

Forecasts for 2016 are characterized by caution. The macroeconomic context and the imbalances (including high inflation, fiscal deficit, monetary and trade restrictions) deriving from certain policies adopted during recent years represent substantial obstacles for the Macri administration to introduce economic policy shifts. As of the date of this annual report, a drop in real GDP is expected for 2016, along with an inflation rate which would remain high, surpassing that of 2015.

Electricity prices and tariffs

Our revenues and margins are substantially dependent on the prices we are able to charge for the electricity sold by our generation plants, as well as the composition of our transmission and distribution tariffs (including the tariff setting and adjustment process contemplated by our transmission and distribution concessions).  Our management is currently focused on improving the prices we are able to charge for electricity generated, including by expanding our generation capacity to increase our sales to the unregulated market under the Energía Plus regulatory framework and under supply agreements within the framework of the SE Resolution No. 220/2007, and renegotiating our transmission and distribution tariff structures, which, if successful, would have a significant impact on our results of operations.

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Electricity prices

Our generation operations derive revenues from the sale of electricity in the spot market and under term contracts, including Energía Plus contracts and supply agreements. 

During 2013, the authorities responsible for the energy sector have continued with the policy adopted in 2003, which consists of having the spot price in the WEM determined on the basis of the maximum variable production costs recognized to power stations that are either gas-fed or available with natural gas, even if these cannot avail themselves of gas (SE Resolution No. 240/2003). Therefore, this price, as established, does not stem from the application of the marginal cost of the least efficient power plant dispatched. Rather, the assumption used is that gas is freely available and therefore, the spot price determined is equal to the marginal cost of the last gas-fed power station dispatched, even if it does not have gas availability. Therefore, when the least efficient power plant that has been dispatched is, for example, fuel-oil-fed, its cut-off price is not determined as the spot price, but rather, the WEM spot price is recognized as the cost that would have resulted if natural gas had been used instead and the additional cost incurred when using liquid fuels is recognized outside the determined WEM spot price, as a temporary dispatch surcharge.

The relevant authorities have resorted to a number of procurement mechanisms for the supply of fuels for electricity generation, including an agreement with the principal electricity generators, which provides that natural gas volumes will be managed by CAMMESA with a view to optimizing the following (see “Item 4. The Argentine Electricity Sector – Procedure for the Dispatch of Natural Gas for Power Generation”):

·natural gas consumption in the most efficient generation units,

·contracts for liquefied natural gas and its re-gasification, and

·natural gas imported from Bolivia, among others.

All of this notwithstanding, the supply of natural gas continues to be insufficient to meet the needs of electricity generation, which explains why electricity generation has had to continue relying on the consumption of liquid fuels.

The consumption of natural gas for electricity generation in 2015 increased 1.0% compared to 2014 (14,438,163 Dam³ in 2015 compared to 14,295,128 Dam³ in 2014). There was a 13.4% increase in fuel-oil consumption in 2015 compared to 2014 and a 24.7% increase in gasoil consumption compared to 2014. Mineral coal consumption was 5.5% lower in 2015 compared to 2014 (948,855 tn in 2015 compared to 1,004,376 tn in 2014).  The electricity demand for 2015 increased 4.4% compared to 2014. 

In February 2013, the SE Resolution No. 95/2013 established a remuneration scheme, for “comprised generators”, whereby the remuneration of generation capacity of Ps.12 per MW was replaced with a remuneration of fixed costs from a minimum of Ps. 12 per MW and up to Ps. 52.8 per MW depending on the type of technology of each generation and its availability. Such remuneration was later modified by SE Resolution No. 529/2014, SE Resolution No. 482/2015 and SEE Resolution No. 22/2016 (see “Item 4. - The Argentine Electric Sector - SE Resolution No. 95/2013, as amended – New price scheme and other modifications to the WEM).

The chart below shows the monthly average cost during 2015 (compared with 2014) that electricity consumers should pay for the system not to be deficient.  This cost includes, in addition to the price of energy, the capacity charge, the increased generation cost resulting from using fuel oil or diesel oil, and other minor items.

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Monthly Average Monomic Cost (Ps. Per MWh)

Source: CAMMESA. It includes charges for excess demand, imports from Brazil and WEM supply agreements.

Tariffs

Transmission.  Our transmission tariffs have four components:

(1)           electricity transmission revenue;

(2)           capacity charges;

(3)           connection charges; and

(4)           reactive equipment charges.

The tariffs are paid on a monthly basis by CAMMESA out of the amounts it collects from local electricity distribution companies, generators and large users of electricity.  The tariffs that Transener and Transba receive under their concession agreements are reviewed periodically by the ENRE 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 Transener RTI.  Under the transition period rules, Transener’s tariffs were increased by an average of 31% and Transba’s tariffs were increased by an average of 25%. 

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According to the terms of 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 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.

On August 5, 2008, the Secretariat of Energy adopted SE Resolutions No. 869/2008 and No. 870/2008, which establish that the new tariffs to be adopted pursuant to the Transener RTI will become effective in February 2009.  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 SE Resolutions No. 869/2008 and No. 870/2008.

Due to the increase in labor costs resulting from the application of National Executive Branch Decree No. 392/2004 and subsequent regulation, and the major operating costs incurred since 2004, Transener and Transba have certified the cost 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 the Definitive Agreements for such purpose.  In that way, 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, that led to the initiation of judicial claims.  The UNIREN ACT has stated that the mechanism for monitoring of costs and regime of service quality had been set to last up to the enforcement of Transener and Transba’s RTI, respectively, and that the delay in the definition of said process is not attributable to the Concessionaires and it could not lead to undermine their rights.

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

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

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

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

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

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

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

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

On May 12, 2009 Transener and Transba entered into Financing Agreements with CAMMESA for an amount of Ps. 59.7 million and Ps. 30.7 million, respectively. On January 5, 2010, the Addenda I were subscribed for an amount of Ps. 107.7 million and Pesos 42.7 million, for Transener and Transba, respectively.

On May 2, 2011, the 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 of 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 the following:

(i)the recognition of Transener and Transba´s rights to collect the amounts resulting from the variations of costs during the period from 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, 2013and February 14, 2014, Transba and Transener, respectively, negotiated the Addenda III.

On September 2, 2014, Transener and Transba executed with CAMMESA the New Financing Agreements. The New Financing Agreements provided:  i) that the Financing Agreements, together with their Addendums I, II and III, are concluded; ii) the granting to Transener and Transba of  new loans in the amount of Ps. 622.2 million and Ps. 240.7 million, respectively, corresponding to receivables acknowledged by the Secretariat of Energy and the ENRE on account of cost variations for the January 2013-May 2014 period; and iii) the assignment as collateral of the receivables recognized on account of higher costs as at May 31, 2014 pursuant to the Renewal Agreement.

Also, on March 17, 2015, Transener and Transba executed with CAMMESA the Addenda IV, setting forth: i) the granting to Transener and Transba of  new loans in the amount of Ps. 563.6 million and Ps. 178.3 million, respectively, corresponding to (a) the outstading amount due pursuant to the Financing Agreement as of January 2015, and (b) receivables acknowledged by the Secretariat of Energy and the ENRE on account of cost variations for the June 2014-November 2014 period; and ii) the assignment as collateral of the receivables recognized on account of higher costs as at November 30, 2014 pursuant to the Renewal Agreement.

In September 2015, Transener and Transba executed with the ENRE and the SE the Amendment to the Renewal Agreement, setting forth the 2015 year financial - economic projection and investment plan in the amount of Ps. 431.9 million and Ps. 186.6 million for Transener and Transba, respectively, and granting additional non-reimbursable resources for the execution of such investment plan.

On November 25, 2015, Transener and Transba executed with CAMMESA the financing agreements for the implementation of the Amendment to the Renewal Agreement, setting forth: i) the granting to Transener and Transba of  new loans in the amount of Ps. 508,9 million and Ps. 317,6 million, respectively, corresponding to (a) receivables acknowledged by the SE and the ENRE on account of cost variations for the December 2014-May 2015 period; and ii) the additional investments required pursuant to the Amendment to the Renewal Agreement.

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 Consolidated Financial Statements, up to the amounts received as of December 31, 2015, through the financing of CAMMESA. Consequently, net revenues amounting to Ps. 1,326.1 million and Ps. 850 million, and interest income amounting to Ps. 176.5 million and Ps. 281.4 million, have been registered by Transener and Transba during the fiscal years ended December 31, 2015 and 2014, respectively.

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Pursuant to the New Financing Agreement, Renewal Agreement and the Amendment 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 in monthly cash flows, investments execution and implementation of funds requirements.  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.   

For the fiscal year ended December 31, 2015, Transener and Transba have recorded revenues from sales as well as accrued interests amounting to Ps. 1,502.6 million in accordance with the Instrumental Agreements and the Renewal Agreement.

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

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

·Edenor’s regulated distribution margin, which is known as the value‑added for distribution, plus the fixed and variable charges contemplated under SE Resolution No. 347/2012; and

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

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

Edenor’s concession originally contemplated a fixed distribution margin for each tariff parameter with semiannual adjustments based on variations in the U.S. wholesale price and U.S. consumer price indices.  However, the Public Emergency Law, enacted in January 2002, among other measures, revoked all adjustment clauses in U.S. Dollars or other foreign currencies and indexation clauses.  As a result, the adjustment provisions contained in Edenor’s concession were no longer in force and, from January 2002 through February 2007, Edenor was required to charge the same fixed distribution margin in Pesos established in 2002, without any type of currency or inflation adjustment. 

Pursuant to the Adjustment Agreement, which came into effect in February 2007, the Argentine Government granted Edenor an increase in Edenor’s distribution margin.  Although this increase applied to all of Edenor’s tariff categories, the amount of the increase was only allocated to Edenor’s non-residential customers (including wheeling customers), while Edenor’s residential customers did not experience any increase in VAD.  The increase is effective retroactively from November 1, 2005 and will remain in effect until the approval of a new tariff scheme under the integral tariff revision process described below.  The Adjustment Agreement also contemplates a cost adjustment mechanism, known as the CMM, which requires the ENRE to review Edenor’s actual distribution costs every six months (in May and November of each year). 

Pursuant to the Adjustment Agreement, Edenor is currently engaged in an integral tariff revision process with the ENRE.  As of the date of this annual report, the Edenor RTI has not yet been completed.

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On November 12, 2009, Edenor submitted an integral tariff proposal to the ENRE’s Board of Directors as requested by ENRE Resolution No. 467/2008.  The proposal included, among other factors, a recalculation of the compensation Edenor receives for its distribution services, including taxes that are not currently passed through to their customers (such as taxes on financial transactions), a revised analysis of its distribution costs, modification to its quality of service standards and penalty scheme and, finally, a revision of its asset base and rate of return.

Additionally, in June 2013, Edenor filed a complaint against the Argentine Government requesting full enforcement of the Adjustment Agreement and compensation for damages as a result of non‑compliance with the commitments established therein.  The damages claimed in the complaint were extended in November 2013.  In February 2014, Edenor filed for injunctive relief with the Federal Court requesting that the Argentine Government be compelled to provide Edenor with economic assistance during the course of the litigation.  This request was denied in both first and second instance in June 2014 and December 2014, respectively.

In Edenor’s opinion, the RTI process will have to factor in a revised analysis of its distribution costs, modifications to its quality of service standards and penalty scheme and, finally, a revision of Edenor’s asset base and rate of return, and the balances and other issues resulting from the measures recently adopted by the Argentine Government to provide it with temporary and partial relief.

Such issues include, among other: (i) the treatment to be given to the outstanding amounts granted under the loans for consumption to cover the insufficiency of the funds deriving from the FOCEDE; (ii) the conditions for the settlement of the outstanding debt with CAMMESA as of the date of issuance of SE Resolution No. 32/2015, for which purpose Edenor has submitted and are currently negotiating a repayment plan; (iii) the treatment to be given to the penalties and discounts determined prior and subsequent to the Adjustment Agreement (In Edenor’s opinion the generation and accumulation of unpaid balances for this concept are not attributable to Edenor inasmuch as the inaction and discretionary decisions of the Argentine Government in the past have led to the deterioration of Edenor’s economic and financial equation, thus preventing it from complying with its basic and elemental obligations for the provision of the public service); (iv) an agreement on quality levels and a new system of penalties and discounts that provides for an adequate transitional period until the tariff schedule resulting from the RTI is fully implemented; and (v) the termination and liquidation of the FOCEDE and its effects.

The outcome of the renegotiation of Edenor’s tariff structure is highly uncertain.  We cannot assure you that the renegotiation process will conclude in a timely manner or that the revised tariff structure will provide Edenor with an adequate return on its asset base, or that if an adjustment agreement is reached that it will not be challenged by Argentine consumer and other groups, something that, if successful, could materially adversely affect Edenor’s ability to implement any tariff adjustments granted by the Argentine Government.  For a more detailed review of our distribution tariff adjustment process and history please see “Item 4.– Our Business – Our Distribution Business”.

Electricity demand and supply

Electricity demand depends to a significant extent on economic and political conditions prevailing from time to time in Argentina, as well as seasonal factors.  In general, the demand for electricity varies depending on the performance of the Argentine economy, as businesses and individuals generally consume more energy and are better able to pay their bills during periods of economic stability or growth.  As a result, energy demand is affected by Argentine Governmental actions concerning the economy, including with respect to inflation, interest rates, price controls, foreign exchange controls, taxes and energy tariffs.

Following the economic crisis in 2001, the demand for electricity in Argentina grew consistently each year driven by the economic recovery.  During 2014, the electricity demand grew 1% compared to 2013, from 125,167 GWh to 126,397 GWh and during 2015, the electricity demand grew 4.4% compared to 2014, from 126,397 GWh to 131,995 GWh.

                The following chart provides a breakdown of the demand for energy in 2015 by type of customer:

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Electric Power Demand According to Type of Customer

100% = 131,995 GWh

 

Source: ADEERA.

A new 25,380 MW record of capacity load was registered on February 12, 2016, which was 1% above the peak for 2013.

Peak Demand Records

	2011	2012	2013	2014	2015	2016
Power Capacity (MW)	21,564	21,949	23,794	24,034	23,949	25,380
Date	01/08/2011	02/16/2012	12/23/2013	01/20/2014	01/27/2015	02/12/2016
Temperature (°C)	3,5	34,2	35,4	29,6	35,6	31,0
Time	8:18 PM	3:10 PM	2:20 PM	3:05 PM	2:13 PM	2:35 PM

Source: CAMMESA.

Generation of electricity increased by 4.0% in 2015, from 129,266 GWh in 2014 to 134,496 GWh in 2015.  For the year 2014, generation of electricity increased by 0.3%, from 128,826 GWh in 2013 to 129,266 GWh in 2014.

Thermal generation continued to be the main resource to supply demand in 2015, as it contributed 86,482 GWh (64%), followed by hydroelectric generation net of pumping, which contributed 40,888 GWh (30%) and nuclear generation, which contributed 6,519 GWh (5%), photovoltaic and wind generation, which contributed 608 GWh (0.5%) and certain engines from ENARSA and the update of the capacity of certain plants (0.5%). There were also imports, for 1,655 GWh (19% higher than in 2014), exports for 53 GWh  and losses for 4,100 GWh (4% lower than in 2014).  During 2014, thermal generation was also the main resource to supply demand in 2014, as it contributed 83,194 GWh (64%), followed by hydroelectric generation net of pumping, which contributed 40,185 GWh (31%) and nuclear generation, which contributed 5,258 GWh (4%), and photovoltaic and wind generation, which contributed 629 GWh (0.5%). There were also imports, for 1,390 GWh (306% higher than in 2013), exports for 0.1 GWh (95% lower than in 2013) and losses for 4,258 GWh (6% higher than in 2013). 

Hydroelectric generation in 2015 did not experience material variations when compared to 2014, while thermal and nuclear generation registered a 4% and 24% increase, respectively, when compared to 2014.  In this

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sense, thermal generation continued to be the main source for the supply of electricity, fueled both by natural gas and by liquid fuels (diesel oil and fuel oil), and mineral coal mainly during the winter months. 

                The following chart shows the development of electricity generation by type of generation (thermal, hydro, nuclear and renewable) since 2008:

   

Source: CAMMESA.

Note: Including WEM and PSWEM. Hydroelectric power generation is considered net of pumping.

During 2015, generation facilities considerably increased their installed capacity from 30,405MW in 2014 to 33,493MW in 2015. This increase was caused by the commercial operations of the Atucha II nuclear plant (720MW), Vuelta de Obligado thermal plant (525 MW, Guillermo Brown thermal plant (434MW), certain engines from ENARSA and the update of the capacity of certain plants.

The chart below shows the composition of installed capacity in Argentina (33.5 GW) as of December 31, 2015:

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Argentina’s Installed Capacity

100%=33.5GW

 

Source: CAMMESA

Seasonality

Seasonality also has a significant impact on the demand for electricity, with electricity consumption peaks in summer and winter.  The impact of seasonal changes in demand is registered primarily among the residential and small commercial customers of Edenor.  The seasonal changes in demand are attributable to the impact of various climatological factors, including weather and the amount of daylight time, on the usage of lights, heating systems and air conditioners.

The impact of seasonality on industrial demand for electricity is less pronounced than on the residential and commercial sectors for several reasons.  First, different types of industrial activity by their nature have different seasonal peaks, such that the effect on them of climate factors is more varied.  Second, industrial activity levels tend to be more significantly affected by the economy, and with different intensity levels depending on the industrial sector.

Cost of sales

Our most significant costs of sales in our generation business are gas purchases, maintenance and penalties by our thermal generation facilities, royalty payments by our hydroelectric generation facilities and energy purchases and personnel costs by our hydroelectric and thermal generation facilities. We also record depreciation and amortization charges related to electricity generation as part of our costs of sales. The cost of energy purchases varies according to the regulated seasonal price of energy.

Our cost of sales in our distribution activities are mainly comprised of purchases of energy for distribution, personnel costs, penalties, depreciation charges and fees for third-party services. 

Our most significant costs of sales in our oil and gas business are property, plant and equipment depreciations, gas production, royalties and fees for third-party services.

Operating expenses

Our most significant operating expenses are our administrative and selling expenses in our distribution activities, which include related salaries, social security charges, fees for third-party services and penalties. In our generation, oil and gas and holding and other business, our selling and administrative expenses relate mainly to salaries, social security charges, compensation agreements, fees for third-party services, and taxes.

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Critical Accounting Policies and Judgments

In the preparation of the Consolidated Financial Statements, we have relied on variables and assumptions derived from historical experience and various other factors that we deemed reasonable and relevant.  Although we review these estimates and assumptions in the ordinary course of business, the presentation of our financial condition and results of operation often requires our management to make judgments regarding the effects of matters that are inherently uncertain on the carrying value of our assets and liabilities and, consequently, our results of operation. 

An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the Consolidated Financial Statements.

In order to provide an understanding about how management forms its judgments about future events, including the variables and assumptions underlying the estimates, and the sensitivity of those judgments to different variables and conditions, we have included comments related to each critical accounting policy described as follows:

Revenue recognition                               

Revenue is measured at the fair value of the consideration received or receivable, taking into account the estimated amount of any discount, thus determining the net amounts.

Ordinary revenue has been recognized when each and every condition described below has been met:

i. the entity transferred to buyer significant risks and rewards;

ii. the amount of revenue was reliably measured;

iii. it is probable that the entity receives the economic benefits associated with the transaction; and

iv. costs incurred or to be incurred in relation to the transaction have been reliably measured.

The revenue recognition criteria of the main activities of the Company include:

i.From the power generation activity: they are recognized from the energy and power effectively consumed by customers or delivered to spot market.

During the fiscal year ended December 31, 2014, the 2014 Expansion Agreement was executed. Consequently condition (iii) above was met, and, therefore, our generation subsidiaries have recognized as income the fair value of the remuneration corresponding to the section c) of SE Resolution No. 406/2003 and the portion of the Additional Remuneration to be allotted to the Trust accrued during fiscal year 2013 and that corresponding to 2014.  

During the fiscal year ended December 31, 2015, HIDISA and HINISA  did not recognize the Maintenance Remuneration —that will be allocated exclusively to finance the works under the major maintenance— as income since the condition (iii) above was not met as the works under the major maintenance to be financed with the LVFVDs to be issued by CAMMESA are subject to approval by the SE and, therefore, there is no reasonable certainty that our generation subsidiaries will collect the receivables.

Additionally during the fiscal year ended December 31, 2015, our generation subsidiaries did not recognize revenues of Remuneration FONINVEMEM 2015-2018.

ii.From the electricity distribution activity: revenue is recognized on an accrual basis upon delivery to customers, which includes the estimated amount of unbilled distribution of electricity at the end of each year. We consider our accounting policy for the recognition of estimated revenue critical because it depends on the amount of

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electricity effectively delivered to customers which is valued on the basis of applicable tariffs. Unbilled revenue is classified as current trade receivables.

Revenue from the electricity provided by Edenor to low-income areas and shantytowns is recognized to the extent that the Framework Agreement has been renewed for the period in which the service was rendered.

Revenue from operations is recognized on an accrual basis and derives mainly from electricity distribution. Such revenue includes both the electricity supplied, whether billed or unbilled at the end of each year, which has been valued on the basis of applicable tariffs, and the charges resulting from the application of Resolution No. 347/2012.

Edenor also recognizes revenue from other concepts included in distribution services, such as new connections, reconnections, rights of use on poles, transportation of electricity to other distribution companies, etc.

iii.From exploration and exploitation of oil and gas activity: Revenues from sales of crude oil, natural gas and liquefied petroleum gas are recognized upon the transfer of title in accordance with the terms of the applicable contracts, which is when the customer has taken ownership and assumed the risks and benefits, prices have been determined and collectibility is reasonably assured.

Higher Costs Recognition under SEE Resolution No. 250/2013 and subsequent Notes and Recognition of income on account of the RTI – SEE Resolution No. 32/2015

The recognition of higher costs and the recognition of income not transferred to the tariff established by SEE Resolution No. 32/2015, fall within the scope of IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” as they imply a compensation to cover the expenses and investments incurred by Edenor in the past to maintain the normal provision of its services.

Their recognition is made at fair value when there is reasonable assurance that they will be collected and the conditions attached thereto have been complied with (i.e. provision of the service in the case of the recognition established in SEE Resolution No. 32/2015, and (the ENRE’s approval and the SE’s recognition of the higher costs set forth in SEE Reolution No. 250/2015 or the provision of Edenor’s service as repayment for the recognition under SEE Resolution No. 32/2015), by means of a Note or Resolution.

As for the income deriving from the funds to which SEE Resolution No. 745/2005 refers, it is recognized according to the amounts billed.

Recognition of compensation for injection of surplus gas – Resolution No. 1/2013 of the Hydrocarbon Investment Plan’s Strategic Planning and Coordination Committee

The recognition of income for the injection of surplus gas is covered by IAS 20 since it involves a compensation as a result of the production increase committed by Petrolera Pampa.

Its recognition is made at its fair value when there is reasonable assurance that it will be collected and that the conditions required have been complied.

This item has been disclosed under Compensation for Surplus Gas Injection - Resolution No. 1/2013, under Operating Income, in the Comprehensive Income (loss) Statement.

Impairment of assets

Property, plant and equipment and identifiable intangible assets, are reviewed for impairment at the lowest level for which there are separately identifiable cash flows (“CGUs”). 

Most of the main subsidiaries or joint ventures of the Company are a CGU, as they have only one power generation plant (generation segment), a power transmission network (transmission segment) or one concession area for the distribution of electricity (distribution segment), and areas of exploration and exploitation of oil and gas (oil and gas segment). Consequently, each subsidiary and joint venture in these segments represents the lowest level of composition of assets generating independent cash flows.

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i.Assets subject to depreciation / amortization are reviewed for impairment when facts or circumstances show that the carrying amount may not be recoverable.

ii.Goodwill: In accordance with the applicable accounting policies, goodwill is tested for impairment annually. The amounts recoverable from CGUs are determined based on the calculations of its value in use.

iii.Intangible assets: Intangible assets having an indefinite useful life are not amortized. Intangible assets having an indefinite useful life are tested for impairment by comparing their recoverable amount with their book value: (i) annually; and (ii) at any time, if there is any indication that they may have been impaired.

In order to evaluate if there is evidence that a CGU could be affected, both external and internal sources of information are analyzed.  Specific facts and circumstances are considered, which generally include the discount rate used in the estimates of the future cash flows of each CGU and the business condition as regards economic and market factors, such as the cost of raw materials, oil and gas, the regulatory framework for the energy industry (mainly the RTI / CMM and recognition of expected prices), the projected capital investments and the evolution of the energy demand.

An impairment loss is recognized when the book value of the asset exceeds its recoverable value. The recoverable amount is the higher of the value in use and the fair value less costs of disposal. Any impairment loss will be allocated (to reduce the book value of the CGU's assets) in the following order:

(a) first, to reduce the book value of goodwill assigned to the CGU, and

(b) then, to the other assets in the cash generating unit (or group of units), prorated for the carrying amount of each asset in the unit (or group of units), taking into account not to reduce the carrying amount of the asset below the higher of its fair value less costs of disposal, its value in use or zero value.

(c) any impairment loss which may not be allocated to the specific asset will be proportionately distributed among the remaining assets making up the CGU.

The value in use of each CGU is estimated on the basis of the present value of the future net cash flows that these units will generate. The Company’s management uses approved budgets up to one-year for its cash flow projections extrapolated into a term consistent with the assets’ remaining useful life, taking into consideration a scrap value and the appropriate discount rates. In order to calculate the fair value less the costs to sale, the Company’s management uses the estimated value of the future cash flows that a market participant could generate from the appropriate CGU, and deducts the necessary costs to carry out the sale of the corresponding CGU.

The Company’s management is required to make judgments at the moment of the future cash flow estimation. The actual cash flows and the values may differ significantly from the expected future cash flows and the related values obtained through discount techniques.

Non-financial assets other than goodwill which have suffered impairment in the past are reviewed for a possible reversal of the impairment as at the closing date of the fiscal year.

Reversal of Property, Plant and Equipment Impairment in CPB

As at September 30, 2012, CPB recorded an impairment loss amounting to Ps. 108.3 million for its property, plant and equipment; which net of the effect of the income tax, amounted to Ps. 70.4 million; as a result of the assessment of their recoverable value. 

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Impairment loss charges have been distributed on a pro rata basis in order to reduce the book value of the assets comprising the cash generating unit taking into consideration the book value of each of the unit’s assets. After recognizing the impairment loss, the asset’s depreciation charges have been adjusted during the following fiscal years to systematically distribute its reviewed book value less any possible residual value through its remaining useful life.

Previously impaired non-financial assets are reviewed for a possible reversal of the impairment at each reporting date.

With the implementation of SE Resolution No. 95/2013 and its amendment through SE Resolution No. 529/2014 —which established a new remuneration scheme for the industry as from February 2013 and the later update of remunerative values effective as from February 2014, respectively— and the granting of financing by CAMMESA under advantageous conditions to CPB, which will allow to afford the cost of the capital investments necessary to recover the company’s plant operating capacity, CPB’s projections regarding the recoverability of its Property, Plant and Equipment and its deferred tax assets have been modified.

As of September 30, 2014, CPB’s management reevaluated its discounted cash flows taking into consideration the new regulatory measures adopted by the National Government. As a result of the new estimates, CPB CGU’s value in use determined based on the present value of future net cash flows was Ps.274.4 million higher than its book value. Therefore, CPB as of December 31, 2014, recovered the above-mentioned impairment losses which, net of accumulated depreciation, amounted to Ps. 88.4 million (recognized under “Reversal of Impairment of Property, Plant and Equipment” in the Statement of Comprehensive Income) and, net of the effect of the income tax, amounted to Ps. 57.5 million. The affected Property, Plant and Equipment items were lands, buildings, machines and generation equipment. As of the date of this annual report, CPB has not identified any events or circumstances indicate that the book value as of December 31, 2015 may not be recoverable.

Test of impairment of property, plant and equipment and intangible assets associated with the subsidiary Edenor

As at December 31, 2011, the Company has recorded impairment losses associated with Edenor’s consolidated assets resulting from the assessment of their recoverable value. Depreciation losses totaled up Ps. 647.7 million which, net of the effect of the income tax, amounted to Ps. 421 million.

Cash flows are prepared on the basis of estimates concerning the future performance of certain variables that are sensitive to the determination of the recoverable amount, among which the following can be noted: (i) nature, opportunity and  method of electricity rate increases and/or cost adjustment recognition; (ii) demand for electricity projections; (iii) evolution of the costs to be incurred, (iv) investment needs in accordance with the service quality levels required by the regulatory authority, and; (v) macroeconomic variables, such as growth rates, inflation rates and foreign currency exchange rates.

The future increase in electricity tariffs used by Edenor to assess the recoverability of its long-lived assets as of December 31, 2015, is based on the rights to which Edenor is entitled, as stipulated in the concession agreement and the agreements described in Note 2 to the Financial Statements. Furthermore, the actions taken to maintain and guarantee the provision of the public service, the presentations made before regulatory authorities, the status quo of the discussions that are being held with government representatives, the announcements made by government officials concerning possible changes in the sector’s revenues to restore the economic and financial equation, and certain measures adopted. Edenor’s Management estimates that it is reasonable to expect that new increases in revenues will be obtained as from 2017 as a result of the carrying out during 2016 of the RTI.

Edenor has made its projections under the assumption that it will obtain better electricity rates, in addition to the adjustments on account of the VAD provided for by Resolution No. 7/2016. However, due to the complexity of the RTI process Edenor’s Management may not ensure that the future performance of the variables used to make its projections will be in line with what it has estimated at the date of preparation of the Financial Statements.

In order to contemplate the estimation risk contained in the projections of the aforementioned variables, Edenor has considered three different probability-weighted scenarios. Although in all of them it is estimated that Edenor will succeed in reaching an acceptable agreement with the Government resulting in a gradual tariff increase, Edenor has considered different timing and magnitude of an increase in the VAD.

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The scenarios that have been considered are the following:

i.Pessimistic scenario: in this scenario, Edenor assumes modest electricity tariff increases as from 2017 as a result of the gradual implementation of the RTI. A five-year term payment plan is established for the penalties owed to customers, whereas those owed to the ENRE are waived. The debt with CAMMESA (for energy and loans), including interest, is paid in 4 years. Probability of occurrence assigned 20%.

ii.Intermediate scenario: in this case, Edenor assumes reasonable electricity tariff increases as from 2017 as a result of the gradual implementation of the RTI. A five-year term payment plan is established for the penalties owed to customers, whereas those owed to the ENRE are waived. The debt with CAMMESA (for energy and loans), including interest, is paid in 10 years with funds deriving from a specific charge included in the electricity bills. Probability of occurrence assigned 65%.

iii.Optimistic scenario: in this case, Edenor assumes increases in its remuneration, in addition to the ones recognized in the Intermediate scenario, as from 2017 as a result of the gradual implementation of the RTI. A five-year term payment plan is established for the penalties owed to customers, whereas those owed to the ENRE are waived. The debt with CAMMESA (for energy and loans for consumption) is waived as part of the Concession Agreement renegotiation process. Probability of occurrence assigned 15%.

Edenor has assigned to these three scenarios the previously described percentages of probability of occurrence based mainly on experience  and considering the present economic and financial situation, the status quo of the conversations that are being held with the Argentine Government and the need to maintain the public service, object of the concession, in operation.

In all the scenarios a different after tax discount rate (WACC) in pesos has been used for each year of the projection. For the first 5 years, the average of these rates is 31%.

Sensitivity analysis:

The main factors that could result in impairment charges in future periods are: i) a distortion in the nature, opportunity and method of the electricity tariff increases and recognition of cost adjustments, ii) the development of the costs to be incurred and iii) the investment needs in accordance with the service quality levels required by the regulatory authority in the RTI, among other factors. These factors have been taken into account in the aforementioned weight of scenarios. Due to the inherent uncertainty involved in these assumptions, Edenor estimates that any sensitivity analysis that considers changes in any of them considered individually could lead to distorting conclusions.

Based on the conclusions previously mentioned, the valuation of property, plant and equipment, taken as a whole, does not exceed its recoverable value, which is measured as the value in use as of December 31, 2015.

Furthermore, the management understands that although these estimates may show an increase in the CGU’s value, actual measurements obtained so far are insufficient to consider a sustainable recovery which can be confirmed with the conclusion of the RTI expected to be completed during 2016, and consequently evaluat the possible reversal of the impairment loss recognized by the Company during fiscal year 2011.

Allowance for doubtful accounts

The Group is exposed to losses for uncollectible receivables. The Company’s management estimates the final collectability of the accounts receivable.

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The allowance for the impairment of accounts receivable is assessed based on the historical level of both the balances written off as an expense and the default balances. Additionally, Edenor’s Management records an allowance applying an uncollectibility rate for customer category, tariff, customers included in the Framework Agreement, and customers not included in the Framework Agreement.  

In order to estimate collections related to the energy generation segment we mainly consider the ability of CAMMESA to meet its payment obligations to generators, and the resolutions issued by SE, which allow the Company to collect its credits with CAMMESA through different mechanisms. Additionally, management analyzes the allowance for uncollectible receivables of the remaining accounts receivables of the segment based on an individual analysis of recoverability of receivables of the WEM debtors.

Future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in the assessment for each year.

We believe that the accounting policy relating to the allowance for doubtful accounts is a “critical accounting policy” because it requires management to make estimates and assumptions with respect to our receivables collection due to uncollectible accounts, which is susceptible to change from period to period, and as such the impact on our financial position and results of operations could be material.

Provisions for legal claims

The Company is subject to several lawsuits, complaints and other legal proceedings, including customers’ claims, where a third party seeks the payment of damages, reimbursement for losses or compensation. The Company’s potential liability as regards these claims, lawsuits and other legal proceedings cannot be estimated for sure. The Company’s management, with the assistance of its legal counselors (lawyers) regularly reviews the status of each important proceeding and assesses its potential financial exposure.

If the loss derived from a lawsuit or legal proceeding is deemed probable and the amount can be reasonably estimated, the Company establishes allowance provision.

The provision for contingent losses reflect a reasonable estimation that losses will be incurred, based on information available to the management at the Consolidated Financial Statements date, and taking into account our litigation and resolution/settlement strategies. These estimates are prepared mainly with the help of legal counsel. However, if the Company’s management estimates are incorrect, current provisions might be inadequate and derive in a charge to profits that could have an adverse effect on the balance sheet, comprehensive income (loss) statement, statements of changes in equity and cash flows.

With respect to the loss contingencies described in our Consolidated Financial Statements, we do not expect to incur any losses exceeding the amounts accrued as of December 31, 2015, that would be material relative to our consolidated financial position, results of operations or liquidity as of such date. However, if reserves prove to be inadequate and we incur a charge to earnings, such charge could have a material adverse effect on our results of operations, financial condition and net worth. For more information regarding the balances for provision for contingencies see Note 37 to our audited Financial Statements. 

Current and deferred Income tax / Minimum notional income tax

A great level of judgment is required to determine the income tax provision since the Company Management has to regularly assess the positions stated in the tax returns as regards those situations where the applicable tax regulations are subject to interpretation and, if necessary, establish provisions according to the estimated amount that the Company will have to pay to the tax authorities. When the final tax result of these items differs from the amounts initially acknowledged, those differences will have an effect on the income tax and on the deferred tax provisions in the fiscal year when such determination is made.

A significant degree of judgment is required to determine the income tax provision. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for eventual tax claims based on estimates of whether additional taxes will be due in the future.

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Deferred tax assets are reviewed at each reporting date and reduced in accordance with the probability that the sufficient taxable base will be available to allow for the total or partial recovery of these assets. Deferred tax assets and liabilities are not discounted. In assessing the realization of deferred tax assets, Management considers that it is likely that a portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income in the periods in which these temporary differences become deductible. To make this assessment, Management takes into consideration the scheduled reversal of deferred tax liabilities, the projections of future taxable income and tax planning strategies.

Defined benefit plans

The liability recognized by the Company is the best estimate of the present value of the cash flows representing the benefit plan obligation at the closing date of the year. Cash flows are discounted using actuarial assumptions about demographic and financial variables that affect the determination of the amount of such benefits. Such estimate is based on actuarial calculations made by independent professionals in accordance with the projected unit credit method.

ENRE penalties and discounts

Edenor consider its accounting policy for the recognition of ENRE Penalties and Discounts critical because it depends on the penalizables events which are valued on the basis of management’s best estimate of the expenditure required to settle the present obligation at the date of this annual report. The balances corresponding to ENRE Penalties and Discounts are adjusted in accordance with the regulatory framework applicable thereto and have been estimated based on Edenor’s estimate of the outcome of the RTI process described in Note 2 to the Financial Statements.

Oil and Gas Reserves

Reserves are oil and gas volumes (expressed in oil-equivalent m3) originated from or associated with any economic income in the areas where Petrolera Pampa operates and over which it holds exploration and exploitation rights.

Crude oil and gas reserves estimates are an essential part of Petrolera Pampa’s decision-making process. Crude oil and gas reserves volumes are taken into consideration in the calculation of depreciation -by using the production unit ratio- and to evaluate exploration and exploitation asset investments’ recoverable amounts.

Reserves estimates have been prepared by Petrolera Pampa’s technical staff, and are based on the technological and economic conditions prevailing as of December 31, 2015, taking into consideration their economic evaluation and the expiration of the relevant concession to determine their recoverability period.

The estimates are adjusted every time changes in the evaluated aspects so justify, or at least once a year. These reserves estimates have been certified by independent hydrocarbon counseling firms for the last time as of December 31, 2015.

There are numerous factors giving rise to uncertainty regarding the estimate of proven reserves and of future production profiles, prices and development costs, several of which are beyond the producer’s control. The reserves calculation procedure is a subjective process for estimating the crude oil and natural gas recoverable from the subsoil which involves a high degree of uncertainty. The reserves estimate is prepared based on the quality of the geological and engineering information available at the date in which the report is issued, as well as on its interpretation.

Asset retirement obligation

The obligations relating to the decommissioning of wells after completion of the operations Petrolera Pampa’s management to make estimates about the costs of abandonment in the long-term and the time remaining until the abandonment. Notably, technology, costs and policy, security and environmental considerations are, continually changing, which may result in differences between the actual future costs and estimates.

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Estimated future costs of wells plugging and abandonment in the hydrocarbon areas, discounted at a rate estimated at the time of their initial measuring, are capitalized together with the assets originating them, and are depreciated using the unit-of-production method. Additionally, a liability is acknowledged for this item at the estimated value of discounted payables.

Going concern status

The  jointly controlled company Citelec have prepared their Financial Statements in accordance with the accounting principles applicable to a going concern, assuming that the companies will continue to operate normally. Therefore, they do not include the effects of the adjustments or reclassifications, if any, that might be necessary to make as a consequence of the situation described as follows, as well as its impact on the Financial Statements.

Transmission

Even though it is still difficult to forecast the evolution of the topics stated in Note 2 to the Financial Statements and their possible impact on Citelec’s business and cash flows, the execution of the Renewal Agreement constitutes a remarkable milestone towards the consolidation of Citelec’s economic and financial equation. Citelec has prepared its financial statements using the accounting principles applicable to an on-going business. Consequently, these statements do not include the effects of any applicable adjustment or reclassification in case these situations are not resolved favorably to the continuity of Citelec’s operations and, thus, this company would be forced to realize its assets and cancel its liabilities, including contingent ones, under conditions that are not in its ordinary course of business.

The interest in the joint venture represents about 1% of the Group’s assets and approximately 0.2% of the Group’s income. Additionally, the Company’s management considers that the uncertainty regarding Citelec’s joint venture does not affect its capacity to continue operating on an ordinary basis, mainly due to the following reasons: (i) there is no financial dependence on Citelec, as this joint venture has not paid it any dividends since its acquisition date in 2006; (ii) even though there is an enforceable and binding technical assistance agreement with Transener, the Company does not depend on this flow of funds to normally develop its activities; and (iii) the Company is not contractually obliged to provide financial assistance to Citelec.

Results of Operations 

The table below provides a summary of our results of operations for the years ended December 31, 2015, 2014 and 2013.

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	For the year ended December 31,
	2015	2014	2013
	(in millons of pesos)
Revenue	7,160.8	6,204.6	5,335.0
Cost of sales	(7,092.8)	(6,029.1)	(5,603.3)
Gross profit (loss)	68.0	175.6	(268.3)
Selling expenses	(972.7)	(713.4)	(634.2)
Administrative expenses	(1,239.4)	(837.5)	(563.9)
Other operating income	940.7	312.0	466.2
Other operating expenses	(754.4)	(447.1)	(204.0)
Reversal of impairment of property, plant and equipment	25.3	88.4	-
Share of profit (loss) of joint ventures	9.3	34.2	(4.8)
Share of (loss) profit of associates	(9.9)	(1.6)	2.2
Operating loss before higher costs recognition and SE Resolution No. 32/15	(1,933.2)	(1,389.3)	(1,206.7)
Income recognition on account of the RTI - SE Resolution No. 32/15	5,025.1	-	-
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes	551.5	2,271.9	2,933.1
Operating profit (loss)	3,643.4	882.6	1,726.3
Financial income	348.5	440.5	336.3
Financial cost	(1,257.3)	(1,113.2)	(813.9)
Other finance results	1,701.0	420.1	(519.3)
Financial results, net	792.2	(252.6)	(996.8)
Profit (Loss) before income tax	4,435.6	630.0	729.5
Income tax	(586.8)	(100.4)	12.2
Profit (Loss) for the year from continuing operations	3,848.8	529.5	741.6
Discontinued operations	-	-	(126.9)
Total Profit (Loss) of the year	3,848.8	529.5	614.8
Total Profit (Loss) of the year attributable to:
Owners of the company	3,065.1	743.2	286.1
Non - controlling interest	783.7	(213.6)	328.7

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	For the year ended December 31,
	2015	2014	2013
	(in millons of pesos)
Revenue
Generation	2,473.2	2,275.5	1,731.3
Transmission	973.4	738.4	436.9
Distribution	3,802.2	3,598.4	3,440.7
Oil and gas	943.5	356.8	170.1
Holding and others	53.6	67.2	43.9
Eliminations	(111.7)	(93.2)	(51.0)
Subtotal Sales	8,134.2	6,943.1	5,771.9
Sales from interest in joint ventures	(973.4)	(738.4)	(436.9)
Total Sales	7,160.8	6,204.6	5,335.0
Gross profit (loss)
Generation	1,135.8	1,098.8	304.5
Transmission	307.4	198.7	43.2
Distribution	(1,386.9)	(1,118.1)	(681.8)
Oil and gas	283.5	155.6	81.9
Holding and others	51.3	65.3	43.0
Eliminations	(15.7)	(26.0)	(16.0)
Subtotal Gross (loss) profit	375.4	374.3	(225.1)
Gross loss (profit) from interest in joint ventures	(307.4)	(198.7)	(43.2)
Total Gross profit	68.0	175.6	(268.3)
Operating profit (loss)
Generation	886.8	1,009.1	402.8
Transmission	169.4	99.3	(21.9)
Distribution	2,140.2	(281.5)	1,288.4
Oil and gas	484.8	134.9	73.5
Holding and others	122.4	(13.6)	(31.5)
Eliminations	-	(0.4)	(2.0)
Subtotal operating profit (loss)	3,803.7	947.8	1,709.3
Operating profit (loss) from interest in joint ventures	(160.3)	(65.2)	17.0
Total operating profit (loss)	3,643.4	882.6	1,726.3
Total profit (loss) of the year
Generation	549.8	633.0	(207.8)
Transmission	9.1	34.1	(4.9)
Distribution	612.8	(1,101.4)	508.1
Oil and gas	351.7	83.9	37.2
Holding and others	2,325.3	879.9	282.2
Total profit (loss) of the year	3,848.8	529.5	614.8
Total profit (loss) attributable to owners of the company
Generation	496.9	529.3	(191.9)
Transmission (1)	9.1	34.1	(4.9)
Distribution	59.1	(742.1)	163.5
Oil and gas	174.6	41.9	37.2
Holding and others	2,325.4	879.9	282.2
Total profit (loss) attributable to owners of the company	3,065.1	743.2	286.1
Total profit (loss) attributable to non - controlling interest
Generation	52.9	103.6	(15.9)
Distribution	553.7	(359.2)	344.6
Oil and gas	177.1	42.0	-
Total profit (loss) attributable to non - controlling interest	783.7	(213.6)	328.7
(1)For the purposes of presenting segment information the indirect interest of our segment Transmission has been consolidated proportionally.

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The Company is engaged in the electricity sector, with a participation in the electricity generation, transmission and distribution segments through different legal entities. As of December 31, 2015, in view of the growth of the operations of Petrolera Pampa, the Company has identified Oil and Gas as a new segment. Therefore, the comparative information by segment in the Holding and others segment has been restated in its entirely. Accordingly, the following business segments have been identified by means of its subsidiaries and based on the nature, customers and risks involved:

Generation, comprised by a direct and indirect equity interest in Piedra Buena, Güemes, Loma la Lata, HINISA, HIDISA, Pampa Comercializadora S.A and investments in shares in other companies related to the electricity generation sector.

Transmission, comprised by a indirect equity interest through Citelec in Transener and its subsidiaries. For the purposes of presenting segment information the indirect equity interest has been consolidated proportionally.

Distribution, comprised by a indirect equity interest in EASA and Edenor.

Oil and gas, comprised by a direct interest in Petrolera Pampa dedicated to exploration and exploitation of oil and gas.

Holding and others, comprised by a financial investment operations, holding activities, and other businesses.

The Company manages its segments to the net income level of reporting.

The segment called “Electricity transmission”, which corresponds to the Company’s indirect interest in Citelec and its subsidiaries, has been included as a reportable segment since it is considered as such in the reports received by the Executive Director of the Company. Since the stake in such companies constitutes an interest in a joint venture, it is not consolidated and it is valued according to the equity method of accounting in the Consolidated Financial Statement. 

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 Year ended December 31, 2015 compared to year ended December 31, 2014                       

Generation Segment

                Generation net sales increased by 8.7% to Ps.2,473.2 million for the fiscal year ended December 31, 2015, from Ps.2,275.5 million for the same period in 2014. The rise of Ps.197.8 million in electricity generation net sales was mainly due to an increase in the average electricity selling prices calculated for the segment (Ps.279.3 per MWh for the fiscal year ended December 31, 2015, compared to Ps.225.3 per MWh for the same period in 2014, which represents a sales increase of Ps.529.1 million), which increase was partially offset by a decrease in the amount of electricity sold by the segment (8,660.7 GWh for the fiscal year ended December 31, 2015, compared to 9,802.0 GWh for the same period in 2014, which represents a Ps.318.7 million decrease in sales).

                Average electricity generation selling prices in this segment reflects the impact of the pricing scheme update set out in SE Resolution No. 95/2013, which was implemented in July 2015 and became effective as of February 2015, as well as the effect of changes in the exchange rate which impacted Energía Plus and SE Resolution No. 220/2007 agreements. Moreover, the decrease in electricity sales (in GWh) was mainly due to scheduled overhauls in Loma de la Lata and CPB, which were partly offset by a higher dispatch at CTG and CTP. In our hydroelectric power units, despite the lower water flow and input levels in the area, the joint sales in 2015 were 5 GWh lower than that in 2014.The following table shows net electricity sales (in GWh) for power generation plants:

	Fiscal Years Ended December 31,
In GWh	2015			2014
	Net generation	Purchases	Total sales	Net generation	Purchases	Total sales
Hydroelectric facilities:
HINISA	538.1	0.5	538.6	516.1	33.0	549.1
HIDISA	366.8	0.0	366.8	322.4	28.9	351.3
Thermal facilities:
CTG	1,681.7	601.0	2,282.8	1,528.2	596.2	2,124.4
CTLL	2,581.8	0.0	2,581.8	3,420.9	80.8	3,501.7
CTP*	151.6	0.0	151.6	131.1	0.0	131.1
CPB	2,736.7	2.4	2,739.1	3,089.6	54.8	3,144.4
Total	8,056.8	603.9	8,660.7	9,008.3	793.6	9,802.0
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Generation cost of sales increased by 13.7%, to Ps.1,337.5 million for the fiscal year ended December 31, 2015, from Ps.1,176.7 million for the same period in 2014, mainly due to higher labor costs of 33.8% in our hydroelectric power units and of 33.4% in our thermal power units, and higher materials and maintenance costs in our thermal power units of 89.1% and 50.9%, respectively, resulting from scheduled overhauls in Loma de la Lata and CPB. These higher costs were partially offset with lower energy purchases in our hydroelectric and thermal power units which decrease by 91.1% and 3.8%, respectively, since MAT contracts are managed by CAMMESA as from the implementation of SE Resolution No. 95/2013. In addition, there was a drop of 72.3% in penalties and of 30.4% in gas consumption costs as a result of scheduled overhauls at Loma de la Lata. The following table shows the main components of our generation segment cost of sales for the specified periods:

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	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2015		2014
Hydroelectric facilities:
Labor costs	74.0	45.0%	55.3	34.1%
Amortization for intangible assets	19.4	11.8%	19.4	12.0%
Royalties	19.2	11.6%	18.1	11.2%
Repairs and Maintenance	15.3	9.3%	10.3	6.3%
Rental and insurance	7.2	4.4%	6.3	3.9%
Material consumption	5.9	3.6%	3.1	1.9%
Fees for third-party services	2.4	1.5%	2.3	1.4%
Energy purchases	2.2	1.4%	25.1	15.5%
Depreciation of property, plant and equipment	1.8	1.1%	1.7	1.1%
Others	17.1	10.4%	20.4	12.6%
Total hydroelectric	164.6	100.0%	162.2	100.0%
Thermal facilities:
Labor costs	287.6	24.5%	215.6	21.3%
Energy purchases	210.2	17.9%	218.5	21.5%
Gas consumption	148.8	12.7%	213.8	21.1%
Depreciation of property, plant and equipment	123.5	10.5%	107.1	10.6%
Repairs and Maintenance	112.2	9.6%	74.3	7.3%
Material consumption	79.7	6.8%	42.2	4.2%
Rental and insurance	69.9	6.0%	42.1	4.2%
Fees for third-party services	49.0	4.2%	20.8	2.1%
Penalties	3.2	0.3%	11.4	1.1%
Others	88.8	7.6%	68.6	6.8%
Total thermal	1,172.9	100.0%	1,014.5	100.0%
Total	1,337.5	100.0%	1,176.7	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Therefore, our generation segment gross profit increased by 3.4% to Ps.1,135.8 million for the fiscal year ended December 31, 2015, compared to Ps.1,098.8 million for the same period in 2014.

                Selling expenses from our generation segment increased to Ps.23.5 million for the fiscal year ended December 31, 2015, compared to Ps.17.9 million for the same period in 2014, mainly due to a Ps.3.0 million increase in labor costs, a Ps.1.4 million increase in taxes, rates and contributions and doubtful accounts and selling expenses for Ps.1.2 million. Selling expenses relating to our hydroelectric power units amounted to Ps.9.7 million and Ps.8.4 million, and those corresponding to our thermal power units reached Ps.13.8 million and Ps.9.5 million for the fiscal years ended December 31, 2015 and 2014, respectively. The following table shows the main components of our generation segment selling expenses for the specified periods:

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	Fiscal Years Ended December 31,
Selling Expenses, in AR$mm except %	2015		2014
Taxes, rates and contributions	10.5	44.6%	9.1	50.6%
Labor costs	7.8	33.3%	4.8	26.9%
Doubtful accounts	2.7	11.6%	1.5	8.3%
Others	2.5	10.5%	2.5	14.1%
Total	23.5	100.0%	17.9	100.0%
Of which:
Hydroelectric	9.7	41.2%	8.4	46.8%
Thermal	13.8	58.8%	9.5	53.2%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Generation administrative expenses increased to Ps.262.7 million for the fiscal year ended December 31, 2015 from Ps.200.0 million for the same period in 2014, mainly due to a 61.4% increase in labor costs borne by our generation subsidiaries, which were partly offset by a 13.0% decrease in the fees for third-party services, a 57.7% decrease in taxes, rates and contributions and a 28.1% decrease in depreciation and amortization. Administrative expenses corresponding to our hydroelectric power units amounted to Ps.26.5 million and Ps.21.5 million, and those corresponding to our thermal power units reached Ps.236.2 million and Ps.178.5 million for the fiscal years ended December 31, 2015 and 2014, respectively. The following table shows the main components of our generation segment administrative expenses for the specified periods:

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2015		2014
Labor costs	170.6	65.0%	105.7	52.8%
Fees for third-party services	43.8	16.7%	50.4	25.2%
Rental and insurance	13.2	5.0%	12.1	6.1%
Depreciation of property, plant and equipment	4.1	1.6%	5.7	2.8%
Taxes, rates and contributions	2.2	0.8%	5.2	2.6%
Others	28.7	10.9%	20.9	10.5%
Total	262.7	100.0%	200.0	100.0%
Of which:
Hydroelectric	26.5	10.1%	21.5	10.8%
Thermal	236.2	89.9%	178.5	89.2%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Other generation operating income and expenses decreased by 70.0%, to a profit of Ps.12.0 million for the fiscal year ended December 31, 2015, compared to Ps.39.9 million for the same period in 2014. This decrease was mainly as a result of non-recurrent income during 2015 that amounted to Ps.74.8 million in connection with compensation received by Loma de la Lata pursuant to the Arbitral Award ruled in its favor against the Project Counterparties (see “Item 8 – Legal Proceedings involving Loma de la Lata”), while during fiscal year 2014 recovery of insurance, receivables and taxes were disclosed for a total amount of Ps.93.1 million. The following table shows the main components of our generation segment other operating income and expenses for the specified periods:

167

 

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2015		2014
Income recognition for arbitral proceedings	74.8	624.6%	-	-
Debit and credit tax	(54.1)	(451.6%)	(30.9)	(77.4%)
Provision for fiscal credits	(12.1)	(101.0%)	(4.0)	(10.0%)
Recovery of receivables	0.8	6.6%	49.5	124.0%
Recovery of penalties	7.2	59.9%	-	-
Provision for contigencies	(1.6)	(13.3%)	(20.1)	(50.4%)
Recovery of insurance	0.0	0.3%	5.6	14.1%
Recovery of tax on gross income	-	-	37.9	95.1%
Other operating costs for contract termination	-	-	(11.4)	(28.5%)
Others	(3.1)	(25.7%)	13.2	33.0%
Total	12.0	100.0%	39.9	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Generation operating income decreased by 12.1% to Ps.886.8 million for the fiscal year ended December 31, 2015, compared to Ps.1,009.1 million for the same period in 2014. Operating profit further reflectsthe reversal of an impairment in property, plant and equipment by Ps.25.3 million and Ps.88.4 million on December 31, 2015 and 2014, respectively.

                Generation financial results accounted for a loss of Ps.144.6 million for the fiscal year ended December 31, 2015, compared to a loss of Ps.152.1 million for the same period in 2014, mainly due to lower revenues from adjustments to current value of CAMMESA’s consolidated credits (Ps.196.4 million), lower net income for changes in the fair value of financial instruments (Ps.70.9 million) and arbitral proceedings interest (Ps.30.4 million) which were partly offset by net foreign exchange losses (Ps.264.2 million), lower net income for commercial interest (Ps.12.6 million), an increase in fiscal interest (P.17.1 million) and an increase in net financial interest (Ps.45.4 million). The following table shows the main components of our generation segment financial results for the specified periods:

168

 

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2015		2014
Financial income
Commercial interest	192.8	63.9%	179.2	74.4%
Financial interest	78.3	26.0%	61.7	25.6%
Arbitral proceedings interest	30.4	10.1%	0.0	0.0%
Subtotal	301.5	100.0%	240.9	100.0%
Financial cost
Financial interest	(284.7)	79.6%	(222.8)	71.7%
Fiscal interest	(48.8)	13.7%	(31.7)	10.2%
Commercial interest	(2.1)	0.6%	(1.1)	0.4%
Others	(21.9)	6.1%	(55.2)	17.7%
Subtotal	(357.5)	100.0%	(310.8)	100.0%
Other financial results
Foreign exchange differences, net	(153.7)	173.5%	(417.9)	508.0%
Changes in the fair value of financial instruments	45.1	(51.0%)	116.1	(141.1%)
Results from current value measurement	20.0	(22.5%)	216.4	(263.1%)
Other financial results	-	-	3.2	(3.8%)
Subtotal	(88.6)	100.0%	(82.3)	100.0%
Total	(144.6)	100.0%	(152.1)	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Our generation segment recorded an income tax charge of Ps.192.4 million for the fiscal year ended December 31, 2015, compared to a charge of Ps.224.1 million for the same period in 2014.

                Finally, our generation segment recorded a net profit of Ps.549.8 million for the fiscal year ended December 31, 2015, of which Ps.496.9 million are attributable to the owners of the Company, compared to a net profit of Ps.529.3 million recorded in the same period in 2014, attributable to the owners of the Company.

Transmission Segment

                Transmission net sales increased by 31.8% to Ps.973.4 million for the fiscal year ended December 31, 2015, compared to Ps.738.4 million for the same period in 2014. Net regulated sales increased by 52.4% to Ps.879.6 million for the fiscal year ended December 31, 2015, from Ps.577.2 million recorded for the same period in 2014, mainly as a result of greater recognition of cost variations (Ps.663.1 million in 2015 compared to Ps.425.0 million in 2014) pursuant to the Instrumental Agreement and the Renewal Agreement entered into by Transener, Transba, the SE, and the ENRE. During 2015, no net revenues from Fourth Line royalties were recognized, whereas Ps.9.1 million were recorded for the same period in 2014. Effective as from January 1, 2015, Transener no longer accrues recurring financial income from Fourth Line’s retroactive royalties and therefore it has requested the ENRE an update of operation and maintenance costs. Other sales decreased by 38.3% to Ps.93.9 million for the fiscal year ended December 31, 2015, compared to Ps.152.1 million for the same period in 2014, mainly as a result of lower unregulated revenues from Transener (supervision and construction works) and Transba.

                Transmission cost of sales increased by 23.4% to Ps.666.0 million for the fiscal year ended December 31, 2015 compared to Ps.539.7 million for the same period in 2014, mainly due to a 31.1% increase in labor costs  in 2015, which were partly offset by a 76.3% decrease in the consumption of materials. The following table shows the main components of our transmission segment cost of sales for the specified periods:

169

 

	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2015		2014
Labor costs	391.7	58.8%	298.8	55.4%
Depreciation of property, plant and equipment	44.9	6.7%	42.8	7.9%
Transport and per diem	30.8	4.6%	23.0	4.3%
Repairs and Maintenance	30.4	4.6%	25.7	4.8%
Rental and insurance	27.4	4.1%	23.1	4.3%
Fees for third-party services	18.4	2.8%	13.7	2.5%
Material consumption	12.5	1.9%	52.6	9.7%
Others	109.9	16.5%	60.0	11.1%
Total	666.0	100.0%	539.7	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Therefore, transmission gross profits increased to Ps.307.4 million for the fiscal year ended December 31, 2015, from a Ps.198.7 million profit for the same period in 2014, mainly as a result of greater sales arising from the Instrumental Agreement and the Renewal Agreement.

                We do not record selling expenses related to our transmission activities.

                Transmission administrative expenses increased by 36.8% to Ps.125.6 million for the fiscal year ended December 31, 2015, compared to Ps.91.8 million for the same period in 2014, mainly due to a 38.8% labor cost increase associated with higher salaries. The following table shows the main components of our transmission segment administrative expenses for the specified periods:

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2015		2014
Labor costs	93.2	74.2%	67.1	73.1%
Fees for third-party services	7.3	5.8%	6.0	6.5%
Rental and insurance	5.2	4.1%	3.4	3.7%
Depreciation of property, plant and equipment	4.5	3.6%	4.3	4.7%
Others	15.4	12.3%	11.0	12.0%
Total	125.6	100.0%	91.8	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Other transmission operating income and expenses recorded a loss of Ps.12.4 million for the fiscal year ended December 31, 2015, compared to Ps.7.6 million loss for the same period in 2014. The following table shows the main components of our transmission segment other operating income and expenses for the specified periods:

170

 

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2015		2014
Debit and credit tax	(12.2)	98.3%	(11.1)	146.1%
Recovery of insurance	-	-	2.7	(35.6%)
Others	(0.2)	1.7%	0.8	(10.4%)
Total	(12.4)	100.0%	(7.6)	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Transmission operating income accounted for a profit of Ps.169.4 million for the fiscal year ended December 31, 2015, 70.6% higher than the profit of Ps.99.3 million for the same period in 2014, mainly as a result of increases in regulated sales, which were partly offset by increases in the above-described costs and expenses.

                Transmission financial results accounted for a loss of Ps.122.9 million for the fiscal year ended December 31, 2015, compared to a profit of Ps.24.7 million for the same period in 2014, mainly as a result of an increase in foreign exchange losses and financial interest on liabilities (Ps.2.5 million), and a decrease in the profits from interest income from the Fourth Line and the IVC under the Memorandum of Understanding (Ps.32.4 million). The following table shows the main components of our transmission segment financial results for the specified periods:

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2015		2014
Financial income
Financial interest	193.8	100.0%	226.1	100.0%
Subtotal	193.8	100.0%	226.1	100.0%
Financial cost
Financial interest	(61.4)	99.0%	(58.9)	99.2%
Others	(0.6)	1.0%	(0.5)	0.8%
Subtotal	(62.0)	100.0%	(59.4)	100.0%
Other financial results
Foreign exchange differences, net	(253.9)	99.7%	(138.4)	97.4%
Others	(0.7)	0.3%	(3.6)	2.6%
Subtotal	(254.7)	100.0%	(142.0)	100.0%
Total	(122.9)	100.0%	24.7	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Our transmission segment recorded an income tax charge of Ps.18.8 million for the fiscal year ended December 31, 2015, compared to a charge of Ps.51.4 million for the same period in 2014.

                Finally, our transmission segment recorded a net profit of Ps.9.1 million for the fiscal year ended December 31, 2015, compared to a net profit of Ps.34.1 million for the same period in 2014, both attributable to the Company’s owners.

Distribution Segment

                Net sales from our distribution activities increased by 5.7% to Ps.3,802.2 million in the fiscal year ended December 31, 2015, compared to Ps.3,598.4 million for the same period in 2014, mainly due to charges collected from Edenor’s customers to be allocated to the FOCEDE fund, implemented under Resolution No. 347/2012. Edenor’s electricity sales volume between 2014 and 2015increased by 1,089 GWh to 22,381 GWh in 2015, compared to 21,292 GWh in 2014.

171

 

                The cost of sales increased by 10.0% to Ps.5,189.0 million in the fiscal year ended December 31, 2015, compared to Ps.4,716.5 million for the same period in 2014, mainly due to an increase in labor costs of 35.4% and in power purchases of 7.7% mainly attributableto higher labor costs as a result of an increase in the number of employees and employee compensation and higher energy purchases due to the increase in the volume of electricity sales, which were partly offset with a decrease in fees and compensations for third-party services in 35.2%. The following table shows the main components of our distribution segment cost of sales for the specified periods:

	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2015		2014
Energy purchases	2,022.0	39.0%	1,878.1	39.8%
Labor costs	1,859.7	35.8%	1,373.2	29.1%
Fees for third-party services	463.2	8.9%	714.3	15.1%
Penalties	257.3	5.0%	233.9	5.0%
Depreciation of property, plant and equipment	240.1	4.6%	211.8	4.5%
Material consumption	211.4	4.1%	205.9	4.4%
Others	135.3	2.6%	99.4	2.1%
Total	5,189.0	100.0%	4,716.5	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Therefore, the gross loss from our distribution activities increased to Ps.1,386.9 million in the fiscal year ended December 31, 2015, compared to a loss of Ps.1,118.1 million for the same period in 2014, mainly due to the increase in the cost of sales, increase that was not offset by a revenue increase.

                Selling expenses increased by 26.5% to Ps.833.4 million in the fiscal year ended December 31, 2015, compared to Ps.658.9 million for the same period in 2014, mainly due to increases in third-party compensation of 25.4%, labor costs increases resulting from granted wage increases of 20.4% and communication expenses increases of 50.3%. The following table shows the main components of our distribution segment selling expenses for the specified periods:

	Fiscal Years Ended December 31,
Selling Expenses, in AR$mm except %	2015		2014
Fees for third-party services	329.5	39.5%	262.8	39.9%
Labor costs	299.8	36.0%	249.0	37.8%
Communication Expenses	58.7	7.0%	39.1	5.9%
Taxes, rates and contributions	48.5	5.8%	42.2	6.4%
Penalties	24.4	2.9%	18.4	2.8%
Doubtful accounts	24.1	2.9%	21.5	3.3%
Others	48.4	5.8%	25.9	3.9%
Total	833.4	100.0%	658.9	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

172

 

                Administrative expenses from our distribution segment increased by 39.5% to Ps.711.9 million for the fiscal year ended December 31, 2015, compared to Ps.510.3 million for the same period in 2014, mainly due to labor cost increases resulting from wage increases of 35.5%, and increases in third-party compensation and fees between both periods of 36.1%. The following table shows the main components of our distribution segment administrative expenses for the specified periods:

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2015		2014
Labor costs	332.3	46.7%	245.5	48.1%
Fees for third-party services	214.8	30.2%	157.8	30.9%
Insurance and rentals	58.2	8.2%	35.2	6.9%
Security surveillance expenses	24.1	3.4%	15.1	3.0%
Others	82.5	11.6%	56.6	11.1%
Total	711.9	100.0%	510.3	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Other operating income and expenses for the fiscal year ended December 31, 2015 amounted to a net loss of Ps.504.3 million, compared to a loss of Ps.266.1 million for the same period in 2014, which was mainly due to higher losses from provisions for liabilities (Ps.151.0) and uncollectible tax credits (Ps.80.6), voluntary retirements (Ps.18.2 million) and debit and credit tax (Ps.21.1 million). These effects were partly offset with an increase in the income from services to third parties (Ps.20.3 million) and a decrease in expenses under the FOCEDE fund implemented under Resolution no. 347/2012 (Ps.38.1 million). The following table shows the main components of our distribution segment other operating income and expenses for the specified periods:

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2015		2014
Provision for contigencies	(226.4)	44.9%	(75.4)	28.3%
Debit and credit tax	(86.3)	17.1%	(65.1)	24.5%
Allowance for uncollectible tax credits	(80.7)	16.0%	(0.1)	0.0%
Other expenses FOCEDE	(59.6)	11.8%	(97.7)	36.7%
Income from services to third-parties	53.6	(10.6%)	33.3	(12.5%)
Voluntary retirements	(43.2)	8.6%	(25.0)	9.4%
Net expenses for technical functions	(12.9)	2.6%	(16.2)	6.1%
Others	(48.8)	9.7%	(19.8)	7.4%
Total	(504.3)	100.0%	(266.1)	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Operating income from our distribution activities increased by Ps.2,421.7 million to a profit of Ps.2,140.2 million for the fiscal year ended December 31, 2015, compared to a loss of Ps.281.5 million for the same period in 2014, mainly due to the fact that the implementation of SE Resolution No. 32/15 exceeded operating costs. Under this resolution there was a recognition of income for Ps.5,576.6 million compared to Ps.2271.9 million for the same period in 2014, which were recognized under SE Resolution No. 250/13 and subsequent Notes. Excluding such effect, operating income from our distribution segment would account for a loss of Ps.3,436.4 million and Ps.2,553.4 million for fiscal years 2015 and 2014, respectively.

                Financial results related to our distribution activities represented a loss of Ps.1,351.1 million for the fiscal year ended December 31, 2015, a 37.6% higher the loss compared to Ps.981.6 million loss for the same period of 2014, primarily due to the appreciation of the U.S. Dollar on the outstanding debt incurred in said currency (Ps.577.3 million), losses  in financial liability interest (Ps.166.6 million), and a decrease in the income from financial interest due to the implementation of SE Resolution No. 250/2013 and subsequent Notes (Ps.145.6 million). These were partially offset by higher income from changes in the fair value of financial assets (Ps.283.7 million) and lower losses from commercial interest due to the incurred debt with CAMMESA (Ps.267.2 million). The following table illustrates the main components of financial results from our distribution segment:

173

 

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2015		2014
Financial income
Financial interest	50.1	52.1%	195.7	81.9%
Commercial interest	46.1	47.9%	43.3	18.1%
Subtotal	96.2	100.0%	239.0	100.0%
Financial cost
Financial interest	(360.2)	62.4%	(193.6)	28.0%
Commercial interest	(192.5)	33.4%	(459.7)	66.4%
Fiscal interest	(4.1)	0.7%	(5.9)	0.9%
Others	(20.2)	3.5%	(33.3)	4.8%
Subtotal	(577.0)	100.0%	(692.5)	100.0%
Other financial results
Foreign exchange differences, net	(1,225.1)	140.8%	(647.8)	122.7%
Changes in the fair value of financial instruments	351.8	(40.4%)	68.1	(12.9%)
Result from repurchase of financial debt	-	-	44.4	(8.4%)
Others	3.0	(0.3%)	7.3	(1.4%)
Subtotal	(870.3)	100.0%	(528.1)	100.0%
Total	(1,351.1)	100.0%	(981.6)	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                In turn, our distribution operations recorded an income tax charge of Ps.176.3 million in the fiscal year ended December 31, 2015, compared to Ps.161.8 million credits in the same period of 2014.

                Finally, our distribution activities registered a net profit of Ps.612.8 million for the fiscal year ended December 31, 2015, of which Ps.59.1 million are attributable to the Company’s owners, compared to a loss of Ps.742.1 million for the same period in 2014 attributable to the Company’s owners .

174

 

Oil and gas Segment

                Net sales related to our oil and gas segment  increased to Ps.943.5 million for the fiscal year ended December 31, 2015, 164.4% higher compared to Ps.356.8 million in  the same period of 2014 mainly due to an increase in sales primarily as a result of higher productionin the Rincón del Mangrullo Block and the entry into effect of the Addendum to the investment Agreement with YPF. The following table shows Petrolera Pampa’s oil and gas production under the investment agreements entered into by Petrolera Pampa for the specified periods:

	Fiscal Years Ended December 31,
	2015	2014
Oil (m3/d)
Ysur	5.3	9.3
Petrobras	4.6	3.9
YPF	15.8	2.9
Total	25.7	16.1
Gas (m3/d)
Ysur	65.2	90.7
Petrobras	366.1	365.1
YPF	994.5	355.7
Senillosa	14.2	-
Total	1,439.9	811.5
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Cost of sales related to our oil and gas segment increased by 228.1% to Ps.660.0 million for the fiscal year ended December 31, 2015, compared to Ps.201.2 million for the same period of 2014, mainly due to higher costs from well depreciation (Ps.194.4 million), costs of internal consumption of oil and gas production (Ps.125.2 million) as a result of increased production in the Rincón del Mangrullo Block and the entry into effect of the Addendum to the investment Agreement with YPF, and fees for third-party services (Ps.54.1 million). The following table shows the main components of cost of sales from our oil and gas segment for the specified periods:

	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2015		2014
Depreciation of property, plant and equipment	275.0	41.7%	80.6	40.1%
Gas production	162.8	24.7%	37.6	18.7%
Royalties	119.5	18.1%	49.4	24.6%
Fees for third-party services	71.4	10.8%	17.3	8.6%
Labor costs	10.4	1.6%	6.8	3.4%
Others	20.9	3.2%	9.4	4.6%
Total	660.0	100.0%	201.2	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Therefore, gross profit related to our oil and gas segment increased by 82.2% to Ps.283.5 million for the fiscal year ended December 31, 2015, compared to Ps.155.6 million for the same period in 2014.

                Selling expenses related to our oil and gas segment increased to Ps.115.7 million for the fiscal year ended December 31, 2015, compared to Ps.36.5 million for the same period of  2014, mainly due to the accrual of higher costs under compensation agreements for the benefit of certain officers of Petrolera Pampa (Ps.55.0 million) and higher tax losses (Ps.22.7 million). The following table shows the main components of our oil and gas segment selling expenses for the specified periods:

175

 

	Fiscal Years Ended December 31,
Selling Expenses, in AR$mm except %	2015		2014
Compensation agreements	74.3	64.2%	19.3	52.9%
Taxes, rates and contributions	35.9	31.0%	13.2	36.1%
Others	5.6	4.8%	4.0	11.0%
Total	115.7	100.0%	36.5	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Administrative expenses increased Ps.149.7 million for the fiscal year ended December 31, 2015, compared to Ps.71.1 million for the same period of 2014, principally due to the accrual of higher costs under compensation agreements for the benefit of certain officers of Petrolera Pampa (Ps.75.4 million) and higher labor costs (Ps.7.3 million), which were partly offset by lower fees for third-party services (Ps.6.2 million). The following table illustrates the main components of administrative expenses from our oil and gas segment for the specified periods:

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2015		2014
Compensation agreements	101.0	67.5%	25.6	36.0%
Labor costs	20.9	14.0%	13.6	19.2%
Fees for third-party services	19.6	13.1%	25.7	36.2%
Others	8.2	5.5%	6.1	8.6%
Total	149.7	100.0%	71.1	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Other operating income from our oil and gas activities registered a profit of Ps.466.8 million for the fiscal year ended December 31, 2015, 437.3% higher compared to the profit of Ps.86.9 million for the same period in 2014, mainly due to an increase in the additional compensation under the Surplus Injection Promotion Program implemented by Resolution No. 1/2013 (Ps.546.8 million for the same period in 2015, compared to Ps.127.1 million in 2014). The following table shows the main components of other operating income and expenses of our oil and gas segment for the specified periods:

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2015		2014
Res. No, 1/13 Natural Gas Excess Injection Income	546.8	117.1%	127.1	146.4%
Compensation agreements	(48.3)	(10.4%)	(16.7)	(19.2%)
Debit and credit tax	(32.8)	(7.0%)	(12.8)	(14.8%)
Decrease in property, plant and equipment	(3.0)	(0.7%)	(21.8)	(25.1%)
Recovery of expenses	-	-	6.5	7.5%
Others	4.1	0.9%	4.5	5.1%
Total	466.8	100.0%	86.9	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                The operating gain related to our oil and gas segment amounted to Ps.484.8 million for the fiscal year ended December 31, 2015, compared to Ps.134.9 million for the same period in 2014.

176

 

                Financial results related to our oil and gas activities represented a profit of Ps.30.5 million for the fiscal year ended December 31, 2015, compared to a loss of Ps.40.7 million for the same period of 2014, mainly due to higher profits from net foreign exchange differences on account of the devaluation of the Peso, the currency in which most of Petrolera Pampa’s debt is denominated (Ps.201.9 million), and changes in the fair value of financial assets (Ps.101.9 million), which were partly offset by higher losses from financial interests (Ps.208.9 million). The following table shows the main components of the financial results from our oil and gas segment for the specified periods:

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2015		2014
Financial income
Financial interest	11.9	100.0%	12.7	98.3%
Commercial interest	0.0	0.0%	0.2	1.7%
Subtotal	11.9	100.0%	12.9	100.0%
Financial cost
Financial interest	(381.5)	98.0%	(173.5)	98.2%
Others	(7.8)	2.0%	(3.2)	1.8%
Subtotal	(389.3)	100.0%	(176.7)	100.0%
Other financial results
Changes in the fair value of financial instruments	246.2	60.3%	144.3	117.3%
Foreign exchange differences, net	180.7	44.3%	(21.3)	(17.3%)
Asset retirement obligation	(18.9)	(4.6%)	-	-
Subtotal	408.0	100.0%	123.0	100.0%
Total	30.5	100.0%	(40.7)	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Also, our oil and gas segment recorded an income tax charge of Ps.163.6 million for the fiscal year ended December 31, 2015, compared to a charge of Ps.10.2 million for the same period in 2014.

                Finally, our oil and gas segment registered a net profit of Ps.351.8 million for the fiscal year ended December 31, 2015, of which Ps.174.6 million are attributable to the owners of the Company, compared to a profit of Ps.41.9 million for the same period in 2014, attributable to the owners of the Company.

177

 

Holding and Others Segment

                Net sales related to our holding and others segment were Ps.53.6 million for the fiscal year ended December 31, 2015, 20.4% lower compared to Ps.67.2 million in the same period of 2014. These sales mostly correspond to fees collected from companies of our other segments.

                Cost of sales related to our holding and others segment increased by 14.1% to Ps.2.3 million in the fiscal year ended December 31, 2015, compared to Ps.2.0 million for the same period of 2014, mainly due to higher labor costs (Ps.0.7 million). The following table illustrates the main components of costs of sales from our holding and others segment for the specified periods:

	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2015		2014
Labor costs	1.2	51.1%	0.5	23.2%
Inventory purchases	0.8	33.9%	1.2	59.8%
Others	0.3	15.0%	0.3	17.0%
Total	2.3	100.0%	2.0	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Therefore, gross profit related to our holding and others segment was Ps.51.3 million for the fiscal year ended December 31, 2015, 21.4% lower compared to Ps.65.3 million for the same period of 2014.

                We did not record significant selling expenses related to our holding and others segment.

                Administrative expenses increased 60.5% to Ps.130.7 million for the fiscal year ended December 31, 2015, compared to Ps.81.5 million for the same period in 2014, principally due to higher fees of directors and statutory auditors (Ps.19.3 million), fees for third-party services (Ps.19.0 million) and taxes, rates and contributions (Ps.18.7 million). These effects were partly offset by lower labor costs (Ps.4.2 million). The following table illustrates the main components of administrative expenses from our holding and others segment for the specified periods:

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2015		2014
Taxes, rates and contributions	32.2	24.6%	13.5	16.6%
Directors' and statutory auditors' fees	31.4	24.0%	12.1	14.8%
Fees for third-party services	31.3	23.9%	12.3	15.1%
Labor costs	19.0	14.5%	23.2	28.4%
Directors' options reserve	0.0	0.0%	6.7	8.2%
Others	16.9	12.9%	13.7	16.8%
Total	130.7	100.0%	81.5	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                Other operating income and expenses from our holding and others segment registered a profit of Ps.211.8 million during fiscal year ended December 31, 2015, 4,955.4% higher compared to a gain of Ps.4.2 million for the same period in 2014. Mainly due to the profits registered of Ps.215.4 million from the cancellation of TGS loan granted by TGS through the assignment of the ICSID Claim to TGS (See Item 4 – Our Business – TGS – Ciesa Transaction”). The following table shows the main components of our holding and other segment other operating income and expenses for the specified periods:

178

 

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2015		2014
Gain from discharge/cancellation of TGS Loan	215.4	101.7%	0.0	-
Debit and credit tax	(3.3)	(1.6%)	(0.9)	(21.7%)
Provision for fiscal credits	(2.5)	(1.2%)	(0.2)	(4.7%)
Recovery of expenses	2.4	1.2%	1.7	40.3%
Provision for contingencies	(0.1)	(0.1%)	(0.9)	(21.8%)
Dividends	0.0	-	3.4	82.3%
Others	(0.1)	(0.0%)	1.1	25.5%
Total	211.8	100.0%	4.2	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

                The operating gain related to our holding and others segment amounted to Ps.122.4 million for the fiscal year ended December 31, 2015, compared to an operating loss of Ps.13.6 million for the same period in 2014, primarily due to the profits arising from the cancellation of the debt under the loan granted by TGS described above.

                Financial results related to holding and others segment represented a profit of Ps.2,257.4 million for the fiscal year ended December 31, 2015, compared to Ps.921.4 million for the same period in 2014, mainly due to higher profits for changes in the fair value of financial assets (Ps.1,074.8 million), net foreign exchange differences (Ps.262.1 million) and the repurchase of corporate bonds (Ps.7.2 million), partially offset by higher losses from net financial interest (Ps.1.1 million) and fiscal interest (Ps.8.3 million). The following table ilustrates the main components of financial results from our holding and others segment for the specified periods:

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2015		2014
Financial income
Financial interest	25.5	100.0%	13.1	100.0%
Subtotal	25.5	100.0%	13.1	100.0%
Financial cost
Fiscal interest	(21.7)	108.1%	(13.4)	(1,575.5%)
Financial interest	2.8	(13.9%)	16.3	1,918.3%
Others	(1.2)	5.8%	(2.1)	(242.8%)
Subtotal	(20.1)	100.0%	0.8	100.0%
Other financial results
Changes in the fair value of financial instruments	1,637.0	72.7%	562.2	62.0%
Foreign exchange differences, net	605.0	26.9%	343.0	37.8%
Result from repurchase of Corporate Bonds	9.9	0.4%	2.7	0.3%
Others	(0.0)	(0.0%)	(0.5)	(0.1%)
Subtotal	2,251.9	100.0%	907.5	100.0%
Total	2,257.4	100.0%	921.4	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Also, our holding and others segment recorded an income tax charge of Ps.54.5 million for the fiscal year ended December 31, 2015, compared to a charge of Ps.27.8 million for the same period of 2014.

179

 

                Finally, our holding and others segment registered a net profit of Ps.2,325.3 million for the fiscal year ended December 31, 2015 compared to a net profit of Ps.879.9 million recorded in the same period of 2014, attributable to the Company’s owners.

180

 

Year ended December 31, 2014 compared to year ended December 31, 2013

Generation Segment

Generation net sales increased by 31.4% to Ps. 2,275.5 million for the fiscal year ended December 31, 2014 from Ps.1,731.3 million for the same period in 2013. The increase of Ps.544.1 million in electricity generation net sales was mainly due to the combined effect of the growth in average electricity selling prices calculated for the segment (Ps.225.3 per MWh for the fiscal year ended December 31, 2014, compared to Ps.193.0 per MWh for the same period in 2013, which represents a sales increase of Ps.287.8 million), and also due to the amount of electricity sold for the segment (9,802.0 GWh for the fiscal year ended December 31, 2014, compared to 8,908.8 GWh for the same period in 2013, which represents a sales increase of Ps.201.2 million).

Average electricity generation selling prices in this segment reflects the impact of the pricing scheme provided in SE Resolution No. 529/2014, which was passed in May 2014 and changed the remuneration sheme provided under SE Resolution No. 95/2013 with retroactive effect to February 2013 and the changes in the exchange rate, which impacted our Energía Plus and SE Resolution No. 220/2007 agreements. Moreover, the increase in electricity sales (in GWh) was mainly due to greater generation in CTLL’s steam turbine and a higher dispatch at CPB. Both effects were partly offset by a lower dispatch at CTG, as well as to a lower dispatch in our hydraulic units, on account of lower water input levels in the area.The following table shows net electricity sales (in GWh) from the power generation plants:

	Fiscal Years Ended December 31,
In GWh	2014			2013
	Net generation	Purchases	Total sales	Net generation	Purchases	Total sales
Hydroelectric facilities:
HINISA	516.1	33.0	549.1	616.1	216.8	832.9
HIDISA	322.4	28.9	351.3	420.8	209.2	629.9
Thermal facilities:
CTG	1,528.2	596.2	2,124.4	1,674.8	592.8	2,267.6
CTLL	3,420.9	80.8	3,501.7	1,947.1	425.1	2,372.2
CTP*	131.1	0.0	131.1	130.3	0.0	130.3
CPB	3,089.6	54.8	3,144.4	2,229.2	446.7	2,675.9
Total	9,008.3	793.6	9,802.0	7,018.4	1,890.5	8,909.8
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Generation cost of sales decreased by 17.5% to Ps.1,176.7 million for the fiscal year ended December 31, 2014 from Ps.1,426.8 million for the same period in 2013, mainly due to the decline in energy purchases of 80.8% in our hydroelectric power units and of 47.3% in our thermal power units, due to the fact that as from the implementation of SE Resolution No. 95/2013 the WEM agreement administration has been managed by CAMMESA. The reduction in cost of sales was also due to a drop of 84.0% in penalties and 20.3% in maintenance costs of our thermal power units as CTLL’s steam turbine was fixed. These effects were partly offset by greater labor costs of 32.8% in our hydraulic power units and of 41.1% in our thermal power units, as well as a 42.9% increase in our hydroelectric facilities maintenance costs. The following table shows the main components of our generation segment cost of sales for the specified periods:

181

 

	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2014		2013
Hydroelectric facilities:
Labor costs	55.3	34.1%	41.7	17.1%
Energy purchases	25.1	15.5%	131.2	54.0%
Amortization for intangible assets	19.4	12.0%	19.4	8.0%
Royalties	18.1	11.2%	21.5	8.9%
Repairs and Maintenance	10.3	6.3%	7.2	3.0%
Rental and insurance	6.3	3.9%	4.3	1.8%
Material consumption	3.1	1.9%	2.3	0.9%
Fees for third-party services	2.3	1.4%	1.7	0.7%
Depreciation of property, plant and equipment	1.7	1.1%	1.7	0.7%
Others	20.4	12.6%	12.0	4.9%
Total hydroelectric	162.2	100.0%	243.0	100.0%
Thermal facilities:
Energy purchases	218.5	21.5%	414.9	35.0%
Labor costs	215.6	21.3%	152.8	12.9%
Gas consumption	213.8	21.1%	182.5	15.4%
Depreciation of property, plant and equipment	107.1	10.6%	80.0	6.8%
Repairs and Maintenance	74.3	7.3%	93.3	7.9%
Material consumption	42.2	4.2%	38.4	3.2%
Rental and insurance	42.1	4.2%	40.8	3.4%
Fees for third-party services	20.8	2.1%	21.0	1.8%
Penalties	11.4	1.1%	71.0	6.0%
Liquid fuel consumption	0.0	0.0%	29.3	2.5%
Others	68.6	6.8%	59.7	5.0%
Total thermal	1,014.5	100.0%	1,183.8	100.0%
Total	1,176.7	100.0%	1,426.8	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Therefore, our generation segment gross profit increased by 260.8% to Ps.1,098.8 million for the fiscal year ended December 31, 2014 compared to Ps.304.5 million for the same period in 2013.

Selling expenses from our generation segment decreased to Ps.17.9 million for the fiscal year ended December 31, 2014, compared to Ps.78.5 million for the same period in 2013, mainly due to a Ps.44.7 million decrease in the amount paid for tax sales and a Ps.16.1 million decrease in doubtful accounts. Selling expenses relating to our hydroelectric power units amounted to Ps.8.4 million and Ps.22.0 million, and those corresponding to our thermal power units reached Ps.9.5 million and Ps.56.5 million for the fiscal years ended December 31, 2014 and 2013, respectively. The following table shows the main components of our generation segment selling expenses for the specified periods:

182

 

	Fiscal Years Ended December 31,
Selling Expenses, in AR$mm except %	2014		2013
Taxes, rates and contributions	9.1	50.6%	53.8	68.5%
Labor costs	4.8	26.9%	4.7	6.0%
Doubtful accounts	1.5	8.3%	17.6	22.5%
Others	2.5	14.1%	2.4	3.0%
Total	17.9	100.0%	78.5	100.0%
Of which:
Hydroelectric	8.4	46.8%	22.0	28.1%
Thermal	9.5	53.2%	56.5	71.9%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Generation administrative expenses increased to Ps.200.0 million for the fiscal year ended December 31, 2014, compared to Ps.139.0 million for the same period in 2013, mainly due to higher labor costs in our generation subsidiaries. Administrative expenses corresponding to our hydroelectric units amounted to Ps.21.5 million and Ps.20.2 million, while our thermal power units amounted to Ps.178.5 million and Ps.118.8 million for the fiscal years ended December 31, 2014 and 2013, respectively. The following table shows the main components of our generation segment administrative expenses segment for the specified periods:

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2014		2013
Labor costs	105.7	52.8%	76.0	54.6%
Fees for third-party services	50.4	25.2%	28.1	20.2%
Rental and insurance	12.1	6.1%	5.1	3.7%
Depreciation of property, plant and equipment	5.7	2.8%	6.4	4.6%
Taxes, rates and contributions	5.2	2.6%	5.7	4.1%
Others	20.9	10.5%	17.8	12.8%
Total	200.0	100.0%	139.0	100.0%
Of which:
Hydroelectric	21.5	10.8%	20.2	14.5%
Thermal	178.5	89.2%	118.8	85.5%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Other generation operating income and expenses resulted in a total profit of Ps. 39.9 million and Ps.315.9 million for the fiscal years ended December 31, 2014 and 2013, respectively, mainly due to the recovery of insurance claims registered by CTLL and the registration of the discount granted as compensation for breaches (reversal of the provision) of the Isolux agreement for CTLL expansion works in 2013. The following table shows the main components of our generation segment other operating income and expenses for the specified periods:

183

 

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2014		2013
Recovery of receivables	49.5	124.0%	0.5	0.2%
Recovery of tax on gross income	37.9	95.1%	-	-
Debit and credit tax	(30.9)	(77.4%)	(25.4)	(8.0%)
Provision for contigencies	(20.1)	(50.4%)	-	-
Other operating costs for contract termination	(11.4)	(28.5%)	-	-
Recovery of insurance	5.6	14.1%	246.0	77.9%
Provision for fiscal credits	(4.0)	(10.0%)	(7.7)	(2.4%)
Recognition of March Agreement	-	-	85.2	27.0%
Others	13.2	33.0%	17.3	5.5%
Total	39.9	100.0%	315.9	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Generation operating income increased by 150.5% to Ps.1,009.1 million for the fiscal year ended December 31, 2014, compared to Ps.402.8 million for the same period in 2013. Operating profit further reflectsthe reversal of an impairment in property, plant and equipment by Ps.88.4 million in December 31, 2014.

Generation financial results accounted for a loss of Ps.152.1 million for the fiscal year ended December 31, 2014, compared to a loss of Ps.590.0 million for the same period in 2013, mainly due to an increase in adjustments to current value of CAMMESA’s consolidated credits (Ps.375.6 million) and income for commercial interest (141.0 million), which were partly offset by an increase in net foreign exchange losses (Ps.104.8 million).The following table shows the main components of our generation segment financial income for the specified periods:

184

 

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2014		2013
Financial income
Commercial interest	179.2	74.4%	48.4	75.7%
Financial interest	61.7	25.6%	15.5	24.3%
Others	0.0	0.0%	0.0	0.1%
Subtotal	240.9	100.0%	63.9	100.0%
Financial cost
Financial interest	(222.8)	71.7%	(176.7)	81.6%
Fiscal interest	(31.7)	10.2%	(22.2)	10.3%
Commercial interest	(1.1)	0.4%	(11.3)	5.2%
Others	(55.2)	17.7%	(6.2)	2.9%
Subtotal	(310.8)	100.0%	(216.5)	100.0%
Other financial results
Foreign exchange differences, net	(417.9)	508.0%	(313.1)	71.6%
Results from current value measurement	216.4	(263.1%)	(159.2)	36.4%
Changes in the fair value of financial instruments	116.1	(141.1%)	34.9	(8.0%)
Other financial results	3.2	(3.8%)	-	-
Subtotal	(82.3)	100.0%	(437.5)	100.0%
Total	(152.1)	100.0%	(590.0)	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Our generation segment recorded an income tax charge of Ps.224.1 million for the fiscal year ended December 31, 2014, compared to a charge of Ps.20.7 million for the same period in 2013.

Finally, our generation segment recorded a net profit of Ps.633.0 million for the fiscal year ended December 31, 2014, of which Ps.529.3 million are attributable to the owners of the Company, compared to a loss of Ps.191.9 million for the same period in 2013 attributable to the owners of the Company.

Transmission Segment

Transmission net sales increased by 69.0% to Ps.738.4 million for the fiscal year ended December 31, 2014, compared to Ps.436.9 million for the same period in 2013. Net regulated sales increased by 72.1% to Ps.577.2 million for the fiscal year ended December 31, 2014, from Ps.335.4 million recorded for the same period in 2013, mainly as a result of greater recognition of cost variations (Ps.425.0 million in 2014 compared to Ps.183.6 million in 2013), pursuant to the Instrumental Agreement and the Renewal Agreement. Net revenues from royalties increased by 19.3% to Ps.9.1 million for the fiscal year ended December 31, 2014 from Ps.7.6 million for the same period in 2013. Other sales increased by 62.0% to Ps.152.1 million for the fiscal year ended December 31, 2014 from Ps.93.9 million for the same period in 2013, mainly as a result of increased unregulated revenues from Transener (supervision and construction works) and Transba.

Transmission cost of sales increased by 37.1% to Ps.539.7 million for the period ended December 31, 2014, compared to Ps.393.7 million for the same period in 2013, mainly as a result of prevailing increases in labor costs in 2014. The following table shows the main components of our transmission segment cost of sales for the specified periods:

185

 

	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2014		2013
Labor costs	298.8	55.4%	215.8	54.8%
Material comsuption	52.6	9.7%	12.1	3.1%
Depreciation of property, plant and equipment	42.8	7.9%	40.9	10.4%
Repairs and Maintenance	25.7	4.8%	20.4	5.2%
Rental and insurance	23.1	4.3%	3.2	0.8%
Transport and per diem	23.0	4.3%	18.4	4.7%
Fees for third-party services	13.7	2.5%	10.4	2.6%
Others	60.0	11.1%	72.5	18.4%
Total	539.7	100.0%	393.7	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Therefore, transmission gross profit increased to Ps.198.7 million for the fiscal year ended December 31, 2014, from a Ps.43.2 million profit for the same period in 2013, mainly as a result of greater sales recognition arising from the Instrumental Agreement and the Renewal Agreement.

We do not record selling expenses related to our transmission activities.

Transmission administrative expenses increased by 35.7% to Ps.91.8 million for the fiscal year ended December 31, 2014, compared to Ps.67.7 million for the same period in 2013, mainly due to a labor cost increase associated with higher salaries. The following table shows the main components of our transmission segment administrative expenses for the specified periods:

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2014		2013
Labor costs	67.1	73.1%	44.3	65.4%
Fees for third-party services	6.0	6.5%	4.3	6.4%
Depreciation of property, plant and equipment	4.3	4.7%	4.2	6.2%
Insurance and rentals	3.4	3.7%	5.1	7.5%
Others	11.0	12.0%	9.8	14.5%
Total	91.8	100.0%	67.7	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Other transmission operating income and expenses recorded a loss of Ps.7.6 million for the fiscal year ended December 31, 2014, compared to a Ps.2.6 million profit for the same period in 2013. The following table shows the main components of our transmission segment other operating income and expenses for the specified periods:

186

 

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2014		2013
Debit and credit tax	(11.1)	146.1%	(7.0)	(269.2%)
Recovery of insurance	2.7	(35.6%)	9.3	357.7%
Others	0.8	(10.4%)	0.3	11.5%
Total	(7.6)	100.0%	2.6	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Transmission operating income accounted for a profit of Ps.99.3 million for the fiscal year ended December 31, 2014, compared to a loss of Ps.21.9 million for the same period in 2013, mainly as a result of increases in regulated sales, which were partly offset by increases in the above-described costs and expenses.

                Transmission financial results accounted for a profit of Ps.24.7 million for the fiscal year ended December 31, 2014, compared to a profit of Ps.16.2 million for the same period in 2013, mainly as a result of an increase in interest income from the Fourth Line and the IVC under the Memorandum of Understanding (Ps.53.1 million), partly offset by an increase in foreign exchange losses (Ps.16.4 million), and financial interest on liabilities (Ps.17.4 million). The following table shows the main components of our transmission segment financial results income for the specified periods:

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2014		2013
Financial income
Financial interest	226.1	100.0%	173.0	100.0%
Subtotal	226.1	100.0%	173.0	100.0%
Financial cost
Financial interest	(58.9)	99.2%	(41.5)	99.0%
Others	(0.5)	0.8%	(0.4)	1.0%
Subtotal	(59.4)	100.0%	(41.9)	100.0%
Other financial results
Foreign exchange differences, net	(138.4)	97.4%	(122.0)	106.2%
Others	(3.6)	2.6%	7.1	0.3%
Subtotal	(142.0)	100.0%	(114.9)	100.0%
Total	24.7	100.0%	16.2	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Our transmission segment recorded an income tax charge of Ps.51.4 million for the fiscal year ended December 31, 2014, compared to a profit of Ps.0.8 million for the same period in 2013.

Finally, our transmission segment recorded a net profit of Ps.34.1 million for the fiscal year ended December 31, 2014, compared to a net loss of Ps.4.9 million for the same period in 2013, both attributable to the Company’s owners.

187

 

Distribution Segment

Net sales from our distribution activities increased by 4.6% to Ps.3,598.4 million in the fiscal year ended December 31, 2014, compared to Ps.3,440.7 million for the same period in 2013, mainly due to charges collected from Edenor’s customers to be allocated to the FOCEDE fund, implemented under Resolution No. 347/2012. Edenor’s electricity sales volume between 2013 and 2014 decreased in 382 GWh, compared to sales volume being 21,292 GWh in 2014 to 21,674 GWh in 2013.

The cost of sales increased by 14.4% to Ps.4,716.5 million in the fiscal year ended December 2014, compared to Ps.4,122.5 million for the same period in 2013, mainly due to higher labor costs. The following table shows the main components of our distribution segment cost of sales for the specified periods:

	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2014		2013
Energy purchases	1,878.1	39.8%	2,050.3	49.7%
Labor costs	1,373.2	29.1%	790.7	19.2%
Fees for third-party services	714.3	15.1%	665.1	16.1%
Penalties	233.9	5.0%	234.8	5.7%
Depreciation of property, plant and equipment	211.8	4.5%	201.7	4.9%
Materials for works	205.9	4.4%	121.9	3.0%
Others	99.4	2.1%	58.0	1.4%
Total	4,716.5	100.0%	4,122.5	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Therefore, the gross loss from our distribution activities increased to Ps.1,118.1 million in the fiscal year ended December 31, 2014, compared to a loss of Ps.681.8 million for the same period in 2013, mainly due to the cost of sales increase that was not offset by a revenue increase.

Selling expenses increased by 20.0% to Ps.658.9 million in the fiscal year ended December 31, 2014, compared to Ps.549.1 million for the same period in 2013, mainly due to increases in third-party compensation and fees between both periods, and labor cost increases resulting from granted wage increases, partly offset by lower penalties and doubtful accounts. The following table shows the main components of our distribution segment selling expenses for the specified periods:

	Fiscal Years Ended December 31,
Selling Expenses, in AR$mm except %	2014		2013
Fees for third-party services	262.8	39.9%	198.5	36.1%
Labor costs	249.0	37.8%	179.4	32.7%
Taxes, rates and contributions	42.2	6.4%	34.3	6.3%
Communication Expenses	39.1	5.9%	32.6	5.9%
Doubtful accounts	21.5	3.3%	38.0	6.9%
Penalties	18.4	2.8%	52.7	9.6%
Others	25.9	3.9%	13.7	2.5%
Total	658.9	100.0%	549.1	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Administrative expenses from our distribution segment increased by 53.4% to Ps.510.3 million for the fiscal year ended December 31, 2014, compared to Ps.322.6 million for the same period in 2013, mainly due to labor cost increases resulting from wage increases, and increases in third-party compensation and fees between both periods. The following table shows the main components of our distribution segment administrative expenses for the specified periods:

188

 

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2014		2013
Labor costs	245.5	48.1%	152.7	45.9%
Fees for third-party services	157.8	30.9%	107.1	32.2%
Insurance and rentals	35.2	6.9%	21.9	6.6%
Security surveillance expenses	15.1	3.0%	10.4	3.1%
Others	56.6	11.1%	40.6	12.2%
Total	510.3	100.0%	332.6	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Other operating income and expenses for the fiscal year ended December 31, 2014, amounted to a net loss of Ps.266.1 million, compared to a loss of Ps.81.2 million for the same period in 2013. The following table shows the main components of our distribution segment other operating income and expenses for the specified periods:

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2014		2013
Other expenses FOCEDE	(97.7)	36.7%	-	-
Provision for contigencies	(75.4)	28.3%	(36.0)	44.4%
Debit and credit tax	(65.1)	24.5%	(55.8)	68.8%
Income from services to third-parties	33.3	(12.5%)	21.7	(26.7%)
Voluntary retirements	(25.0)	9.4%	(15.9)	19.6%
Net expenses for technical functions	(16.2)	6.1%	(15.5)	19.2%
Allowance for uncollectible tax credits	(0.1)	0.0%	-	-
Others	(19.8)	7.4%	20.4	(25.2%)
Total	(266.1)	100.0%	(81.2)	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Operating income from our distribution activities decreased by Ps.1,569.9 million to a loss of Ps.281.5 million for the fiscal year ended December 31, 2014, compared to a profit of Ps.1,288.4 million for the same period in 2013, mainly due to the fact that the implementation of SE Resolution No. 250/2013 and the subsequent Notes were not enough to offset higher operating costs. Under this resolution there was a recognition of higher costs for Ps.2,271.9 million in the fiscal year 2014, compared to Ps.2,993.1 million for the same period in 2013. Excluding such effect, operating income from our distribution segment would account for a loss of Ps.2,553.4 million for the fiscal year 2014.

Financial results related to our distribution activities represented a loss of Ps.981.6 million for the fiscal year ended December 31, 2014, a 39.4% higher loss compared to a loss of Ps.704.2 million for the same period of 2013, primarily due to the appreciation of the U.S. Dollar on the outstanding debt incurred in said currency (Ps.115.4 million), and losses from commercial interest under the debt with CAMMESA (Ps.133.9 million). The following table illustrates the main components of financial results from our distribution segment for the specified periods:

189

 

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2014		2013
Financial income
Financial interest	195.7	81.9%	238.0	82.9%
Commercial interest	43.3	18.1%	49.1	17.1%
Subtotal	239.0	100.0%	287.1	100.0%
Financial cost
Commercial interest	(459.7)	66.4%	(325.8)	57.6%
Financial interest	(193.6)	28.0%	(214.7)	37.9%
Fiscal interest	(5.9)	0.9%	(13.8)	2.4%
Others	(33.3)	4.8%	(11.5)	2.0%
Subtotal	(692.5)	100.0%	(565.8)	100.0%
Other financial results
Foreign exchange differences, net	(647.8)	122.7%	(532.5)	125.1%
Changes in the fair value of financial instruments	68.1	(12.9%)	15.0	(3.5%)
Result from repurchase of financial debt	44.4	(8.4%)	88.9	(20.9%)
Others	7.3	(1.4%)	3.1	(0.7%)
Subtotal	(528.1)	100.0%	(425.5)	100.0%
Total	(981.6)	100.0%	(704.2)	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

In turn, our distribution operations recorded an income tax charge of Ps.161.8 million in the fiscal year ended December 31, 2014, compared to Ps.52.7 million credits in the same period of 2013.

Finally, our distribution activities registered a net loss of Ps.1,101.4 million for the fiscal year ended December 31, 2014, of which Ps.742.1 million are attributable to the Company’s owners, compared to a gain of Ps.163.5 million for the same period in 2013 attributable to the Company’s owners.

190

 

Oil and gas Segment

Net sales related to our oil and gas segment were Ps.356.8 million for the fiscal year ended December 31, 2014, 109.6% higher compared to Ps.170.1 million in the same period of 2013. These sales mostly corresponded to sales of gas and oil. The following table shows Petrolera Pampa’s oil and gas production under the investment agreements entered into by Petrolera Pampa for the specified periods :

	Fiscal Years Ended December 31,
	2014	2013
Oil (m3/d)
Ysur	9.3	11.2
Petrobras	3.9	4.2
YPF	2.9	0.0
Total	16.1	15.4
Gas (m3/d)
Ysur	90.7	98.1
Petrobras	365.1	275.6
YPF	355.7	-
Total	811.5	373.7
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Cost of sales related to our oil and gas segment increased by 128.1% to Ps.201.2 million in the fiscal year ended December 31, 2014 compared to Ps.88.2 million for the same period of 2013.The following table illustrates the main components of cost of sales from our oil and gas segment for the specified periods:

	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2014		2013
Depreciation of property, plant and equipment	80.6	40.1%	35.6	40.4%
Royalties	49.4	24.6%	24.03	27.3%
Gas production	37.6	18.7%	11.6	13.1%
Fees for third-party services	17.3	8.6%	9.1	10.3%
Labor costs	6.8	3.4%	3.9	4.4%
Others	9.4	4.6%	4.0	4.5%
Total	201.2	100.0%	88.2	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Therefore, gross profit related to our oil and gas segment was Ps.155.6 million for the fiscal year ended December 31, 2014 compared to Ps.81.9 million for the same period of 2013.

Selling expenses related to our oil and gas segment increased to Ps.36.5 million for the fiscal year ended December 31, 2014 compared to Ps.8.5 million for the same period of 2013. The following table illustrates the main components of selling expenses from our oil and gas segment for the specified periods:

191

 

	Fiscal Years Ended December 31,
Selling Expenses, in AR$mm except %	2014		2013
Compensation agreements	19.3	52.9%	1.9	22.5%
Taxes, rates and contributions	13.2	36.1%	5.3	62.2%
Others	4.0	11.0%	1.3	15.4%
Total	36.5	100.0%	8.5	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Administrative expenses increased 172.4% to Ps.71.1 million for the fiscal year ended December 31, 2014 compared to Ps.26.1 million for the same period of 2013, principally due to higher fees for third-party services, compensation agreements with some of Petrolera Pampa’s executives and labor costs. The following table illustrates the main components of administrative expenses from our oil and gas segment for the specified periods:

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2014		2013
Fees for third-party services	25.7	36.2%	5.3	20.3%
Compensation agreements	25.6	36.0%	7.0	26.8%
Labor costs	13.6	19.2%	7.8	29.8%
Others	6.1	8.6%	6.1	23.2%
Total	71.1	100.0%	26.1	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Other operating income from our oil and gas activities registered a profit of Ps.86.9 million for the fiscal year ended December 31, 2014, 233.3% higher compared to a gain of Ps.26.1 million for the same period in 2013, mainly due to Ps.104.5 million from the implementation of Natural Gas Excess Injection Encouragement Program of Petrolera Pampa, which was partly offset by losses in property, plant and equipment (Ps.18.1 million) and compensation agreements (Ps.16.7 million). The following table shows the main components of our oil and gas segment other operating income and expenses for the specified periods:

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2014		2013
Res. No, 1/13 Natural Gas Excess Injection Income	127.1	146.4%	22.6	86.4%
Decrease in property, plant and equipment	(21.8)	(25.1%)	(3.6)	(13.9%)
Compensation agreements	(16.7)	(19.2%)	0.0	-
Debit and credit tax	(12.8)	(14.8%)	(1.7)	(6.5%)
Recovery of expenses	6.5	7.5%	6.9	26.4%
Others	4.5	5.1%	2.0	7.7%
Total	86.9	100.0%	26.1	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

The operating gain related to our oil and gas segment amounted to Ps.134.9 million for the fiscal year ended December 31, 2014 compared to an operating gain of Ps.73.5 million for the same period of 2013, primarily explained by an increase in net sales from Petrolera Pampa in 2014 and Resolution No. 1/2013 Natural Gas Excess Injection Income.

192

 

Financial results related to our oil and gas activities represented a loss of Ps.40.7 million for the fiscal year ended December 31, 2014 compared to a loss of Ps.32.1 million for the same period of 2013, primarily due to higher losses from net financial interest (Ps.104.4 million), partially offset by higher profits from changes on the fair value of financial assets (Ps.106.2 million). The following table shows the main components of financial results from our oil and gas segment for the specified periods:

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2014		2013
Financial income
Financial interest	12.7	98.3%	2.0	97.0%
Others	0.2	1.7%	0.1	3.0%
Subtotal	12.9	100.0%	2.1	100.0%
Financial cost
Financial interest	(173.5)	98.2%	(58.5)	97.3%
Others	(3.2)	1.8%	(1.6)	2.7%
Subtotal	(176.7)	100.0%	(60.1)	100.0%
Other financial results
Changes in the fair value of financial instruments	144.3	117.3%	38.1	146.4%
Foreign exchange differences, net	(21.3)	(17.3%)	(12.1)	(46.4%)
Subtotal	123.0	100.0%	26.0	100.0%
Total	(40.7)	100.0%	(32.0)	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Also, our oil and gas segment recorded an income tax charge of Ps.10.2 million for the fiscal year ended December 31, 2014, compared to a charge of Ps.4.2 million for the same period of 2013.

Finally, our oil and gas segment registered a net profit of Ps.83.9 million for the fiscal year ended December 31, 2014, of which Ps.41.9 are attributable to the owners of the Company, compared to a net profit of Ps.37.2 million recorded in the same period of 2013, attributable to the owners of the Company.

193

 

Holding and Others Segment

Net sales related to our holding and others segment were Ps.67.2 million for the fiscal year ended December 31, 2014, 53.2% higher compared to Ps.43.9 million in the same period of 2013. These sales mostly corresponded to fees collected from companies of our other segments.

Cost of sales related to our holding and others segment increased by 136.2% to Ps.2.0 million in the fiscal year ended December 31, 2014 compared to Ps.0.8 million for the same period of 2013.The following table shows the main components of cost of sales from our holding and others segment for the specified periods:

	Fiscal Years Ended December 31,
Cost of Sales, in AR$mm except %	2014		2013
Inventory purchases	1.2	59.8%	0.2	20.0%
Labor costs	0.5	23.2%	0.4	45.3%
Others	0.3	17.0%	0.3	34.6%
Total	2.0	100.0%	0.8	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Therefore, gross profit related to our holding and others segment was Ps.65.3 million for the fiscal year ended December 31, 2014 compared to Ps.43.0 million for the same period of 2013.

We do not record selling expenses related to our holding and others segment.

Administrative expenses increased 3.0% to Ps.81.5 million for the fiscal year ended December 31, 2014 compared to Ps.78.8 million for the same period of 2013, principally due to higher labor costs. The following table illustrates the main components of administrative expenses from our holding and others segment for the specified periods:

	Fiscal Years Ended December 31,
Administrative Expenses, in AR$mm except %	2014		2013
Labor costs	23.2	28.4%	17.8	22.8%
Taxes, rates and contributions	13.5	16.6%	18.1	23.2%
Fees for third-party services	12.3	15.1%	11.8	15.0%
Directors' and statutory auditors' fees	12.1	14.8%	12.5	16.0%
Directors' options reserve	6.7	8.2%	8.9	11.4%
Others	13.7	16.8%	9.1	11.6%
Total	81.5	100.0%	78.2	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Other operating income and expenses from our holding and other segment registered a profit of Ps.4.2 million for the fiscal year ended December 31, 2014, 218.3% higher compared to a gain of Ps.1.3 million for the same period in 2013. The following table shows the main components of our holding and others segment other operating income and expenses for the specified periods:

194

 

	Fiscal Years Ended December 31,
Other Op. Income & Expenses, in AR$mm except %	2014		2013
Dividends	3.4	82.3%	4.5	355.0%
Recovery of expenses	1.7	40.3%	3.1	241.2%
Provision for contingencies	(0.9)	(21.8%)	(0.4)	(31.3%)
Debit and credit tax	(0.9)	(21.7%)	(0.9)	(68.4%)
Provision for fiscal credits	(0.2)	(4.7%)	(2.3)	(183.9%)
Others	1.1	25.5%	(2.7)	(212.6%)
Total	4.2	100.0%	1.3	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

The operating loss related to our holding and others segment amounted to Ps.13.6 million for the fiscal year ended December 31, 2014 compared to an operating loss of Ps.31.5 million for the same period of 2013.

Financial results related to our holding and others represented a profit of Ps.921.4 million for the fiscal year ended December 31, 2014 compared to a profit of Ps.329.4 million for the same period of 2013, primarily due to higher profits for changes on the fair value of financial assets (Ps.354.3 million) and net foreign exchange differences (Ps.229.4 million). The following table illustrates the main components of financial results from our holding and others segment for the specified periods:

	Fiscal Years Ended December 31,
Financial Results, in AR$mm except %	2014		2013
Financial income
Financial interest	13.1	100.0%	4.5	100.0%
Subtotal	13.1	100.0%	4.5	100.0%
Financial cost
Financial interest	16.3	1,918.3%	16.5	230.6%
Fiscal interest	(13.4)	(1,575.5%)	(4.9)	(68.3%)
Others	(2.1)	(242.8%)	(4.5)	(62.3%)
Subtotal	0.8	100.0%	7.1	100.0%
Other financial results
Changes in the fair value of financial instruments	562.2	62.0%	207.9	65.4%
Foreign exchange differences, net	343.0	37.8%	113.5	35.7%
Result from repurchase of Corporate Bonds	2.7	0.3%	-	-
Others	(0.5)	(0.1%)	(3.7)	(1.2%)
Subtotal	907.5	100.0%	317.7	100.0%
Total	921.4	100.0%	329.4	100.0%
Note: All figures have been subject to rounding, so figures shown as totals may not sum.

Also, our holding and others segment recorded an income tax charge of Ps.27.8 million for the fiscal year ended December 31, 2014, compared to a charge of Ps.15.7 million for the same period of 2013.

195

 

Finally, our holding and others segment registered a net profit of Ps.879.9 million for the fiscal year ended December 31, 2014, which are attributable to the owners of the Company, compared to a net profit of Ps.282.2 million recorded in the same period of 2013, attributable to the owners of the Company.

196

 

Liquidity and Capital Resources

Sources and uses of funds

We acquired our principal generation, transmission and distribution assets relatively recently, beginning in the second half of 2006.  Our principal source of liquidity for these acquisitions was capital contributions from our shareholders, particularly our September 2006 and February 2007 equity offerings.  We have also used a combination of funds from operations and short-term borrowings to makeour last acquisitions.  In September 2006, we consummated a capital increase of 300 million shares of our common stock, including shares issued in the form of GDSs, which was subscribed by Argentine and international investors and generated aggregate cash proceeds to us of approximately Ps. 345 million.  In February 2007 we consummated an additional capital increase of 600 million shares of our common stock, including shares issued in the form of GDSs in an underwritten offering to Argentine and international investors, which generated aggregate cash proceeds to us of approximately Ps. 1.3 billion.  In addition, we acquired our indirect controlling interest in EASA in September 2007 through an exchange of newly-issued shares of our company for the shares of DESA and IEASA held by EASA’s former indirect shareholders.  In connection with this acquisition, in September 2007 we issued 480,194,242 additional shares of our common stock to the former indirect shareholders of EASA, including shares issued in the form of GDSs.  In 2011, we acquired: a controlling interest in EMDERSA and AESEBA, the CIESA Bonds and other liabilities of CIESA, and PEPCA through a combination of funds from operations, and short-term borrowings, a significant part of which has already been cancelled. In 2012, we spun off EMDERSA and sold its subsidiaries other than EDELAR and EGSSA, as well as started the exchange process from CIESA notes to CIESA shares.  In March 2013, we sold our controlling interest in AESEBA and in October 2013, we sold our controlling interest in EDELAR. On November 2015, the holders of all warrants formally communicated their decision to exercise them against the payment of the exercise price. On December 2015, against the payment of US$ 103 millon, the Company issued 381,548,564 new common shares in the form of ADS. After such issuance, the Company’s current capital stock is comprised of 1,695,859,459 common shares.

Our business activities are now focused on the development and value-enhancement of our energy assets, while continuing to identify, evaluate and invest in other opportunities in the Argentine energy industry that offer significant growth potential and/or synergies with our electricity businesses such as our investments in the oil and gas sector.  Historically, our operating subsidiaries have relied on their respective cash flows from operations and on short-term and long-term borrowings to finance their operations, including capital expenditures.  As of April 30, 2015, due to tariff freeze and increased operating costs, our subsidiaries began to received financing from the Argentine Government (mainly from CAMMESA) in order to fulfill the operating deficit or to make capital expenditures. We expect that our principal sources of liquidity for any future acquisitions by us will include capital contributions from our shareholders, cash flow from the operations of our subsidiaries and short-term and long-term borrowings. Under current conditions, we expect our operating subsidiaries will continue to rely on cash flow from operations and short-term and long-term borrowings and government financing to finance their capital requirements in the near term. We currently expect to generate sufficient working capital through cash flow generated from operations, short- and long-term borrowings and other additional financing activities.

In the Distribution segment, our cash flows from operations have been significantly affected in recent periods due to our failure to obtain adjustments to our tariffs to cover increases in our distribution costs, resulting in a working capital deficit as of December 31, 2015, 2014 and 2013. In order to preserve and guarantee the provision of the public service and improve the existing cash deficit, beginning in October 2012 Edenor decided to partially cancel the obligations with CAMMESA with surplus cash balances. This decision arose as a consequence of the volume of commitments necessary to ensure the provision of the public service, including investment plans and ongoing operation and maintenance tasks. In 2015, following the issuance of SE Resolution No. 32/2015, Edenor resumed full payment of its commercial obligations with CAMMESA, but did not cancel past commercial debt. As of the date of this annual report, Edenor’s commercial debt with CAMMESA amounts to approximately Ps. 2,714.3 million including interest. In November 2015, Edenor submitted to CAMMESA a repayment plan. As of the date of this annual report, negotiations with CAMMESA continue with respect to a final repayment schedule. See “Item 3. Risk Factors—Risk relating to our Distribution Business—Edenor may not have the ability to raise the funds necessary to repay its commercial debt with CAMMESA, Edenor’s major supplier.”

197

 

Since entering into the Adjustment Agreement in February 2006, Edenor has been engaged in an RTI with the ENRE, relating to the adjustment and renegotiation of the terms of the concession. If Edenor is not able to recover all of the incremental costs contemplated in the Adjustment Agreement and all such future cost increases or there is a significant lag of time between when Edenor incurs the incremental costs and when it receives increased revenues, or if it is not successful in achieving a satisfactory re-negotiation of its tariff structure, Edenor may be unable to comply with its financial and commercial obligations, it may suffer liquidity shortfalls and it may need to restructure its debt to ease its financial condition, all of which, individually or in the aggregate, would have a material adverse effect on its business and results of operations and may cause the value of its ADSs to decline.

The Argentine Government adopted a series of measures such as the issuance of ENRE Resolution No. 347/2012, SE Resolution No. 32/2015 and the granting of certain economic assistance program (through the extensions of loans for consumption (mutumms)) to help Edenor cope with its cash needs for specific purposes. The obligations deriving from such financial assistance programs are classified in our financial statements as “other payables” and the related costs as “financial expenses”, since they result from a lack of adjustment of the electricity rate schedule, which depends exclusively on the Argentine Government and financial assistance has been granted under these special circumstances. Therefore, such obligations do not constitute financing decisions made by Edenor in the ordinary course of business.

On June 24, 2014, by Note No. 4012/2014, the SE instructed CAMMESA to enter into a loan for the consumption and assignment of secured receivables agreement with Edenor in order to pay the higher salary costs. The aforementioned agreement was entered into on July 10, 2014. The agreement was guaranteed by Edenor through the assignment of future surplus sale settlements with maturity dates to be determined (Liquidaciones de Venta con Fecha de Vencimiento a Definir, or the “LVFVDs”), as a result of the application of SE Resolution No. 250/2013.

As of December 31, 2014, Edenor’s debt related to this financing amounted to Ps. 298 million (comprised of Ps.280.6 million in principal and Ps. 17.4 million in accrued interest).

In September 2014, the SE, through Resolution No. 65/2014, instructed CAMMESA to enter into a loan and guarantee assignment agreement with Edenor in order to provide the necessary financing to cover the Extraordinary Investment Plan approved by the SE as a consequence of a temporary insufficiency of funds received through SE Resolution No. 347/2012. During 2015, after several amendments, such loan agreement reached Ps. 2,913 million for the entire plan.

SE Resolution No. 32/2015 resolved that LVFVDs be issued in our favor for the amounts generated by the salary increases deriving from the application of Resolution No. 836/14 of the Ministry of Labor, Employment and Social Security for which payment Edenor received this loan;(mutuumm); allowing any amounts discussed thereunder to be offset with outstanding balances of LVFVDs. The LVFVDs were issued on July 16, 2015 to offset the debt under the loan for consumption (mutuum) and assignment of secured receivables agreement entered into to pay for the higher salaries cost.

As of December 31, 2015, the total debt under these loans (mutumms agreements) amounted to Ps. 1,099.8 million, comprised of Ps. 923.6 million in principal for the actual disbursements, and Ps. 176.2 million in accrued interest.

These loans were discontinued as from February 1, 2016 under the terms of ME&M Resolution No. 7/2016.

Edenor’s principal uses of cash are expected to be operating costs, the servicing of our financial debt and our investment plan. Edenor is subject to limitations on its ability to incur new debt under the terms of our debt instruments so the company cannot assure that it will be able to obtain additional financing on acceptable terms.

Although the ENRE is expected to take all necessary action to conclude the RTI process by December 31, 2016, the outcome of such process is uncertain. Thus, if in the future: (i) the new electricity rate schedules are not issued pursuant to the RTI by the ENRE; (ii) Edenor is not granted any other recognition of additional revenue or any other mechanism to compensate for cost increases, and/or; (iii) Edenor does not obtain from the Argentine government any other financing to cover cost increases, it is likely that Edenor will have insufficient liquidity and will therefore be obliged to pursue measures similar to those applied in the past in order to preserve cash and enhance its liquidity.

198

 

See “Item 5. Operating and Financial Review and Prospects—Factors Affecting our Results of Operations—Tariffs” and “Item 3. Key Information—Risk factors—Risks Relating to Our Distribution Business—Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our tariffs adjusted to reflect increases in our distribution costs in a timely manner or at all, has affected our capacity to perform our commercial obligations and could also have a material adverse effect on our capacity to perform our financial obligations.”

In the oil and gas segment, our financial condition and liquidity is and will continue to be influenced by a variety of factors, including: (i) our ability to generate cash flows from our operations; (ii) our capital expenditure requirements; (iii) the level of our outstanding indebtedness and the interest we are obligated to pay on this indebtedness; and (iv) changes in exchange rates that impact our generation of cash flows when measured in U.S. Dollars.

Petrolera Pampa's principal sources of liquidity have historically been contributed by shareholder equity, debt financings and cash generated by its operations. As of the date of this annual report, Petrolera Pampa is focused on the development of proved gas reserves, while continuing to identify, evaluate and invest in other opportunities in the Argentine oil and gas sector.

Petrolera Pampa believes that its current operations and 2016 capital expenditures program can be funded from cash flows from existing operations, cash on hand and by refinancing its debt securities that mature in 2016.  Should Petrolera Pampa's operating cash flow decline due to unforeseen events, including delivery restrictions or a protracted downturn in oil and gas prices, it would examine measures such as further capital expenditure program reductions, pre-sale agreements, disposition of assets or a debt or equity issuance, among others.

We record a portion of our trade receivables in our generation segment as non-current assets, as we do not expect to collect payment on these receivables within the following year in accordance with the terms of such receivables.  In our generation segment, our non-current trade receivables relate to (i) amounts owed us by FONINVEMEN, which are payable in 120 monthly installments, and (ii) credits arising from the 2008-2015 LVFVDs accrued as of SE Resolution No. 406/2003 which are not committed to other projects and as “Additional Remuneration” which are allocated to the trust included in the new scheme established for the remuneration of the generation sector provided in SE Resolution No. 95/2013, as amended, that are expected to finance the Loma de la Lata 2014 Expansion Project.

Our total non-current trade receivables amounted to Ps. 888.7 million as of December 31, 2015.   “See Item 4. – The Argentine Electricity Sector - Regulatory and Legal Framework—FONINVEMEM  - WEM Supply Agreements under SE Resolution No. 724/2008 - Price Scheme – 2008-2011 Agreement.”

Each of our segments operates as a separate entity and all funding and treasury policies are controlled at the segment level.  While we do not have a centralized funding and treasury policy among segments, we maintain our cash and cash equivalents in Pesos, and in U.S. Dollars depending on medium term requirements and availability, at all levels of operations.  We and our subsidiaries conduct financing at both variable and fixed rates.

The table below reflects our cash position at the dates indicated and the net cash provided by (used in) operating, investing and financing activities during the years indicated:

	At December 31,
	2015	2014	2013
	(in millions of pesos)
Cash at the beginning of the year	335.2	341.7	167.8
Net cash generated by operating activities	4,580.7	2,574.2	1,656.2
Net cash used in investing activities	(7,114.5)	(2,472.1)	(1,456.6)
Net cash generated by (used in) financing activities	2,637.4	(147.7)	(76.9)
Foreing currency exchange difference generated by cash and cash equivalent	77.8	39.1	51.2
Cash and cash equivalent at the end of the year	516.6	335.2	341.7

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Net cash generated by operating activities

Net cash generated by operating activities amounted to Ps. 4,580.7 million for the year ended December 31, 2015, attributable principally to net income adjustements of Ps. 2,226 million for changes in the fair value of financial instruments, Ps. 551.5 million for Higher Costs Recognition  associated with SE Resolution No. 250/2013 and subsequent Notes issued by the SE, Ps. 495.5 million for income recognition on account of the RTI associated with SE Resolution No. 32/2015 in our distribution segment and Ps. 215.4 million from the cancellation of debts with arbitration rights, which were partially offset by the positive adjustments to net income for non-cash charges in this period, including losses related to a Ps. 720.7 million for depreciation and amortization of assets, Ps. 566.2 million for foreign currency exchange difference and Ps. 859.6 million for interest accruals

Changes in operating assets and liabilities amounted to Ps. 796.9 million for the year ended December 31, 2015. These changes in operating assets and liabilities were primarily due to a Ps. 1,189.6 million increase in proceeds from account payables and loans with CAMMESA, Ps. 1,061.4 million increase in trade and other payables and Ps. 185.2 for proceeds from derivative financial instruments, which were partially offset by Ps. 1,712.3 million increase in trade and other receivables. Edenor understands the debt with CAMMESA as a type of assistance program to cope with Edenor’s need of cash for specific purposes. All these supplementary measures were used by the Argentine Government so as to avoid increasing the tariffs.

Net cash generated by operating activities amounted to Ps. 2,574.2 million for the year ended December 31, 2014, attributable principally to net income adjustements of Ps. 907.9 million for changes in the fair value of financial instruments, Ps. 2,271.9 million for Higher Costs Recognition associated with SE Resolution No. 250/2013 and subsequent Notes issued by the SE in our distribution segment, Ps. 223.3 million for results from measurement at present value  and Ps. 47.1 million resulting from purchase of corporate bonds, which were partially offset by the positive adjustments to net income for non-cash charges in this period, including losses related to a Ps. 467.2 million for depreciation and amortization of assets, Ps. 761.3 million for foreign currency exchange difference and Ps. 596.7 million for interest accruals

Changes in operating assets and liabilities amounted to Ps. 3,407.6 million for the year ended December 31, 2014. These changes in operating assets and liabilities were primarily due to a Ps. 3,455.5 million increase in proceeds from accounts payable and loans (mutuum) with CAMMESA and Ps. 482.9 million increase from funds obtained for PUREE at our distribution segment, which were partially offset by Ps. 753.8 million increase in trade and other receivables.

Net cash generated by operating activities amounted to Ps. 1,656.2 million for the year ended December 31, 2013, attributable principally to net income adjustements of Ps. 295.9 million for changes in the fair value of financial instruments, Ps. 2,933.1 million for Higher Costs Recognition associated with SE Resolution No. 250/2013 and subsequent Notes issued by the SE in our distribution segment, and Ps. 88.9 million resulting from purchase of corporate bonds, which were partially offset by the positive adjustments to net income for non-cash charges in this period, including losses related to a Ps. 374.8 million for depreciation and amortization of assets, Ps. 744.2 million for foreign currency exchange difference, Ps. 447.6 million for interest accruals, Ps. 199.1 for discontinued operations at our distribution segment, and Ps. 155.9 million for results from measurement at present value.

Changes in operating assets and liabilities amounted to Ps. 2,416.3 million for the year ended December 31, 2013. These changes in operating assets and liabilities were primarily due to a Ps. 183.4 million increase in trade and other payables, Ps. 2,231.5 million increase in proceeds from account payable and loans with CAMMESA, and Ps. 491.9 million increase from funds obtained for PUREE at our distribution segment, which were partially offset by Ps. 508.7 million increase in trade and other receivables.

Net cash used in investing activities

Net cash used in investing activities amounted to Ps. 7,114.5 million for the year ended December 31, 2015, principally due to Ps. 4,797.9 million in capital expenditures, Ps. 3,506.2 million paid for the purchases of financial assets at fair value and Ps. 1,390.9 million in the purchase and redemption of securities issued by investments funds. These uses of cash and cash equivalent were partially offset by net cash and cash equivalents generated by our investing activities, including Ps. 2,263.9 million of proceeds from the sale of financial assets at fair value and Ps. 293.4 million in proceeds from deposits in guarantee.

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Net cash used in investing activities amounted to Ps. 2,472.1 million for the year ended December 31, 2014, principally due to Ps. 2,331.1 million in capital expenditures, Ps. 1,055.5 million paid for the purchases of financial assets at fair value and Ps. 276.6 million in constitution of deposits in guarantee. These uses of cash and cash equivalent were partially offset by net cash and cash equivalents generated by our investing activities, including Ps. 1,258.2 million of proceeds from the sale of financial assets at fair value.

Net cash used in investing activities amounted to Ps. 1,456.6 million for the year ended December 31, 2013, principally due to Ps. 1,050.3 million in capital expenditures, Ps. 353.5 million paid for the purchases of financial assets at fair value, Ps. 282.2 million in subscription and rescue of investments funds, net, and Ps. 124.2 million in connection with discontinued operations at our distribution segment. These uses of cash and cash equivalent were partially offset by net cash and cash equivalents generated by our investing activities, including Ps. 279.1 million of proceeds from the sale of financial assets at fair value.

Net cash generated by (used in) financing activities

Net cash generated by our financing activities amounted to Ps. 2,637.4 million for the year ended December 31, 2015, principally due to Ps. 4,793.3 million generated by borrowings at our different segments and Ps. 998.8 million of capital contributions that we received. These uses of cash and cash equivalents were partially offset by payments of Ps. 3,013 made in connection with bank and financial borrowings (including principal and interest) by all of our segments.  

Net cash used in our financing activities amounted to Ps. 147.7 million for the year ended December 31, 2014, principally due to payments of Ps. 2,821.4 made in connection with bank and financial borrowings (including principal and interest) by all of our segments. These uses of cash and cash equivalents were partially offset by Ps. 2,519.4 million of net cash and cash equivalent generated by borrowings at our different segments.

Net cash used in our financing activities amounted to Ps. 76.9 million for the year ended December 31, 2013, principally due to payments of Ps. 779.6 made in connection with bank and financial borrowings (including principal, interest and repurchase costs for the repurchase of debt) by all of our segments. These uses of cash and cash equivalents were partially offset by Ps. 656.5 million of net cash and cash equivalent generated by borrowings at our different segments and Ps. 25.4 million generated in connection with discontinued operations at our distribution segment.

Capital Expenditures

The following table sets forth our capital expenditures for the years ended December 31, 2015 and 2014:

	At December 31,
	2015		2014
	(in millions of pesos)
Generation	Ps.	1,515.6	Ps.	387.0
Distribution		2,518.2		1,701.8
Oil and gas		2,213.6		618.8
Holding and others		0.5		1.6
	Ps.	6,247.9	Ps.	2,709.2

In 2015, our capital expenditures in our generation segment mainly related to work in progress and advances to suppliers (Ps. 1,433.6 million) and materials and spare parts (Ps. 73.6 million). In our distribution segment, we invested Ps. 2,518.2 million, a substantial portion of which was used to expand and improve our grid in order to keep pace with the growth in our customer base.  In addition, we made investments in order to meet our quality standards levels. Our capital expenditures in our oil and gas segment increased in line with the execution of Petrolera Pampa’s investment commitments under the YPF Agreement.

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In 2014, our capital expenditures in our generation segment mainly related to work in progress and advances to suppliers (Ps. 330.1 million), materials and spare parts (Ps. 30.1 million) and generation equipment and machinery (Ps. 9.0 million). In our distribution segment, we invested Ps. 1,701.8 million to expand and improve our grid in order to keep pace with the growth in our customer base.  In addition, we made investments in order to meet our quality standards levels and to maintain the level of past due receivables. In October 2015, Edenor decided to acquire real property with the aim of concentrating centralized functions and reducing rental costs and the risk of future increases in rent, for a total amount of Ps.439.2 million, which was fully paid, as of December 31, 2015. Our capital expenditures in our oil and gas segment increased in line with the execution of Petrolera Pampa’s investment commitments under the YPF Agreement.

In our generation segment we currently expect our capital expenditures to remain high in 2016, principally in connection with the completion of Loma de la Lata’s 2014 Expansion Project and the major maintenance works in one CPB’s units (unit 30). In our oil and gas segment, for the year 2016 Petrolera Pampa expects to continue with the development plan with YPF in the Rincón del Mangrullo Area, and to complete the installation of a new treatment plant and compression infrastructure in order to increase production. We expect to cover such capital expenditures mainly with cash flows from operations, cash on hand, short- and long-term borrowings and financing extended by CAMMESA.

Debt 

The economic crisis in Argentina, and the measures adopted by the Argentine Government to address it, had a material adverse effect on the generation, transmission and distribution companies and operations that are now part of our group.  See “Item 4. - The Argentine Electricity Sector—History.”  As a result of these developments, several of these companies were forced to suspend principal and interest payments on their debt and have gone through one or more financial debt restructurings, including Güemes, Transener and Edenor.  Given the ongoing changes in the Argentine electricity regulatory framework, including the current uncertainties regarding transmission and distribution tariffs, we cannot assure you that one or more of our subsidiaries or operations will not have to undergo another debt restructuring in the future, or whether any such debt restructuring will be successful.

Our total consolidated financial debt as of December 31, 2015 was Ps. 7,992.4 million, of which 83.6% was long-term debt.  Approximately 39.1% of our consolidated debt outstanding at December 31, 2015 was denominated in U.S. Dollars.  The amount of our total consolidates financial debt does not include Transener given that our stake in Transener constitutes an interest in a joint venture, and it is not consolidated and it is valued according to the equity method of accounting in the Consolidated Financial Statements.

The below is a description of the main characteristics of the indebtedness of our group companies.

Under the terms of their respective outstanding debt, our group companies are subject to a number of restrictive covenants, including limitations on incurrence of new indebtedness, capital expenditures and dividend payments, among others. As of December 31, 2015, all of these companies were in compliance with the covenants under their respective outstanding indebtedness.

Generation

Piedra Buena

On March 21, 2011, Piedra Buena entered into a loan agreement with CAMMESA to finance a construction project that will increase the power output of steam turbine units of Piedra Buena, for a total amount of Ps. 56.8 million, in accordance to SE Resolution No. 146/2002 and Notes No.6157/10 and 7375/10. The collected amounts will be returned in 48 monthly, equal and consecutive installments, which will include interest resulting from the application of a rate equivalent to the average yield obtained by CAMMESA from its WEM’s financial placements, the first installment maturing on the month immediately following the works’ conclusion, estimated for the month of June 2011. Installments have been paid by WEM pursuant to the provisions of such notes, and distribution among demanding agents will be made based on the applicable criteria to be timely informed by the SE.

As from the works’ conclusion of each unit, Piedra Buena guaranteed a minimum 80% availability for each unit during a three-year period, which, as of the date of this annual report, has concluded. In order to guarantee the due performance of the obligations undertaken by Piedra Buena under this contract, Piedra Buena assigned and transferred to CAMMESA 100% of its current and future receivables, both accrued and to be accrued, excluding those receivables already assigned to CTLL as of December 31, 2010.

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As of May 2011, Piedra Buena finished the works undertaken and, as from July 2011, units were made subject to the minimum availability control set forth by the loan agreement executed with CAMMESA. In case of breach of its availability obligation by Piedra Buena, the agreement provides for the application of a penalty, the maximum amount of which is set at 25% of the value of the received financing’s principal installment. During fiscal year ended December 31, 2013, Piedra Buena has started to bear penalties for failing to reach the minimum 80% availability undertaken under the loan agreement. The penalties imposed on Piedra Buena during the fiscal year ended December 31, 2014 and 2015 amounted to Ps. 4.7 and Ps. 4.7 million, respectively.

On January 27, 2012, Piedra Buena executed an addendum to the loan agreement entered into with CAMMESA which modified the financing amount, which current amounts to Ps. 69.6 million. As of December 31, 2015, the loan was totally cancelled.

On January 8, 2013, Piedra Buena signed a loan agreement with CAMMESA stipulating the terms for the financing of certain repair work delayed in units BBLATV29 and BBVLATV30 for an amount of Ps. 19.9 million plus VAT pursuant to SE Resolution No. 146/2002 so as to cover 70% of those maintenance costs.

On February 25, 2013, through Note No. B-78922-1, CAMMESA informed Piedra Buena of the modification to that financing pursuant to the provisions approved by SE Resolution No. 356/2013 increasing the financing to Ps. 32.7 million plus VAT in order to cover 100% of maintenance costs.

On April 24, 2014, Piedra Buena off set the loan against the LVFVDs for the amount of Ps. 39,545,740 plus interest.

Finally, in August 2013, through Piedra Buena LegR Note No. 64/13, CPB submitted to CAMMESA the “2014-2015 Maintenance Plan” for the conduct of major maintenance works in units BBLATV29 and BBLATV30, requesting its approval based on a remuneration scheme that would allow for their financing as the remuneration set by SE Resolution No. 95/2013 was insufficient to bear the costs of major maintenance works.

The 2014-2015 Maintenance Plan was amended and adjusted after the meetings held with representatives of CAMMESA and the Technical Group (CPB LegR Notes No. 65/13, 67/13 and 72/13). The total estimated amount of the works to be executed is U.S.$ 82 million plus VAT and associated import duties.

On April 8, 2014, Piedra Buena executed a new loan agreement with CAMMESA for an amount equal to the peso-equivalent of U.S.$82.6 million plus the associated taxes. This loan is to be paid in 48 equal installments with a grace period of, the first to occur between, 12 months as from the first disbursement of the loan or 24 months as from the subscription of the loan. As long as Piedra Buena’s availability is higher than 80% (summer) or 83% (winter), Piedra Buena’s payment obligations shall be limited to the revenue established to cover extraordinary maintenance works (SE Resolution No. 529/2014) and 50% of the Debt Payment Cash Flow (as defined in such agreement). If Piedra Buena’s availability is below the abovementioned percentages, Piedra Buena shall pay the applicable installment on the applicable payment date. 

On May 18, 2015, under the above mentioned loan, CPB requested an additional U.S.$7.2 million plus VAT, which was granted by CAMMESA to continue the maintenance works.

In order to guarantee the due performance of the obligations taken by Piedra Buena under this agreement, Piedra Buena assigned and transferred to CAMMESA 100% of its current and future receivables, except for the ones already assigned to other projects or agreements, both accrued and to be accrued, excluding those receivables already assigned.

As of the date of this annual report, Piedra Buena received from CAMMESA Ps. 803.0 million of which Ps. 191.5 million were paid with Additional Maintenance Remuneration.

Güemes

203

 

On July 25, 2007, CTG finished the restructuring process for its outstanding Series “A” and “B” 2% Corporate Bonds maturing in 2013 (the “2013 Bonds”), having obtained an 88.7% acceptance rate on the total debt subject to restructuring. Said restructuring consisted of exchanging the previous debt securities for a combination of cash payments and the issuance of new simple Corporate Bonds for a nominal value of U.S.$ 22 million at a 10.5% rate, which are payable on March 11 and September 11 of each year and mature in September 2017 (the “2017 Bonds”). In June and July 2009, CTG repurchased under successive transactions at market prices its 2017 Bonds for a total of U.S.$ 18.2 million (nominal value). During June and July 2009 and January, Mach and May 2011, CTG repurchased under successive transactions and at market prices its 2017 Bonds for a nominal value of, approximately, U.S.$ 18 million and U.S.$ 0.8 million respectively. During March 2013, CTG cancelled all of its 2013 Bonds.  As of December 31, 2015, CTG held all the repurchased 2017 Bonds in its portfolio and the outstanding 2017 Bonds total a nominal value of U.S.$ 3.1million.

On July 21, 2008, the Ordinary and Extraordinary Shareholders’ Meeting of Güemes approved the creation of a Global Program of Securities Representing Short-Term Debt (the “VCP”) up to a maximum amount outstanding at any time that may not exceed Ps. 200 million or the equivalent amount in other currencies, under which Güemes may issue VCPs in various classes and/or series, each one of them with an amortization term of up to 365 days or a shorter or longer term that in the future applicable regulations may contemplate (the “Güemes VCP Program”). Such meeting delegated to Güemes’ board of directors the power to provide for certain conditions of the Güemes VCP Program  and the opportunity of issuance and other terms and conditions of each class and/or series of VCPs to be issued under the Güemes VCP Program.  On January 17, 2012, Güemes’ Board of Directors approved the terms and conditions of the Güemes VCP Program as detailed in its Prospectus draft.  As of the date of this annual report, Güemes has not issued any notes under the Güemes VCP Program.

In addition, on October 11, 2011, Güemes’ Extraordinary General Meeting of Shareholders, approved the creation of a program for the issuance of nonconvertible, simple corporate bonds for a nominal value of up to U.S.$ 50 million or its equivalent in other currencies (the “Güemes Corporate Bonds Program”).  The shareholders of Güemes also vested Güemes’ board of directors with the power to establish the terms of any debt under the Güemes Corporate Bonds Program and the time of the issuance of such debt.  On January 17, 2012 the board of directors approved the terms and conditions of the Güemes Corporate Bonds Program.

On January 3, 2014 the board of directors approved the terms and conditions of the Class 5 Notes to be issued under the Güemes Corporate Bonds Program, and on March 6, 2014, Güemes issued class 5 notes for an amount of Ps. 60.127.495 million at an interest rate equal to the private Badlar rate plus of 5%. The terms and conditions of Class 5 Notes permitted settlement of the same with Notes of Class 3 and/or 4. As a result of this issuance, Ps. 19,092,025 were settled in Class 4 and Ps. 1,835,470 were settled in Class 3, and those Notes are held in CTG’s portfolio.  Also, on January 27, 2014, the board of directors approved the terms and conditions of the Class 6 Notes to be issued under the Güemes Corporate Bonds Program, and on March 6, 2015, Güemes issued Class 6 Notes for an amount of Ps 91.0 million at an interest rate equal to (i) for the first nine months 28% and (ii) from month tenth to eighteenth private Badlar rate plus 5%.  The final maturity date of the Class 5 and Class 6 Notes is September 6, 2016, respectively. In all cases interest under the Notes is payable on a quarterly basis.

On May 18, 2015, CTG entered into a loan agreement with CAMMESA to finance TV11 unit's maintenance in a Peso-denominated amount equivalent to U.S.$ 10.3 million plus VAT and nationalization costs. This financing is schedule to be repaid in 36 monthly and consecutive installments, with the application of the average yield obtained by CAMMESA from its financial placements with the WEM, maturing as from the date of the economic transaction corresponding to the month following the completion of the works with the possibility of extending this period to 12 months in the case that the remuneration payable for the maintenance of such unit (the “Maintenance Remuneration”) accrued in that period is not sufficient to repay the funding. The Maintenance Remuneration will be allocated to the payment of the granted financing. In the case that it is necessary to use the additional period of twelve months mentioned above, in addition to applying the Maintenance Remuneration for cancellation of the installment should be applied Additional Remuneration Direct accrued by CTG in the relevant month.

As of the date of this annual report, CTG had received partial advances in the amount of Ps. 8 million, which are disclosed under trade and other receivables, net of the Maintenance Remuneration.

204

 

Loma de la Lata

On December 28, 2009, the shareholders of Loma de la Lata approved the creation of a medium-term note program not to exceed the amount of U.S. $ 50 million.  The terms of any debt under this program were determined by Loma de la Lata’s board of directors at the time that such debt were to be issued.  In addition, the shareholders approved, under a shareholders meeting held on November 17, 2011, the increase of the amount of the program from U.S.$ 50 million to U.S.$ 350 million. The program was approved by the CNV on March 21, 2012.  On September 8 and 18, 2014, the board of directors approved the terms and conditions of the Class 1, 2, 3 and 4 notes to be issued under the Loma de la Lata medium-term note program, and on October 30, 2014, Loma de la Lata declared Class 1 deserte, issued Class 2 notes for an amount of Ps 96.4 million at an interest rate equal to the private Badlar rate plus 4% maturing on April 30, 2016, the Class 3 notes for an amount of Ps. 50.8 at an interest rate equal to the private Badlar rate plus 5% to be paid in three installments, maturing on April 30, 2017 and Class 4 notes for an amount of U.S.$ 29.9 at a fix rate of 6.25% maturing on October 31, 2016.

On November 11, 2014, Banco de Crédito y Securitización S.A., Banco Hipotecario S.A., Industrial and Commercial Bank of China S.A. and Citibank N.A. granted a financing to Loma de la Lata for up to an amount of Ps. 450 million to be paid in eight quarterly, equal and consecutive installments of 11% of the outstanding principal amount of the loan and a ninth installment of 12%.  Interest will accrue at an interest rate equal to the fixed private Badlar rate plus 5.75% and will be paid quarterly.  The Company granted a guarantee to secure the obligations of Loma de la Lata under the loan and Loma de la Lata issued several promissory notes. As of the date of this annual report, the loan was totally cancelled.

On December 1, 2014, Loma de la Lata entered into a Loan and Receivables Assignment Agreement with CAMMESA for the financing of the 2014 Expansion Project with an investment estimated at Ps. 930 million.

The main characteristics of this financing are described below:

i)Amount: up to the amount of the receivables accrued until December 31, 2015;

ii)Interest rate: a rate equivalent to the monthly yield obtained by CAMMESA from its WEM’s financial placements;

iii)Repayment: in a single payment on the maturity of the economic transaction corresponding to the 36th month as from the month following the commercial commissioning of the last generating unit making up the Project or, at Loma de la Lata’s option, through a cash payment or the offset with receivables;

iv)Payment guarantee: assignment 100% of its receivables to the Stabilization Fund, up to the total amount of the financing, as collateral.

On March 5, 2015, CAMMESA granted Loma de la Lata a loan up to the amount of U.S.$11,799,879 plus VAT and Ps. 7,217,000 plus VAT, to conduct major maintenance works at Loma de la Lata’s plant. The financing will (i) be disbursed in different installments according to a work plan, (ii) paid in 36 equal and consecutive installments (with the possibility to extend the maturity up to 12 months) the first of them maturing one month after the end of the works and the availability of the unit LDLTAG02, (iii) bear interest at a variable rate, and (iv) be secured with the assignment and transferr to CAMMESA of 100% of its current and future receivables derived from the Remuneración Adicional Directa a Generadores and from the Remuneración de los Mantenimientos no Recurrentes, (except for the ones already assigned to other projects or agreements), both accrued and to be accrued, excluding those receivables already assigned. After the end of the works, Loma de la Lata ir required to have an availability of 90%. If Loma de la Lata fails to accomplish the required availability, it shall pay the whole applicable installment on the stipulated maturity date.

After unit LDLATG02's maintenance was completed, the unit became operative on December 21, 2014.

Loma de la Lata later requested the execution of an Addendum to the Loan Agreement to conduct the maintenance of unit LDLATG03. On August 20, 2015, Addendum I to this Agreement was executed, which extended the financing to an amount equivalent in Pesos to U.S.$ 4.8 million and Ps. 18.2 million, in both cases plus VAT, nationalization and logistics costs. Maintenance of unit LDLATG03 finished on June 1, 2015, as from which date the unit became operative again.

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Based on the modifications introduced to Addendum I, Loma de la Lata guarantees a minimum of 80% availability from both units until the total repayment of the Financing. If the availability commitment is not met in a certain month, the repayment of the installment will not be limited to the Maintenance Remuneration amount and, if applicable, the difference between it and the Direct Additional Remuneration, and the whole installment will be payable.

Later, an extension of the loan was requested in order to include the execution of unit LDLATG01's overhaul, upgrade and refurbishment in the amount of U.S.$ 13 million and Ps. 17.8 million , in both cases plus VAT, nationalization and logistics costs,  and withholdings to be imposed on foreign contractors. The extension was approved pursuant to SSETT y DEE Note No. 52/16. However, as of the date of this annual report, the applicable Addendum has not yet been entered into.

As of the date of this annual report, Loma de la Lata had received partial advances in the amount of Ps. 191.7 million, which are disclosed under “Loans”, net of the Maintenance Remuneration collected by Loma de la Lata.

On March 18, 2015, the shareholders of Loma de la Lata approved the creation of a new medium-term note program not to exceed the amount of U.S. $ 350 million.  The terms of any debt under this program will be determined by Loma de la Lata’s board of directors at the time that such debt is issued.  The program was approved by the CNV on July 2, 2015.  On April 13, 2015, May 22, 2015, August 20, 2015 and October 6, 2015, the board of directors approved the terms and conditions of the Class A, B, C, D and E notes, respectively, to be issued under the Loma de la Lata medium-term note program. On August 6, 2015, the Class C Notes were issued for an amount of Ps. 257,954,545 at a fixed interest rate equal 27.75% maturing on May 6, 2017. On October 5, 2015, the Class A Notes were issued for an amount of Ps. 282,441,000 at an interest rate equal to Badlar maturing on October 5, 2018. On November 13, 2015, the Class E Notes were issued for an amount of Ps. 575,160,000 at an interest rate equal to Badlar maturing on November 13, 2020.

As of the date of this annual report, no Classes B or D Notes have been issued.

Transmission

Transener

Additionally, due to the delay in the implementation of the cost adjustments as set forth in the Definitive Agreements, on May 12, 2009, pursuant to Resolution No. 146/2002 of the Secretariat of Energy, Transener and Transba entered into a financing agreement with CAMMESA (as lender) for an amount of up to Ps. 59.7 million and Ps. 30.7 million, respectively (the “Initial CAMMESA Agreement”). On December 30, 2009, both companies and CAMMESA executed an amendment to the Initial CAMMESA Agreement (the “Mutual Fund Amendment”, and together with the Initial Agreement, the “CAMMESA Financing”), pursuant to which the available financing amount to be provided by CAMMESA was increased to up to Ps.107.7 million and Ps.42.7 million for Transener and Transba, respectively. Transener and Transba will apply the receivables acknowledged by the Secretariat of Energy and the ENRE on account of cost variations (pursuant to the Instrumental Agreement) to the cancellation, up to such amounts, of the financing granted by CAMMESA.  On May 2, 2011, Transener and Transba executed amendments to the financing agreements with CAMMESA, which provided for:  i) the cancellation of the amounts received as of January 17, 2011 by both companies pursuant to the financing granted by the agreements executed on May 12, 2009; ii) the granting to Transener and Transba of new loans for the amounts of Ps. 289.7 million and Ps. 134.1 million, respectively, corresponding to the favorable balances resulting from receivables acknowledged by the Secretariat of Energy and the ENRE on account of cost variations from June 2005 to November 2010; and iii) all amounts owed to Transener under the Instrumental Agreements would serve as a guarantee for the new CAMMESA Financing.  The funds arising from the new loans were used for operation and maintenance purposes and additionally applied to the investment plan for the year 2011.  Disbursements are made through partial advances based on the availability of cash and cash equivalents by CAMMESA and as instructed by the Secretariat of Energy. As of December 31, 2011, collected disbursements under this financing amounted to Ps. 235.4 million, Ps. 224.6 million of which correspond to principal and Ps. 10.8 million to accrued interest. All disbursements have been assigned as collateral for the payment of the balance of receivables acknowledged on account of higher costs pursuant to the Complementary Agreement. After December 31, 2011, disbursements amounting to Ps. 9.0 million were collected.

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On October 25, 2013 and February 14, 2014, Transba and Transener, respectively negotiated the Addenda III.

On September 2, 2014, Transener and Transba executed with CAMMESA the New Financing Agreements. The New Financing Agreements provided i) that the Financing Agreements, together with their Addendums I, II and III, are concluded; ii) the granting to Transener and Transba of  new loans in the amount of Ps. 622.2 million and Ps. 240.7 million, respectively, corresponding to receivables acknowledged by the Secretariat of Energy and the ENRE on account of cost variations for the January 2013-May 2014 period; and iii) the assignment as collateral of the receivables recognized on account of higher costs as at May 31, 2014 pursuant to the Renewal Agreement.

Also, on March 17, 2015, Transener and Transba executed with CAMMESA the Addenda IV, setting forth: i) the granting to Transener and Transba of  new loans in the amount of Ps. 563.6 million and Ps. 178.3 million, respectively, corresponding to (a) the outstading amount due pursuant to the Financing Agreement as of January 2015, and (b) receivables acknowledged by the Secretariat of Energy and the ENRE on account of cost variations for the June 2014-November 2014 period; and ii) the assignment as collateral of the receivables recognized on account of higher costs as at November 30, 2014 pursuant to the Renewal Agreement.

In September 2015, Transener and Transba executed with the ENRE and the SE the Amendment to the Renewal Agreement, setting forth the 2015 year financial - economic projection and investment plan in the amount of Ps. 431.9 million and Ps. 186.6 million for Transener and Transba, respectively, and granting additional non-reimbursable resources for the execution of such investment plan.

On November 25, 2015, Transener and Transba executed with CAMMESA the financing agreements for the implementation of the Amendment to the Renewal Agreement, setting forth: i) the granting to Transener and Transba of  new loans in the amount of Ps. 508,9 million and Ps. 317,6 million, respectively, corresponding to (a) receivables acknowledged by the SE and the ENRE on account of cost variations for the December 2014-May 2015 period; and (b) the additional investments required pursuant to the Amendment to the Renewal Agreement.

Distribution

Edenor

On January 20, 2006, Edenor launched a voluntary exchange offer and consent solicitation to the holders of Edenor’s outstanding financial debt. All of these holders elected to participate in the restructuring and, as a result, on April 24, 2006, Edenor exchanged all of its then-outstanding financial debt for the following three series of newly issued notes, which Edenor refer to as the restructuring notes:

·U.S. $123,773,586 Fixed Rate Par Notes due December 14, 2016, with approximately 50% of the principal due and payable at maturity and the remainder due in semiannual installments commencing June 14, 2011, and bearing interest starting at 3% and stepping up to 10% over time;

·U.S. $12,656,086 Floating Rate Par Notes due December 14, 2019, with the same payment terms as the Fixed Rate Par Notes and bearing interest at LIBOR plus a spread, which starts at 1% in 2008 and steps up to 2% over time; and

·U.S. $239,999,985 Discount Notes due December 14, 2014, with 60% of the principal due and payable at maturity and the remainder due in semiannual installments commencing on June 14, 2008, and bearing interest at a fixed rate that starts at 3% and steps up to 12% over time.

As of the date of this annual report, all of the restructuring notes have been repaid and cancelled.

In October 2007, Edenor completed an offering of U.S. $220 million aggregate principal amount of its 10.5% Senior Notes due 2017, which Edenor refers to as the Senior Notes due 2017. Edenor used a substantial portion of the proceeds from that offering to redeem in full its Discount Notes due 2014 in several transactions throughout the period from October through December 2007.

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During 2008, Edenor repurchased U.S. $17.5 million of its Senior Notes due 2017, of which U.S. $6 million Senior Notes due 2017 were cancelled.

In May 2009, Edenor issued Ps. 75.7 million principal amount of Par Notes due 2013 under its Medium Term Note Program. The Par Notes due 2013 are denominated and payable in Pesos and accrue interest on a quarterly basis at a rate equal to the private BADLAR, as published by the Central Bank, for each such quarter plus 6.75%.  Principal on the notes is payable in 13 quarterly installments, starting on May 7, 2010. As of December 31, 2013, these Notes had been fully paid.

During 2009, Edenor repurchased U.S. $53.8 million Senior Notes due 2017, U.S. $24.5 million of which was transferred to Edenor as a consequence of the dissolution of the discretionary trust described below.

On October 25, 2010, Edenor issued Senior Notes due 2022 with a face value of U.S. $ 230.3 million, of which U.S. $ 140 million were subscribed under a cash offer and U.S. $ 90.3 million were exchanged, as a result of an exchange offer, for Senior Notes due 2017, paying in cash U.S. $ 9.5 million plus accrued unpaid interest on those Senior Notes due 2017. Edenor lunched an offer to purchase under which Edenor purchased Senior Notes due 2017 with a face value of U.S. $33.6 million for U.S. $35.8 million, including payment of accrued and unpaid interest on the Senior Notes due 2017.

The Senior Notes due 2022 have a 12-year maturity and were issued at par, with interest accruing from the date of issuance at a fixed rate of 9.75% and payable semi-annually on October 25 and April 25 of each year, with the first interest payment on April 25, 2011. As of December 31, 2015, the outstanding amount of Senior Notes due 2022 was U.S.$ 176.4 million. Edenor repurchased and cancelled U.S.$ 123.6 million during 2014, of which, U.S.$ 68 million were repurchased by the Aeseba Sale Trust during 2014.  

On October 18, 2010, Edenor cancelled Senior Notes due 2017 with a nominal value of U.S. $65.3 million.

In addition, on October 25, 2010, November 4, 2010, and December 9, 2010, Edenor cancelled Senior Notes due 2017 for a face value of U.S. $122.6 million, U.S. $1.3 million, and U.S. $0.04 million, respectively, representing approximately 83.3% of the Senior Notes due 2017 then outstanding.

On February 2, 2016, Edenor repurchased the Senior Notes due 2022 at market prices for a nominal value of US$ 0.3 million.

Oil and Gas

Petrolera Pampa

Short-term Corporate Bonds (VCPs)

On July 27, 2011, the creation of a global short-term debt securities program for a maximum amount of Ps. 200 million, or its equivalent in other currencies, was approved at Petrolera Pampa’s extraordinary general meeting of shareholders.  Under this program, Petrolera Pampa may issue short-term corporate bonds (in the form of simple, non-convertible bonds), promissory notes or VCPs with common, special and/or floating security and/or any other guarantee (including, but not limited to, third-party guarantees), whether subordinated or not. On July 2, 2015, the maximum amount of this debt securities program was increased to U.S.$70.0 million.

During the period from 2011 through 2015, Petrolera Pampa issued series 1, 2, 3, 4, 5, 6, 7, 8, 9, 11, 12 and 14 under the VCPs program.  Below we summarize the main terms and conditions of the series that remain outstanding.

VCP 14

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On April 20, 2016, Petrolera Pampa issued Ps. 295.7 million of its senior unsecured notes due 360 days after the issuance date, at a rate equal to the private BADLAR plus 5.90 % (paid quarterly).

VCP 14 may be redeemed at Petrolera Pampa’s option at any moment beginning 90 days prior to final maturity.

At Petrolera Pampa shareholders’ meeting held on January 14, 2016, a new global short-term debt securities program for a maximum amount of U.S.$100.0 million, or its equivalent in other currencies, was approved.  Under this program Petrolera Pampa may issue short-term corporate bonds (in the form of simple, non-convertible bonds), promissory notes or VCPs with common, special and/or floating security and/or any other guarantee (including, but not limited to, third-party guarantees), whether subordinated or not.  As of the date of this annual report, CNV authorization of this program is pending.

Corporate Bonds (ONs)

On March 19 and May, 10, 2013, a program for the issuance of nonconvertible, simple corporate bonds for a nominal value of up to U.S.$100.0 million, or its equivalent in other currencies (the “Petrolera Pampa Corporate Bonds Program”), was approved at Petrolera Pampa’s extraordinary general meeting of shareholders.  Petrolera Pampa’s shareholders also vested Petrolera Pampa’s board of directors with the power to establish the terms of any debt issuance under the Petrolera Pampa Corporate Bonds Program and determine the time of any such issuance.  Accordingly, on March 21, 2013, Petrolera Pampa’s board of directors approved the terms and conditions of the Petrolera Pampa Corporate Bonds Program.  In 2015, the maximum issuance amount of such Corporate Bonds Program was increased twice, from U.S.$. 100.0 million to U.S.$125.0 million, as approved by the CNV on January 29, 2015, and from U.S.$125.0 million to U.S.$250.0 million, as approved by the CNV on July 2, 2015.  In 2016, the maximum amount of the Petrolera Pampa Corporate Bonds Program was increased again from U.S.$250.0 million to U.S.$500.0 million. As of the date of this annual report, CNV authorization of this program is pending.

From 2013 through 2016 series 1, 2, 4, 5, 6 and 7 have been issued under the Petrolera Pampa Corporate Bonds Program. We summarize below the main terms and conditions of the series that remain outstanding.

Outstanding Series under the Petrolera Pampa Corporate Bonds Program

On May 6, 2013, Petrolera Pampa’s board of directors approved the terms and conditions of series 1 under the Petrolera Pampa Corporate Bonds Program.  On June 26, 2013, Petrolera Pampa issued Ps 254.8 million of series 1 bonds at a variable interest rate equal to the Badlar rate plus 3% and a maturity of 36 months.  Series 1 bonds may be redeemed by Petrolera Pampa at any time beginning 18 months prior to the maturity date.

On December 18, 2013 and March 31, 2014, Petrolera Pampa’s board of directors approved the terms and conditions of series 2 and 3, respectively, under the Petrolera Pampa Corporate Bonds Program.  On June 6, 2014, Petrolera Pampa issued Ps. 525.4 million of series 2 bonds at a variable interest rate equal to the Badlar rate and a maturity of 36 months.  The series 3 bonds were not issued. Series 2 bonds may be redeemed by Petrolera Pampa at any time beginning 18 months prior to final maturity.

On January 28, 2015, Petrolera Pampa’s board of directors approved the terms and conditions of series 4 and 5 bonds under the Petrolera Pampa Corporate Bonds Program.  On February 26, 2015, Petrolera Pampa issued (i) Ps. 51.0 million of series 4 bonds at an interest rate equal to (i) 27.48% for the first nine months, and (ii) thereafter, the Badlar rate plus 5%, and a maturity of 18 months, and (ii) U.S.$18.5 million of series 5 bonds at an interest rate equal to 5% and a maturity of 21 months.  Series 4 and 5 bonds may be redeemed by Petrolera Pampa at any time beginning three months prior to the maturity date.

On March 18, 2015, Petrolera Pampa’s board of directors approved the terms and conditions of series 6 bonds under the Petrolera Pampa Corporate Bonds Program. On April 30, 2015, Petrolera Pampa issued Ps. 49.9 million of series 6 bonds at an interest rate equal to (i) 27.25% for the first nine months and (ii) thereafter, the Badlar rate plus 4.5%, and a maturity of 18 months.  Series 6 bonds may be redeemed by Petrolera Pampa at any time beginning three months prior to the maturity date.

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On November 6, 2015, Petrolera Pampa’s board of directors approved the terms and conditions of the series 7 bonds under the Petrolera Pampa Corporate Bonds Program.  On February 3, 2016, Petrolera Pampa issued Ps. 309.8 million of series 7 bonds at a variable interest rate equal to the Badlar rate plus 5%, and a maturity of 18 months.  Series 7 bonds may be redeemed by Petrolera Pampa at any time beginning 45 days after the date of issuance.

All outstanding series under the Petrolera Pampa Corporate Bonds Program have common guarantees and an indebtedness covenant which restricts Petrolera Pampa from incurring new indebtedness unless Petrolera Pampa’s net debt to Ebitda ratio is below 4.25.

Syndicated Loans

On July 27, 2015, Petrolera Pampa entered into a syndicated loan agreement for Ps. 765 million with a syndicate composed of Banco Hipotecario, BACS Banco de Crédito y Securitización, ICBC Argentina and Citibank Argentina. The main terms and conditions of such syndicated loan are as follows:

•Amortization: ten quarterly and consecutive installments, with a 15-month grace period from the date of disbursement.  The first two installments will each be 5.25% of the principal, the third will be 7.5%, the fourth will be 11.5% plus the balance, of 11.75% of the principal; and

•Interest rate: Badcor plus 5.75% on an amount of Ps. 615 million, and a 30% fixed rate on an amount of Ps. 150 million, in both cases, payable quarterly.

Promissory notes were issued to each of the lenders in the proportion of their share in the borrowing to guarantee the outstanding principal and interest amounts under the loan.

The syndicated loan agreement contains customary covenants, which include, among others, limitations on the incurrence of debt, the incurrence of liens, asset sales, transactions with affiliates, engaging in certain businesses, and merger or consolidation and payment restrictions (including restrictions on our ability to pay dividends). As of the date of this annual report, Petrolera Pampa was in compliance with such covenants.

On March 28, 2016, the Company and the banks of the syndicated loan described above, entered into a waiver and prepayment agreement, pursuant to which Petrolera Pampa, prepaid Ps.465 million of said loan. As of the date of this annual report the outstading principal amount due thereunder is Ps. 300million.

On March 3, 2016, the Company executed a loan agreement with Banco de Galicia y Buenos Aires S.A. The principal amount of the loan is Ps. 100 million. The loan accrues interest at a fixed rate of 32% and is payable on a montlhy basis.

On March 30, 2016, the Company executed a loan agreement with Industrial and Commercial Bank of China (Argentina) S.A., pursuant to Communications “A” 5380, as amended by Communication “A” 5896 issued by the Central Bank. The principal amount of the loan is Ps. 300 million. The loan accrues interest for the first twelve moths at a fixed rate of 33%, and for the last twenty-four months, at Badlar plus 5.75%. In both cases, interest will be payable on a quarterly basis.

Holding and Others

The Company

On October 6, 2011, TGS granted a loan for the amount of U.S.$ 26 million (Ps. 109.4 million) to the Company for an initial one-year period (automatically renewable for one year upon expiration) that accrues interest at a 6.8% annual rate plus VAT. On October 6, 2012, such loan was renewed for an amount of U.S.$ 26 million plus the interest accrued during the first one-year term under the originally agreed conditions, which do not differ from current market conditions for this type of transaction. Also, on April 26, 2013, the maturity of the loan was extended until October 6, 2014 with an automatic renewal of one year and included the possibility of payment at maturity or in advance through the full and unconditional assignment to TGS of all the Company’s rights and obligations under the ICSID Claim in case, on or before the maturity date: (a) TGS has received a 20% increase on its tariff chart and that increase remains effective pursuant to the Transitory Agreement approved by Order No. 1918/2009 of the National Executive Branch, or (b) the following has been granted to TGS and remains effective: (x) the tariff adjustment set forth in an agreement initialized by TGS and approved by its Board of Directors on October 5, 2011, or (y) any other compensatory system implemented through any tariff review system or mechanism hereinafter replacing those currently in force under Economic Emergency Law No. 25,561 of the Republic of Argentina and having an equivalent economic effect on TGS. On January 12, 2015, the parties agreed to suspend the arbitration proceeding for six months as from that date.

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On, October 6, 2015, pursuant to the occurrence of certain events relating to an increase in TGS’s tariff described above, that was a condition under a loan granted from TGS to the Company for U.S.$. 26 million, the Company assigned to TGS, all its rights and obligations under the ICSID Claim to cancel the amounts owed under the loan.

Contractual Obligations

In the tables below, we set forth certain contractual obligations as of December 31, 2015 and the period in which the contractual obligations come due.  Peso amounts have been translated from Dollar amounts at the seller rate for Dollars quoted by Banco Nación on December 31, 2015 of Ps. 13.04 to U. S$. 1.00.   

		Payments due by period
	Total	Less than 1 year	1 - 3 years	3 - 5 years	More than 5 years	Until
Payments Obligations
Debt obligations and commercial debt obligations (1)	10.753,7	2.203,6	2.220,1	3.794,6	2.535,4
Capital Expenditures (2)	4.246,8	3.311,1	476,3	149,3	310,2
Royalty payments (3)	391,5	25,1	52,3	52,4	261,7
Operating leases(4)	78,3	47,9	30,1	0,3	-
	15.470,3	5.587,7	2.778,8	3.996,5	3.107,3
	-	-
Purchase Obligations
Natural gas purchase agreements for electricity generation (5)	1.393,2	1.393,2	-	-	-	2016
Natural gas transportation agreement (6)	99,0	4,0	7,9	7,9	79,2	2046
	1.492,2	1.397,1	7,9	7,9	79,2
Other
Accrued fines and penalties (7)	1.253,1	116,7	1.136,4	-	-
Total	18.215,6	7.101,5	3.923,2	4.004,5	3.186,5

(1)Includes amortization of principal and accrued and future interest payments.  See “Item 5. - Debt” for a broader description of our financial debt.

(2)     Includes executed contractual obligations relating to our generation business.  Edenor’s concessions do not require them to make any specified amount of capital expenditures, but Edenor’s concession requires Edenor to meet certain quality and other service standards. 

(3)     Based on estimated payments included in our annual budget; royalty payments beyond 2017 are calculated based on average hydraulicity.

(4)     Represents our minimum required lease payments.

(5)     Based on the estimated average price of Ps. 1739.72 per Dam3.

(6)     Based on the estimated average price of Ps. 16.65 per Dam3.

(7)    See “Our Distribution Business - Empresa Distribuidora y Comercializadora Norte (Edenor) - Fines and penalties.”

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		Payments due by period
	Total	Less than 1 year	1 - 3 years	3 - 5 years	More than 5 years
Sales Obligations
Electric Power (1)	2,508.9	1,960.1	548.7
Total	2,508.9	1,960.1	548.7	-	-

(1)Prices are generally determined by formulas based on future market prices. Estimated prices used to calculate the monetary equivalent of these sales obligations for purposes of the table are based on current market prices as of December 31, 2015 and may not reflect actual future prices of these commodities. Accordingly, the Peso amounts provided in this table with respect to these obligations are provided for illustrative purpose only.

(2)Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements of the type that we are required to disclose under Item 5.E. of Form 20-F.

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Item 6.  Directors, Senior Management and Employees

General

We are managed by our board of directors, which is composed of ten directors and equal or less number of alternate directors subject to the Annual Shareholders’ Meeting decision. Five of our ten directors are independent according to the criteria and requirements for independent directors under applicable Argentine law. Four of our alternate directors are independent. The directors are elected on a staggered basis each year (three directors at a time in each of the first two years of a three-year cycle, and four in the third year). Our directors are elected for a three-fiscal-year term and can be reelected except for our independent directors, who cannot be reelected for successive terms.

Pursuant to section 12 of our by-laws, any shareholder or group of shareholders who holds more than 3% of our capital stock (each, a “Proposing Shareholder”) may require our board of directors to give notice to our other shareholders of the candidate or candidates to be nominated by such shareholder or group of shareholders at our shareholders’ meeting for election of our board of directors.  To such end, the relevant slate executed by the Proposing Shareholder or its representatives, as applicable, will be sent to the chairman of our board of directors, no less than five business days prior to the date of the relevant shareholders’ meeting, to be published in the Bulletin of the Buenos Aires Stock Exchange at least two days prior to the date of our shareholders’ meeting.  To facilitate the formation of the slates and the record of the candidates’ names, as of the date of the first notice calling for the relevant meeting, a special book will be made available to our shareholders at our registered office in which the names of the candidates proposed by any proposing shareholder shall be recorded.  Similarly, our board of directors will propose to the shareholders’ meeting the candidates for election by slate or, if election by slate is objected to, individually.  The names of the candidates proposed by the board will be made known to all our shareholders together with the slates proposed by the Proposing Shareholder.  In addition, no proposal for the election of directors may be made, either before or during the shareholders’ meeting, unless written evidence of acceptance of office by the proposed candidates is submitted to us.  Such slate or person, as the case may be, who obtains the vote of a majority of the shares present at the meeting will be declared elected.  If no slate obtains such majority, a new vote will be taken in which the two slates or persons that obtained the largest number of votes will take part, and the slate or person who obtains the largest number of votes will be declared elected.  The preceding rules will not prevent a shareholder who is present at the shareholders’ meeting from proposing candidates not included in the proposals from our board of directors.

Duties and Liabilities of Directors

Pursuant to section 59 of the Ley General de Sociedades No. 19,550 (Argentine Business Companies Law, or “BCL”), directors have the obligation to perform their duties with the loyalty and the diligence of a prudent business person.  Directors are jointly and severally liable to the company, the shareholders and third parties for the improper performance of their duties, for violating the law, the company’s by-laws or regulations, if any, and for any damage caused by fraud, abuse of authority or negligence, as provided for in Section 274 of the BCL.  The following are considered integral to a director’s duty of loyalty: (1) the prohibition on using corporate assets and confidential information for private purposes; (2) the prohibition on taking advantage, or to allow another to take advantage, by action or omission, of the business opportunities of the company; (3) the obligation to exercise board powers only for the purposes for which the law, the company’s by-laws or the shareholders’ or the board of directors’ resolution have intended; and (4) the obligation to take strict care so that acts of the board are not contrary, directly or indirectly, to the company’s interests.  A director must inform the board of directors and the supervisory committee of any conflicting interest he or she may have in a proposed transaction and must abstain from voting thereon.

A director shall not be responsible for the decisions taken in a board of directors’ meeting as long as he or she states his or her opposition in writing and informs the supervisory committee before any claim arises.  A director’s decision approved by the company’s shareholders releases that director of any responsibility for his decision, unless shareholders representing 5% or more of the company’s capital stock object to that approval, or the decision was taken in violation of applicable law or the company’s by-laws.  The company is entitled to file judicial actions against a director if a majority of the company’s shareholders at a shareholders’ meeting request that action.

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Under the BCL, the board of directors is in charge of the administration of the company and, therefore, makes any and all decisions in connection therewith, as well as those decisions expressly provided for in the BCL, the company’s by-laws and other applicable regulations.  Furthermore, the board is generally responsible for the execution of the resolutions passed by shareholders’ meetings and for the performance of any particular task expressly delegated by the shareholders.  In general, our board of directors may be more involved in operating decision-making than might be customary in other jurisdictions.  Under the BCL, the duties and responsibilities of an alternate director, when acting in the place of a director on a temporary or permanent basis, are the same as those discussed above for directors.  They have no other duties or responsibilities as alternate directors.

Board of Directors

The following table sets forth information about the members and alternate members of our board of directors, five of whom have terms that expired in December 2016, while five have terms that will expire in December 2017 and the remaining ten have terms that will expire in December 2018. In accordance with Argentine law, each member maintains his or her position on the board until a new shareholders’ meeting elects new directors.  

(1)Independent Directors under Argentine law and under Rule 10A-3 under the Securities Exchange Act of 1934,
as amended.

Marcos Marcelo Mindlin, Damián Miguel Mindlin and Alejandro Mindlin are brothers.  There are no other family relationships between the other members of our board of directors.

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Senior Management

The table below sets forth certain information concerning our senior management:

Name	Position	Age
Marcos Marcelo Mindlin	Executive Director	52
Gustavo Mariani	Chairman, Co-Chief Executive Officer, Chief Generation Manager and Chief of New Business	45
Ricardo Alejandro Torres	Vice Chairman, Co-Chief Executive Officer and Chief Financial Officer and Chief of Distribution	58
Damián Miguel Mindlin	Chief Investment Portfolio Manager	50
Horacio Turri	Oil & Gas Director	55
Gabriel Cohen	Corporate Financing Director	51
Orlando Escudero	Operations and Maintenance Co-Director	58
Ruben Turienzo	Commercial Director	51
Mario Ricardo Cebreiro	Human Recourses Director and Operations and Maintenance Co-Director	63
Gerardo Paz	Legal Director	47
Mauricio Penta	Administration, Tax, Accounting, Managerial Control, Purchasing and Insurance Director	39

The business address of each of our current directors and executive officers is Ortiz de Ocampo 3302, Building #4, City of Buenos Aires, Argentina (C1425DSR).

Set forth below are brief biographical descriptions of the members of our board of directors and our senior management. 

Gustavo Mariani was born on September 9, 1970. Mr. Mariani holds a degree in Economics from the Universidad de Belgrano and a Master’s degree in Business Administration from the Universidad del CEMA (Center of Macroeconomic Studies) and also is a Chartered Financial Analyst (CFA) since 1998.  He has been a member of our board of directors since November 2005 and elected as Chairman in 2013.  Mr. Mariani joined Grupo Dolphin in 1993 as an analyst and also served as an investment portfolio manager.  He currently serves as Director of Bodega Loma la Lata S.A., CPB, CTG, Loma de La Lata, GMA Warrants S.A., Transener, Compañía de Inversiones S.A., Citelec, Comunicaciones y Consumo S.A., Consultores Fund Management S.A., Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Dolphin Finance S.A, Grupo Mtres S.A., Dolphin Inversora S.A., IEASA, EASA, Transba, Edenor, Energía Distribuida S.A., PEPCA, Grupo Dolphin S.A. Grupo Dolphin Holding S.A., HIDISA, HINISA, Nihuiles, Diamante, IPB, Orígenes Seguros de Vida S.A., Orígenes Seguros de Retiro S.A., Pampa Comercializadora S.A., Pampa F&F LLC, Pampa Participaciones II, Pampa Participaciones, Transelec, Petrolera Pampa, CIESA, Sitios Argentinos S.A. and TGS and as alternate liquidator of CAM Gerenciadora S.A. (en liquidación).  Also, Mr. Mariani is the executive secretary of the management board of “Fundación Pampa Energía Comprometidos con la Educación.”

Ricardo Alejandro Torres was born on March 26, 1958.  Mr. Torres holds a degree in Accounting from the Universidad de Buenos Aires and a Master’s degree in Business Administration from the Instituto de Altos Estudios Empresariales-Escuela de Negocios de la Universidad Austral.  He has been a member of our board of directors since November 2005 and was elected as Vice Chairman in 2013.  Mr. Torres is, since March 2012, Chairman of the Board of Directors of Edenor.  Mr. Torres has also held a post as a profesor of Tax and Finance at the school of Economics of the Universidad de Buenos Aires.  He currently serves as director of Bodega Loma la Lata S.A., CPB, CTG, Loma de la Lata, Energía Distribuida S.A., EASA, PEPCA, HIDISA, HINISA, IEASA, Diamante, Nihuiles, IPB, Pampa Comercializadora S.A., PISA, Pampa Participaciones, Pampa Participaciones II, Petrolera Pampa, Ponderosa Assets Holding I LLC. Ponderosa Assets Holding II LLC, RT Warrants S.A., Transelec, Pop Argentina S.R.L. (Partner), Todos Capital S.R.L. (Partner); Citelec (alternate director), Orígenes Seguros de Vida S.A., Orígenes Seguro de Retiro S.A., Transba (alternate director).  Also, Mr. Torres is the vocal of the management board of “Fundación Pampa Energía Comprometidos con la Educación.”

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Marcos Marcelo Mindlin was born on January 19, 1964.  He has been a member of our board of directors since 2006.  He is a member of the Council of the Americas.  Mr. Mindlin received a Master of Science in Business Administration from the Universidad del CEMA (Center of Macroeconomic Studies).  He also holds a degree in Economics from the Universidad de Buenos Aires. In 2008, Mr. Mindlin founded and since that time has directed a charity foundation called “Fundación Pampa Energía Comprometidos con la Educación” whose purpose is to improve childhood development and education.  Mr. Mindlin is also a member and was Chairman of the Board of the Executive Committee of Tzedaka, a leading Jewish-Argentine foundation.  From 1989 to 2004, Mr. Mindlin served as the founder, Senior Portfolio Manager and a shareholder of Grupo Dolphin.  From 1991 to 2003, Mr. Mindlin was also a shareholder, Vice-Chairman and Chief Financial Officer of Inversiones y Representaciones S.A. (IRSA), a leading Argentine real estate company listed on the New York Stock Exchange.  In November 2003, Mr. Mindlin resigned from IRSA to focus his work on Grupo Dolphin.  Mr. Mindlin has extensive expertise in Latin America through his role as Chairman of the board of directors of Grupo Dolphin and several of its affiliates.  From 1999 to 2004, Mr. Mindlin also served as Vice President of Alto Palermo S.A. (a leading owner and operator of shopping centers in Buenos Aires), Vice President at Cresud S.A.I.C. (one of the largest listed agricultural companies in Argentina) and as Director and member of the Executive Committee of Banco Hipotecario, the leading mortgage bank in Argentina.  Mr. Mindlin also serves as director of Edenor, Grupo Dolphin S.A., Dolphin Finance S.A., EASA, IEASA, HINISA, HIDISA, Transelec, Loma de la Lata, Güemes, Diamante, Nihuiles, Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Dolphin Inversora S.A., Piedra Buena, IPB, Petrolera Pampa, Pampa Participaciones II S.A., Energía Distribuida S.A., Pampa Participaciones S.A., Bodega Loma la Lata S.A., PEPCA, Grupo Dolphing Holding S.A., Orígenes Seguros de Retiro S.A., Orígenes Seguros de Vida S.A. Consultores Fund Management, Sitios Argentinos S.A., Pampa Comercializadora S.A. and Mindlin Warrants S.A.  

Damián Miguel Mindlin was born on January 3, 1966.  He has been a member of our board of directors since November 2005.  Mr. Mindlin joined Grupo Dolphin in 1991 as a shareholder and a director.  Since November 2003, Mr. Mindlin has served as Investment Portfolio Manager of Grupo Dolphin.  Also, Mr. Mindlin is the vice president of management board of “Fundación Pampa Energía Comprometidos con la Educación”.  Additionally, he currently serves as director of Edenor (alternate director), Grupo Dolphin S.A., Dolphin Finance S.A., EASA, IEASA, HINISA, HIDISA, Transelec, Pampa Participaciones S.A.,  Güemes, Diamante, Nihuiles, Piedra Buena, IPB, Dolphin Créditos S.A., Dolphin Créditos Holding.S.A., Dolphin Inversora S.A., Petrolera Pampa, Pampa Participaciones II S.A., Energía Distribuida S.A., Pampa Inversiones, Bodega Loma la Lata S.A., PEPCA (alternate director), Citelec (alternate director), Grupo Dolphin Holding S.A., ARPHC S.A., Estancia María S.A., Pampa Comercializadora S.A., Consultores Fund Management, Grupo Mtres S.A., Pampa F&F and DMM Warrants S.A., Orígenes Seguros de Vida S.A., Orígenes Seguros de Retiro S.A. and Sitios Argentinos S.A. and as Liquidator of CAM Gerenciadora S.A. (en liquidación). 

Diego Martín Salaverri was born on August 7, 1964. He has been a member of our board of directors since June 2006.  He is a founding partner of the Argentine law firm of Salaverri, Dellatorre, Burgio & Wetzler Malbrán.  He earned a degree in law in 1988 from the Universidad Católica Argentina, Buenos Aires.  He is member of the board of directors of Edenor (alternate director), Estancia María S.A., Socotherm Amercias S.A. and ARPHC S.A. He is also a member of the supervisory committee of Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Grupo Dolphin Holding S.A., Dolphin Finance S.A., Orígenes Seguros de Retiro S.A., Orígenes Seguros de Vida S.A., CIESA, and TGS. Until 2007, he was a member of the board of directors of EASA.  Mr. Salaverri resigned from his position as director of EASA at the November 14, 2007 meeting of the board of directors of EASA.  Mr. Salaverri is also an alternate member of the statutory audit committee of GSF S.A. and Partners I S.A.

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Carlos Tovagliari was born on December 27, 1959.  Mr. Tovagliari has been an alternate director of the Company and Güemes since 2013.  He also serves as vicepresident and CEO of Pop Argentina S.R.L.  Previously, he worked at Inversiones y Representaciones S.A. and at Petersen Thiele y Cruz S.A. Mr. Tovagliari holds a degree in Industrial Engineering from the Universidad de Buenos Aires.

Clarisa Lifsic was born on July 28, 1962.  On April 29, 2016 she joined the Company as a member of the board of directors.  Mrs. Lifstic is presently Secretary of State in the Ministry of Communication. She is also Director of Axis Investment and Director and Co-founder of Fondo de Inversion en Tierras SA. She was formerly Chairman of the Board and CEO of Banco Hipotecario from 2003 to 2009. Prior to that, she was Director of the Board of Cresud, Dolphin Fund Plc and Cactus Argentina, among others. Mrs. Lifstic holds a Bachelor in Economics from the University of Buenos Aires, where she graduated with honors and a Master of Science in Management from the Massachusetts Institute of Technology (Summa Cum Laude).

Santiago Alberdi was born on April 6, 1983.  On April 29, 2016 joined the Company as a member of the board of directors. Previously to joining the Company he worked at the Instituto de Juegos de Apuestas de la Ciudad autónoma de Buenos Aires. Mr. Alberdi holds a lawyer degree from the Universidad de Buenos Aires.

Julio Suaya Demaría was born on November 29, 1974. On April 29, 2016 joined the Company as a member of the board of directors. Currently Mr. Suaya Demaría has a main role as a Manager for an International Turism company. In the past he has developed his professional skills with critical leadership roles in various business units in companies from diverse industries such a Telefonica de Argentina, Cohen Sociedad de Bolsa and MP&M Comunicacion among others. Mr. Suaya Demaría has a degree in Business Administration from the Universidad Católica Argentina.

Javier Campos Malbrán was born on June 27, 1958.  On April 29, 2016 he joined the Company as a member of the board of directors.  Mr. Campos Malbrán is an experienced entrepreneur and an investor in different areas. He is Founder and CEO at Casa Cor events Brasil’s,  #1 Expo of Architecture & Design from1987 to 2004 and President of its Spain/Portugal Branch from 1992 to 2010.  He is currently Owner and CEO of 107.9 FM Station in Buenos Aires and President and Founder of La Colina Golf & Polo real state project in Opendoor Bs. As.

Pablo Díaz was born on June 26, 1957.  Mr. Díaz has been an alternate director of our company since June 2006.  Previously, he was an advisor to the federal Subsecretaría de Energía Eléctrica (the Sub-Secretariat for Electrical Energy).  He currently serves as director of Piedra Buena (alternate), Güemes (alternate), Loma de la Lata (alternate), Citelec, Transener, Edenor, Transba (alternate), HIDISA (alternate), HINISA (alternate), IEASA (alternate), Diamante (alternate), Nihuiles (alternate), IPB (alternate), Pampa Comercializadora S.A.(alternate), Pampa Participaciones S.A. (alternate), Pampa Participaciones II S.A. (alternate), Transelec.

Alejandro Mindlin was born on August 30, 1975.  Mr. Mindlin has been an alternate director of Pampa since June 2006.  Also, Mr. Mindlin is a member of the management board of “Fundación Pampa Energía Comprometidos con la Educación”.   Mr. Mindlin has a B.A. in Middle Eastern History and Languages from Tel Aviv University, as well as a film director’s degree.

Gabriel Cohen was born on September 11, 1964.  Mr. Cohen has been an alternate director of Pampa since June 2006, and he is presently vicepresident of Transener and president of CITELEC S.A. and TRANSBA S.A.  Mr. Cohen holds a degree in Business Administration from the Universidad de Buenos Aires.  In addition, he worked for 15 years at Citibank, N.A., serving at the bank’s offices in Buenos Aires and Paris, holding different positions in financial control, treasury, investment banking, corporate banking and debt restructuring processes.  He currently serves as alternate director of Bodega Loma la Lata S.A., Güemes, EASA, Energía Distribuida S.A., HIDISA, HINISA, IEASA, Diamante, Nihuiles, IPB, Pampa Comercializadora S.A., Pampa Participaciones S.A., Pampa Participaciones II S.A., Transelec.

Carlos Perez Bello was born on September 19, 1954.  He has been an alternate director of Pampa since April 2013.  Mr. Perez Bello also serves as director of Mantero, Arcucci&Asociados and of Pereira, Teliz, Bonin & Asociados and is the president of the Comisión de Cambio y Competitividad del CPCECABA, of the red de Apoyo del Club Argentino de Negocios de Familia and of the red de Apoyo del Centro de Entrepreneurship of the IAE.  Mr. Perez Bello holds a degree in Public Accounting from the Universidad de Belgrano.  Also Mr. Perez Bello has a post graduate degree in Commercialization and Agro Business and a master’s degree in Business Administration.

Brian Henderson was born on September 23, 1945. Mr. Henderson is a technical advisor of Grupo Dolphin S.A.  Previously, Mr. Henderson served as director of the Latin America Region of National Grid, Silica Networks and Manquehue Net Telecomunicaciones (Chile) and vicepresident of commercial operations of Energy Charter Oak for America, Africa and Europe. Before Charter Oak Energy, Mr Henderson served as vicepresident and CEO of Deutsche Babcock Riley, Canada Inc. Mr. Henderson is the 2nd Vicepresident of Transba.  He is also director of Güemes, Citelec, HINISA(alternate director), HIDISA(alternate director), Diamante (alternate director), Nihuiles (alternate director), Pampa Participaciones II S.A. (alternate director), Transelec (alternate director), Transener (alternate director), Energía Distribuída S.A. (alternate director), Transba, Bodega Loma la Lata S.A. (alternate director). He holds a degree in Industrial Engineering from the Hebum University.

Mariano Batistella was born on July 31, 1982. He has been an alternate director of the Company since 2013. He currently works as Investor Relations Officer, Planning Manager and Special Projects Manager of the Company. Mr. Batistella worked in investment banking at Goldman Sachs. Mr. Batistella holds a degree in business administration from the Universidad de San Andres and has a postgraduate degree in finance from the same institution.  He currently serves as alternate director for Edenor, CIESA and TGS.

Gerardo Carlos Pazwas born on October 24, 1968. Mr Paz holds a law degree from the Universidad Nacional de Córdoba and a Masters in Business Law form the Escuela Superior de Economía y Adminsitración de Empresas.  He currently serves as alternate auditor for CAMMESA, director of Termoeléctrica San Martín S.A. and Termoeléctrica Manuel Belgrano S.A., and alternate director of EASA, Edenor, HIDISA, HINISA, Pampa Comercializadora S.A., Petrolera Pampa and Güemes.

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José María Tenaillón was born on October 23, 1979.  On April 29, 2016 he joined the Company as an alternate member of the board of directors.  Mr. Tenaillon worked in Severgnini, RObiola Grinberg y Larrechea from 1998 to 2000, in Liendo & Castiñeyras from 2000 to 2005, in the CNV during 2005 and 2006, in Zang, Bergel & Viñes during 2006 and 2007, in Marval, O Farrell y Mairal from 2007 to 2010. Since 2010, Mr. Tenaillon works in Fondo de Garantía de Sustentabilidad. Mr. Tenaillon holds a lawyer degree from the Universidad de Buenos Aires.

Juan Francisco Gómez was born on March 17, 1988.  On April 29, 2016 he joined the Company as an alternate member of the board of directors.  Mr. Gómez works at Fondo de Garantía de Sustentabilidad since 2010.  Mr. Gómez holds a degree in Economics from the Universidad de Buenos Aires and a master’s degree (thesis pending) in Economics from Universidad de Buenos Aires.

Mariano González Alzaga was born on December 21, 1975.  On April 29, 2016 he joined the Company as an alternate member of the board of directors.  Mr. Gonzalez Alzaga worked at Edesur S.A. from 1998 to 2000. Mr. Gonzalez Alzaga holds a degree in business administration from the Universidad Torcuato Di Tella.

Horacio Turri was born on March 19, 1961.  Mr. Turri is an industrial engineer and received his degree at Instituto Tecnológico Buenos Aires.  From March 2000 to June 2008, Mr. Turri served as Chief Executive Officer of Central Puerto S.A.  Since August 1997, to March 2000, he was Chief Executive Officer of Hidroeléctrica Piedra del Águila.  From 1994 to 1997 he was Chief Executive Officer of Gener Argentina S.A.  Prior to 1994, he was Development Assistant Manager at Central Puerto S.A. He worked as an analyst of investment projects in the oil, gas and electricity sectors at SACEIF Luis Dreyfus from 1990 to 1992. He also worked at Arthur Andersen & Co. and Schlumberger Wireline in 1987-1990 and 1985-1987, respectively. 

Orlando Escudero was born on January 2, 1958. Mr. Escudero has worked in the Company since 2007. He also worked at Central Puerto S.A. and Hidroeléctrica Piedra del Aguila S.A. from 1992 to 2007 and at Segba S.A. from 1983 to 1992.  Mr. Escudero holds a degree in mechanical and naval engineering from the Universidad de Buenos Aires and a master’s degree in business administration, also from the Universidad de Buenos Aires.

Ruben Turienzo was born on July 23, 1964. Mr. Turiezo has worked in the Company since 2007. He also worked at Hidroeléctrica Piedra del Aguila S.A. and Central Puerto S.A. He was also a director of CAMMESA for seven years and president of AGEERA. Mr. Turienzo holds a degree in electrical engineering from the Universidad Nacional del Sur and holds a master’s degree in business from the Universidad del CEMA.

Mario Ricardo Cebreiro was born on April 12, 1953.  Mr. Cebreiro has a degree in electrical engineering from the Universidad Nacional del Sur.  From June 2008 to August 2011, he served as Chief of Central Piedra Buena.  From August 2004 to April 2008, he was Chief Operating Officer of Distrocuyo.  From September 2000 to 2004 he was Chief of Research and Development at Electricité de France.  Prior to 2000, he was Chief Operating Officer of Transba, Chief Operating Officer of ESEBA Generación and Chief of Central Termoeléctrica Necochea.

Mauricio Penta was born on July 23, 1976. Mr. Penta has worked in the Company since 2007.  Mr. Penta is an accountant and holds a degree in accounting from the UADE and has a master’s degree in business administration, from the IAE.

Independence of the Members of Our Board of Directors

Pursuant to CNV regulations, a director shall not be considered independent in certain situations, including where a director:

(1)owns a 15% equity interest in the relevant company, or a lesser interest if such director has the right to appoint one or more directors of the company (hereinafter, a significant participation) or has a significant participation in a corporation having a significant participation in the company or a significant influence on the company;

(2)is a member of the board or depends on shareholders, or is otherwise related to shareholders, having a significant participation in the company or of other corporations in which these shareholders have directly or indirectly a significant participation or significant influence;

(3)is or has been in the previous three years an employee of the company;

(4)has a professional relationship or is a member of a corporation that maintains professional relationships with, or receives remuneration (other than the one received in consideration of his performance as a director) from the company or its shareholders having a direct or indirect significant participation or significant influence on the same, or with corporations in which the shareholders also have a direct or indirect significant participation or a significance influence;

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(5)directly or indirectly sells or provides goods or services to the company or to the shareholders of the same who have a direct or indirect significant participation or significant influence, for higher amounts than his remuneration as a member of the administrative body; or

(6)is the spouse or parent (up to the second level of affinity or up to the fourth level of consanguinity) of persons who, if they were members of the administrative body, would not be independent, according to the above listed rules.

The following directors, including alternate directors, do not qualify as independent members of our board of directors in accordance with the CNV criteria: Marcos Marcelo Mindlin, Ricardo Alejandro Torres, Damián Miguel Mindlin, Gustavo Mariani, Diego Martín Salaverri, Pablo Diaz, Alejandro Mindlin, Gabriel Cohen, Mariano Batistella, Brian Henderson and Gerardo Carlos Paz. On the other hand, the following directors, including alternate directors, qualify as independent members of our board of directors according to the above mentioned criteria: Clarisa Lifsic, Santiago Alberdi, Javier Campos Malbrán, Julio Suaya Demaría, José María Tenaillón, Mariano González Álzaga, Juan Francisco Gómez, Carlos Perez Bello, and Carlos Tovagliari.

The Argentine independence standards under CNV rules differ in many ways from the NYSE, NASDAQ or the U.S. federal securities law standards.

Audit Committee

According to the provisions of Section 109 of the CML, the Company established an audit committee. During the extraordinary shareholders’ meeting held on April 26, 2013, our shareholders approved an amendment to the audit committee’s charter, which regulates the audit committee’s structure and functions. The main purpose of said amendment was to update the charter as per the most recent provisions of the CML.

Composition

Our audit committee is comprised of three members of the board.All the members of our audit committee must be independent according to the audit charter and must have professional experience in finance, accounting, law and/or management. 

Budget

Our audit committee will have an annual budget approved by the ordinary annual shareholders’ meeting based on available funds from, without limitation, our revenues, investments and cost savings.

Duties and authority

Our audit committee is responsible for the performance of the duties that fall within its scope of authority pursuant to the provisions of the CML.  These duties include, among other things, the following:

·supervising the operation of the internal control systems and the administrive-accounting system of the Company as well as the reliability of the administrative-accounting system and of all the financial information for any other material facts submitted to the consideration of the authorities in compliance with the applicable reporting requirements in force;

·issuing an opinion on the external auditors nominated by the board of directors to be retained by the Company and verifying if they are independent pursuant to the CML;

·reviewing the plans submitted by the external auditors, supervising and assessing their performance and issuing an opinion thereon upon the presentation and publication of the Company’s annual financial statements;

·supervising compliance with the risk management information policies in place in the Company;

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·approving transactions with related parties in the events set forth in the applicable law and issue an opion in such respect and inform the same pursuant to the provisions of the applicable law to the extent there is or may be and alleged conflict of interest in the Company;

·providing the market with complete information regarding transactions in connection of which there is a conflicts of interest with the members of our corporate bodies or controlling shareholders;

·approving the submission by the board of directors of any proposed compensation to the Company’s executives to the consideration of the shareholders’ meeting;

·verifying compliance with applicable standards of conduct;

·nominating two independent candidates for each renewal election for the board of directors to include one of them in the slate to be submitted to the shareholders’ meeting for the appointment of directors members of the audit committee;

·issuing an opinion on the absence of any default by the executives under the Opportunities Assignment Agreement approved by the shareholders’ meeting held on June 16, 2006 and executed on September 27, 2006, at least ten days in advance of the date on which each series of warrants vests and within twenty days of receiving notice from one of the executives of an event of acceleration, if applicable;

·approving any proposal related to the remuneration and compensation of our directors, before any such proposal is submitted to shareholders for consideration.  In reviewing such proposals the audit committee may consult with internationally recognized experts in the matter to make sure that our directors and executive officers earn compensation similar to the compensation received by other persons holding similar positions; and

·advising our board of directors with respect to the nomination of independent director candidates to be members of the audit committee.

Compensation policy

Our audit committee charter provides that any proposed compensation to the Company’s executives, must be similar to any remuneration paid to persons in comparable positions, in Argentina and/or abroad, engaged in the management of private equity and investments activities. In addition, according to applicable regulation, such compensation must be based on the contribution made by each executive, as well as the Company’s financial condition and result of operations.  Any proposal for remuneration that is not duly considered and approved by our audit committee cannot be submitted for the consideration of the shareholders’ meeting.

Nomination policy

The members of our audit committee are responsible for nominating two independent director candidates (based on the criteria and requirements for independent directors under applicable Argentine law) each time a renewal of directors must take place. In accordance with applicable regulations, all members of our audit committee are independent.

As of the date of this annual report, the only member of the audit committee is Carlos Tovagliari. A meeting of our Board of Directors is scheduled to take place on May 11, 2016. In such meeting, two additional independent directors (under Argentine law and Rule 10A-3) are expected to be appointed as members of our audit committee.

For biographical information on the member of the audit committee see his biography under “Board of Directors”.

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Supervisory Committee

Our current by-laws set forth a supervisory committee composed of three regulars and three alternate members. The members of the supervisory committee shall hold office for a term of three fiscal years.  Pursuant to the BCL, only lawyers and accountants admitted to practice in Argentina may serve as members of a supervisory committee of an Argentine sociedad anónima, or limited liability corporation.

The primary responsibilities of the supervisory committee are to monitor the management’s compliance with the BCL, the by-laws, its regulations, if any, and the shareholders’ resolutions, and to perform these duties include, inter alia, the following:

(1)attending meetings of the board of directors, executive committee, audit committee and shareholders;

(2)calling extraordinary shareholders’ meetings when deemed necessary and ordinary and special shareholders’ meetings when not called by the board of directors;

(3)investigating written complaints of shareholders; and

(4)monitoring the operation of the Ethics line through which executives and employees of the Company may make, among others, complaints regarding accounting, internal control and audit matters. 

In performing these functions, the supervisory committee does not control our operations or assess the merits of the decisions made by the directors.  The duties and responsibilities of an alternate statutory auditor, when acting in the place of a statutory auditor on a temporary or permanent basis, are the same as those discussed above for statutory auditors.  They have no other duties or responsibilities as alternate statutory auditors.

The following table sets forth certain relevant information of the members of our supervisory committee.

Name	Position	Age
Jorge Roberto Pardo	Statutory Auditor	62
Germán Wetzler Malbrán	Statutory Auditor	45
José Daniel Abelovich	Statutory Auditor	59
Marcelo Héctor Fuxman	Alternate Statutory Auditor	60
Victoria Hitce	Alternate Statutory Auditor	39
Silvia Alejandra Rodriguez	Alternate Statutory Auditor	43

Set forth below are brief biographical descriptions of the members of our supervisory committee:

                Jorge Roberto Pardo was born on March 31, 1953. He has been a member of our supervisory committee since April 2015. From 1993 to 2015, Mr. Pardo served in the internal audit body of the Argentine Government (Sindicatura General de la Nación). He also serves in the supervisory committee for several Argentine companies, including Nación Bursátil Sociedad de Bolsa S.A., Nación Fideicomisos S.A. and Compañía de Transporte de Energía Eléctrica en Alta Tensión Transener S.A. Mr. Pardo holds a degree in Public Accounting from the Universidad de Buenos Aires.

Marcelo Héctor Fuxman was born on November 30, 1955.  He has been a member of our supervisory committee since June 2006.  Mr. Fuxman holds a degree in Accounting from the Universidad de Buenos Aires.  Mr. Fuxman is a partner of Abelovich, Polano & Asociados/NEXIA INTERNATIONAL, an auditing firm, and managing partner of Real Estate Investments S.R.L.  He currently serves as Director of Abelovich, Polano & Asoc. S.R.L., Abus las Americas I S.A., Abus Securities S.A., Advanced Capital Securities S.A., Agra Argentina S.A., Agro Managers S.A., Agro Investment S.A., Agrotech S.A., Alto Palermo S.A., Arcos del Gourmet S.A., Austral Gold Argentina BACSAA S.A., Banco de Crédito y Securitización S.A., Banco Hipotecario S.A., Baicom Networks S.A., BH Valores S.A. de Sociedad de Bolsa, BHN Seguros Generales S.A., BHN Sociedad de Inversión S.A., BHN Vida S.A., Bitania 26 S.A., Boulevard Norte S.A., Cactus Argentina S.A., Güemes, Loma de la Lata, Transener, Citelec, Conil S.A., Convexity Sociedad Gerente de Fondos Comunes de Inversión S.A., Cresud SACIF y A, Cyrsa S.A., Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Dolphin Finance S.A., E-Commerce Latina S.A., EASA, Emprendimiento Recoleta S.A., Emprendimientos del Puerto S.A., Transba, Edenor, Exportaciones Agroindustriales Argentinas S.A., Fibesa S.A., Futuros y Opciones.com S.A., FYO Trading S.A., Grupo Dolphin Holding S.A., HIDISA, Hoteles Argentinos S.A., Inversora Bolívar S.A., IRSA Inversiones y Representaciones S.A., Jordelis S.A., La Clara de Banderaló S.A., La Pionera de Anta S.A., Llao – Llao Resorts S.A., Nuevas Fronteras S.A., Nabsa Corporation, Nuevo Puerto Santa Fe S.A., Orígenes Seguros de Retiro S.A., Orígenes Seguros de Vida S.A., Oberli S.A., Palermo Invest S.A., Panamerican Mall S.A., Petrolera Pampa, Préstamos y Servicios S.A., Proyectos Edilicios S.A., Puerto Retiro S.A., Quality Invest S.A., Palermo Invest S.A., Real Estate Investments S.R.L., Shopping Neuquén S.A., Solares de Santa María S.A., Tarshop S.A., Torres del Puerto S.A., Torres de Puerto Madero S.A., TGS and Unicity S.A.  

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Germán Wetzler Malbrán was born on April 25, 1970. He has been a member of our supervisory committee since April 2010, as well as member the supervisory committee of many of our subsidiaries. Mr. Wetzler Malbrán holds a law degree from the Universidad Católica Argentina.  Mr. Wetzler Malbrán is a founder partner of Salaverri, Dellatorre, Burgio & Wetzler Malbrán law firm. He is a member of the statutory audit committee of Loma de la Lata, IPB, IEASA, Pampa Participaciones S.A., Pampa Participaciones II S.A., Petrolera Pampa, Bodega Loma la Lata S.A., Transelec, Diamante, Nihuiles, PEPCA, Los Yaros Agropecuaria S.A and Agropecuaria La Volanta S.A.  He currently serves as alternate director of ARPHC S.A. and Estancia María S.A. Additionally, Mr. Wetzler Malbrán serves as an alternate member of statutory auditor of Grupo Dolphin Holding S.A., Orígenes Seguros de Retiro S.A., Orígenes Seguros de Vida S.A. and Dolphin Finance S.A., among others.

Silvia Alejandra Rodríguez was born on December 15, 1972.  She has been a member of our supervisory committee since April 2011.  Ms. Rodriguez holds a law degree from the Universidad de Buenos Aires.  Since October 2009, Ms. Rodriguez has served in the internal audit body of the Argentine Government (Sindicatura General de Empresas Públicas-Sindicatura General de la Nación). She also serves as a member of the statutory audit committee of Parque Eólico Arauco S.A.P.E.M., Agua y Saneamiento S.A. and Nucleoeléctrica Argentina S.A., as alternate member of the statutory audit committee of Arsat S.A., Telecom S.A., Ferrosur Roca S.A., Ferroexpreso S.A. and CEAT S.A. 

José Daniel Abelovich was born on July 20, 1956.  He has been a member of our supervisory committee since 2007.  Mr. Abelovich holds a degree in Public Accounting from the Universidad de Buenos Aires.  Mr. Abelovich is a partner of Abelovich, Polano & Asociados/NEXIA INTERNATIONAL, an auditing firm. Mr. Abelovich also serves as member of the of the following supervisory committees, among aothers, of Alto Palermo S.A., Arcos del Gourmet S.A., Banco de Crédito y Securitización S.A., Banco Hipotecario S.A., BH Valores S.A. de Sociedad de Bolsa, BHN Seguros Generales S.A., BHN Sociedad de Inversión S.A., BHN Vida S.A., Transener, Citelec, Convexity Sociedad Gerente de Fondos Comunes de Inversión S.A., Cresud SACIF y A, EASA, Emprendimiento Recoleta S.A., Transba, Edenor, Hoteles Argentinos S.A., Inversora Bolívar S.A., IRSA Inversiones y Representaciones S.A., Llao – Llao Resorts S.A., Nuevas Fronteras S.A., Orígenes Seguros de Retiro S.A., Orígenes Seguros de Vida S.A., Palermo Invest S.A., Panamerican Mall S.A., Petrolera Pampa, Shopping Neuquén S.A., Solares de Santa María S.A., Tarshop S.A. and Unicity S.A.

Victoria Hitce was born on April 9, 1977.  She has been an alternate member of our supervisory committee since April 2015. Ms. Hitce received her law degree from the Universidad Católica Argentina. She is a founding partner of the Argentine law firm Salaverri, Dellatorre, Burgio & Wetzler Malbrán. Mrs. Hitce serves as a member of the supervisory committee of Bodega Loma La Lata S.A., IEASA, Diamante, Nihuiles, IPB, Pampa Participaciones II S.A., Pampa Participaciones S.A., PEPCA S.A., Transelec and as an alternate member of the supervisory committee of Dolphin Créditos Holding S.A., Dolphin Créditos S.A., Dolphin Finance S.A. and EASA.

Corporate Governance 

The Company enacted a comprehensive code of trading as well as a business code of conduct.

·Policy of Trading. This Policy was approved by the board of directors on June 14, 2007 and its latest amendment was approved through by the board of directors’ meeting held on January 27, 2015. It has been implemented in order to avoid ‘insider trading’ practices by the Company’s employees (i.e, to prevent the use of non-public material information to gain advantage for oneself or for others, either directly or indirectly). The Policy applies to the Company’s staff and its subsidiaries, including directors, supervisory committee members, and senior management lines, and it extends to their families or persons who live with them, as well as to certain suppliers.

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·Business Code of Conduct approved by the board of directors’ meeting held on December 10, 2007. This Code not only states the ethical principles that constitute the foundation of the relationship between the Company, its employees and suppliers, but also offers the means and instruments that guarantee the transparency of issues and problems affecting the management of the Company. As part of the various corporate governance policies adopted, the Company’s approved implementing the Ethics Hotline as an exclusive channel to report, under strict confidentiality, any suspected misconduct or breach of the Code.

Additionally, the Company adopted the following policies and practices:

·Self-Assessment Questionnaire for the Board of Directors.  In 2008 the Company’s Board of Directors passed the implementation of a self-assessment questionnaire to annually examine and assess its own performance and management. The Company’s Corporate Law Division is in charge of examining and filing each questionnaire with the individual answers given by the Board members and, based on the results, it shall submit to the Company’s board of directors all the proposed measures deemed useful to improve the performance of the board of directors’ duties.

·Internal Policy on Transactions with Related Parties. According to the provisions the CML, the Company approved the Internal Policy of Transactions with Related Parties.  Pursuant to such policy and as stated in the applicable regulations, all high-value transactions  (i.e. all exceeding 1% of the equity of the Company) made by the Company with individuals and/or legal entities which are considered as ‘related parties’ pursuant to the provisions set forth in applicable regulations, must be subject to a specific prior authorization and control procedure that is carried out under the coordination of the Company’s Corporate Law Division and which involves both the Companys’s board of directors and its Audit Committee, as the case may be.

The Company adopted as well the following polices:

·Pre-approval of Principal Accountant Services. This Policy standardizes an internal process that allows the Audit Committee to comply with its obligation to grant prior approval for hiring an external auditor for the provision of any kind of authorized service to the Company or any of its subsidiaries.

·Fraud Prevention Procedures. In accordance with the provisions of the U.S. Foreign Corrupt Act and in addition to the Business Code of Conduct, the Company adopted the Fraudulent Practices Prevention Program, which sets out the responsibilities, duties and methodology necessary to prevent and detect any misconduct and/or fraudulent behavior within the Company and/or any of its subsidiaries.

·Policy on Material Information’s Disclousure. This Policy was approved with the aim of standardizing the basic principles concerning the way in which Company’s material information disclosure processes operate, in accordance with the regulatory requirements of the securities markets on which the Company’s securities are listed or those in which it is registered to such end. To ensure the duly execution and compliance with the internal dispositions and applicable regulations as regards this matter, the Company established an Information Disclosure Committee. 

Compensation of Directors and Officers

The BCL provides that the compensation payable to all directors (including those directors who are also members of senior management) in a fiscal year may not exceed 5% of net income for such fiscal year, if the company is not paying dividends in respect of such net income.  The BCL increases the annual limitation on director compensation to up to 25% of net income if all the net income for such year is distributed as dividend.  The percentage decreases proportionally based on the relation between the net income and the dividends distributed.  The BCL also provides that the shareholders’ meeting may approve the remuneration of the directors in excess of the limits set by the BCL in case the company has no net income or the net income is low, if the relevant directors performed during such fiscal year special commitments or technical-administrative functions.  The audit committee approves proposals presented by our board of directors with respect to the compensation of our directors who are also executive officers.  See “Audit Committee—Compensation Policy.”  The compensation of all directors and members of the supervisory committee requires shareholders’ approval at an ordinary shareholders’ meeting.

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For the fiscal year ended December 31, 2015, fees paid during that year to our directors and executive officers who are also members of our Board of Directors amounted to Ps.50 million, and fees accrued during that year to our directors and executive officers who are also members of our Board of Directors amounted to Ps.26.6 million. We do not currently have any pension plan in place for our directors and executive officers.

Share Ownership

As of April 19, 2016, Marcos Marcelo Mindlin, Gustavo Mariani, Ricardo Alejandro Torres and Diego Martín Salaverri each owns shares representing, in the aggregate, 11.2%, 2.4%, 1.5%, 2.4% and 0.0%, respectively of our capital stock.  No other member of our board of directors or our senior management beneficially owns any shares of our capital stock.  See “Item 7. Major Shareholders and Related Party Transactions.”

Employees

Excluding those employed by us on a temporary basis, at December 31, 2015, we, together with our jointly controlled companies, had 6,325 full time employees.  The following table sets forth the number of our full-time employees by segment for the periods indicated:

         

______________________

(1)Includes the total number of employees of each company in which we have a  jointly controlling interest.  See “Presentation of Information—Financial Information—Proportionate consolidation of certain subsidiaries”.

Approximately 81.0% of our work force is affiliated with a union and/or is a party to a collective bargaining agreement.  We have completed salary negotiations for 2015.  We maintain a positive relationship with each of the employee unions at our subsidiary companies.  The distribution sector started, in March, the salary negotiations for 2016.  Negotiations have not been completed yet, as of the date of this annual report.

We offer a variety of benefits beyond those required by the Argentine Labor Contract Law, but make no payments to retirees or terminated employees.  In accordance with the agreements we have entered with the unions at some of our subsidiaries, we are required to pay certain seniority premiums to retiring employees as a one time payment upon retirement.

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Item 7.  Major Shareholders and Related Party Transactions  

Major Shareholders

Prior to May 31, 2006, we had 6 million outstanding common shares, with a par value of Ps. 1.00 per share.  On May 31, 2006, September 28, 2006 and February 1, 2007, we consummated capital increases of 140 million, 300 million and 600 million additional shares, respectively.  Also, on September 28, 2007, we issued an additional 480,194,242 shares to the former indirect shareholders of EASA (including shares in the form of GDSs) in connection with our acquisition of Edenor.  Due to the recent international economic crises and the fluctuation in the price of our shares, on September 8, 2008, and again on April 16, 2009, our board of directors approved a share repurchase program, through which we have acquired 211,883,347 shares, or 13.9%, of our then outstanding capital stock, through transactions in the local market.  In the meeting held on April 23, 2010, our shareholders decided to reduce our capital stock in the amount equal to the shares acquired under our share repurchase program.  On March 8, 2010, the Buenos Aires Stock Exchange authorized the share capital reduction approved by our shareholders.  On September 13, 2010, the CNV proceeded with the reduction of capital. 

On September 27, 2006, we executed the Opportunities Assignment Agreement with the Key Executives.  As amended, the Opportunities Assignment Agreement provided that, until September 28, 2014, these four individuals were obliged to offer to us on a priority basis any investment opportunity relating to assets and opportunities in the energy sector (including electricity, oil and gas and alternative energies) in all the stages of its production and commercialization in or outside Argentina that each of these four individuals or all of them as a group may identify, provided that such investment was within our financial possibilities.

As consideration for Marcelo Mindlin, Damián Mindlin, Gustavo Mariani and Ricardo Torres’ agreeing to offer to us the investment opportunities mentioned above, our shareholders approved the issuance of certain warrants to these four individuals on June 16, 2006.  Such warrants were issued to these individuals on September 27, 2006 pursuant to the capital stock increase in the Company approved in September 2006.  As amended, the warrants agreements provide that the warrants shall confer to the Key Executives (or any company controlled by any of them that holds such warrants), on their respective exercise date, the right to subscribe for shares of our common stock representing 20% of our outstanding capital.  The warrants are issued in three series divided into three equal parts (Series I, II and III). 

Series I, Series II and Series III warrants have vested by fifths on each of September 28, 2010, September 28, 2011, September 28, 2012, September 28, 2013, and September 28, 2014.  The exercise period for such warrants was 15 years, commencing on their issuance date on September 27, 2006. The exercise price of the warrants is U.S. $ 0.27.

On November 23, 2015, Merrill Lynch, Pierce, Fenner & Smith Incorporated (“BAML”) notified us, on behalf of the holders of warrants, of their decision to exercise, the outstanding warrants, which granted them the right to subscribe 381,548,564 of our shares or our common stock.  The aggregate exercise price of the warrants paid by the Key Executives was U.S.$ 103,018,112.28, which was payable to us in Pesos as provided in the warrant agreements. As a consequence, we issued new shares of our common stock, of which (i) a portion were sold in the form of ADSs in a public offering, and (ii) the remainder were delivered to the holders of warrants in the form of ADSs.

As a result, as of the date of this annual report, our share capital authorized for public trading is Ps. 1,695,859,459, represented by 1,695,859,459 common shares of par value Ps. 1 and with right to one vote per share.  The ADS Depositary has informed us that, as of April 19, 2016, there were approximately 44 million outstanding ADSs. 

As of such date, there was one registered holder of our ADSs in the United States. Since certain of our ADSs are held by brokers or other nominees, the number of direct record holders in the United States may not be fully indicative of the number of direct beneficial owners in the United States of our ADSs, or of where the direct beneficial owners of such ADSs are resident.  We have no information concerning holders with registered addresses in the United States that hold our shares which are not represented by ADSs.

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The table below sets forth information concerning the beneficial ownership of our common shares as of April 19, 2016: 

(1)     On November 20, 2008, the Argentine Congress passed a law unifying the Argentine pension and retirement system into a system publicly administered by the Administración Nacional de la Seguridad Social (National Social Security Agency, or ANSES) and eliminating the retirement savings system previously administered by private pension funds under the supervision of a governmental agency. In accordance with the new law, private pension funds transferred all of the assets administered by them under the retirement savings system to the ANSES.  These transferred assets included 295,765,953 common shares of the Company, representing 20.50% of our capital stock at that date. The ANSES is subject to the same investment rules, prohibitions and restrictions that were applicable to the Argentine private pension funds under the retirement savings system, except as described in the following sentence.  On April 12, 2011, the Executive Power issued Emergency Decree No. 441, which annulled the restrictions under Section 76(f) of Law No. 24,241on the exercise of more than 5% of the voting power in any local or foreign company, such as the Company, in any meeting of shareholders, irrespective of the actual interest held in the relevant company's capital stock.  The annulment of the restrictions under Section 76(f) of Law No. 24,241 came into effect on April 14, 2011.  As of such date, ANSES may exercise its voting power in any local or foreign company, such as the Company, based on the actual interest held in the relevant company’s capital stock.

Related Party Transactions

Argentine corporate law permits directors of a corporation to enter into transactions with that corporation provided that any such transactions are consistent with prevailing market practice.  The CML provides that corporations whose shares are subject to public offering must submit to their respective audit committees the approval of any transaction with a related party involving an amount that exceeds 1% of the corporation’s net worth. 

Except as set forth below and as otherwise permitted under applicable law, we are currently not party to any transactions with, and have not made any significant loans to, any of our directors, key management personnel or other related persons, and have not provided any guarantees for the benefit of such persons, nor are there any such transactions contemplated with any such persons.

Legal Services

During the year ended December 31, 2012, we engaged the services of the Argentine law firm Errecondo, Salaverri, Dellatorre, González & Burgio and also of the Argentine law firm Salaverri, Dellatorre, Burgio & Wetzler Malbrán. During the year ended December 31, 2013, 2014 and 2015, we engaged the services of the Argentine law firm Salaverri, Dellatorre, Burgio & Wetzler Malbrán.  One of our directors, Diego Martín Salaverri, one member of the supervisory committee, German Wetzler Malbran, and one alternate member of our supervisory committee, Santiago Dellatorre, are partners of Salaverri, Dellatorre, Burgio & Wetzler Malbrán.

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Item 8.   Financial Information

CONSOLIDATED FINANCIAL STATEMENTS

See “Item 18.  Financial Statements” beginning on page F-1.

LEGAL PROCEEDINGS

In the normal course of business, we are a party to lawsuits of various types.  Our management evaluates the merit of each claim and assesses the likely outcome, recording an accrual in our financial statements for the related contingent liability when an unfavorable decision is probable and the amount may be reasonably estimated.  At December 31, 2015, we had established accruals in the aggregate amount of Ps. 335.2 million to cover potential losses from such claims and legal proceedings.  The abovementioned amount, does not include Transener given that our stake in Transener constitutes an interest in a joint venture, and it is not consolidated and it is valued according to the equity method of accounting in the Consolidated Financial Statements.  Except as disclosed below, we are not a party to any legal proceedings or claims that may have a material adverse effect on our financial position or results of operations.

Generation

Legal proceedings involving Piedra Buena’s real estate

Pursuant to the contracts relating to Piedra Buena’s privatization in 1997, the Province of Buenos Aires transferred all the assets comprising the Piedra Buena facilities to Piedra Buena.  Although the real property on which the plant was built was not registered in the name of the Province of Buenos Aires, the Province assumed the obligation to transfer the real property with clear and marketable title to Piedra Buena.  As of the date of this annual report, the Province of Buenos Aires has not transferred the real property with clear and marketable title to Piedra Buena but did initiate the expropriation process required to begin the transfer process.  Nonetheless, Piedra Buena initiated legal action against the Province of Buenos Aires in order to avoid an expiration of the statute of limitations for an action claiming the transfer of real property.

In addition, the Province of Buenos Aires transferred the rights to a 22-kilometer gas pipeline, which runs from Transportadora del Gas del Sur’s General Cerri Plant to Piedra Buena’s Plant in Ingeniero White, Province of Buenos Aires, and the rights over a 27-kilometer electricity transmission line, which runs from Piedra Buena’s Plant in Ingeniero White, Province of Buenos Aires to Estación Transformadora Bahía Blanca.  Both the pipeline and the transmission line were built on third party land.  Therefore, the Province of Buenos Aires agreed to create administrative easements on the third party land in order to transfer good title for the use of the pipeline and transmission line.  The Province of Buenos Aires has not yet created the administrative easements, and 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 owners of the land through which the pipeline and the electricity transmission line of Piedra Buena run seeking compensation for the use of their land.  As of the date of this annual report, these complaints have been limited to such letters and no judicial or administrative action has been filed.  As a result, no reserve has been established in Piedra Buena’s financial statements in connection with these real property issues. 

Legal proceedings involving Loma de la Lata

As a consequence of the delays in the hand-over of the Loma de la Lata Project, the lower power of the steam turbine installed, and certain defaults of the Project Counterparties in their obligations assumed under the Project Agreements, Loma de la Lata, in exercise of its contractual rights, required of 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 bank guarantees issued under the Project Agreements.

Subsequently, the Contractor requested Loma de la Lata to issue the formal certificate of provisional acceptance of the Loma de la Lata Project, which was rejected as the Contractor did not comply with the terms and conditions required to that end. Loma de la Lata proposed to sign an alternative certificate of provisional acceptance reflecting the real situation of the plant as of November 2011. The parties did not reach an agreement.

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As a result of the execution of the bank guarantees of the Project Counterparties, Loma de la Lata collected from BBVA Banco Francés S.A. and from Commerzbank AG approximately U.S.$20 million.

In this context, in 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:

a.The delivery of the formal provisional acceptance of the Loma de la Lata Project under the Construction Agreement.

b.The refund of the sums received for the foreclosure of the guarantees issued by BBVA Banco Francés S.A.

c.The payment of damages as a consequence of items a. and b. above.

On December 30, 2011, Loma de la Lata rejected before the Court of the International Chamber of Commerce the claim of the Contractor and filed a counterclaim with respect to the Project Counterparties for the integral recovery of the damages caused as a consequence of both parties defaults under the Project Agreements.

As a consequence of the execution of guarantees, the Contractor filed a claim before an Argentine court requesting a lien over certain assets of Loma de la Lata as a preemptive measure in relation to the arbitration described above, through which the Contractor was claiming the reimbursement of the amounts paid by BBVA Banco Francés S.A. under such guarantees. On December 27, 2011, Güemes was notified of the attachment of the shares owned by Loma de la Lata which represent a 74.2% of the capital stock and votes of Güemes, for the amount of U.S.$ 8,179,840.42. Such lien also included the attachment of any sums that Loma de la Lata received from CAMMESA (the “Attachments”).

On January 11, 2012, the court that ordered the Attachments, accepted the requirement from Loma de la Lata to replace the Attachments for a bail insurance.  As of the date of this annual report, such replacement is in place.

On May 21, 2012, the Court of Appeals in Commercial Matters of Buenos Aires, confirmed the lien requested by the Contractor, which should remain in place until final resolution of the arbitration dispute.

In addition to the above mentioned developments, Loma de la Lata had also executed a guarantee issued by Commerzbank Madrid branch for the amount of U.S.$ 13,207,650, to guarantee the obligations of the Supplier under the Supply Agreement. This execution was carried on after the Supplier rejected Loma de la Lata’s request to pay the damages (valuated approximately in U.S.$ 27 million) caused, among other issues, by the failure of the Supplier to deliver a turbine that generates approximately 176MW.

In order to prevent the payment of the guarantee described above, the Contractor required a preemptive measure to a commercial court in Madrid, Spain, which was granted on December 29, 2011, and notified to Loma de la Lata on January 23, 2012. Such measure ordered Loma de la Lata to abstain from executing the guarantee for an amount that exceeds U.S.$ 1.200.000. Such amount is the amount of the performance penalties that the Supplier alleged to be the only amount owed to Loma de la Lata under the Supply Agreement.

Additionally, the measure ordered the bank to abstain from paying Loma de la Lata any amount in excess of U.S.$ 1,200,000 until the arbitration process is concluded.

On January 26, 2012, Loma de la Lata was notified that the Supplier had extended the scope of the claim filed in the arbitration process, in order to include a claim for damages regarding the execution of the guarantee issued by the Commerzbank.

                Loma de la Lata opposed to the preemptive measure granted in Madrid and on March 20, 2012 such preemptive measure was revoked by the Spanish court which had granted it, in light of the arguments presented by Loma de la Lata. The Contractor submitted an appeal of such measure, and on February 3, 2014 the Court of Appeals of Madrid (Audiencia Provincial de Madrid) confirmed the first instance judgment rejecting the Contractors’ arguments.

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On October 2012, Loma de la Lata was notified of an extension of the lien adopted by the Buenos Aires courts, in this instance with respect to the sum of U.S.$ 11,986,458 which corresponds to the amounts transferred to Loma de la Lata by Commerzbank, minus the sum of U.S.$ 1,221,192 that the Project Counterparties consider to be owed to Loma de la Lata. The latter appealed such decision and on December 5, 2014, the Court of Appeals confirmed the lien imposed by the first instance court. Nonetheless, Loma de la Lata obtained an order of the judge to replace the Attachments for bail insurance.

On November 14, 2012, there was a new blackout in the plant as a result of an outage in the transmission lines that connect the plant to the WEM. Such event caused an outage of the gas units and the steam unit of the plant. The outage of the steam unit occurred in such conditions that it produced major damages to the turbine and the generator. Loma de la Lata gave the corresponding notices to the insurance companies, the Contractor and to CAMMESA.

                The Contractor alleged that the guarantee period had expired and the final reception of the plant had operated, thus it rejected any responsibility for the event and its consequences.

                The claims made by Loma de la Lata to the insurance companies included the damages for business interruption and material damages and repairs, and it totaled U.$.S 43.7 million, which the insurance companies recognized and paid to Loma de la Lata during the last quarter of 2013. The steam turbine was out of service for 7 months and recommenced operations on June 13, 2013.

                The claims to the Contractor regarding the November 14, 2012 event were included in the arbitration referred above.

                On March 27, 2013, the parties filed their respective briefs of their claims (the Contractor for the amount of U.S.$ 97,546,030.40 and Loma de la Lata for the amount of U.S.$ 228,245,293.), presenting the corresponding evidence. On July 26, 2013 the parties submitted their respective responses, and on October 15, 2013, they submitted their last responses before the hearings. Such hearings took place in March 2014 and in May 2014 the parties submitted their final allegations.

On June 11, 2015, the arbitral award on this dispute was issued, in which: (i) breaches by the Project Counterparties were acknowledged, and (ii) the Project Counterparties were ordered to pay for the damages to Loma de la Lata for an amount of U.S.$ 49.3 million and (iii) such amount was offset with certain credits of the Project Counterparties had against Loma de la Lata, which resulted in a final amount due by the Project Counterparties to Loma de la Lata of U.S.$15.1 million (the “Arbitral Award”).

On December 3, 2015, Loma de la Lata and the Project Counterparties entered into an agreement to comply with the Arbitral Award, pursuant to which the Project Counterparties agreed to pay Loma de la Lata an amount of U.S.$. 15.2 million, in four different installments, the first three for U.S.$ 4 million due on December 30, 2015, January 30, 2016 and Fabruary 27, 2016, respectively and the fourth and last one, for the outstanding amount maturing on March 30, 2016 (the “Payment Agreement”). The Payment Agreement is governed under the laws of Spain and the parties agreed to submit any dispue to the jurisdiction of the courts of Spain.

The Project Counterparties breached the Payment Agreement by failing to timely pay the installments. Loma de la Lata initiated the enforcement of the Payment Agreement before the courts of Spain.

As of the date of this annual report, Loma de la Lata had received the full amount due under the Payment Agreement, which amounted to U.S.$15.7 million, including interest and costs, the first week of May 2016.

Breach of the 2008-2011 Agreement

On March 22, 2012, PESA’s affiliates, Güemes, Loma de la Lata, Piedra Buena, EGSSA (now merged into CTG. Please see “Item 4. Our Business – Our Generations Business – Güemes – History”) and HIDISA, filed a Reclamo Administrativo Previo requesting the cancelation of the LVFVDs accrued on 2011 for a total amount of U.S. $ 8,083,799 based on the provisions of the Complementary Agreement (see Item 5. “Operating and Financial Review and Prospects - Previous Scheme for Recognizing Costs and Remuneration”).  

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Moreover, and in virtue of the amounts due to Güemes, Loma de la Lata and Piedra Buena and based on the provisions of the 2008-2011 Agreement, and the instructions given by the Secretariat of Energy to CAMMESA by means of the Notes No. 495/12 and 1269/12, such companies filed a Reclamo Administrativo Previo requesting the fulfillment of the 2008-2011 Agreement and the amounts accordingly owed in concept of damages and interest accrued derived from such breach.  

Hidoeléctrica Nihuiles has filed a Reclamo Administrativo Previo in order to seek compensation due to the Secretariat of Energy’s breach of the 2008-2011 Agreement related to the liquidation of its commercial transactions in the WEM.

As a consequence of the enactment of SE Resolution No. 95/2013 and, in order to be able to participate in the new remuneration scheme, Güemes, Loma de la Lata, Piedra Buena, HINISA and HIDISA withdrew the claims filed in connection to the breach of the 2008-2011 Agreement and renounced to file new claims on such matter and/or in relation to SE Resolution No.406/2003.

Such withdrawal did not include the claims filed seeking the cancellation of the LVFVD allocated in Central Térmica Piquirenda Project. On this matter, on June 28, 2013, Loma de la Lata, Piedra Buena, Güemes and HIDISA filed a claim against the Argentine Government.

As indicated above, the unpaid LVFVD allocated to the Project CTP were allocated to Loma de la Lata’s 2014 Expansion Project. The Specific Conditions established that the parties thereto shall suspend the abovementioned claim for a 6 months period (with automatic renewals). Under argentine procedural law, such suspension requires the filing of a joint request by the parties to the claim. However, the plaintiffs filed a petition to the court requiring the suspension of the claims. The court granted the suspension. As of the date of this annual report, the claim remains suspended.

Breach of Loma de la Lata’s WEM Supply Agreement under SE Resolution No. 724/2008

On April 14, 2008, Loma de la Lata entered into a WEM Supply Agreement under SE Resolution No. 724/2008 with CAMMESA (see “Item 4. – The Argentine Electricity Sector - WEM Supply Agreements under SE Resolution No. 724/2008”).

CAMMESA had partially cancelled the LVFVDs allocated under such agreement. Upon such breach by CAMMESA, Loma de la Lata filed, on May 22, 2012, – a Reclamo Administrativo Previo in order to safeguard its rights and seeking the total cancellation of such LVFVDs plus damages. On June 28, 2013, Loma de la Lata filed a claim against the Argentine Government seeking the cancellation of such LVFVD plus damages.

As indicated above, the unpaid LVFVD allocated in CTP Project were allocated to Loma de la Lata’s 2014 Expansion Project. The Specific Conditions established that the parties thereto shall suspend the abovementioned claim for a 6 months period (with an automatic renewals). Under argentine procedural law, such suspension requires the filing of a joint request by the parties to the claim. However, Loma de la Lata filed a petition to the court requiring the suspension of the claims. The court did not grant the suspension and required the Secretariat of Energy’s consent. After Loma de la Lata’s appeal, the court granted the suspension. As of the date of this annual report, the claim remains suspended.

CTLL’s Gas Plus costs recognition

In September 2015, CAMMESA informed Loma de la Lata that, in accordance with SE Resolution No. 529/14, that after the first automatic renewal of the term of the natural gas supply agreements, CAMMESA will no longer acknowledge (i) any further automatic renewals of such agreements, and (ii) the costs associated to such supply, including the additional 10% of such costs  established in the “Convenio Marco para el Cierre del Ciclo Combinado de Loma de la Lata”.

As a consequence thereof: (i) on September 3, 2015 Loma de la Lata declared the force majeure of the Natural Gas Agreement with Pan American Energy LLC Argentine branch, resulting in the suspension of the obligations of Loma de Lata thereunder, and filed claims against CAMMESA in connection with such agreement; and (ii) on January 1, 2016, declared the force majeure of the Natural Gas Agreement with Petrolera Pampa, resulting in the suspension of the obligations of Loma de Lata thereunder, and filed claims against CAMMESA in connection with such agreement.  As of the date of this annual report, the administrative claims filed by Loma de la Lata against CAMMESA are still pending.

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The former SE did not addressed Loma de la Lata’s petition. Consequently, on November 13th, 2015, Loma de la Lata filed a Reclamo Administrativo Previo in order to revert CAMMESA’s unilateral decision and seek compensation for the damages. As of the date of this annual report the claim has not been decided.

Transmission

Transener legal proceedings

Transener is party to several civil, tax, commercial, easement and labor proceedings in the ordinary course of business.  As of December 31, 2015, Transener had established reserves in the aggregate amount of approximately Ps. 64.2 million to cover potential losses related to such claims.

Distribution

Proceedings Challenging the Renegotiation of Edenor’s Concession

In December 2009, an Argentine consumer association, Unión de Usuarios y Consumidores, brought an action against Edenor and the Argentine Government before a federal administrative court seeking to (i) abrogate Clause 4.6 of Annex I of the Adjustment Agreement, which provides that the tariff increase has retroactive effects; (ii) annul ENRE Resolution No. 51/2007, which authorizes the retroactive increase of tariffs in Edenor’s favor; and (iii) obtain an order that requires that Edenor reimburse its customers the full amounts paid by them based on the retroactive tariff increase and that such reimbursement be made by crediting our customers’ accounts.

On November 11, 2010, the judge upheld the claim and ordered that (i) Clause 4.1 of Annex I of Decree No. 1957/06 and Articles 2, 3 and 4 of ENRE Resolution No. 51/2007, which had authorized the retroactive rate increase for the period between 11/1/2005 and 1/31/2007, be annulled; (ii) the fees collected retroactively during such period be repaid to Edenor’s customers; (iii) the ENRE be instructed to control our distribution of refunds and to report the results to the court; and (iv) each party bear its own court-related costs. On November 25, 2010, Edenor appealed the court’s order and requested that the court’s order be stayed pending a decision on the appeal.  On December 2, 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 in Edenor’s favor. The plaintiff filed a Federal Extraordinary Appeal, which admissibility was granted as of November 3, 2011.  On October 1, 2013, the Supreme Court dismissed the appeal.  As a result, the decision of the Administrative Court of Appeals in our favor became final.

We cannot assure you that other actions or requests for injunctive relief will not be brought by these or other groups seeking to reverse the adjustments Edenor have obtained or to block any further adjustments to our tariffs. 

Preliminary Injunction of the Public Ombudsman

On October 31, 2008, the SE approved the seasonal reference prices of power and energy in the Wholesale Electricity Market. Consequently, the ENRE applied the new rate schedule as of October 1, 2008.  The new rate schedule passed the purchase price of electricity as well as the other costs related to the Wholesale Electricity Market, including transmission, onto the final customer.

In response to the new tariff schedule, the Defensor del Pueblo de la Nación (National Public Ombudsman, the “Ombudsman”) filed a claim opposing the resolutions that approved the October 1, 2008 tariff schedule and naming Edenor as a third-party defendant.  On January 27, 2009, the ENRE notified Edenor of a preliminary injunction, as a result of the Ombudsman’s claim, pursuant to which Edenor was ordered to refrain from cutting the energy supply to customers challenging the October 2008 tariff increase until a decision is reached with respect to the claim. We have appealed this injunction along with the Argentine government through various legal actions. On August 20, 2013, the Court of First Instance in Federal Administrative Claims (Juzgado en lo Contencioso Administrativo Federal) dismissed the judicial remedy action initiated. 

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This decision was appealed by the plaintiff and upheld in its entirety by the Administrative Court of Appeals (Cámara Nacional de Apelaciones en lo Contencioso Administrativo Federal – Sala IV) on May 20, 2014. The Ombudsman filed a Federal Extraordinary Appeal with the Supreme Court. At the request of Edenor, on September 29, 2014, the relevant court of first instance formally declared the loss of validity of the injunction timely delivered, thus being the authorized to issue the respective dunning notices to Edenor and act in each case as provided in the rules of supply its concession agreement.

However, by Note No. 114,039/2014 dated October 11, 2014, the ENRE instructed Edenor to refrain from cutting supply to users with unpaid balances until the number of affected users and the amounts owed are reported by Edenor and such report’s accuracy is evaluated and confirmed by the ENRE.

Once the above was accomplished, the relevant court revoked the measures issued in 2009. The Ombudsman filed an extraordinary federal appeal against such decision, which was ruled against by the acting court. The Ombudsman filed a complaint to the Argentine Supreme Court which was dismissed thus ending the proceedings.  

On August 14, 2009, the SE issued Resolution No. 652/2009, which ordered the suspension of the then applicable reference market prices of energy, and established new reference prices for the periods from June to July 2009 and from August to September 2009, reinstating partial government subsidies to the electricity generation sector. Furthermore, the resolution also established the unsubsidized reference market prices of energy for the months of June and July 2009 and August to October 2009.

On October 26, 2009, Edenor received notice of a complaint filed by a consumer association, the Consumer’s Cooperative for Community Action, against the Argentine Government, the ENRE, Edesur, Edelap and Edenor. In accordance with the terms of the complaint, two additional associations for the defense of consumer rights, Association for the Legal Defense of Consumers(Asociación de Defensa de los Derechos de los Usuarios y Consumidores) and Consumers Union Legal Defense (Unión de Usuarios y Consumidores en Defensa de sus Derechos), have joined the complaint.

The remedies sought in the complaint are as follow:

·that all the most recent tariff resolutions be declared null and unconstitutional (ENRE Resolution No. 324/2008 – 365/2008 – 628/2008, 645/2008 and SE No. 1169/2008 – 797/2008 – 1170/2008 and its annexes) and, as a consequence, that the amounts billed by virtue of these resolutions be refunded;

·that all the defendants be required to carry out the RTI;

·that the resolutions issued by the SE that extend the transition period of the Adjustment Agreement be declared null and unconstitutional;

·that the defendants be ordered to carry out the sale process, through an international public bidding, of their respective class “A” shares, due to the fact that the management period of the respective concessions has ended;

·that the resolutions as well as any act performed by a governmental authority that modify contractual renegotiations be declared null and unconstitutional;

·that the resolutions that extend the management periods contemplated in the defendant’s respective concessions be declared null and unconstitutional; and

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·that, alternatively, should the main claim be rejected, the defendants be ordered to bill all customers on a bi-monthly basis.

Additionally, the plaintiffs requested that the court issue a preliminary injunction suspending the rate hikes established in the resolutions questioned by the plaintiffs and that, alternatively, the application of the resolutions be partially suspended. Finally, the plaintiffs also requested that the application authority be ordered not to approve new increases other than within the framework of the RTI process.

Edenor answered the complaint denying all its terms and requesting the summoning of CAMMESA as a third-party. The relevant court upheld the third-party summon and CAMMESA answered such third-party summon The Argentine Government answered the complaint filed against it by arguing lack of personal jurisdiction (“falta de legitimación pasiva”).  A decision on this case is pending.

We can give no assurance that these actions or other potential future actions or requests for injunctive relief will not reverse the adjustments Edenor has obtained or block any further adjustments to our tariffs.

Breach of Contract Claims

In March 2010, Consumidores Financieros, Asociación Civil Para Su Defensa, a consumers’ association, instituted an action against Edenor and Edesur in the National Court of First Instance in Federal Administrative Claims Tribunal No. 2, Secretariat 3 (Juzgado Nacional de Primera Instancia en lo Contencioso Administrativo Federal N^o 2, Secretería 3) seeking repayment to customers for alleged excess charges over the course of the past 10 years. The action is based on three claims.  First, the plaintiffs claim a refund for the percentage payment of VAT over a taxable base they allege was inappropriately increased to include an amount that exceeded Edenor’s and Edesur’s own payments to the wholesale electricity market. Second, the plaintiffs claim a refund for charges relating to interest on payments by customers that the plaintiffs claim Edenor and Edesur failed to adjust to reflect the actual number of days the payment was outstanding. Finally, the plaintiffs claim a refund for late payment charges from 2008 onwards calculated at the rate of the tasa pasiva (the interest rate that Banco de la Nación Argentina pays on deposits) in alleged contravention of the Law of Consumer Defense (Ley de Defensa del Consumidor) in April 2008. Edenor has given express directions to its legal advisors to contest the suit and all related claims and, on April 22, 2010, Edenor answered the complaint and filed a motion to dismiss for lack of standing on the part of the plaintiffs, requesting, at such opportunity, that a summons be served upon the Argentine Government, the Federal Tax Administration Agency (“AFIP”) and the ENRE as third-party defendants. Although plaintiffs’ opposition to the requested summons has not been resolved, the proceedings were brought to trial, in response to which Edenor filed a motion for reversal with a supplementary appeal.

The court ordered the summoning as third parties of the Argentine Government, ENRE and AFIP, which was already effected. A decision on this case is pending.

On October 21, 2011, Edenor was notified of a lawsuit filed by the Association for the Defense of Rights of Users and Consumers (Asociación de Defensa de Derechos de Usuarios y Consumidores, or “ADDUC”) requesting that the interviewing Court (i) order the reduction or moderation of penalty interest rates or late payment interest that Edenor charges to customers, because such rates allegedly violate Art. 31 of Law 24,240, and (ii) declare the non-implementation of the agreements or conventions which have stipulated the interest rates that we apply to its customers, and of the administrative regulations on the basis of which we justify the interest charging and (iii) orders the restitution of wrongfully perceived interests of customers provided since August 15, 2008 until the day that Edenor complies with the order of interest reduction. The plaintiff also requested the reinstatement of VAT (21%) and other taxes charged on the portion of charges unlawfully perceived. On November 11, 2011, Edenor answered the complaint and filed a motion to dismiss for both lack of standing and the fact that the claims at issue were being litigated in another lawsuit (lis pendens). The summoning as third-party of ENRE was also requested. On April 8, 2014, the court decided to grant the motion to dismiss on account of the existence of other action pending (lis pendens) and ordered that the proceedings be referred to such other court, to be consolidated with such other case “Consumidores Financieros Asociación Civil c/EDESUR y Otro s/ incumplimiento contractual”.

We can give no assurance that these actions or other potential future actions or requests for injunctive relief will not reverse the adjustments Edenor has obtained or block any further adjustments to our tariffs.

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Legal actions brought by Edenor

On February 9, 2011, Edenor challenged Resolution No. 32/2011 of the ENRE which, in the context of the power cuts that occurred between December 20 and December 31, 2010, established the following:

- That Edenor be fined in the amount of Ps. 750,000 due to its failure to comply with the obligations arising from the Concession Agreement and Section 27 of Law No. 24,065.

- That Edenor be fined in the amount of Ps. 375,000 due to its failure to comply with the obligations arising from Section 25 of the Concession Agreement and Resolution No. 905/1999 of the ENRE.

- That Edenor’s customers be paid the following amounts as compensation for the power cuts suffered: Ps. 180 to each small-demand residential customer who suffered power cuts that lasted more than 12 continuous hours, Ps. 350 of each of those who suffered power cuts that lasted more than 24 continuous hours, and Ps. 450 to of each of those who suffered power cuts that lasted more than 48 continuous hours. The resolution stated that such compensation did not include damages to customer facilities and/or appliances, which were to be dealt with in accordance with a specific procedure.

Edenor has filed a direct appeal with the Appellate Court in Contentious and Administrative Federal Matters No. 1, requesting that such resolution be declared null and void. Additionally, we filed a petition requesting injunctive relief aimed at suspending the application of the fine imposed until a decision on the direct appeal is issued.

On July 8, 2011, we requested that process be served on the ENRE. On October 28, 2011, the court denied the request for injunctive relief. As a consequence, Edenor filed a Federal Extraordinary Appeal with the Supreme Court which was dismissed. Edenor then filed another appeal with the Supreme Court (“Recurso de Queja por apelación denegada”) requesting review of the rejected federal extraordinary appeal, which as of the date of this annual report had not been resolved.

On April 24, 2013, Edenor was notified of the decision of the Appellate Court in Contentious and Administrative Federal Matters No. 1 to deny direct appeal filed by Edenor. On May 3, 2013 and May 13, 2013, Edenor filed an Ordinary Appeal and a Federal Extraordinary Appeal, respectively, with the Supreme Court. On November 7, 2014, Edenor’s Ordinary Appeal was rejected and Edenor’s Federal Extraordinary Appeal, partially granted. Edenor timely submitted an extraordinary appeal on account of the partially denied appeal (“Recurso de Queja por Recurso Extraordinario Denegado”). As of the date of this annual report, the appeals to the Supreme Court on the merits and on the denial of injunctive relief have not been resolved yet.

As of December 31, 2014, the provision recorded in relation to the aforementioned compensations amounted to Ps. 34.9 million, including principal amount and accrued interest.

On December 7, 2012, Edenor challenged Resolution No. 336/2012 of the ENRE pursuant to which:

-Edenor is to determine the customers affected by the power cuts that occurred as a consequence of failures between October 29 and November 14, 2012;

-Edenor is to determine the discounts to be recognized to each of the customers identified in accordance with the preceding caption;

-Edenor is to credit such discounts on account of the final discounts that will result from the evaluation of the Technical Service Quality relating to the six-month control period;

-Edenor is to compensate each small-demand residential customer (T1R) who has been affected by the power cuts occurred during the aforementioned period. The amount of the compensation will depend on the length of the power cut, provided, however, that such power cut lasted more than 12 continuous hours.

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This resolution has been challenged by Edenor by means of a direct appeal (“Recurso Directo”), which is pending before the Court of Appeals in Contentious and Administratvie Federal Matters (Chamber No.4).  The appeal, which was filed on February 4, 2014, has not been served upon the ENRE yet. As of April 14, 2016, the ENRE had not yet submitted an answer to the complaint.

On December 28, 2012, Edenor filed an acción de amparo (judicial remedy action) against ENRE seeking to protect Edenor’s constitutional rights relating to the provision of a secure and continuing public service of distribution of energy. To file the amparo Edenor has considered unconstitutional the ENRE’s failure to implement the necessary measures to guarantee the provision of the public service of distribution of energy, such as the failure to recognize the CMM adjustments that Edenor has requested and the delay in implementing the new tariff structure under the RTI, which have led to an unstable situation that threatens the regular provision of the public service. As a consequence, Edenor is seeking to obtain the necessary funds to provide the public service of distribution of energy as contemplated in its concession agreement.

On February 19, 2013, the National Court of First Instance in Federal Administrative Claims Tribunal No. 12 (Juzgado Nacional de Primera Instancia en lo Contencioso Administrativo Federal No 12) served summons to ENRE and denied the preliminary injunction requested by Edenor. Edenor decided to discontinue this action.

As a consequence of Resolution No. 250/2013, issued by the SE partially modifying the situation described in the previous paragraph, Edenor attempted to resolve throughout the initiated judicial remedy of December 2012 and the requirements of art. 12 (abandonment of actions in process). On May 29, 2013, Edenor discontinued the action. As of the date of this annual report, the issue regarding the legal expenses of the process had not been resolved.

On June 28, 2013, Edenor initiated a legal action against the Ministry of Planning, Public Investment and Services pursuant to the acknowledgment process and benefit of litigation without expenses, both entertained by theNational Court of First Instance in Federal Administrative Claims Tribunal No. 11 (Juzgado Nacional de Primera Instancia en lo Contencioso Administrativo Federal No 12). Breach by the Argentine Government of the agreed terms under the Adjustment Agreement was claimed and compensation of damages sought.

On November 22, 2013, Edenor amended the complaint so as to claim additional damages as a consequence of the Argentine Government’s omission to perform the obligations under the aforementioned “Adjustment Agreement”. On February 3, 2015, the court hearing the case ordered that notice of the complaint be served to be answered within the time limit prescribed by law, which was answered by the Argentine Government.  Subsequently, Edenor informed the Court of the issuance of SE Resolution No. 32/2015 as new event (“hecho nuevo”), under the terms of Section 365 of the Federal Code of Civil and Commercial Procedure. After notice was served, the court rejected the treatment thereof as an “event”, holding Edenor liable for costs. Edenor filed an appeal, which was admitted “with a delayed effect” (i.e. the Appellate Court will grant or reject the appeal when deciding on the granting or rejection of the appeal against final judgment). On December 4, 2015, Edenor requested the suspension of the procedural time-limits under the terms of section 157 of the Federal Code of Civil and Commercial Procedure, in accordance with the provisions of SE Resolution No. 32/2015, notice of which has been served upon the defendant. On February 16, 2016, Edenor reiterated the request due to the revocation of SE Resolution No. 32/2015.

The motion to litigate without liability for court fees or costs, which was filed on July 2, 2013, is at the discovery period.

Additionally, and in the same action, in February 2014, Edenor applied for the immediate granting of a provisional remedy in order to maintain an efficient and safe service, requesting that until judgment is passed on the merits of the case, the Federal Government be compelled to provide the Company with economic assistance, whether by means of a temporary rate adjustment or through government grants. After notice was served upon and answered by the Federal Government – Ministry of Federal Planning, on May 27, 2014, the court hearing the case rejected the provisional remedy sought by the Company, decision which was confirmed by Division V of the Appellate Court and notified to Edenor on December 19, 2014.

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In December 2015, Edenor filed a petition for a declaratory judgment and requested injunctive relief with the City of Buenos Aires Courts in Contentious and Tax-Related Matters (Fuero Contencioso Administrativo y Tributario de la Ciudad de Buenos Aires), in connection with a claim by the City of Buenos Aires against Edenor in connection with an alleged local tax liability (relating to the Study, Review and Inspection of Works in Public Spaces Fees, the “TERI”). The injunctive relief requested aims at suspending the foreclosure proceedings initiated by the City of Buenos Aires and avoiding an attachment on Edenor’s assets. As of the date of the filing of the petition, the City of Buenos Aires’ claim amounted to Ps. 28.8 million.

In Edenor’s opinion, such local taxes are not applicable to it under federal regulations and case law. Edenor’s management and its external counsel understand that there are reasonable grounds to believe that Edenor should prevail on this matter.

Legal Proceedings involving the Company and its subsidiaries

Tax on minimum presumed income

Tax refund claim

The Company and CTLL have filed different petitions for refund against AFIP – DGI for the application of the minimum notional income tax corresponding to the fiscal years 2008 and 2009 and, CPB, corresponding to the fiscal years 2002.  This claim seeks the refund of Ps. 24.9 million, including the recovery of payments recorded and the reversal of the payment made on account of the offsetting of several fiscal credits.

As AFIP did not answer the claim, the Company and certain subsidiaries brought the tax refund claim before a National First Instance Administrative Litigation Court and simultaneously requested the granting of interim injunctive relief so that AFIP refrains from demanding payment or instituting tax execution proceedings or lock action against the companies.

Regarding the interim relief filed, on May 10, 2011 and March 3, 2011, we were notified of the judgment of First Instance, whereby the precautionary measures requested by the Company and certain subsidiaries, respectively, were rejected.

Also, on December 30, 2008, CPB filed a tax refund claim before AFIP regarding the income tax payable for fiscal year 2002. This claim seeks the refund of Ps. 4.3 million. The refund was based on the substantial and unreasonable differences resulting from the failure to apply the inflation adjustment to tax returns submitted before such fiscal period.

As AFIP didn’t answer the claim, on March 18, 2011, CPB brought the tax refund claim before a National First Instance Administrative Court.

On March 10, 2015 CPB was notified of a judgment upholding its tax refund claim.  The National Treasury filed an appeal to the ruling.  On August 3, 2015 a second-instance court dismissed the appeal filed by the National Treasury. The National Treasury filed an extraordinary appeal to such dismissal on August 18, 2015. The extraordinary appeal was dismissed, and such decision was not challenged by the Treasury.  As a result, the ruling in favor of CPB is deemed a final and conclusive judgment.

Declaratory relief

The Company and its subsidiaries filed a petition for declaratory relief pursuant to Section 322 of the Federal Code of Civil and Commercial Procedure against AFIP in order to obtain assurance as to the application of the minimum notional income tax for the fiscal years 2010, 2011, 2012 and 3013, based on the decision by the Supreme Court of Justice of Argentina passed on June 15, 2010 ( “Hermitage” case).

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In this precedent, the Court had declared this tax unconstitutional since it may be considered unreasonable under certain circumstances and since it breaches the tax capacity principle.

Furthermore, the Company and certain subsidiaries have requested the granting of interim injunctive relief so that AFIP may refrain from demanding payment or instituting tax execution proceedings on the tax for the fiscal years mentioned. The Court overseeing the proceedings decided to reject the precautionary measures, a decision that was appealed by the Company and certain subsidiaries.

At the date of this annual report, the presiding judge has not ruled on the precautionary measures for the fiscal period 2013 or on the merits.

As at December 31, 2015 and 2014, the Company held a provision for the minimum notional income tax for the fiscal years mentioned and for the proportional tax estimated for this year for a total amount of Ps. 256.6 million and Ps. 207.2 million, respectively, including compensatory interest.

DIVIDENDS

In accordance with the provisions of the Argentine Personal Asset Tax Law, we are required to pay the personal asset tax, payable by all of our shareholders who are subject to the tax to the Administración Federal de Ingresos Públicos (Argentine Tax Authority, or AFIP) as of December 31 of each year.  Although the law permits companies to recover the amounts paid, recovery can be burdensome.  In practice, companies usually bear the cost of this tax, which adversely affects their results and does not generate any income tax deduction.  After review and analysis of the alternatives for public companies in Argentina to recover such tax payments, we established a policy in December 2007 to pay a dividend in advance of the tax payment in an offsetting amount.

We did not declare any dividends for the fiscal years ended on either December 31, 2012, December 31, 2013, December 31, 2014 or December 31, 2015.

We have paid no other dividends over the past three years.  Although we do not have a formal dividend policy, we could decide to pay dividends in the future in accordance with applicable law and based on various factors then existing.  See “Item 10.  Additional Information—Share Capital—Dividends.”

SIGNIFICANT CHANGES

Except to the facts below, there are no significant changes to the financial information included in the most recent audited financial statements contained in this annual report.

On April 15, 2016, the ENRE issued Note No. 120,151(the “Note”) establishing that all fines and penalties imposed by the ENRE after April 15, 2016 (whether with respect to events occurring on or after such date or events occurring prior to the date thereof but for which fines or penalties had not been imposed on Edenor by such date that include a reference to “Note No. 120,151” must be valued according to the KWh values in effect as of the last date of the semester or period during which the event giving rise to the penalty occurred, including any increases or adjustments applicable to Edenor’s “remuneration” at such date. In addition, fines and penalties that fall within the purview of the Note will accrue interest from the date on which the event giving rise to the penalty occurred until the date they are paid by Edenor. As of the date of this annual report, it is unclear how the ENRE will consider that the fines and penalties not yet imposed on Edenor relating to events that occurred prior to April 15, 2016, should be valued as per Edenor’s “remuneration” and Edenor has therefore calculated such amounts according to its interpretation of the Note. Regarding this, Edenor believes that the term “remuneration” should be interpreted to mean those amounts effectively paid by the users through the tariff.

As of the date of this annual report, fines and penalties in an aggregate amount equal to Ps. 364.1 million (at historical values) are subject to the Note. Edenor believes that such amount as adjusted to reflect accrued interest according to the Note would increase by Ps. 129.0 million. As of the date of this annual report, it is unclear what will be the ENRE’s interpretation of “remuneration” with respect to fines and penalties not yet imposed on Edenor relating to events that occurred prior to April 15, 2016. If the ENRE interpreted that the term “remuneration” includes all amounts received by Edenor in the form, or in lieu, of subsidies, such amount could be significantly higher (in a range of three to five times higher).

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Item 9.           The Offer and Listing

TRADING HISTORY

Our capital stock is comprised of common shares, with a par value of Ps. 1.00 each.  For a summary of the number of outstanding shares of each series, see “Item 10.  Additional Information—Share Capital.”  Each share entitles the holder thereof to one vote at shareholders’ meetings.  All outstanding shares are fully paid in and our common shares have been listed on the Buenos Aires Stock Exchange since 1947.  Since October 9, 2009, our ADSs have been listed on the NYSE.  The ADSs have been issued by the Bank of New York as depositary.  Each ADS represents 25 common shares.

Shares

Our common shares are currently traded on the Buenos Aires Stock Exchange under the symbol “PAMP”, and our ADSs are traded on the YSE under the symbol “PAM”.

The following table sets forth, for the years indicated, the reported high and low sales prices as well as the average daily trading volume of our shares traded on the Buenos Aires Stock Exchange, and of our ADSs traded on the NYSE:   

The following table sets forth, for the periods indicated, the reported high and low sales prices as well as the average daily trading volume of our shares traded on the Buenos Aires Stock Exchange, and of our ADSs traded on the NYSE:

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The following table sets forth, for the months indicated, the reported high and low sales prices as well as the average daily trading volume of our shares traded on the Buenos Aires Stock Exchange, and of our ADSs traded on the NYSE:

    

⁽¹⁾                              Values provided by Bloomberg.

⁽²⁾                              Values available for our ADSs from October 9, 2010, the first trading date on the NYSE.

⁽³⁾                              As of April 19, 2016.

Share Repurchase Program 

Due to the recent international economic crisis and the fluctuation in the price of our shares, on September 8, 2008, our board of directors approved a share repurchase program, through which we have acquired shares through transactions in the local market.  In addition, we have launched three local tender offers for the acquisition of our ordinary shares in recent months.  After each of our tender offers were completed, we resumed open market repurchases.  In first local tender offer, launched on October 21, 2008, we acquired 70,000,000 shares of our common stock.  In the second local tender offer, launched on November 7, 2008, we acquired 15,384,730 shares of our common stock. In the third local tender offer, launched on January 30, 2009, we acquired 46,689,578 shares of our common stock.  With this third tender offer our total holdings of our common stock reached 10% of our total capital stock, the maximum amount that listed companies are permitted to acquire under applicable Argentine regulations.  However, due to the current instability in stock prices, the CNV waived this 10% limit until June 2009.  On April 16, 2009, our board renewed the share repurchase authorization, and we continued repurchasing shares in the open market until June 30, 2009.  As of May 31, 2010, we held 211,883,347 shares, or 13.9%, of our capital stock. 

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In the meeting held on April 23, 2010, our shareholders decided to reduce our capital stock in the amount equal to the shares acquired under our share repurchase program.  On March 8, 2010, the Buenos Aires Stock Exchange authorized the share capital reduction approved by our shareholders.  On September 13, 2010, the Argentine Securities Commission proceeded with the reduction of capital. Finally on December 1, 2015, after the execution of the warrants by the Key Executives (Please see “Item 7. – Majer Shareholders and Related Party Transactions”), our share capital authorized for public trading as of the date of this annual report is Ps. 1,695,859,459, represented by 1,695,859,459 common shares of par value Ps. 1 and with right to one vote per share.

Global Depositary Receipts (“GDRs”)

From December 21, 2006, to October 9, 2009 our GDRs were listed on the Luxembourg Stock Exchange and traded on the Euro MTF Market, the exchange-regulated market operated by the Luxembourg Stock Exchange.  Each GDR represented 25 common shares.  There was practically no trading activity on the Euro MTF Market of our shares.  The last trade occurred on March 5, 2007.  On August 5, 2009, the U.S. Securities and Exchange Commission (“SEC”) declared effective the registration of our common shares and our American Depositary Shares (“ADSs”) under the U.S. Securities Exchange Act of 1934.  On August 14, 2009, we converted all of our outstanding GDRs into ADSs. 

American Depositary Shares (“ADSs”)

Since October 9, 2009, our ADSs have been listed on the New York Stock Exchange (NYSE) and trade under the ticker PAM.  Each ADS represents 25 common shares (or a right to receive 25 common shares).  Each ADS will also represent any other securities, cash or other property which may be held by the ADS Depositary, the Bank of New York Mellon.  The ADS Depositary’s office at which the ADRs are administered is located at 101 Barclay Street, Floor 4E, New York, NY 10286.  See “Item 12.  Description of Securities Other than Equity Securities—Description of American Depositary Shares.”  The Designated Market Maker on the trading floor of the NYSE for our ADSs is Barclays Capital.

The ADS Depositary has informed us that, as of April 19, 2016, there were approximately 44 million outstanding ADSs. 

THE ARGENTINE SECURITIES MARKET

Trading on the Mercado de Valores de Buenos Aires

Trading in the Argentine securities market

Pursuant to the provisions of the CML, securities market in Argentina is comprised of several markets that require authorization from the CNV to operate (the “Authorized Markets”), including the MERVAL, the Mercado Abierto Electrónico S.A., the Mercado Argentino de Valores S.A., the Mercado de Valores de Córdoba S.A., the Mercado a Término de Rosario S.A., among others.  The CML allows the authorized Markets to delegate certain of its duties and rights as a market to other qualified entities, as previously authorized by the CNV.  Securities listed on these exchanges include corporate equity and bonds and government securities.

Prior to the issuance of the CML, the Buenos Aires Stock Exchange was the principal and longest-established exchange in Argentina and is currently the fourth largest exchange in Latin America in terms of market capitalization.  The Buenos Aires Stock Exchange began operating in 1854 and accounted for approximately 95% of all equity trading in Argentina.  In addition, through separate agreements with the Buenos Aires Stock Exchange, all of the securities listed on the Buenos Aires Stock Exchange could be listed and subsequently traded on the Córdoba, Rosario, Mendoza, La Plata and Santa Fe exchanges, by virtue of which many transactions originating on these exchanges related to Buenos Aires Stock Exchange-listed companies and were subsequently settled in Buenos Aires.  With the enactment of the CML, securities listed on the Buenos Aires Stock Exchange are now listed in the MERVAL.

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Although companies may list all of their capital on the MERVAL or any other Authorized Market, controlling shareholders in Argentina typically retain the majority of a company’s capital stock, resulting in a relatively small percentage of active trading of the companies’ stock by the public on any such Authorized Market.

Argentina’s equity markets have historically been comprised of individual investors, though in the past years, there has been an increase in the level of investment by institutional investors in these markets.  The participation of the Administración Nacional de la Seguridad Social (ANSES) as equity holder in Argentine publicly traded companies after the elimination of the Argentine pension funds resulted in a decrease in the trading of equity in the MERVAL; however, Argentine fondos comunes de inversión (mutual funds), insurance companies and other institutional investor continue sustaining trading in the MERVAL.  During the year ended December 31, 2015, the total value traded of shares on the MERVAL was Ps. 46,665 million. 

The MERVAL is the largest authorized market in Argentina.  Pursuant to Resolution No. 17,501, the CNV authorized the MERVAL to operate as an Authorized Market, and allowed MERVAL to delegate certain of its rights and duties as a market in the Buenos Aires Stock Exchange, including without limitation, the right to authorize the listing of issuers and securities in the MERVAL, and the right to publish the daily market gazette. 

Trading on the MERVAL is conducted either through the traditional auction system from 11:00 a.m. to 5:00 p.m. on trading days, or through the Sistema Integrado de Negociación Asistida por Computación (Computer-Assisted Integrated Negotiation System, or SINAC).  SINAC is a computer trading system that permits trading in both debt and equity securities and is accessed by brokers directly from workstations located in their offices.  Currently, all transactions relating to listed negotiable obligations and listed government securities can be effectuated through SINAC.  In order to control price volatility, MERVAL imposes a 15-minute suspension on trading when the price of a security registers a variation in price between 10% and 15% and between 15% and 20%.  Any additional 5% variation in the price of a security will result in additional 10-minute successive suspension periods.

Recently, the shareholders of MERVAL and the Buenos Aires Stock Exchange entered into a framework agreement to create Bolsas y Mercados Argentinos S.A. for purposes of operating a stock market in accordance with the requirements of the newly enacted CML. The new company will be incorporated as a result of a spin-off of certain assets of MERVAL relating to its stock market business and shall be further capitalized by the Buenos Aires Stock Exchange. Authorization for the public offering of its shares has been requested to the CNV. Further, MERVAL and the Buenos Aires Stock Exchange entered into a memorandum of understanding with (i) Mercado de Valores de Córdoba S.A., to integrate the stock market of Córdoba into a federal stock market managed by Bolsas y Mercados Argentinos S.A., and (ii) several brokers of the city of Santa Fe, Province of Santa Fe, for them to act within such federal market.

As of the date of this annual report, the required authorizations from the CNV in respect of the abovementioned spin-off of MERVAL and the public offering of the shares of Bolsas y Mercados Argentinos S.A. are still pending.  Therefore, MERVAL is still operating as an Authorized Market, and the Buenos Aires Stock Exchange is in charge of the rights and duties that MERVAL delegated to it, as authorized by the CNV.

Regulation of the Argentine securities market

The Argentine securities market is regulated and overseen by the CNV, pursuant to Law No. 26,831,  as well as stockbroker transactions, market operations, the public offering of securities, corporate governance matters relating to public companies and the trading of futures and options.  Argentine insurance companies are regulated by a government agency, the Superintendencia de Seguros de la Nación, whereas financial institutions are regulated primarily by the Central Bank.

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In Argentina, debt and equity securities traded on an exchange or the over-the-counter market must, unless otherwise instructed by their shareholders, be deposited with Caja de Valores S.A. (“Caja de Valores”), a corporation owned by the Buenos Aires Stock Exchange, MERVAL and certain provincial exchanges.  Caja de Valores is the central securities depositary of Argentina and provides central depositary facilities, as well as acting as a clearinghouse for securities trading and as a transfer and paying agent for securities transactions.  Additionally, Caja de Valores handles the settlement of securities transactions carried out by the Buenos Aires Stock Exchange and operates the computerized exchange information system mentioned above.

Despite a change in the legal framework of Argentine securities trading in the early 1990s, which permitted the issuance and trading of new financial products in the Argentine capital markets, including commercial paper, new types of corporate bonds and futures and options, and significant corporate governance regulations introduced in 2001 as further described below, there is still a relatively low level of regulation of the market for Argentine securities and investors’ activities in such markets and enforcement of them has been extremely limited.  Because of the limited exposure and regulation in these markets, there may be less publicly available information about Argentine companies than is regularly published by or about companies in the United States and certain other countries.  However, the CNV has taken significant steps to strengthen disclosure and regulatory standards for the Argentine securities market, including the issuance of regulations prohibiting insider trading and requiring insiders to report on their ownership of securities, with associated penalties for noncompliance.

In order to improve Argentine securities market regulation, the Argentine Government issued Decree No. 677/2001 on June 1, 2001, which provided certain guidelines and provisions relating to capital markets transparency and best practices.  Decree No. 677/2001 applied to individuals and entities that participate in the public offering of securities, as well as to stock exchanges.    Further improvements to Argentine securities market regulations were introduced in December 2011 when the Argentine Congress enacted changes to the Argentine Criminal Code to include insider trading as a criminal offense. Also, on November 29, 2012, the Argentine Government enacted the CML which revoked law No. 17,811 and Decree No. 677/2001. However, CML incorporated most of the provisions established in those regulations.  In this respect, the following key provisions of Decree No. 677/2001 have been incorporated into the CML, among others:  the definition of the term “security”; corporate governance requirements, including the obligation for publicly-listed companies to have an audit committee composed of three or more members of the board of directors (the majority of which must be independent under CNV regulations); the regulation of market stabilization transactions under certain circumstances; regulation governing insider trading, market manipulation and securities fraud; and the regulation of going-private transaction and acquisitions of voting shares, including controlling stakes in public companies. In addition, the CML included relevant changes for the modernization and future design of the Argentine capital markets, such as granting regulatory powers and resources to the CNV, providing for a mandatory tender offer system and other provisions such as certain requirements for brokers/dealers and other market participants.  These provisions were regulated by the CNV through Resolution No. 622/2013.

Before offering securities to the public in Argentina, an issuer must meet certain requirements established by the CNV with regard to the issuer’s assets, operating history and management, among others, and only securities for which an application for a public offering has been approved by the CNV may be listed on a stock exchange.  Despite these requirements imposed by the CNV, CNV approval does not imply any kind of certification as to the quality of the securities or the solvency of the issuer, although issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements and various other periodic reports with the CNV and the stock exchange on which their securities are listed, as well as to report to the CNV and the relevant stock exchange any event related to the issuer and its shareholders that may affect materially the value or trading volume of the securities traded.

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Item 10.         Additional Information

MEMORANDUM AND ARTICLES OF ASSOCIATION

Please see our registration statement under the Securities Act filed on Form 20-F on August 3, 2009.

MATERIAL CONTRACTS

The Opportunities Assignment Agreement that we entered into with Marcelo Mindlin, Damián Mindlin, Gustavo Mariani and Ricardo Torres was filed as exhibit Exhibit 2.2 to our Registration Statement on Form 20-F (File No. 001-34429) on August 3, 2009 and incorporated by reference herein.

EXCHANGE CONTROLS

Prior to December 1989, the Argentine foreign exchange market was subject to exchange controls. From December 1989 until April 1991, Argentina had a freely floating exchange rate for all foreign currency transactions, and the transfer of dividend payments in foreign currency abroad and the repatriation of capital were permitted without prior approval of the Central Bank. From April 1, 1991, when the Convertibility Law became effective, until December 21, 2001, when the Central Bank closed the foreign exchange market, the Argentine peso was freely convertible into U.S. dollars.

On December 3, 2001, the Argentine government imposed a number of monetary and currency exchange control measures through Decree 1570/01, which included restrictions on the free disposition of funds deposited with banks and tight restrictions on transferring funds abroad (including the transfer of funds to pay dividends) without the Central Bank’s prior authorization subject to specific exceptions for transfers related to foreign trade. In June 2003, the Argentine government set restrictions on capital flows into Argentina, which mainly consisted of a prohibition against the transfer abroad of any funds until 180 days after their entry into the country.

In January 2002, the Argentine government issued the Public Emergency Law and declared a state of public emergency in respect of its social, economic, administrative, financial and foreign exchange matters, authorizing the Argentine government to establish a system to determine the foreign exchange rate between the Peso and foreign currencies and to issue foreign exchange-related rules and regulations.  Within this context, on February 8, 2002, through Decree No. 260/2002, the Argentine government established (i) the MULC through which all foreign exchange transactions in foreign currency must be conducted, and (ii) that foreign exchange transactions in foreign currency must be conducted at the foreign exchange rate to be freely agreed upon among contracting parties, subject to the requirements and regulations imposed by the Argentine Central Bank.  A summary of the main regulations is set forth below.

On June 9, 2005, through Decree No. 616/2005, the Argentine government mandated that (i) all inflows of funds into the local foreign exchange market arising from foreign debts incurred by residents (including both individuals and legal entities in the Argentine private sector), other than those concerning foreign trade financing and primary issuances of debt securities offered to the public and listed on self-regulated markets, and (ii) all inflows of funds by non-residents channeled through the MULC and intended to be held in local currency for acquiring all types of financial assets or liabilities in the financial or non-financial private sector (except for foreign direct investments and primary issuances of debt securities and shares offered to the public and listed on self-regulated markets), as well as investments in securities issued by the public sector and acquired in secondary markets, had to meet the following requirements: (a) such inflows of funds could only be transferred outside the local foreign exchange market at the expiration of a term of 365 calendar days from the date of settlement of such funds into Pesos; (b) the proceeds of such inflows of funds had to be credited to an account in the local banking system; (c) a non-transferable and non-interest-bearing deposit for 30% of the amount of the transaction had to be kept in Argentina for a period of 365 calendar days, in accordance with the terms and conditions set forth in the applicable regulations (the “Deposit”); and (d) the Deposit had to be denominated in U.S. Dollars and held in Argentine financial institutions, and it may not be used to guarantee or serve as collateral for any type of credit transactions. The requirements of Decree No. 616/2005 were subsequently eased.

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On December 16, 2015, following the election of President Macri, the newly appointed Central Bank authorities issued Communication “A” 5850, which lifted many of the existing restrictions and, among other things, established free access to the MULC to purchase foreign currency for general purposes (subject to certain limits set forth below) without requiring the Central Bank’s or the AFIP’s prior authorization, reduced the period in which incoming funds must remain in Argentina from 365 calendar days to 120 calendar days and also reduced the Deposit from 30% to 0%.

Although these recent changes to the Argentine government’s foreign exchange policies allow all individuals free access to the local foreign exchange market, certain restrictions remain, including the following:

·Argentine residents have free access to the MULC, provided the total amount transacted in the market does not exceed the equivalent of U.S.$2,000,000 per month, per person;

·any proceeds from the sale of foreign currency in the local exchange market that exceeds the equivalent of U.S.$2,500 per month must be credited to a checking or savings account in Pesos at a domestic financial institution;

·although the requirement of mandatory inflow and settlement of funds resulting from foreign indebtedness transactions is no longer in effect, the transfer and sale of funds in the local foreign exchange market will be necessary to make any payments of principal or interest through the local foreign exchange market; and

·foreign indebtedness incurred or renewed after December 17, 2015 must remain in Argentina for a minimum period of at least 120 concurrent days, commencing on the date on which the funds are transferred into Argentina.

Under the exchange regulations currently in force, restrictions exist in respect of the repatrition of funds or investments by non-Argentine residents.  For instance the repatriation by non-Argentine residents of funds received as a result of the sale of our common shares in the secondary market is subject to demonstrating that the funds used to make the investment in such common shares were transferred to Argentina at least 120 days before the proposed repatriation and obtaining a certificate from an Argentine financial entity or Argentine stock exchange stating the date and amount of the settlement of said funds in the MULC.  The transfer abroad of dividend payments is currently authorized by applicable regulations to the extent that such dividend payments are made in connection with audited financial statemtns and are approved by a shareholders’ meeting.

The Argentine government may, in the future, impose additional controls on the foreign exchange market and on capital flows from and into Argentina, in response to capital flight or depreciation of the Peso.  These restrictions may have a negative effect on the Argentine economy and our business if imposed in an economic environment where access to local capital is constrained. See “—Risk Factors—The implementation of new exchange controls and restrictions on capital inflows and outflows could limit the availability of international credit and could threaten the financial system, adversely affecting the Argentine economy and, as a result, our business.”

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Money Laundering

On April 13, 2000, the Argentine Congress passed Law No. 25,246, as amended by Laws No. 26,087, 26,119,  26,268 and 26,683 (the Money Laundering Law), which establishes an administrative criminal system and supersedes various sections of the Argentine Penal Code relating to money laundering.  This law defines money laundering as crime, stating that a crime is committed whenever a person converts, transfers, manages, sells, encumbers, or otherwise uses money, or any other assets, connected with a crime in which that person has not participated, with the possible result that the original or substituted assets may appear to be of a legitimate origin, provided the applicable amount of money or value of the relevant assets exceeds Ps. 300,000, whether such amount results from one or more transactions.

In addition, the Money Laundering Law created the Financial Information Unit, which is charged with the handling and the transmission of information in order to prevent the laundering of assets originating from:

·Crimes related to illegal trafficking and commercialization of narcotics (Law No. 23,737);

·Crimes related to arms trafficking (Law No. 22,415);

·Crimes related to the activities of an illegal association as defined in Article 210 bis of the Penal Code;

·Illegal acts committed by illegal associations (Article 210 of the Penal Code) organized to commit crimes for with political or racial objectives;

·Crimes of fraud against the Public Administration (Article 174, Section 5 of the Penal Code);

·Crime against the Public Administration under Chapters VI, VII, IX and IX bis of Title XI of Book Two of the Penal Code;

·Crimes of underage prostitution and child pornography under Articles 125, 125 bis, 127 bis and 128 of the Penal Code; and

·Crimes related to terrorism financing (Article 213 quarter of the Penal Code).

Argentina’s Money Laundering Law, like other international money laundering laws, does not designate sole responsibility to the Argentine Government for the monitoring of these criminal activities, but rather also delegates certain obligations to various private sector entities (including the Company) such as banks, stockbrokers, stock market entities and insurance companies.  These obligations essentially consist of information gathering functions, such as:

·obtaining from clients documents that indisputably prove the identity, legal status, domicile and other information, to accomplish any type of activity intended;

·reporting any suspicious activity or operation; and

·keeping any monitoring activities in connection with a proceeding pursuant to the Money Laundering Law confidential from both clients and third parties.

In addition, Central Bank regulations require that Argentine banks undertake certain minimum procedures to prevent money laundering.  CNV regulations also require that the issuers and traders of publicly traded securities in Argentina and those persons participating in financial trusts and common investment funds subject to the CNV’s control comply with certain obligations and requirements relating to money laundering prevention and to the suppression of the financing of terrorism.

Financial entities must inform the Unidad de Información Financiera (“UIF”) about any suspicious or unusual transaction, or transactions lacking economical or legal justification, or being unnecessarily complex.  The Central Bank publishes a list of “non-cooperating” jurisdictions.  The UIF has regulated the duty to report through Resolutions 229/2011.  In addition, it has established guidelines and internal procedures for unusual or suspicious transactions which must be implemented by financial institutions and other entities. 

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CNV regulations provide that entities involved in the public offering of securities (other than issuers), including, among others, underwriters of any primary issuance of securities, must comply with the standards set by the UIF.  In particular, they must comply with the obligation regarding customer identification and required information, record-keeping, precautions to be taken to report suspicious operations, policies and procedures to prevent money laundering and terrorist financing. With respect to issuers (such as the Company), CNV regulations provide that any entity performing significant capital contributions or loans must be identified, whether or not a shareholder at the time of the contributions, and must meet the requirements for general participants in the public offering of securities, provided in the CNV regulations and the UIF regulations, especially with regards to the identification of such persons and to the origin and legality of the funds and loans provided.

On June 1, 2011 the Argentine Congress adopted law 26,683. Pursuant to such law, money laundering is now an autonomous crime and self-money laundering is also punished.  The law also extended the reporting obligations to certain private sector parties not obliged before, and also extended from 30 to 150 days the lapse of time within which certain private entities are required to report suspicious activities or operations, in order to permit those entities to analyze transactions and operations in more detail before reporting them to the relevant authorities.

TAXATION

The following summary contains a description of the principal Argentine and U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase common shares or ADSs.  The summary is based upon the tax laws of Argentina and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect on the date hereof, which are subject to change.  Investors should consult their own tax advisors as to the tax consequences of the acquisition, ownership and disposition of common shares or ADSs.

Although there is at present no income tax treaty between Argentina and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty.  No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of common shares or ADSs.

Argentine Tax Considerations

Dividends tax

Dividends paid on our common shares or ADSs to individuals or undivided estates domiciled in Argentina and non-resident persons (whether individuals or legal entities) are subject to income withholding tax at a 10% rate as a single and final payment (except for dividends paid out in the form of shares or quotas).  Additionally, such dividends paid in excess of our taxable accumulated income at the previous fiscal period are subject to a withholding at the rate of 35% in respect of the excess portion of the dividends paid.If applicable, the 10% withholding will apply on the amount resulting from subtracting the 35 % withholding from the dividends or earnings distribution amount.Both the 10% and the 35% withholdings are subject to the limits set forth by double taxation treaties in force. See “Tax Treaties” below.

Capital gains tax

Resident individuals

The Income Tax Reform introduced by Law No. 26,893 (the “Income Tax Reform”) provided for the taxation of resident individuals’ income resulting from the purchase and sale, exchange or other disposition of shares not listed on stock exchanges or securities markets as authorized by the CNV, irrespective of the frequency or regularity of such operations.This income is subject in all cases to the 15% tax rate.

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Notwithstanding the above, based on certain tax precedents, there may be support to argue that gains obtained by resident individuals from the disposal of ADSs should be considered as foreign source income. Recently, the Argentine Tax Authority understood that foreign source income obtained by resident individuals is taxed at a 9% to 35% rate.  As this is a controversial issue, a case by case analysis is required.

Foreign beneficiaries

Pursuant to the Income Tax Reform, all income resulting from the purchase and sale, exchange or other disposition of shares and other securities earned by foreign beneficiaries will be subject to the Income Tax, whether they are listed on stock exchanges or securities markets and/or have an authorization for public offering or whether they do not meet such requirements.These provisions will apply to foreign individual and legal entities at a 15% rate on the net capital gain or at a 13.5% rate on the gross price.

Notwithstanding the above, based on certain tax precedents, there may be support to argue that gains obtained by foreign beneficiaries from the disposal of ADSs should be regarded as foreign source income and, therefore, not subject to Argentine income tax. As this is a controversial issue, a case by case analysis is required.

Local entities

Capital gains obtained by Argentine entities in general, entities organized or incorporated under Argentine law, certain traders and intermediaries, local branches of non Argentine entities, sole proprietorships and individuals carrying on certain commercial activities in Argentina derived from the sale, exchange or other disposition of our common shares or ADSs are subject to income tax at the rate of 35%.  Losses arising from the sale of our common shares or ADSs can be applied to offset such income.

Personal assets tax

Argentine entities, such as us, have to pay the personal assets tax corresponding to Argentine and foreign individuals and foreign entities for the holding of our shares at December 31 of each year.  The applicable tax rate is 0.5% and is levied on the equity value, or the book value, of the shares arising from the last balance sheet.  Pursuant to the Personal Assets Tax Law, the Argentine company is entitled to seek reimbursement of such paid tax from the applicable Argentine individuals and/or foreign shareholders or by withholding dividend payments.

Tax on Minimum Notional Income (Impuesto a la Ganancia Mínima Presunta or “IGMP”)

Companies domiciled in Argentina, partnerships, foundations, sole proprietorships, trusts, certain mutual funds organized in Argentina, and permanent business establishments owned by foreign persons, among other taxpayers, shall apply a 1% rate to the total value of assets held by such persons, above an aggregate nominal amount of Ps. 200,000. Nevertheless, common shares and ADSs issued by entities subject to such tax are exempt from the IGMP.

Gross Income Tax

The gross income tax is a local tax; therefore, the rules of the relevant provincial jurisdiction should be considered, which may levy this tax on the customary purchase and sale, exchange or other disposition of common shares and ADSs, and/or the collection of dividends at an average rate of 6%, unless an exemption is applicable. In the particular case of the City of Buenos Aires, any transaction involving common shares and/or the collection of dividends and revaluations is exempt from this tax.

Value added tax

The sale, exchange or other disposition of our common shares or ADSs and the distribution of dividends are exempted from the value added tax.

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Transfer taxes

The sale, exchange or other disposition of our common shares or ADSs is not subject to transfer taxes.

Stamp taxes

Stamp taxes may apply in the City of Buenos Aires and in certain Argentine provinces in case transfer of our common shares or ADSs is performed or executed in such jurisdictions by means of written agreements.

Other taxes

There are no Argentine inheritance or succession taxes applicable to the ownership, transfer or disposition of our common shares or ADSs.  In addition, neither the minimum notional income tax nor any local gross turnover tax is applicable to the ownership, transfer or disposition of our common shares or ADSs.

Tax treaties

Argentina has signed tax treaties for the avoidance of double taxation with Australia, Belgium, Spain, Bolivia, Brazil, Canada, Denmark, Finland, France, Germany, Italy, the Netherlands, Norway, Russia, Sweden, Uruguay and the United Kingdom.  There is currently no tax treaty or convention in effect between Argentina and the United States.  It is not clear when, if ever, a treaty will be ratified or entered into effect.  As a result, the Argentine tax consequences described in this section will apply, without modification, to a holder of our common shares or ADSs that is a U.S. resident.  Foreign shareholders located in certain jurisdictions with a tax treaty in force with Argentina may be exempted from the payment of the personal asset tax.

United States Federal Income Tax Considerations

This summary describes certain U.S. federal income tax consequences for a U.S. holder (as defined below) of acquiring, owning, and disposing of ADSs.  This summary applies to a holder only if such holder holds the ADSs as capital assets for tax purposes.  This summary does not address the Medicare tax on net investment income and does not apply to investors that are members of a class of holders subject to special rules, such as:

·a dealer in securities or currencies;

·a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;

·a bank;

·a life insurance company;

·a tax-exempt organization;

·a person that holds ADSs that are a hedge or that are hedged against interest rate or currency risks;

·a person that holds ADSs as part of a straddle or conversion transaction for tax purposes;

·a person who is liable for the alternative minimum tax;

·a person whose functional currency for U.S. tax purposes is not the U.S. Dollar; or

·a person that owns or is deemed to own 10% or more of any class of our stock.

This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as currently in effect.  These laws are subject to change, possibly on a retroactive basis.  Investors should consult their own tax advisors concerning the consequences of purchasing, owning, and disposing of ADSs in their particular circumstances, including the possible application of state, local, non-U.S. or other tax laws.  For purposes of this summary, an investor is a “U.S. holder” if such investor is a beneficial owner of an ADS and is:

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·a citizen or resident of the United States;

·a U.S. domestic corporation; or

·otherwise subject to U.S. federal income tax on a net income basis with respect to income from the ADS.

If a partnership holds our ADSs, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities of the partnership.  An investor who is a partner of a partnership holding our ADSs should consult its own tax advisor.

In general, if an investor is the beneficial owner of ADSs, such investor will be treated as the beneficial owner of the common stock represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if such investor exchanges an ADS for the common stock represented by that ADS.

Dividends

The gross amount of distributions that investors receive (prior to deduction of Argentine taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income, to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles.  Dividends paid in Argentine Pesos will be included in an investor’s income in a U.S. Dollar amount calculated by reference to the exchange rate in effect on the date of the depositary’s receipt of the dividend, regardless of whether the payment is in fact converted into U.S. Dollars.  A U.S. holder will have a tax basis in such Pesos for U.S. federal income tax purposes equal to the U.S. Dollar value on the date of such receipt.  Any subsequent gain or loss in respect of such Pesos arising from exchange rate fluctuations will be ordinary income or loss and will be treated as income from U.S. sources for foreign tax credit purposes.  If such a dividend is converted into U.S. Dollars on the date of receipt, investors generally should not be required to recognize foreign currency gain or loss in respect of the dividend income.  Subject to certain exceptions for short-term (60 days or less) and hedged positions, the U.S. Dollar amount of dividends received by an individual U.S. holder in respect of ADSs generally will be subject to taxation at a maximum rate of 20% if the dividends are “qualified dividends.” Dividends paid on the ADSs will be treated as qualified dividends if (1) the ADSs are readily tradable on an established securities market in the United States and (2) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (PFIC).  The ADSs are listed on the New York Stock Exchange and will qualify as readily tradable on an established securities market in the United States so long as they are so listed.  Based on our Consolidated Financial Statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2014 taxable year.  In addition, based on our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2015 taxable year.

Based on existing guidance, it is not entirely clear whether dividends received with respect to the common shares will be treated as qualified dividends, because the common shares are not themselves listed on a U.S. exchange.  In addition, the U.S. Treasury has announced its intention to promulgate rules pursuant to which holders of ADSs and intermediaries through whom such securities are held will be permitted to rely on certifications from issuers to establish that dividends are treated as qualified dividends.  Because such procedures have not yet been issued, it is not clear whether we will be able to comply with them.  U.S. holders of ADSs should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances.

Distributions of additional shares in respect of ADSs that are made as part of a pro-rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax.

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Sale or other disposition

Upon a sale or other disposition of ADSs, an investor will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. Dollar value of the amount realized and such investor’s tax basis, determined in U.S. Dollars, in the ADSs.  Generally, such gain or loss realized on the sale or other disposition of ADSs will be treated as U.S. source capital gain or loss, and will be long-term capital gain or loss if the ADSs were held for more than one year.  The ability to offset capital losses against ordinary income is limited.  Long-term capital gain recognized by an individual U.S. holder, generally is subject to taxation at a reduced rate.

Foreign tax credit considerations

Investors should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits.  If no such rules apply, investors may claim a credit against their U.S. federal income tax liability for Argentine taxes withheld from cash dividends on the ADSs, so long as they have owned the ADSs (and not entered into specified kinds of hedging transactions) for at least a 16-day period that includes the ex-dividend date.  It is unclear whether the Argentine personal assets tax (as described in “—Argentine Tax Considerations”) is treated as an income tax for U.S. federal income tax purposes.  If the Argentine personal assets tax is not treated as an income tax for U.S. federal income tax purposes, a U.S. holder would be unable to claim a foreign tax credit for any Argentine personal assets tax withheld.  A U.S. holder may be able to deduct such tax in computing its U.S. federal income tax liability, subject to applicable limitations.  The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions, involve the application of complex rules that depend on a U.S. holder’s particular circumstances.  Investors should consult their own tax advisors regarding the creditability or deductibility of such taxes.

U.S. information reporting and backup withholding rules

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting unless the holder is an exempt recipient and may also be subject to backup withholding unless the holder (1) provides its taxpayer identification number and certifies that it is not subject to backup withholding or (2) otherwise establishes an exemption from backup withholding.  Investors may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim or refund with the Internal Revenue Service and filing any required information.

DIVIDENDS AND PAYING AGENTS

The holders of ADSs are entitled to receive dividends to the same extent as the owners of our common shares.  We have not paid any dividends in the last three fiscal years.  See “Item 8.—Dividends.”  However, we could decide to pay dividends in the future in accordance with applicable law and based on various factors then existing, including:

·our financial condition, operating results and current and anticipated cash needs;

·general economic and business conditions;

·our strategic plans and business prospects;

·legal, contractual and regulatory restrictions on our ability to pay dividends; and

·other factors that our board of directors may consider to be relevant.

Under the BCL, the declaration and payment of annual dividends, to the extent that the company presents retained earnings in accordance with IFRS and CNV regulations, are determined by shareholders at the annual ordinary shareholders’ meeting.  In addition, under the BCL, 5% of the net income for the fiscal year calculated in accordance with IFRS and CNV regulations must be appropriated by resolution adopted at shareholders’ meetings to a legal reserve until such reserve equals 20% of the capital stock.  This legal reserve is not available for distribution.

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Amount Available for Distribution

Dividends may be lawfully declared and paid only out of our earnings stated in our annual financial statements approved by the annual ordinary shareholders’ meeting.  Under the BCL, listed companies (such as ourselves) may distribute provisional dividends or dividends in advance resulting from interim audited financial statements.

Under the BCL and our by-laws, our annual net income (as adjusted to reflect changes in prior years’ results) is allocated in the following order: (1) to comply with our legal reserve requirement of 5% of our net income until such reserve equals 20% of the capital stock; (2) for voluntary or contingent reserves, as may be resolved from time to time by our shareholders at the annual ordinary shareholders’ meeting; (3) the remainder of the net income for the year may be distributed as dividends on common shares, and/or (4) as otherwise decided by our shareholders at the annual ordinary shareholders’ meeting.

The board of directors submits our financial statements for the preceding fiscal year, together with reports thereon by the supervisory committee and the independent accountants, at the annual ordinary shareholders’ meeting for approval.  Within four months of the end of each fiscal year, an ordinary shareholders’ meeting must be held to approve our annual financial statements and determine the appropriation of our net income for such year.

Under applicable CNV regulations, cash dividends must be paid to shareholders within 30 days of the shareholders’ meeting approving such dividends.  In the case of stock dividends, shares are required to be delivered within three months of our receipt of notice of the authorization by the CNV for the public offering of the shares relating to such dividends.  The statute of limitations in respect of the right of any shareholder to receive dividends declared by the shareholders’ meeting is three years from the date on which it has been made available to the shareholder.

DOCUMENTS ON DISPLAY

The materials included in this annual report in Form F-20, and exhibits therein, may be inspected and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C.  20549.  You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.  Any SEC filings we make are also available to the public over the Internet at the SEC’s website: www.sec.gov.

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Item 11.         Quantitative and Qualitative Disclosures about Market Risk

Qualitative Disclosure

Market risk generally represents the risk that losses may occur in the value of financial instruments as a result of movements in interest rates, foreign currency exchange rates or commodity prices.  We are exposed to changes in financial market conditions in the normal course of our business due to our use of certain financial instruments as well as transactions incurred in various foreign currencies.

In the normal course of business, we are exposed to interest rate and exchange rates risks, primarily related to changes in exchanges rates and interest rates.  We manage our exposure to these risks through the use of various financial instruments.

Interest rate risk

Borrowings at variable rates exposes the Company to the interest rate risk on its cash flows due to the possible volatility they may experience, as it has happened throughout 2014 and 2015. Borrowings at fixed rates exposes the Company to the interest rate risk on the fair value of its liabilities, since they may be considerably higher than variable rates. As at December, 31, 2015, approximately 86.5 % of the loans were granted at a variable interest rate, based on the Private Badlar and Badlar rate plus an applicable margin corrected. The remaining liabilities were agreed at fixed interest rates, denominated in U.S. dollars (82.9% of the total fixed rate debt). Borrowings at variable rates are denominated in pesos.

The Company seeks to mitigate its interest-rate risk exposure through the analysis and evaluation of (i) the different liquidity sources available in the financial and capital market, both domestic and (if available) international; (ii) interest rates alternatives (fixed or variable), currencies and terms available for companies in a similar sector, industry and risk than the Company; (iii) availability, access and cost of interest-rates hedge agreements. On doing this, the Company evaluates the impact on profit or losses resulting from each strategy over the obligations representing the main interest-bearing positions.

During the fiscal year ended December 31, 2015, the Private Badlar rate, the reference rate used by the Company for an important part of its financial liabilities, has remained constant during most of the year and then, towards its end, has increased significantly from an average 21% during the first nine months until reaching 30% during the last term, and was later stabilized at around 26%. In case the fluctuations in variable interest rates become more significant, the Company may mitigate such risk, for example, through interest rate hedge agreements. In the case of fixed rates and in view of the market’s current conditions, the Company considers that the risk of a significant decrease in interest rates is low and, therefore, does not foresee a substantial risk in its indebtedness at fixed rates.

Any significant increase in the variable interest rates at which the Company holds a significant portion of its existing financial debt may result in a significant increase in its financial burden which, in turn, may have a material adverse effect on its operating results and assets and financial position.

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The following chart shows the opening of the Company’s loans classified by interest rate and the currency in which they are denominated:

Exchange Rate Risks

The Company, through its subsidiaries in the Generation segment, collects a meaningful part of its income in Argentine pesos pursuant to tariffs which are indexed to U.S. dollars, as is the case of income resulting from the Supply Agreement entered into between Loma de la Lata and the SE or EGSSA (actually merged with CTG) and the SE, pursuant to SE Resolution No.  220/2007, or CTG’s Energy Plus agreements. The other part of its operating flows expressed in Argentine pesos are not indexed to the U.S. dollar, and comprise income from hydroelectric and thermal generators that do not have Energy Plus or Supply Agreements with the SE pursuant to SE Resolution No. 220/2007. On the other hand, most of the financial debt of the subsidiaries of the Generation segment is denominated in pesos keeping a lower portion of debt denominated in U.S. dollars (a 13.5% as of December 31, 2015 approximately), which exposes them to the risk of loss on a devaluation of the Peso.

Therefore, as there is not a strong currency mismatch between the operating generation of funds and financial debt, the risk of foreign-currency exchange rate fluctuations is reasonably hedged. However, in case such risk is not adequately hedged by business operations, as of December 31, 2015, Loma de la Lata has conducted forward transactions to purchase U.S. Dollars with pesos for US$ 72 million at an average exchange rate of Ps. 14.18 to a U.S. dollar, with maturities between January and June, 2016.

However, the subsidiaries receive most of its income from CAMMESA, which during the past year has incurred in significant delays in its payment terms. A significant part of the transactions are denominated in U.S. dollars, they are billed in Argentine pesos and converted at the exchange rate effective during the month in which they are perfected. For the income from the Supply Contracts under SE Resolution No. 220/2007, this amount in pesos is collected from CAMMESA, on average, 100 days afterward, but the difference in the exchange rate is recognized by CAMMESA only until the expiration date, about 45 days. In case there is a strong devaluation between the billing and the collection date, as was the case during the months of January 2014 to December 2015, the U.S. dollars collectable by the Company may be severely reduced, thus limiting the effectiveness of its exchange rate hedge.

Additionally, as part of the Work Technological Update 2015-2016, CPB assumed different commitments with foreign suppliers, which are mostly denominated in foreign currencies (mainly euros and dollars) and will be funded through the loan agreement and its collateral subscribed with CAMMESA during April 2014. In addition, a substantial portion of its financial debt with related companies is denominated in U.S. dollars.

In the distribution segment, Edenor’s exposure to currency risk relates to the collection of its revenue in pesos, in conformity with regulated electricity tariff that are not indexed in relation to the U.S. dollar, whereas a significant portion of its existing financial liabilities is denominated in U.S. dollars. Therefore, Edenor is exposed to the risk of a loss resulting from a devaluation of the Peso. Edenor may hedge its currency risk trying to enter into currency fowards. Nevertheless, as of December 31, 2015, it has not been able to hedge its exposure to the U.S. dollar under terms it may consider viable.

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If Edenor continued to be unable to effectively hedge all or a significant part of its exposure to currency risk, any devaluation of the peso could significantly increase its debt service burden, which, in turn, could have a substantial adverse effect on its financial and cash position (including its ability to repay its Corporate Notes) and the results of its operations.

In the Oil and Gas segment, part of the Petrolera Pampa’s income is denominated in U.S. Dollars but collectable in Pesos. Most of the financial debt of Petrolera Pampa is denominated in pesos and a portion of its debt is denominated in U.S. Dollars but is payable in Pesos indexed relative to the U.S. Dollar (12%). Petrolera Pampa contracted investment commitments and operating expenses are denominated in U.S. Dollars. As there isn’t a strong currency mismatch between the generation of own funds and the undertaken expenses, the risk of foreign-currency exchange rate fluctuations is reasonably hedged. However, as of December 31, 2015, Petrolera Pampa has conducted forward transactions to purchase U.S. Dollars with pesos for US$ 83 million at an average exchange rate of Ps. 14.08 to a U.S. dollar, with maturities between January and June, 2016.

The economic impact of forward transactions to purchase U.S. Dollars with Pesos in all of our segments resulted in an income of Ps. 471.8 million, which is disclosed in “Foreign currency exchange difference”, under “Other financial results” in the Statement of Comprehensive Income.

On December 17, 2015, the Peso underwent a devaluation of approximately 40% that affected not only the economic context in which the Company operates but also its results in these financial statements.

At the date of issuance of the Financial Statements, the devaluation of the Peso increased, as compared to its value at year-end, by approximately 17%. This variation would generate a negative impact of Ps. 369 million. Those impacts have been determined without considering the effects of the hedging contracts.

The following table shows the Company’s exposure to the exchange rate risk for financial assets and liabilities denominated in a currency different from the Company’s functional currency.

Price risk

The Company’s investments in quoted and unquoted equity securities are subject to the risk of change in the market prices resulting from the uncertainties as to the future value of those securities .

The Company is exposed to the price risk on its fiduciary ownership of 40% of CIESA’s shares which is calculated based on the market values of TGS’s ADRs. However, the Company considers that the price fluctuation risk in the securities market is low, since once the pending regulatory approval is obtained, the shares held in trust will be transferred to the Company, which will allow to exercise an indirect joint control over TGS. On the other hand, the Company is not exposed to commodities price risks. Additionally, the Company has investments in Government securities which are exposed to the risk of a significant change in market prices.

The following table shows the Company’s exposure to the price risk for the previously mentioned financial assets:

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Sesitivity Analysis Disclosures

The Company estimates that, provided all other variables remain constant, a 10% revaluation/(devaluation) of each foreign currency as compared to the Argentine Peso would generate the following increase/(decrease) in the fiscal year’s income:

Based on the conducted simulations, and provided all other variables remain constant, a 10% increase/ (decrease) in variable interest rates would generate the following (decrease)/increase in the fiscal year's income:

The Company estimates that provided all other variables remain constant, a 10% revaluation/(devaluation) of each quotation would generate the following increase/(decrease) in the fiscal year’s income:

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Quantitative Disclosure

The chart below provides quantitative information about our financial debt as of December 31, 2014, that is sensitive to changes in interest rates and foreign exchange rates.

Foreign Currency Exchange Rate Risk and Interest Rate Risk

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Item 12.         Description of Securities Other than Equity Securities

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

Payment of Taxes

You will be responsible for any taxes or other governmental charges payable on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to register any transfer of your ADSs or allow you to withdraw the deposited securities represented by your ADSs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your American Depositary Shares to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.

Fees and Expenses for Holders of ADRs

Persons depositing or withdrawing shares or ADS holders must pay:	For:
·U.S. $ 5.00 (or less) per 100 ADSs (or portion of 100 ADSs)	·Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property; and ·Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
·U.S. $ 0.02 (or less) per ADS	·Any cash distribution to ADS holders
·A fee equivalent to the fee that would be payable by you if the Company distributes shares and you deposit the shares with the depositary for issuance of ADSs	·Distribution of securities to holders of deposited securities which are distributed by the depositary to ADS holders
·U.S. $ 0.02 (or less) per ADS per calendar year	·Depositary services
·Registration or transfer fees	·Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares
·Expenses of the depositary	·Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); and ·Converting foreign currency to U.S. Dollars
·Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes	·As necessary
·Any charges incurred by the depositary or its agents for servicing the deposited securities	·As necessary

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Depositary Payments to the Company

The Bank of New York Mellon, as depositary, has agreed to reimburse us for expenses they incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse us for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility.  There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available us is not necessarily tied to the amount of fees the depositary collects from investors.

The depositary collects fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them.  The depositary collects fees related to making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees.  The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them.  The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

From June, 2015, to the date of this annual report, the Company received from the depositary U.S. $ 299,669. for continuing annual stock exchange listing fees, standard out-of-pocket maintenance costs for the ADRs (consisting of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls), any applicable performance indicators relating to the ADR facility, underwriting fees and legal fees.

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PART II

Item 13.         Defaults, Dividend Arrearages and Delinquencies

Not applicable.

Item 14.         Material Modifications to the Rights of Security Holders and Use of Proceeds

Not applicable.

Item 15.         Controls and Procedures

(a) Disclosure Controls and Procedures

We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of December 31, 2015.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.  Based upon our evaluation, we, with the participation of our chief executive officer and chief financial officer, concluded that as of December 31, 2015, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013).  Based on our assessment and those criteria, management believes that the company maintained effective internal control over financial reporting as of December 31, 2015.  

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The effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 has been audited by Price Waterhouse & Co. S.R.L., an independent registered public accounting firm, as stated in their report which appears herein.

(c) Attestation Report of the Registered Public Accounting Firm

Reference is made to the report of the Price Waterhouse & Co. S.R.L. on page F-3 of this annual report.

(d) Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 16A.      Audit Committee Financial Expert  

On April 29, 2016, the term as member of our board of directors of Marcelo P. Blanco, our former audit committee financial expert, expired. A meeting of our Board of Directors is scheduled to take place on May 11, 2016. In such meeting, two additional independent directors (under Argentine law and Rule 10A-3) are expected to be appointed as members of our audit committee, one of which is expected to be an “audit committee financial expert” as defined in Item 16A of Form 20-F under the Securities and Exchange Act of 1934 and pursuant to section 407 of Sarbanes Oxley Act.

Item 16B.      Code of Ethics

We adopted a Business Code of Conduct in 2007, which applies to all of our employees, including our principal executive, financial and accounting officers, as well as other corporate governance policies (see “Item 6 – Directors, Senior Management and Employees – Corporate Governance”).  Our Business Code of Conduct is posted, in both English and Spanish, on our website at http://www.pampaenergia.com.ar.

Item 16C.      Principal Accountant Fees and Services

Fees Paid to the Principal Accountant

Price Waterhouse & Co. S.R.L. acted as our independent registered public accounting for the fiscal years ended December 31, 2015, 2014 and 2013.  The following table discloses the services rendered to Pampa Energía S.A. and its consolidated companies by Price Waterhouse & Co. S.R.L and the fees billed for those services:

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	Year ended December 31,
	2015	2014	2013
	(in thousands of Ps.)
Audit Fees (1)	14,404.5	10,329.8	11,919.5
Audit-related Fees (2)	305.3	252.2	361.1
Tax Fees (3)	69.9	38.2	32.2
Other non-audit Fees (4)	233.0	252.1	24.4
Total	15,012.8	10,872.2	12,337.1

(1)            Audit Fees comprised of audit of the financial statements of the Company and its subsidiaries, the review of the interim financial statements, review of the Company’s annual report on Form 20-F, work to comply with the requirements of the Sarbanes Oxley – Section 404 and other services rendered by the external auditor in connection with statutory or regulatory filings or engagements.

(2)            Audit-related Fees comprised of those outside the normal scope of the services included in an audit but are nevertheless reasonably related to the performance of the audit or review of financial statements of the Company or its subsidiaries and may be effectively and efficiently rendered by the external auditor because of his knowledge of the financial information of the Company.

(3)            Tax Fees comprised of services rendered by the external auditor for tax compliance.

                (4)           Services included under this heading include permissible advisory services consisting in the analysis of transactions.

For a description of the permissible services included under these headings, please see the description of the categories of services of the “Audit Committee’s Pre-approval Policy” described below.

All of our audit fees, and audit-related fees, contained in the above table were billed by Price Waterhouse & Co. S.R.L.

Audit Committee’s Pre-approval Policy

The Audit Committee has developed a Pre-approval Policy regarding the engagement of services by the external auditor, establishing the obligation to obtain prior approval from the audit committee for any service to be rendered by the external auditor to the Company or any of its subsidiaries. The policy ensures that the external auditor preserves its independence and is applicable to the Company and its subsidiaries. Services pre-approved by the audit committee of Edenor do not require pre-approval by the audit committee of Pampa Energía, but are reported to the latter. 

The Audit Committee has delegated to one of its members the authority to grant pre-approvals to auditors.  The decision of that member to pre-approve a service is presented to the full audit committee at each of its scheduled meetings.   

Pre-approval is required for all services rendered by the external auditor.

Item 16D.      Exemptions from the Listing Standards for Audit Committees

Not applicable.

Item 16E.      Purchases of Equity Securities by the Issuer and Affiliated Purchasers

There were no shares purchased during 2015 by us or on our behalf, or by or on behalf of any affiliated purchaser.

Item 16F.      Change in Registrant’s Certifying Accountant

Not applicable.

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Item 16G.     Corporate Governance

Among the corporate governance principles that are applicable at Pampa Energía S.A. are several provisions of Argentine law, including, but without limitation: (i) the BCL; (ii) the CML; and (iii) the regulations of the CNV approved on September 5, 2013 (the “Regulations”).

In addition, we follow certain corporate governance guidelines and practices that prevail in the international markets and in international regulations applicable to us (sometimes mandatory), including United States law. On August 27, 2009, we registered with the SEC as a “foreign private issuer” and began to trade its American Depositary Shares on the NYSE.

Thus, we are subject to the provisions of Section 303A.11 of the NYSE’s Listed Company Manual (“LCM”) and Item 16.G of Form 20-F of the SEC, which require foreign issuers to disclose the differences existing between their corporate governance practices and the corporate governance requirements for U.S. domestic companies under their applicable listing standards. The following table provides the comparison required under the aforementioned Section 303A.11 of the NYSE LCM and Item 16.G of the SEC’s Form 20-F:

CORPORATE GOVERNANCE PRACTICES COMPARATIVE TABLE
NYSE REQUIREMENTS for DOMESTIC COMPANIES		REQUIREMENTS AND OUR PRACTICES
NYSE LCM	DESCRIPTION	DESCRIPTION
Section 303A.01	Independent directors must constitute the majority of a listed company’s board of directors.	Under Argentine law, the board of directors of a listed company need not be composed of a majority of independent directors. Nonetheless, the CML and the CNV’s Regulations require listed companies to have a sufficient number of independent directors to form the audit committee, which must be composed of a majority of independent members. Although not required by Argentine law, and in accordance with our audit committee’s regulations, all the members of our audit committee must qualify as independent.
Section 303A.02	This rule establishes the standards that determine whether a director qualifies as independent. It provides that directors cannot qualify as independent unless the board of directors finds them to have no material relationship with the listed company. A number of per se exclusions from independence apply, generally triggered by having a connection, individually or through an immediate family member, to the listed company or to a company that has a material relationship with the listed company as a shareholder, employee, officer, or director of the listed company.	The CNV’s Regulations, specifically Article 11 of Section III, Chapter III, Title II I, indicate the criteria for establishing independence of a director. They provide that any director who does any of the following is not independent: (i)Is a member of the board of directors of or employee of any of the shareholders with material holdings 2 in the company or of other companies whose shareholders have direct or indirect material holdings; (ii)works at the company in an employment relationship or worked in an employment relationship at any time in the past 3 years; (iii)performs professional services or belongs to a company or professional association that provides such services to the company or its shareholders with material holdings; (iv)directly or indirectly has a material holding in the company; (v)directly or indirectly sells or supplies goods or services to the company and/or its direct or indirect shareholders with material holdings; (vi)is spouse, relative to the fourth degree of consanguinity, or relative to the second degree of affinity of any individuals who would qualify as non-independent if they were members of the management body. In addition, Article 4 of Section III, Chapter I, Title XII of the CNV’s Regulations provides that at each election of directors, the non-independence or independence of any candidates proposed at the shareholders’ meeting must be disclosed. Moreover, after the shareholders’ meeting in which directors are appointed, the personal data of the appointed directors and their qualification as independent or non-independent (in the latter case in the form of an affidavit executed by each director) must be disclosed to the CNV and the exchanges where the company has its securities listed.
Section 303A.03	This rule requires regularly scheduled meetings of non-executive directors to increase the involvement and efficiency of such director.	Argentine law does not require that non-executive directors hold separate meetings. Non-executive directors attend the general board meetings, which must be held at least every three months pursuant to Section 267 of the BCL. Notwithstanding the aforementioned, our by-law in article 20 thereof, set forth that the board meetings must be held at least once a month.
Section 303A.04	Listed companies must organize an Appointment and Corporate Governance Committee composed entirely of independent directors.	The organization of an Appointment and Corporate Governance Committee is not mandatory. In most cases, the functions of such committee are functions that the Audit Committee is already required to perform. Nonetheless, the CNV’s Regulations suggest (among its non-binding recommendations) that an Appointment and Corporate Governance Committee be organized. We have determined not to organize an Appointment and Corporate Governance Committee because its functions are already covered by the Audit Committee. Additionally and with respect to corporate governance matters, the Legal and Compliance Corporate Department of Pampa Energía S.A. oversees this area.
Section 303A.05	Listed companies must organize a Compensation Committee composed entirely of independent directors.	The organization of a Compensation Committee is not mandatory under Argentine law. In most cases, the functions of such a committee are included in the functions that the audit committee is required to perform. However, the CNV’s Regulations suggest (among its non-binding recommendations) that a Compensation Committee be organized. At Pampa Energía S.A., the audit committee approves the compensation of executive officers who also are directors of the Company before submitting a compensation plan for consideration at a shareholders’ meeting.
Section 303A.06	Listed companies must organize an audit committee that meets the requirements set forth in the Securities Exchange Act of 1934.	Pursuant to Section 303A.00, Pampa Energía S.A., as a foreign private issuer, is subject to Rule 303A.06, and we are in full compliance.
Section 303A.07	The audit committee must have at least 3 members, all of whom must qualify as independent. In addition, the audit committee must have written regulations establishing: (i) the purpose of the committee; (ii) the annual assessment of the committee’s performance; and (iii) the committee’s obligations and responsibilities. Finally, the rule establishes that listed companies must have internal audit functions within their organization in order to assist both the audit committee and the company’s management in matters related to risk and internal control processes.	Article 109 of the CML and Article 16, Section 5, Chapter III, Title II of the CNV Regulations provide that the audit committee must have at least 3 board members, the majority of whom must qualify as independent. All the members of our audit committee qualify as independent. Argentine law does not require the audit committee to issue its own regulations. The scope of the committee’s powers and obligations is detailed in Article 110 of the CML and Article 17 and following sections of Section 5, Chapter III, Title II, of the CNV’s Regulations. Such obligations and responsibilities are similar to those attributed to this body under the U.S. law. Our audit committee has its own written regulations, adopted by the shareholders’ meeting. Argentine law does not require the audit committee to conduct an annual self-assessment. However, the CNV’s Regulations recommend that all directors (i.e., not only the independent directors who are members of the audit committee) complete a self-assessment. We have adopted this recommendation and have developed a self-assessment form to be completed by all our directors at the close of each fiscal year. Argentine laws contain no rules regarding internal audit functions. However, in 2010 Pampa hired, as a new staff member, a professional to perform the duties of an internal auditor who is supervised by, and reports to, Pampa’s Audit Committee. Additionally, Pampa’s internal auditor relies on the aid of Abelovich, Polano y Asociados, the professional services firm that performs the field work in terms of internal controls. Pampa’s Audit Committee regularly reviews, during its meetings, the internal audit reports submitted to it.
Section 303A.08	The shareholders must be given the opportunity to vote on equity-compensation plans and their material revisions, although there are exceptions to this requirement, such as when these compensation plans serve as labor incentive tools.	Directors’ compensation is fixed at the ordinary shareholders’ meeting (Section 234, Subsection 2, of the BCL). That compensation is for national currency cash. We do not provide equity compensation to officers or directors. Our shareholders approved the issuance of warrants to our executive directors as consideration for the execution of an Opportunities Assignment Agreement between the company and the directors. Moreover, any amendment or new issuance of warrants must be approved by the shareholders’ meeting. Beyond those warrants, it is not a practice of the Company to provide any equity compensation to their officers.
Section 303A.09	Listed companies must adopt and disclose their corporate governance guidelines.	Listed companies must meet the annual disclosure requirements of the CNV’s Regulations. Listed companies must issue a report stating whether and how they followed the recommendations provided by the CNV’s Regulations or explaining the reasons for their failure to adopt such recommendations, either fully or in part, and/or whether they plan to adopt them in the future. This information must appear in their annual report, attached to the financial statements for the relevant fiscal year as a separate exhibit. Once filed with the CNV and the exchanges where the company is listed, the CNV’s Regulations report qualifies as public information. We comply with the CNV’s Regulations annual disclosure requirements and fully disclose all corporate governance policies and practices. This information may be viewed on the company’s website, www.pampaenergia.com.
Section 303A.10	Listed companies must adopt and disclose to the market a Code of Ethics and Business Conduct which is applicable to their directors, managers and employees. In addition, any waiver of the provisions contained in this Code in favor of any of the parties that are subject to it must be immediately disclosed.	Under Argentine law there is no requirement that listed companies adopt a Code of Ethics and Business Conduct. Nonetheless, in 2008, our board of directors approved a Code of Business Conduct applicable to all the employees, interns and trainees of Pampa Energía S.A. and of its controlled and related companies and subsidiaries. This Code is applicable to all directors and statutory auditors of Pampa Energía S.A. and its controlled and related companies and subsidiaries, as well as to their suppliers and consultants. Additionally, in 2010, Pampa’s Management Committee approved the implementation of the Ethics Hotline as a channel to be solely used for reporting, in the strictest confidentiality, any presumed irregularity concerning the Business Conduct Code and/or violations thereof.
Section 303A.12	The Chief Executive Officer (CEO) of a listed company must certify on a yearly basis that he or she has no knowledge of any violation or default of the corporate governance standards. Additionally, the CEO must report any default or violation of the corporate governance standards contained in the NYSE LCM by any of the company’s executives to the NYSE immediately. Finally, listed companies must file an annual statement and updated reports with the NYSE disclosing any changes in the composition of their board of directors or any of the committees described in Section 302A of the NYSE LCM.	Pursuant to Section 303A.00, Pampa Energía S.A., as a foreign private issuer, is subject to Section 303A.12, with the exception of the annual CEO certification. Pampa Energía S.A. is in full compliance with the applicable provisions.

¹ Under Argentine law, a “material holding” is defined as any shareholding equivalent to at least 15% of a company’s capital stock.

262

 

Item 16H. Mine Safety Disclosure

Not applicable.

263

 

PART III

Item 17.         Financial Statements

Not applicable.

Item 18.         Financial Statements

Our Consolidated Financial Statements are included in this annual report beginning on page F-1.

Item 19.         Exhibits  

Documents filed as exhibits to this annual report:

1.1	Amended and Restated By-laws (estatutos sociales) of the Registrant (English translation)(previously filed as 6-K (File No. 001-34429) on November 11, 2015 and incorporated by reference herein.)
2.1	Form of Amended and Restated Deposit Agreement among the Registrant, the Bank of New York, as depositary, and Holders from time to time of American Depositary Shares issued thereunder (previously filed as Exhibit 2.1 to our Registration Statement on Form 20-F (File No. 001-34429) on August 3, 2009 and incorporated by reference herein.)
4.1	Opportunities Assignment Agreement among Marcelo Mindlin, Damián Mindlin, Gustavo Mariani, Ricardo Torres and the Registrant, dated as of September 28, 2006 and its subsequent amendments dated September 28, 2007 and April 16, 2009 (English translation) (previously filed as Exhibit 2.2 to our Registration Statement on Form 20-F (File No. 001-34429) on August 3, 2009 and incorporated by reference herein.)
4.2	Amended and Restated Warrant Agreement, among Marcelo Mindlin and the Registrant, dated as of September 28, 2007 (English translation) (previously filed as Exhibit 2.3 to our Registration Statement on Form 20-F (File No. 001-34429) on August 3, 2009 and incorporated by reference herein.)
4.3	Amended and Restated Warrant Agreement, among Damián Mindlin and the Registrant, dated as of September 28, 2007 (English translation) (previously filed as Exhibit 2.4 to our Registration Statement on Form 20-F (File No. 001-34429) on August 3, 2009 and incorporated by reference herein.)
4.4	Amended and Restated Warrant Agreement, among Gustavo Mariani and the Registrant, dated as of September 28, 2007 (English translation) (previously filed as Exhibit 2.5 to our Registration Statement on Form 20-F (File No. 001-34429) on August 3, 2009 and incorporated by reference herein.)
4.5	Amended and Restated Warrant Agreement, among Ricardo Torres and the Registrant, dated as of September 28, 2007 (English translation)(previously filed as Exhibit 2.6 to our Registration Statement on Form 20-F (File No. 001-34429) on August 3, 2009 and incorporated by reference herein.)
4.6	Stock Subscription Agreement among Marcelo Mindlin, Damián Mindlin, Gustavo Mariani, Latin American Energy LLC, New Equity Ventures LLC, Deutsche Bank AG, London branch and the Registrant, dated as of July 31, 2007 (previously filed as Exhibit 2.7 to our Registration Statement on Form 20-F (File No. 001-34429) on August 3, 2009 and incorporated by reference herein.)
8.1	List of significant subsidiaries of Pampa Energía S.A.
12.1	Certification of Ricardo Alejandro Torres, Co-Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
12.2	Certification of Gustavo Mariani, Co-Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
13.1	Certification of Co-Chief Executive Officers and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
13.2	Reserves Report of Netherland, Sewell and Associates, Inc., dated as of March 4, 2016

264

 

SIGNATURE

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

Pampa Energía S.A.

By: /s/ Ricardo Alejandro Torres

Name: Ricardo Alejandro Torres
Title: Co-Chief Executive Officer

By: /s/ Gustavo Mariani

Name: Gustavo Mariani
Title: Co-Chief Executive Officer

Date: April 29, 2016

265

 

INDEX TO FINANCIAL STATEMENTS

Pampa Energía S.A.

Consolidated Financial Statements as of December 31, 2015 and 2014, and for the Years Ended December 31, 2015, 2014, and 2013

Report of Independent Registered Public Accounting Firm	F-3
Consolidated Statement of Financial Position	F-9
Consolidated Statement of Comprehensive Income (Loss)	F-11
Consolidated Statement of Changes in Equity	F-13
Consolidated Statement of Cash Flows	F-16
Notes to the Consolidated Financial Statements	F-19

F - 1

 

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2015 AND 2014, AND

FOR THE YEARS ENDED DECEMBER 31, 2015, 2014 AND 2013.

F - 2

 

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Pampa Energía Sociedad Anónima (Pampa S.A.)

In our opinion, the accompanying consolidated statements of financial position and the related consolidated statements of comprehensive income (loss), changes in equity and of cash flows present fairly, in all material respects, the financial position of Pampa Energía Sociedad Anónima (Pampa S.A.) (hereinafter, “Pampa S.A.” or the “Company”) and its subsidiaries as of December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in  Management’s Annual Report on Internal Control Over Financial Reporting appearing under Item 15 of this Annual Report on Form 20-F. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

F - 3

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Autonomous City of Buenos Aires, March 09, 2016.

/s/ PRICE WATERHOUSE & CO. S.R.L.

Andrés Suarez (Partner)

F - 4

 

GLOSSARY OF TERMS

The following are not technical definitions, but they are helpful for the reader’s understanding of some terms used in the notes to the consolidated financial statements of the Company.

Terms	Definitions
AFIP	Federal Administration of Public Revenue
BLL	Bodega Loma La Lata S.A.
CAMMESA	Compañía Administradora del Mercado Eléctrico Mayorista S.A.
CC	Combined Cycle
CGU	Cash-Generating Units
CIESA	Compañía de inversiones de energía S.A.
CINIIF	International Financial Reporting Interpretations Committee
Citelec	Compañía Inversora en Transmisión Eléctrica Citelec S.A.
CPB	Central Piedra Buena S.A.
CTG	Central Térmica Güemes S.A.
CTLL	Central Térmica Loma La Lata S.A.
CTP	Central Térmica Piquirenda
CSJN	Supreme Court of Justice of the Nation
CYCSA	Comunicación y Consumos S.A.
DESA	Desarrollos Energéticos S.A.
EASA	Electricidad Argentina S.A.
Edenor	Empresa Distribuidora y Comercializadora Norte S.A.
Edesur	Empresa Distribuidora Sur S.A.
EGSSA	EMDERSA Generación Salta S.A.
ENDISA	Energía Distribuida S.A.

F - 5

 

GLOSSARY OF TERMS: (Continuation)

Terms	Definitions
ENRE	National Regulatory Authority of Electricity
FOCEDE	Fund works of consolidation and expansion of electrical distribution
FONINVEMEM	Fund for Investments required to increase the electric power supply in the WEM
FOTAE	Works Administration Trust Transport for Electricity Supply
FRD	Flow for debt repayment
Foundation	Pampa Energía Foundation committed to education (Foundation)
GE	General Electric
GyP	Gas y Petróleo de Neuquén S.A.P.E.M.
HA	Historical Availability
HI	Hydroelectric
HIDISA	Hidroeléctrica Diamante S.A.
HINISA	Hidroeléctrica Los Nihuiles S.A.
HRP	Hours Power Compensation
IEASA	IEASA S.A.
IGMP	Minimum Notional Income Tax
INDISA	Inversora Diamante S.A.
INNISA	Inversora Nihuiles S.A.
IPB	Inversora Piedra Buena S.A.
LNG	Liquefied Natural Gas
LVFVD	Sales Liquidations with Maturity Date to be Defined
MAT	WEM’s Forward Market
MAN Engines	MAN B & W Diesel model 18V32/40PGI
MECON	Ministry of Economy
MEyM	Ministry of Energy and Mining
MMC	Cost Monitoring Mechanism

F - 6

 

GLOSSARY OF TERMS: (Continuation)

Terms	Definitions
MPFIPYS	Ministry of Federal Planning, Public Investment and Services
NIC	International Accounting Standards
NIIF	International Financial Reporting Standards
NYSE	New York Stock Exchange
Orígenes Retiro	Orígenes Seguros de Retiro S.A.
PACOSA	Pampa Comercializadora S.A.
PEN	Federal Executive Power
PEPASA	Petrolera Pampa S.A.
PEPCA	PEPCA S.A.
PISA	Pampa Inversiones S.A.
PP	Pampa Participaciones S.A.
PP II	Pampa Participaciones II S.A.
PUREE	Rational Use of Electricity Programme
PYSSA	Préstamos y Servicios S.A.
RA	Recorded Availability
RTI	Tariff Structure Review
RTT	Temporary Tariff Regime
SACME	Centro de Movimiento de Energía S.A.
Salaverri, Dellatorre, Burgio & Wetzler	Salaverri, Dellatorre, Burgio y Wetzler Malbran Abogados Sociedad Civil
SADI	Argentine Interconnection System
SE	Secretary of Energy
SEC	Security and Exchange Comission
SIGEN	National Comptroller Office
SSN	Superintendencia de Seguros de la Nación
ST	Secretary of Labor
TG	Gas Turbine

F - 7

 

GLOSSARY OF TERMS: (Continuation)

Terms	Definitions
TGS	Transportadora de Gas del Sur S. A.
The Company / Group	Pampa Energía S. A. and its subsidiaries
TJSM	Termoeléctrica San Martín S. A.
TMB	Termoeléctrica Manuel Belgrano S. A.
Transba	Empresa de Transporte de Energía Eléctrica por Distribución Troncal de la Provincia de Buenos Aires Transba S. A.
Transelec	Transelec Argentina S. A.
Transener	Compañía de Transporte de Energía Eléctrica en Alta Tensión Transener S. A.
TV	Vapor Turbine
UMA	Undertaken Minimum Availability
UTE Senillosa	Petrolera Pampa S. A. Rovella Carranza Gas y Petróleo de Neuquén, Unión Transitoria de Empresas Senillosa
VAT	Value Added tax
VCP	Short-term securities
VRD	Debt Securities
WEM	Wholesale Electricity Market

F - 8

 

CONSOLIDATEDSTATEMENT OF FINANCIAL POSITION

As of December 31, 2015 and 2014

(In Argentine Pesos (“$”) – unless otherwise stated)

	Note	12.31.2015	12.31.2014
ASSETS
NON CURRENT ASSETS
Investments in joint ventures	8	223,918,951	226,894,893
Investments in associates	9	123,237,325	133,169,584
Property, plant and equipment	10	14,508,403,073	9,218,099,975
Intangible assets	11	734,167,886	872,384,099
Biological assets	12	1,853,667	1,894,481
Financial assets at fair value through profit and loss	13	2,578,182,705	963,012,962
Deferred tax assets	14	52,279,953	93,681,916
Trade and other receivables	15	1,169,397,290	954,842,893
Total non current assets		19,391,440,850	12,463,980,803
CURRENT ASSETS
Biological assets	12	245,361	198,470
Inventories	16	225,462,790	135,570,860
Financial assets at fair value through profit and loss	13	4,081,019,508	1,028,577,127
Derivative financial instruments	4.13	197,150	-
Trade and other receivables	15	4,934,645,531	2,903,411,995
Cash and cash equivalents	17	516,597,918	335,234,106
Total current assets		9,758,168,258	4,402,992,558
Total assets		29,149,609,108	16,866,973,361

F - 9

 

 CONSOLIDATEDSTATEMENT OF FINANCIAL POSITION

(Continuation)

	Note	12.31.2015	12.31.2014
SHAREHOLDERS´ EQUITY
Share capital	18	1,695,859,459	1,314,310,895
Additional paid-in capital and other reserve		1,231,483,268	342,984,871
Legal reserve		51,462,158	14,304,190
Voluntary reserve		977,780,998	271,779,611
Reserve for directors’ options		-	266,060,067
Retained earnings		3,065,089,423	743,159,355
Other comprehensive loss		(31,086,202)	(32,191,096)
Equity attributable to owners of the company		6,990,589,104	2,920,407,893
Non-controlling interest		1,390,609,148	633,431,122
Total equity		8,381,198,252	3,553,839,015
LIABILITIES
NON CURRENT LIABILITIES
Trade and other payables	19	2,698,769,957	1,909,433,852
Borrowings	20	6,684,746,241	3,786,988,603
Deferred revenue	21	153,815,820	109,089,120
Salaries and social security payable	22	80,039,338	62,858,307
Defined benefit plans	23	264,454,859	196,587,957
Deferred tax liabilities	14	591,588,053	470,584,488
Taxes payable	24	388,463,004	281,231,713
Provisions	25	313,778,975	119,527,656
Total non current liabilities		11,175,656,247	6,936,301,696
CURRENT LIABILITIES
Trade and other payables	19	6,652,485,409	4,536,471,292
Borrowings	20	1,307,662,872	783,583,090
Deferred revenue	21	763,684	763,684
Salaries and social security payable	22	886,967,815	725,274,898
Defined benefit plans	23	46,089,380	26,759,690
Taxes payable	24	610,112,473	231,928,622
Derivative financial instruments	4.13	18,081,410	47,880,462
Provisions	25	70,591,566	24,170,912
Total current liabilities		9,592,754,609	6,376,832,650
Total liabilities		20,768,410,856	13,313,134,346
Total liabilities and equity		29,149,609,108	16,866,973,361

       The accompanying notes are an integral part of these consolidated financial statements.

F - 10

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

For the years ended December 31, 2015, 2014 and 2013

(In Argentine Pesos (“$”) – unless otherwise stated)

	Note	12.31.2015	12.31.2014	12.31.2013
Revenue	26	7,160,781,433	6,204,645,511	5,334,993,550
Cost of sales	27	(7,092,790,535)	(6,029,079,708)	(5,603,274,246)
Gross profit		67,990,898	175,565,803	(268,280,696)
Selling expenses	28	(972,682,033)	(713,360,347)	(636,129,432)
Administrative expenses	29	(1,239,386,075)	(837,458,716)	(561,873,093)
Other operating income	30	940,678,036	311,975,857	466,220,030
Other operating expenses	30	(754,401,446)	(447,074,876)	(204,111,074)
Reversal of impairment of property, plant and equipment	10	25,259,957	88,406,704	-
Profit of cancellation debts with arbitration rights	20	-	-	-
Share of profit of joint ventures	8	9,277,768	34,208,368	(4,799,349)
Share of loss of associates	9	(9,932,259)	(1,605,070)	2,228,499
Operating loss before higher costs recognition and SE Resolution No. 32/15		(1,933,195,154)	(1,389,342,277)	(1,206,745,115)
Income recognition on account of the RTI - SE Resolution No. 32/15	2	5,025,113,729	-	-
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes	2	551,498,435	2,271,926,952	2,933,051,544
Operating income		3,643,417,010	882,584,675	1,726,306,429
Financial income	31	348,527,733	440,541,774	336,295,165
Financial expenses	31	(1,257,314,794)	(1,113,228,906)	(813,875,720)
Other financial results	31	1,700,971,014	420,055,021	(519,261,217)
Financial results, net		792,183,953	(252,632,111)	(996,841,772)
Profit before income tax		4,435,600,963	629,952,564	729,464,657
Income tax and minimun national income tax	32	(586,776,949)	(100,412,278)	12,178,991
Profit for the year from continuing operations		3,848,824,014	529,540,286	741,643,648
Discontinued operations		-	-	(126,858,328)
Total profit of the year		3,848,824,014	529,540,286	614,785,320
Other comprehensive income (loss)
Items that will not be reclassified to profit or loss
Remeasurements related to defined benefit plans	23	(1,095,782)	(23,297,267)	(27,034,200)
Minimum notional income tax	14	383,524	10,763,517	6,852,496
Profit from share in joint ventures	8	839,661	(2,129,126)	(70,562)
Other comprehensive income (loss) of the year		127,403	(14,662,876)	(20,252,266)
Comprehensive income of the year		3,848,951,417	514,877,410	594,533,054

F - 11

 

 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)

(Continuation)

	Note	12.31.2015	12.31.2014	12.31.2013
Total Profit (loss) of the year attributable to:
Owners of the company		3,065,089,423	743,159,355	286,083,801
Non - controlling interest		783,734,591	(213,619,069)	328,701,519
		3,848,824,014	529,540,286	614,785,320
Total profit (loss) of the year attributable to owners of the company:
Continuing operations		3,065,089,423	743,159,355	371,782,245
Discontinued operations		-	-	(85,698,444)
		3,065,089,423	743,159,355	286,083,801
Total comprehensive income (loss) of the year attributable to:
Owners of the company		3,066,194,317	735,353,580	272,451,852
Non - controlling interest		782,757,100	(220,476,170)	322,081,202
		3,848,951,417	514,877,410	594,533,054
Earnings per share attributable to the equity holders of the company during the year
Basic earnings per share	33	2.2760	0.5654	0.2829
Diluted earnings per share	33	2.2760	0.5082	0.2829
Basic and diluted loss per share from discontinued operations	33	-	-	(0.0652)

The accompanying notes are an integral part of these consolidated financial statements.

F - 12

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the years ended December 31, 2015, 2014 and 2013

(In Argentine Pesos (“$”) – unless otherwise stated)

	Attributable to owners
	Equity holders of the company		Retained earnings						Non-controlling interest	Total equity
	Share capital	Additional paid-in capital and other reserves	Legal reserve	Voluntary reserve	Reserve for directors’ options	Other comprehensive (loss) income	Retained earnings (Accumulated losses)	Subtotal
Balance as of December 31, 2012	1,314,310,895	1,018,352,216	-	-	250,405,701	(10,753,372)	(771,796,574)	1,800,518,866	529,796,278	2,330,315,144
Reserve for directors’ options	-	-	-	-	8,945,352	-	-	8,945,352	-	8,945,352
Accumulated losses absorptions - Shareholders’ meeting 04.26.2013	-	(771,796,574)	-	-	-	-	771,796,574	-	-	-
Dividends attributables to non-controlling interest	-	-	-	-	-	-	-	-	(15,467,679)	(15,467,679)
Sale of subsidiaries	-	-	-	-	-	-	-	-	(72,127,674)	(72,127,674)
Sale of interest in subsidiaries	-	7,698,689	-	-	-	-	-	7,698,689	20,941,588	28,640,277
Merging of subsidiaries	-	9,235,580	-	-	-	-	-	9,235,580	(9,251,951)	(16,371)
Profit of the year	-	-	-	-	-	-	286,083,801	286,083,801	328,701,519	614,785,320
Other comprehensive profit of the year	-	-	-	-	-	(13,631,949)	-	(13,631,949)	(6,620,317)	(20,252,266)
Comprehensive (loss) profit of the year	-	-	-	-	-	(13,631,949)	286,083,801	272,451,852	322,081,202	594,533,054
Balance as of December 31, 2013	1,314,310,895	263,489,911	-	-	259,351,053	(24,385,321)	286,083,801	2,098,850,339	775,971,764	2,874,822,103

F - 13

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Continuation)

	Attributable to owners
	Equity holders of the company		Retained earnings						Non-controlling interest	Total equity
	Share capital	Additional paid-in capital and other reserves	Legal reserve	Voluntary reserve	Reserve for directors’ options	Other comprehensive (loss) income	Retained earnings (Accumulated losses)	Subtotal
Balance as of December 31, 2013	1,314,310,895	263,489,911	-	-	259,351,053	(24,385,321)	286,083,801	2,098,850,339	775,971,764	2,874,822,103
				-
Reserve for directors’ options	-	-	-	-	6,709,014	-	-	6,709,014	-	6,709,014
Sale of interest in subsidiaries	-	66,900,103	-	-	-	-	-	66,900,103	7,814,930	74,715,033
Change of interest in subsidiaries	-	12,594,857	-	-	-	-	-	12,594,857	86,752,644	99,347,501
Dividends attributables to non-controlling interest	-	-	-	-	-	-	-	-	(16,632,046)	(16,632,046)
Constitution of legal reserve - Shareholders’ meeting 04.30.2014	-	-	14,304,190	-	-	-	(14,304,190)	-	-	-
Constitution of voluntary reserve - Shareholders’ meeting 04.30.2014	-	-	-	271,779,611	-	-	(271,779,611)	-	-	-
Profit of the year	-	-	-	-	-	-	743,159,355	743,159,355	(213,619,069)	529,540,286
Other comprehensive profit of the year	-	-	-	-	-	(7,805,775)	-	(7,805,775)	(6,857,101)	(14,662,876)
Comprehensive (loss) profit	-	-	-	-	-	(7,805,775)	743,159,355	735,353,580	(220,476,170)	514,877,410
Balance as of December 31, 2014	1,314,310,895	342,984,871	14,304,190	271,779,611	266,060,067	(32,191,096)	743,159,355	2,920,407,893	633,431,122	3,553,839,015

F - 14

 

 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(Continuation)

	Attributable to owners
	Equity holders of the company		Retained earnings						Non-controlling interest	Total equity
	Share capital	Additional paid-in capital and other reserves	Legal reserve	Voluntary reserve	Reserve for directors’ options	Other comprehensive (loss) income	Retained earnings (Accumulated losses)	Subtotal
Balance as of December 31, 2014	1,314,310,895	342,984,871	14,304,190	271,779,611	266,060,067	(32,191,096)	743,159,355	2,920,407,893	633,431,122	3,553,839,015
Constitution of legal reserve - Shareholders’ meeting 04.30.2015	-	-	37,157,968	-	-	-	(37,157,968)	-	-	-
Constitution of voluntary reserve - Shareholders’ meeting 04.30.2015	-	-	-	706,001,387	-	-	(706,001,387)	-	-	-
Issuance of shares on exercise of stock options (Note 41)	381,548,564	883,272,106	-	-	(266,060,067)	-	-	998,760,603	-	998,760,603
Dividends attributables to non-controlling interest	-	-	-	-	-	-	-	-	(26,092,252)	(26,092,252)
Sale of interest in subsidiaries	-	5,226,291	-	-	-	-	-	5,226,291	513,178	5,739,469
Profit of the year	-	-	-	-	-	-	3,065,089,423	3,065,089,423	783,734,591	3,848,824,014
Other comprehensive profit (loss) of the year	-	-	-	-	-	1,104,894	-	1,104,894	(977,491)	127,403
Comprehensive profit of the year	-	-	-	-	-	1,104,894	3,065,089,423	3,066,194,317	782,757,100	3,848,951,417
Balance as of December 31, 2015	1,695,859,459	1,231,483,268	51,462,158	977,780,998	-	(31,086,202)	3,065,089,423	6,990,589,104	1,390,609,148	8,381,198,252

The accompanying notes are an integral part of these consolidated financial statements.

F - 15

 

CONSOLIDATEDSTATEMENT OF CASH FLOWS

For the years ended December 31, 2015, 2014 and 2013

(In Argentine Pesos (“$”) – unless otherwise stated)

	Note	12.31.2015	12.31.2014	12.31.2013
Cash flows from operating activities:
Total profit for the year		3,848,824,014	529,540,286	614,785,320
Adjustments to reconcile net (loss) profit to cash flows generated by operating activities:
Income tax and minimum notional income tax	32	586,776,949	100,412,278	(12,178,991)
Accrued interest		859,592,603	596,724,545	447,574,296
Depreciations and amortizations	27, 28 and 29	720,684,258	467,160,148	374,791,231
Reserve for directors’ options	29	-	6,709,014	8,945,352
Reversal of impairment of property, plant and equipment	10	(25,259,957)	(88,406,704)	-
Gain from discharge/cancellation of TGS Loan	20	(215,413,769)	-	-
Constitution (Recovery) of accruals, net	28 and 30	120,672,006	(23,697,702)	48,343,247
Constitution of provisions, net	30	228,150,344	95,822,786	36,571,446
Share of (loss) profit of joint ventures and associates	8 and 9	654,491	(32,603,298)	2,570,850
Accrual of defined benefit plans	27, 28 and 29	121,778,161	73,163,395	33,754,716
Net foreign currency exchange difference	31	566,172,708	761,254,771	744,150,070
Result from measurement at present value	31	(23,228,386)	(223,304,132)	155,869,735
Changes in the fair value of financial instruments		(2,226,008,275)	(907,867,357)	(295,854,837)
Result from repurchase of corporate bonds	31	(9,904,686)	(47,122,571)	(88,879,485)
Results from property, plant and equipment sale and decreases	30	8,756,789	18,639,620	13,404,236
Consumption of materials		40,996,168	11,869,855	6,783,353
Recovery of other operative expenses		-	-	(13,002,003)
Revenue recognition from CAMMESA finance (*)		(7,019,838)	(18,852,659)	(17,402,480)
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes	2	(551,498,435)	(2,271,926,952)	(2,933,051,544)
Income recognition on account of the RTI - Res. SE No. 32/15	2	(495,516,409)	-	-
Dividends earned	30	(4,486,563)	(6,226,319)	(6,876,038)
Recognition of March Agreement		-	-	(85,177,042)
Recovery of tax on gross income	37	-	(41,110,709)	-
Provision for decommissioning of wells	31	18,899,410	47,953	-
Compensation agreements	27, 28 and 29	223,600,947	61,546,421	-
Other operating costs for contract termination	30	-	11,366,548	-
Other expenses FOCEDE	30	59,563,107	97,701,000	-
Other finance results		10,260,586	(4,301,834)	3,811,823
Income recognition for arbitral proceedings	30	(74,770,949)	-	-
Other		1,533,908	38,242	1,871,525
Discontinued operations		-	-	199,135,735
Changes in operating assets and liabilities:
Increase in trade receivables and other receivables		(1,712,278,963)	(753,779,506)	(508,715,144)
Increase in inventories		(89,662,239)	(21,085,864)	(50,402,379)
(Increase) Decrease in biological assets		(46,892)	365,961	(916,879)
Increase (Decrease) in trade and other payables		1,061,352,687	(29,446,104)	183,440,125
Increase in deferred income		45,490,384	76,187,087	(700,044)
Increase in salaries and social security payable		178,868,247	260,712,693	112,375,704
Decrease in defined benefit plans		(35,677,351)	(18,186,942)	(13,164,865)
Increase in taxes payable		103,396,097	51,441,807	(31,963)
Decrease in provisions		(34,021,661)	(54,049,454)	(25,358,712)
Income tax and minimum notional income tax paid		(120,948,438)	(880,339)	(3,692,829)
Funds obtained from PUREE (SE Resolution No. 1037/07)		25,612,143	482,928,401	491,946,068
Proceeds from (Payments of) derivative financial instruments		185,214,525	(42,125,000)	-
Subtotal before variations of debts with CAMMESA		3,391,107,721	(881,340,635)	(575,280,403)
Increase in account payable and loans (MUTUUM) with CAMMESA in distribution		1,189,554,703	3,455,497,600	2,231,477,000
Net cash generated by operating activities		4,580,662,424	2,574,156,965	1,656,196,597

(*) Corresponds to the financing of CAMMESA under the Note SE No. 6157/10, payment of which is in charge of the MEM

F - 16

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Continuation)

	Note	12.31.2015	12.31.2014	12.31.2013
Cash flows from investing activities:
Purchases of property, plant and equipment acquisition		(4,797,918,069)	(2,331,115,327)	(1,050,265,080)
Purchases of financial assets at fair value		(3,506,210,675)	(1,055,481,705)	(353,525,353)
Proceeds from property, plant and equipment sale		40,660	2,281,299	399,407
Proceeds from financial assets at fair value sale		2,263,908,118	1,258,242,711	279,128,770
Proceeds from financial assets' amortization		1,579,202	3,239,076	54,793,585
Proceeds from financial assets' interest		16,161,243	18,169	1,878,384
Dividends received		4,486,563	2,777,280	13,028,406
Proceeds from loans		1,430,518	2,182,025	4,617,341
Proceeds from interest on loans		13,411	-	-
Proceeds (Constitution) of guarantee deposits, net		293,392,019	(276,616,965)	-
Recovery (Subscription) of investment funds, net		(1,390,929,067)	(77,330,026)	(282,191,942)
Capital contribution in joint ventures		(475,000)	(250,000)	(205,386)
Discontinued operations		-	-	(124,246,000)
Net cash used in investing activities		(7,114,521,077)	(2,472,053,463)	(1,456,587,868)
Cash flows from financing activities:
Proceeds from borrowings		4,793,347,633	2,519,386,589	656,489,875
Payment of borrowings		(2,281,317,918)	(2,253,561,870)	(513,035,781)
Payment of borrowings' interests		(731,714,230)	(567,793,296)	(200,559,674)
Capital contributions received		998,760,603	-	-
Capital contributions received from third parties in subsidiries		-	98,997,500	-
Proceeds from sale of interest in subsidiaries to Non Controlling Interest		5,739,469	74,714,844	28,640,301
Dividends paid to third parties in subsidiaries		(26,092,252)	(19,432,044)	(7,871,681)
Payment for repurchase of own debt		(121,371,300)	-	(65,982,241)
Discontinued operations		-	-	25,388,000
Net cash geterated by (used in) financing activities		2,637,352,005	(147,688,277)	(76,931,201)
Increase (Decrease) in cash and cash equivalent		103,493,352	(45,584,775)	122,677,528
Cash and cash equivalents at the beginning of the year	17	335,234,106	341,668,865	156,647,001
Cash and cash equivalents at the beginning of the year included in assets classified as held for sale		-	-	11,154,000
Foreign currency exchange difference generated by cash and cash equivalents		77,870,460	39,150,016	51,190,336
Increase (Decrease) in cash and cash equivalent		103,493,352	(45,584,775)	122,677,528
Cash and cash equivalents at the end of the year	17	516,597,918	335,234,106	341,668,865

F - 17

 

CONSOLIDATED STATEMENT OF CASH FLOWS (Continuation)

	Note	12.31.2015	12.31.2014	12.31.2013
Significant Non-cash transactions:
Acquisition of property, plant and equipment through an increase in trade payables		(988,827,033)	(208,339,247)	(158,325,018)
Borrowing costs capitalized in property, plant and equipment		(433,823,766)	(123,861,184)	(24,532,005)
Increase (Decrease) from offsetting of PUREE-related liability against receivables (SE Res. No. 250/13, subsequent Notes and SE Res. 32/15)		10,618,797	(574,009,553)	1,661,103,990
Increase (Decrease) from offsetting of liability with CAMMESA for electricity purchases against receivables (SE Res. No. 250/13, subsequent Notes and SE Res. 32/15)		158,081,277	(2,218,423,960)	(1,152,267,285)
Decrease from offsetting liability with CAMMESA form loans for consumption (mutuums) granted for higer salary cost (SE Res. No. 32/15)		(495,516,409)	-	-
Decrease in borrowings through offsetting trade receivables		(92,129,978)	(131,875,580)	-
Decrease in financial assets at fair value repurchased Corporate Bonds		-	(91,637,990)
Increase of asset retirement obligation		(26,900,873)	(53,594,289)	-
(Constitution) Recovery of guarantee of derivative financial instruments, net through the delivery of financial assets at fair value through profit or loss		(138,310,986)	(24,767,682)	-
Reclassification of assets classified as held for sale to property, plant and equipment		-	(11,987,500)	-
Acquisition of property, plant and equipment through an increase in liability with FOTAE		-	(32,939,174)	(48,960,000)
Decrease in property, plant and equipment for arbitral proceedings	37.2	235,866,673	-	-
Offsetting of rights over arbitration proceedings against loans	20	308,071,413	-	-
Increase in financial assets at fair value from subsidiary sale		-	-	334,339,766
Increase in other receivables from subsidiary sale		-	-	44,626,592

The accompanying notes are an integral part of these consolidated financial statements.

F - 18

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the year ended December 31, 2015. 2014 and 2013

 (in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 1: GENERAL INFORMATION

The Company is an integrated electricity company which, through its subsidiaries and joint ventures, is engaged in of the electricity generation, transmission and distribution in Argentina.

In the generation business, the Company has an installed capacity of approximately 2,217 MW, which accounts for approximately 7% of the installed capacity in Argentina.

In the transmission business, the Company jointly controls Citelec, which is the controlling company of Transener, that performs the operation and maintenance of the high-tension transmission network in Argentina which covers 12,365 km of lines of its own and 6,158 km of Transba high voltage lines in the Province of Buenos Aires. Both companies together carry 90% of the electricity in Argentina.

In the distribution business, the Company, through Edenor, distributes electricity to over 2.8 million customers throughout the northern region of Buenos Aires City, the north and northwest of Greater Buenos Aires.

In the oil and gas segment, the Company, through PEPASA, operates exploration and exploitation of oil and gas.

In other businesses, the Company operates financial investment and keep investments in other companies with complementary businesses.

On February 11, 2010 the Company was authorized to act as agent and clearing member of ROFEX.

NOTE 2: REGULATORY FRAMEWORK

2.1 Generation

The future development of the power generation activity could force the Government to modify adopted measures or to introduce additional regulations. The impacts generated by the whole set of measures adopted as at the date hereof by the National Government on the Company and its subsidiaries’ financial, economic and cash position as at December 31, 2015 have been calculated based on the assessments and estimates made by the Company management as at the date of preparation of these consolidated financial statements and should be interpreted considering these circumstances.

Regarding changes the Government may introduce in this sector, Executive Order No. 134/15, which declared a state of emergency in the electrical sector until December 31, 2017, empowers the Ministry of Energy and Mining to adopt the necessary measures regarding the generation, transportation and distribution of electric power within the national jurisdiction in order to accommodate the quality and safety of the supply and guarantee the operation of the public utility under proper technical and economic conditions.

F - 19

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

a.Resolution No. 95/13 – New Remuneration Scheme and other Modifications to the WEM

On March 22, 2013, the SE issued Res. 95/13 which provided for a new general-scope system replacing the applicable remuneration scheme previously in force for all the power generation sector, with the exception of power plants the energy and/or power of which are sold as an Energy Plus Service (SE Res. No. 1281/06) and under the WEM Supply Agreement pursuant to SE Res. No. 220/07.

The new remuneration scheme became applicable to CTG, CPB and CTLL as from the economic transactions for the month of February, 2013, and to HINISA and HIDISA as from the commercial transaction for the month of November, 2013, after such subsidiaries waived all their administrative and/or judicial claims against the National Government, the SE and/or CAMMESA regarding the 2008-2011 Agreement and/or SE Resolution No. 406/03, as well as their right to file new claims relating to said items and periods.

Pursuant to SE Resolution No. 529/14 passed on May 20, 2014 and SE Resolution No. 482/15 dated July 10, 2015, the SE provided for a retroactive updating —as from the economic transactions for the months of February, 2014 and 2015— of the remuneration scheme implemented by SE Resolution 95/13.

It should be pointed out that the system set forth by SE Resolution No. 482/15 applies directly to generators adhering under SE Resolution No. 95/13 or SE Resolution No. 529/14.

The applicable remuneration scheme comprises the following items:

i.Fixed Costs Remuneration: It considers and remunerates Power Capacity Made Available in HRP. The method for calculating the remuneration will be variable based on the RA and each unit's HA.

The parameters defined in the Resolution according to the type of technology are the following:

Classification or technology and scale	$/MW-HRP
TG units with power capacity (P) > 50 Mw	64
TV units with power capacity (P) < 100 Mw	106.4
TV units with power capacity (P) > 100 Mw	76
HI units with power capacity (P) between 30 Mw and 120 Mw	103.4
HI units with power capacity (P) between 120 Mw and 300 Mw	49

A base percentage is defined, which is applied to the Fixed Costs Remuneration in accordance with the following values:

F - 20

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

TV/TG	June-August and December-February periods	March-May and September-November periods
RA > 90%	110%	100%
80% < RA ≤ 90%	105%	100%
70% < RA ≤ 80%	85%	85%
RA ≤ 70%	70%	70%

50% of the percentage difference between the generator's RA and HA will be added to or subtracted from the base percentage; that is, for each percentage point variation in the generator’s RA as compared with its HA, half a percentage point will be applied to the Fixed Costs remuneration. The maximum and minimum values are those set forth for each period (maximum 110% and minimum 70%, as applicable). Pursuant to SE Resolution No. 482/15, the reference availability value will be defined regarding the available power capacity based on the typical temperature conditions at the site.

HA values for each thermal group will be determined based on its RA during the last 5 rolling years.

ii.Variable Costs Remuneration: It replaced the remuneration of Maintenance Variable Costs and Other Non-Fuel Variable Costs, It is calculated on a monthly basis based on the power generated by each type of fuel:

Classification or technology and scale	Operating with:
	Natural Gas	FO/GO Hydrocarbons
	$/MWh
TG units with power capacity (P) > 50 Mw	33.1	57.9
TV units with power capacity (P) < 100 Mw	33.1	57.9
TV units with power capacity (P) > 100 Mw	33.1	57.9

Hydroelectric Units	$/MWh
HI units with power capacity (P) between 30 Mw and 120 Mw	26.2
HI units with power capacity (P) between 120 Mw and 300 Mw	26.2

F - 21

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

iii.Additional Remuneration: Part of this remuneration is settled directly to the generator and another will be destined to “new infrastructural projects in the electric sectors”, which will be defined by the SE through a trust. The SE will establish the trust funding mechanisms.

Classification or technology and scale	Allocation
	Generator $/MWh	Trust $/MWh
TG units with power capacity (P) > 50 Mw	11.7	7.8
TV units with power capacity (P) < 100 Mw	13.7	5.9
TV units with power capacity (P) > 100 Mw	11.7	7.8
HI units with power capacity (P) between 30 Mw and 120 Mw	84.2	14.9
HI units with power capacity (P) between 120 Mw and 300 Mw	59.4	39.6

Additionally, the SE will define the mechanism under which the LVFVDs issued by CAMMESA pursuant to SE Resolution No. 406/03 and not comprised within the general and/or specific agreements entered into with the SE and/or provisions aimed at the execution of investment works and/or existing equipment maintenance tasks should be destined to the payment of such trust.

iv.Maintenance Remuneration: Besides the previously stated remuneration items, SE Resolution No. 529/14 incorporated a new concept of “Remuneration for Non-Recurring Maintenance Works” (“Maintenance Remuneration”) applicable as from the economic transaction corresponding to February 2014 and calculated monthly based on the total generated energy. Such remuneration is implemented through LVFVDs and is destined exclusively to the financing of major maintenance works, subject to the SE approval. As from the passing of SE Resolution No. 482/15, this Maintenance Remuneration is also recognized to hydroelectric generators as from the economic transaction corresponding to February 2015.

Classification or technology and scale	$/MWh
TG units with power capacity (P) > 50 Mw	28.2
TV units with power capacity (P) < 100 Mw	28.2
TV units with power capacity (P) > 100 Mw	28.2
HI units with power capacity (P) between 30 Mw and 120 Mw	8
HI units with power capacity (P) between 120 Mw and 300 Mw	8

The Maintenance Remuneration for thermal generators will result from the application of a formula contemplating adjustments based on the Power Utilization Factor during the last rolling year and a Start Factor contemplating starts pursuant to the dispatch administered by CAMMESA during the last rolling year. In both cases, the rolling year is calculated until the month prior to the transaction.

F - 22

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

v.“Production” and “Operating Efficiency” Promotion:

The promotion system implemented through SE Resolution No. 482/15 consists of an increase in the remuneration of variable costs upon the meeting of certain conditions.

The “Production” promotion consists of a 15% or 10% percent increase in the remuneration of variable costs of thermal units operating with liquid fuels and gas/coal, respectively, as from the moment its accumulated production during the calendar year exceeds by 25% or 50% its production capacity with the applicable fuel and for its actual power capacity.

The “Efficiency” consists of the acknowledgment of an additional remuneration equivalent to the variable cost remuneration for the percentage difference between the actual consumption and the reference consumption determined for each unit and fuel type. Comparisons will be made on a quarterly basis. In the case of higher consumptions, the base remuneration is not affected by variable costs.

Specific consumption reference values are as follows:

Generating Unit	Natural Gas	Alternative Fuels (FO/GO/CM)
	Kcal/kWh	Kcal/kWh
TG	2,400	2,600
TV	2,600	2,600

vi.2015-2018 FONINVEMEM Resources:

Pursuant to the provisions of the 2015-2018 Agreement, SE Resolution No. 482/15 included a specific contribution, the 2015-2018 FONINVEMEM Resources, destined to the execution of works under such system. 2015-2018 FONINVEMEM Resources will be allocated to generators participating in projects approved or to be approved by the SE.

Specific contributions will be automatically allocated by CAMMESA retroactively as from the economic transactions for the month of February 2015 and until December 2018 to each applicable generating agent as from the execution of the relevant construction and supply agreements. Pursuant to SE Resolution No. 482/15, timely assigned 2015-2018 FONINVEMEM Resources do not create acquired rights for the generator and, in case of breach of the construction and/or supply agreements, such resources may be reassigned by the SE.

F - 23

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

The 2015-2018 FONINVEMEM Resources values are as follows:

Technology and scale	2015-2018 Investment Resources ($/MWh)
TG units with power capacity (P) > 50 Mw	15.8
TV units with power capacity (P) < 100 Mw	15.8
TV units with power capacity (P) > 100 Mw	15.8
HI units with power capacity (P) between 30 Mw and 120 Mw	6.3
HI units with power capacity (P) between 120 Mw and 300 Mw	6.3

vii.2015-2018 FONINVEMEM Direct Remuneration:

It consists of the recognition of an additional remuneration to units installed under the 2015-2018 FONINVEMEM scheme equivalent to 50% of the Direct Additional Remuneration. The term for the recognition of such remuneration will begin with the unit's commercial commissioning and extend for a term not exceeding 10 years.

This remuneration makes up the whole remuneration collectable by generators under the WEM, after discounting the electric energy and/or power committed to the MAT or pursuant to other similar agreements, valued at the applicable market price, with the exception of the previously mentioned specific contracts, and after deducting any other charge and/or service to be borne by said agents.

Payment Priority

Two new payment priorities have been established, excluding to such effect the application of SE Res. No. 406/03: (i) the Fixed Costs Remuneration, the recognition of fuel costs and the Variable Costs Remuneration will be canceled in the first place; and (ii) the Additional Remuneration will be canceled in the second place.

However, it is established that CAMMESA —based on what is provided for by the SE— should accommodate this priority to the applicable criteria, that is, to SE Res. No. 406/03 itself.

As regards the priority in the settlement of the above-mentioned remuneration, it was provided that the Fixed Costs Remuneration, the Variable Costs Remuneration and the Additional Remuneration settled directly to the generator, as well as the recognition of fuel costs, will have the same priority as that set forth in Section 4 of SE Res. No. 406/03.

The remuneration of frequency regulation and short-term reserve services will have the same priority as that set forth in Section 4.d of SE Res. No. 406/03, and the additional remuneration allocated to the trust, the same as that contemplated in subsection c) of said resolution.

F - 24

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Through SE Note No. 4858/13, the SE instructed CAMMESA to implement a payment priority mechanism in favor of generators adhering to SE Resolution No. 95/13 in order to keep a liquidity level similar to that prior to the passing of such Res. To such effect, CAMMESA will:

i.Account for the amounts directly received from Large Users;

ii.Allocate such amounts to cover the remuneration due to generators by distributing such funds to cover: first, fixed costs; secondly, variable costs; and lastly, direct additional remuneration. The distribution will be made proportionally to each Generator’s relative share in each of said items.

Fuel Supply

It was provided that the commercial management and dispatch of fuels for generation purposes will be centralized in CAMMESA. Generators may not renew or extend their contracts with suppliers, with the exception of those trading electric energy under supply agreements having a differential remuneration scheme, in which case they may continue entering into fuel agreements to provide firm support to their supply commitments. Notwithstanding that, until the termination of the contracts currently in force between generators and their suppliers, costs associated with the reference price, acknowledged freight costs, costs associated with the transportation and distribution of natural gas, as well as their related taxes and rates, will be recognized. For the recognition of said costs, two conditions should be met: (i) on the Resolution’s effective date, costs should be recognized by CAMMESA; and (ii) said costs should result from contractual relationships taken on before the Resolution’s effective date.

Later on, and regarding the supply of fuel for generation purposes, SE Note No. 8152/13 instructed CAMMESA to call oil companies registered under the “Natural Gas Surplus Injection Promotion Program” and/or the “Program for the Promotion of Natural Gas Injection for Companies with Reduced Injection” for the supply of natural gas from the Northeast and Neuquén Basins.

Under SE Note No. 5129/13, CAMMESA was instructed to optimize fuel and generation dispatch considering actual purchase costs consistently with the conditions described by CAMMESA in the analysis previously sent to the Secretariat of Energy. This modification will result in a change in the current dispatch conditions and the mixture of fuels used for power generation.

Moreover, and in furtherance of the objective sought by SE Resolution No. 95/13 of optimizing and minimizing costs in the supply of fuel to the WEM plants, it was provided that generation agents the energy and power of which have been committed under SE Resolution No. 1193/05 (FONINVEMEM), the WEM Supply Commitment under SE Resolution No. 220/07 and SE Resolution No. 1836/07, as well as under any other kind of energy supply agreement subject to a differential remuneration system —with the exception of agreements under the Energy Plus Service passed by SE Resolution No. 1,281/06— may not renew or extend their contracts with suppliers upon termination, the supply of such fuel thus becoming centralized in CAMMESA.

F - 25

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

It should be pointed out that for transaction purposes and to provide for the coverage of the agreements now subject to this provision, the availability of the generating unit shall be considered independently of fuel.

Within this framework, during September 2015 CAMMESA has interpreted that the provisions of SE Resolution No. 529/14 were applicable to the supply of CTLL's natural gas and, therefore, informed that, as from January 2016, it would stop recognizing the costs of such supply. This position entails that CAMMESA has ceased recognizing the 10% remuneration over such costs provided for in the “Master Agreement for the Closing of Loma de la Lata's Combined Cycle” entered into between the SE and CTLL. In view of this situation and in order to safeguard its rights, during November 2015 CTLL presented a claim prior to the filing of a complaint before the MPFIPyS.

Suspension of contracts in the MAT

A temporary suspension on the inclusion of new contracts into the MAT was provided (excluding those derived from resolutions fixing a differential remuneration scheme), as well as their extension or renewal. Notwithstanding the foregoing, contracts in force as at the new remuneration scheme's effective date will continue being managed by CAMMESA until their termination. As from such termination, Large Users should acquire their supplies directly from CAMMESA pursuant to the conditions established to such effect by the SE.

Resolution’s Implementation Criteria

The categorization by CAMMESA of generation units pursuant to the scales set forth by SE Resolution No. 95/13 is detailed below:

F - 26

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Company	Generating unit	Technology	Power
CTG	GUEMTG01	TG	> 50 MW
CTG	GUEMTV11	TV	<100 MW
CTG	GUEMTV12	TV	<100 MW
CTG	GUEMTV13	TV	>100 MW
CPB	BBLATV29	TV	>100 MW
CPB	BBLATV30	TV	>100 MW
CTLL	LDLATG01	TG	>50 MW
CTLL	LDLATG02	TG	>50 MW
CTLL	LDLATG03	TG	>50 MW
HIDISA	AGUA DEL TORO	HI	HI – Medium  120<P≤300
HIDISA	EL TIGRE	HI	HI – Low    0<P≤120
HIDISA	LOS REYUNOS	HI	HI – Medium  120<P≤300
HINISA	NIHUIL I	HI	HI – Medium  120<P≤300
HINISA	NIHUIL II	HI	HI – Medium  120<P≤300
HINISA	NIHUIL III	HI	HI – Medium  120<P≤300

b.Energy Plus - SE Resolution No. 1281/06

The SE approved Res. No. 1281/06, in which it is established that the existing energy commercialized in the Spot market will have the following priorities: (i) Demands below 300 KW; (ii) Demands over 300 KW with contracts; and (iii) Demands over 300 KW without contracts.

It also establishes certain restrictions to the commercialization of electricity, and implements the Energy Plus service, which consist in the offering of additional generation availability by the generating agents. These measures imply the following:

-Hydroelectric and thermal generators without fuel contracts are not allowed to execute any new contract.

-Large Users with a demand over 300 KW will be only allowed to contract their energy demand in the forward market for the electrical consumption made during the year 2005 (“Base Demand”) with the thermoelectric plants existing in the WEM.

-The new energy consumed by Large Users with a demand over 300 KW over the Base Demand must be contracted with new generation at a price freely negotiated between the parties (“Energy Plus”).

-The New Agents joining the system must contract their whole demand under the Energy Plus service.

- For the new generation plants to be included within the Energy Plus service, they must have fuel supply and transportation contracts.

F - 27

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Under such standard, CTG extended its generation capacity on 98.8 MWISO with the implementation of the generation unit LMS 100. CTG was the first WEM generator that provided the service of Energy Plus, for which executed several service agreements with Energy Plus that cover for the entire Net Effective Power of the extension with various agents from the MAT.

Together with the approval by the MPFIPYS of the profit margin presented by CTG through MPFIPyS Note No. 2495/08, the Energy Secretariat, by virtue of Notes No. 625/08, 2429/08 and 2495/08, authorized the CTG contracts for a total power of 98.0 MW.

If an Energy Plus client cannot meet the demand for energy assigned to it, the generator may purchase that energy in the Spot Market at the operating marginal cost.

CTG has current Power Availability Agreements in force with other generators, including TermoAndes S.A., Petrobras Arg. S.A. (for its Genelba and Ecoenergia plants), Generación Mediterránea S.A., Solalban Energía S.A., Generación Independencia S.A. and Centrales Térmicas Mendoza S.A., whereby it can purchase energy from those generators to support its contracts in case of unavailability of its LMS 100 unit. Thus, CTG substantially limits the contracts’ support risk in case of unavailability of the LMS 100 unit.

These contracts include an automatic call clause applicable by CAMMESA under certain market conditions, which takes into consideration the total or partial unavailability of the equipment to support 100% of the energy demanded by customers, the Operating Marginal Cost hourly price and the contract price. The purchase prices for the power subject-matter of the stated contracts range from US$ 64.60/MWh to US$ 65.50/MWh.

Furthermore, CTG has entered into power availability agreements with the above mentioned generating agents whereby CTG acts as the selling party, supporting generators in case of unavailability of their equipment. These agreements are ranked with a lower priority than Energy Plus contracts and relate to surplus energy (energy committed to the Energy Plus contracts which has not been demanded by customers).        

The SE, through Note No. 567/07 and its amendments, has implemented the Surplus Demand Incremental Average Charge as the maximum price payable by Large Users (with a power consumption above 300 KW) for their Surplus Demand in case they do not have an Energy Plus Service Agreement in force. These values imply a cap in pesos on the sales price authorized Generators may offer to provide the Energy Plus service.

Currently these values are $ 450/MWh for GUMA and GUME and $ 550/MWh for GUDI. Considering these values and the U.S. dollar exchange rate, the surplus demand purchase cost for a Large User (GUMA, GUME and GUDI) is currently similar to the Energy Plus generation cost in U.S. dollars; therefore, as they are unable to lower their prices and reach these values, generators are losing contracts, as clients prefer not to renew them, thus obliging generators to sell their energy and power capacity in the spot market, with the resulting decline in income.

F - 28

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Finally, under that established in Art. 6 of Res. SE 482/15, and with the agreement of the generators of Energy Plus, the energy delivered to the spot market and the uncommitted power available in Energy Plus contracts in force in each period will be paid under the criteria established by Res. SE 482/15, being the cost of fuel provided by CAMMESA out of the transaction.

c.Supply contracts WEM- Resolution SE No. 220/07

Aiming to modify the market conditions allowing for new investments to increase the generation offer, the SE passed Res. No. 220/07, which empowers CAMMESA to enter into “WEM Supply Commitment Agreements” with WEM generating agents for the energy produced with new generation equipment. They will be long-term agreements, and the price payable by CAMMESA should compensate the investment made by the agent at a rate of return accepted by the ES.

On November 1, 2011, CAMMESA granted to CTLLL the provisional commercial commissioning of the TV unit, and the combined cycle started to operate on a commercial basis. Electricity generated by TV may be sold pursuant to the Energy Plus Plan and through the WEM Supply Agreements executed by CAMMESA pursuant to SE Res. No. 220/07. Pursuant to the Addendum to the December 2010 Supply Agreement, during the first 3 years of the Supply Agreement all the power produced by the TV may be marketed thereunder.

On October 27, 2014, the Addendum to CTLL’s Supply Agreement was extended until the termination, in the year 2021, of the WEM Supply Agreement pursuant to SE Resolution No. 220/07 entered into with CAMMESA.

Pursuant to the agreement mentioned in subsection k), Central Térmica Piquirenda, owned by EGSSA (which makes up CTG´s assets after its merger with EGSSA and EGSSAH) was commissioned for commercial operation on May 3, 2011. On July 15, 2011, such company executed the WEM Supply Agreement pursuant to SE Res. No. 220/07. As from such date, the power produced is marketed in whole pursuant to the provisions of such agreement.

d.Receivables from WEM generators

As of December 31, 2015 and December 31, 2014, the Company, through its generation subsidiaries, holds receivables with CAMMESA which, at nominal value, together with accrued interest, amount to a total $ 1.016 and $ 797.4 million, with an estimated recoverable value of $ 978 and $ 745.6 million, respectively. Below its integration are detailed.

F - 29

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

a.LVFVDs pursuant to SE Resolution No. 406/03 2004-2006. They have been assigned to FONINVEMEM in the amount of $ 53.6 million and $ 66 million including interest, and their estimated recoverable value amounts to $ 46.9 million and $ 54.8 million, respectively.

b.LVFVDs pursuant to SE Resolution No. 406/03 2008-2011. They have been allocated to the “2014 Agreement” in the amount of $ 480.1 million and $ 408.5 million including interest, and their estimated recoverable value amounts to $ 480.1 million and $ 397.8 million, respectively.

c.LVFVDs pursuant to SE Resolution No. 406/03 2012-2013 and SE Resolution No. 95/13. These have been allocated to the “2014 Agreement” in the amount of $ 403.3 million and $ 228.6 million including interest, and their estimated recoverable value amounts to $ 371.9 million and $ 198.8 million, respectively

d.LVFVDs for Maintenance Remuneration in the amount of $ 79.1 million and $ 94.3 million, respectively, bound to cancel the funding approved by the SE previously authorized for maintenance work. They have been valued at their nominal value plus interest, net of advances received partial funding under CAMMESA detailed in note 20, except in the case of HIDISA and HINISA, which are subject to approval by the SE and, therefore, these Companies have decided to recognize this remuneration as income for the period in which the approval for the maintenance is verified, until reaching the amounts approved by the SE.

Regarding the 2015-2018 FONINVEMEM Resources, as at the date hereof generating subsidiaries have advanced in the study of projects seeking to obtain, with the prior SE approval, the automatic allocation of specific contributions which as of December 31, 2015 amount to $ 92,8 million. However, the change in administration in December 2015 prevented the execution of such agreements. Proceeds from the 2015-2018 FONINVEMEM Remuneration will be acknowledged as from the approval of the investment projects and the allocation of the specific contributions.

WEM Supply Commitment Agreements – SE Resolution No. 724/08

Pursuant to such resolution, on December 9, 2008 CTLL entered into a Master Agreement with the SE whereby it undertook to conduct an extension project for the closing of the combined cycle of its generation plant, which would be partially financed through the collection from CAMMESA of its LVFVDs accumulated between January 1, 2008 and December 31, 2010 corresponding to subsection c) of SE Res. No. 406/03, as well as the LVFVDs from other WEM generators wishing to assist in the project.

Furthermore, on April 14, 2009, CTLL entered into an Electric Power Supply Agreement with CAMMESA pursuant to such resolution and the Master Agreement.

During the months of May 2009 and June 2010, CTLL entered into several receivables assignment agreements with other WEM generators (including its subsidiaries HINISA, HIDISA, CTG and CPB) regarding their LVFVDs accumulated between January 1, 2008 and December 31, 2010.

F - 30

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Pursuant to such agreement, CTLL has collected from CAMMESA all receivables accrued during fiscal year 2008 and has entered into several assignments with other generators for a total amount of $ 51.2 million during 2010 and 2011.

Upon the breach by CAMMESA of the commitments undertaken under the Supply Agreement and the Master Agreement resulting from the lack of payment of the LVFVDs issued by CAMMESA to CTLL and the other generation agents expressing their decision to allocate their LVFVDs to the execution of CTLL's CC closing project, and after all administrative remedies had been exhausted, on June 28, 2013, CTLL brought a legal action to safeguard its rights.

During the month of April 2014, CPB applied all of the LVFVD accumulated between January 2008 and December 2010, including accrued interest, to cancel the loan with CAMMESA as detailed in Note 20 - CAMMESA Financing II.

Afterwards, CTLL filed a petition before the intervening Court requesting the suspension of judicial proceedings pursuant to the commitments undertaken under the 2014 Agreement to allow for the collection of the pending LVFVDs. On November 9, 2015, the Court granted a new suspension of the proceeding for a term of six months.

2008 – 2011 Agreement

On November 25, 2010, the power generation subsidiaries together with other generating agents executed the 2008 – 2011 Agreement, the main purposes of which were as follows: i) to permit the entry of new generation to meet the increase in the power and energy demand; (iii) to define a mechanism for the cancellation of the pending LVFVDs for the 2008 - 2011 period.

Pursuant to that and in order to perfect the 2008 - 2011 Agreement, on April 1, 2011, the Company and its generating subsidiaries entered into a new agreement with the SE whereby they undertook to conduct a project for the installation and expansion of a new power generation plant (Instrumentation Agreement). The project, which involved CTP, owned by EGSSA (which makes up CTG’s assets after the merger of both companies), would be developed in two stages, upon the completion of which the total installed power would amount to 45 MW.

The Instrumentation Agreement provided for the payment of the LVFVDs accrued in favor of the signatory generators during the 2008 – 2011 period and not included under SE Res. No. 724/08 up to a total amount which not exceed 30% of the project’s amount.

On October 17, 2011, CAMMESA submitted to the consideration of the SE the report drawn up by the Technical Group regarding the execution of the first stage of the project, concluding that the maximum value to be recognized for that stage pursuant to the Instrumentation Agreement amounts to US$ 8.1.

F - 31

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Upon the breach by CAMMESA of the commitments undertaken under the Instrumentation Agreement resulting from the failure to cancel the undersigned generators' LVFVDs for the 2008-2011 period not committed under SE Res. No. 724/08, which represented 30% of the amount of the investment made to execute the first stage of the project, and after all administrative remedies had been exhausted, on June 28, 2013, CTLL CPB, CTG and HIDISA brought a legal action in order to safeguard their rights.

The plaintiffs filed a petition before the intervening Court requesting the suspension of judicial proceedings pursuant to the commitments undertaken under the 2014 Agreement in order to allow for the collection of the pending LVFVDs. On September 23, 2015, the Court granted a new suspension of the proceeding for a term of six months.

Modification of the Final Agreement for the Readjustment of the WEM (the “Final Agreement”) – FONINVEMEM

SE Res. No. 1261/12 approved a 25 MW and 19.01 MW power increase in the amount of US$ 11.9 million and US$ 10.1 million plus VAT respectively for TMB and TJSM's plants, and authorized the amendment of the Final Agreement, in furtherance whereof two companies (TMB and TJSM) were organized, as well as the modification of the equity interests in said companies (funding for the works would be provided by generators and not by the National Government), among other modifications.

SE Note No. 5568/13 instructed CAMMESA to call for agents making up TMB and TJSM to turn the commitments taken on pursuant to SE Res. No. 1261/12 into irrevocable commitments pursuant to the terms of the Addendum to the Final Agreement included in said note.

The Addendum to the Final Agreement stipulates that generating agents should contribute their LVFVDs generated during the 2008-2011 period up to the amounts necessary to cover the amounts corresponding to the above-mentioned power expansion.

TMB and TJSM’s power-generating shareholders adhering to the call will receive an equity interest in said companies pro rata their respective LVFVDs’ participation in the whole capital allocated to the construction of the plants, including the investment necessary for power expansion.

As from the Addendums to the WEM Supply Agreements' effective dates, the 2008-2011 LVFVDs committed to the payment of additional power will be returned to participating generators, converted into U.S. dollars, upon actual payment of the additional power through the application of the 2004-2006 LVFVDs and in the same number of installments pending as from such Addendums' effective dates.

F - 32

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

CTG, HIDISA, HINISA and CPB adhered to the call, and CAMMESA informed of such decision to the SE through Note B-84261-1. This note states that not all TMB and TJSM’s power-generating shareholders have adhered to the call, and, consequently, these companies would be entitled to a proportional increase over the non-adhering generators’ portion. However, as at the issuance hereof, no progress has been made in the implementation of the operations contemplated in SE Res. No. 1261/12.

Since the LVFVDs accrued in favor of the subsidiaries during the year 2011 were committed under the 2008-2011 Agreement, on September 30, 2013, subsidiaries CTG, HIDISA and HINISA offered CTLL to partially terminate the assignments of LVFVDs perfected pursuant to the applicable executed receivables assignment agreements, for up to the amounts committed pursuant to SE Resolution No. 1261/12 and SE Note No. 5568/13 which, as at the termination date, amounted to $ 8.1 million plus VAT, and the amounts resulting from the right to a proportional increase pursuant to the provisions of the generating companies’ Bylaws, and CTLL accepted the proposal.

New Generation Project. 2014 Thermal Generation Availability Increase Agreement.

On September 5, 2014, the Company, together with its generation subsidiaries (the “Generators”) executed  a new thermal generation availability increase agreement with the National Government through the application of LVFVDs and the generators’ own resources (the “2014 Agreement”).

Conditional upon the meeting of certain precedent conditions precedent, the 2014 Agreement provided for an enhanced generation capacity in CTLL’s Plant by incorporating two 8 MW each engine generators and one 105 MW high-efficiency gas turbine, with an estimated investment of $ 930 million (jointly, the “Project”).

The Project is funded by CAMMESA up to an amount equivalent to: i) the LVFVDs issued pursuant to SE Resolution No. 406/03 and not committed under other agreements; ii) the receivables from the Additional Remuneration to the Trust issued until December 31, 2015 pursuant to SE Resolution No. 95/13 and amendments (jointly, the “Receivables”); and well as with the contribution of CTLL’s own funds.

In order to guarantee that funds equivalent to the Receivables will be allocated to the Project’s execution, such funds will be transferred to a fund to be created by CAMMESA at the SE’ direction.

The SE will instruct CAMMESA to include the remuneration acknowledgeable for this new generation within the WEM’s economic transactions. In this sense, the remuneration for power equivalent to the percentage representing the amount of the Receivables to be allocated to the Project by Generators over the total funds destined to the Project will be remunerated pursuant to SE Resolution No. 95/13 and amendments. In turn, the remuneration for power equivalent to the percentage representing CTLL’s own contributions additional to the Receivables over the whole funds allotted to the Project will be remunerated through a WEM Supply Commitment Agreement pursuant to SE Resolution No. 220/07.

F - 33

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

On October 27, 2014, Generators and the SE entered into a Supplementary Agreement setting forth the specific conditions applicable to the Project’s execution. The most important aspects of the agreement are indicated below:

·The subscription of a Financing and Assignment of Secured Receivables Agreement with CAMMESA that would allow the financing of the Project’s works (the “Financing”). The financing will be cancelled, at CTLL’s option, through a cash payment or through the offsetting with receivables.

·The LVFVDs committed by generators to CTLL’s CC Closing Project and to CTP’s project outstanding as at the date hereof (hereinafter, the “Outstanding LVFVDs”) will be considered CTLL’s own capital in order to determine the power to be remunerated under the WEM Supply Agreement pursuant to SE Resolution No. 220/07.

·The execution of an Addendum to CTP’s WEM Supply Agreement aiming to exclude the second stage of the project, which involved that plant in the framework the 2008-2011 Agreement.

·The suspension of all brought legal actions seeking the collection of the outstanding LVFVDs for a term of six months, which will be automatically renewable. Once they have been wholly cancelled, these legal actions will be waived.

Based on the commitments undertaken pursuant to the 2014 Agreement, and as the Financing will be secured with receivables from subsidiaries and a final cancellation is foreseen, at CTLL's option, either in cash or by its offset with Receivables, on November 26, 2014, CTLL entered into new Receivables Assignment Agreements with CPB, CTG, HINISA and HIDISA involving their LVFVDs for their allocation to the Project. SE No. 406/03 for the 2008-2013 period and LVFVDs issued as Additional Remuneration to be allocated to the Trust pursuant to SE Resolution No. 95/13 and amendments for the 2013-2015 period, plus interest.

In all cases, the assignment of receivables will be conditional upon the actual cancellation of the Financing between CTLL and CAMMESA, after which CTLL will cancel all balances with counterparties under the terms and conditions of each specific agreement.

On December 1, 2014, CTLL entered into the Financing and Assignment of Secured Receivables Agreement with CAMMESA in order to obtain the financing for the Project pursuant to the 2014 Agreement and the Supplementary Agreement.

On December 3, 2014, CTLL entered into an Equipment Supply Agreement and an agreement for the building of a new electric generation plant on a turnkey basis to install a 105 MW high-efficiency gas turbine.

Furthermore, on September 18, 2015, CTLL entered into the necessary agreements for the installation of the MAN engines with ManDiesel & Turbo and with Empresa Walter Rittner S.A.

F - 34

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

As at the issuance hereof, CTLL has received financial advances in the amount of $ 735.7 million pursuant to the Financing and Receivables Security Assignment Agreement.

2015 - 2018 Agreement for the Management and Operation of Projects, Thermal Generation Availability Increase and Adjustment of the Generation Remuneration

On July 2, 2015, the Company and its power generation subsidiaries entered into the "2015 - 2018 Agreement for the Management and Operation of Projects, Thermal Generation Availability Increase and Adjustment of the Generation Remuneration" (the "2015-2018 Agreement"). The 2015-2018 Agreement aims to expand SADI's installed capacity through the execution of new generation projects to be financed with: (i) the LVFVDs resulting from the application of SE Resolution No. 406/03 and not committed under other agreements; (ii) the charges for the Additional Remuneration committed to the Trust; (iii) a new  charge to be accrued in favor of generating agents executing the 2015-2018 Agreement, which will be regulated by the SE (the “2015 -2018 FONINVEMEM Resources”) (in this respect, items (i), (ii) and (iii) will make up the “Committed Receivables”), and (iv) possibly, the generating agents and/or the National Government's Additional Contributions.

In the case of the Additional Remuneration committed to the Trust and the 2015 -2018 FONINVEMEM Resources, all amounts accrued and to be accrued between February 2015 - December 2018 period (and not committed under other agreements) will be bound.

Any possible Additional Contributions to the Committed Receivables will be repaid through the execution of a supply agreement with the new power plants' MEM as from the commercial commissioning of each new Project. The remuneration for the power capacity equivalent to the percentage of the Committed Receivables allocated by the generator to the Project over the whole funds destined to the Project will be determined pursuant to the scheme provided by SE Resolution No. 95/13 as amended by SE Resolution No. 529/14 and SE Resolution No. 482/15 or any other provision superseding it.

The National Government's shareholding in the Project will be equivalent to the whole allotted funds less the percentage corresponding to the Committed Receivables and each generator's Additional Contributions over the whole allotted funds. Power generation companies will have an equity interest equivalent to the whole funds allotted to the Project less the National Government's shareholding.

Even though the Company and its generation subsidiaries have entered into the 2015-2018 Agreement and made progress in the study of the projects executable under such scheme —consisting of the expansion of CTLL's generation installed capacity through the installation of a new high-efficiency TG (105 MW) and investments in renewable energies— the change in administration in December 2015 prevented the company from entering into the specific project execution agreements.

F - 35

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

2.2 Transmission

In order to regularize the remuneration adjustment effective a from December 1, 2010, on May 13, 2013 and on May 20, 2013, Transener and Transba, respectively, entered into a Renewal Agreement of the Instrumental Agreement (“Renewal Agreement”) with the SE and the ENRE, which will be effective until December 31, 2015 and which set forth as follows:

i)the recognition of receivables by Transener and Transba resulting from cost variations during the December 2010 – December 2012 period, calculated through the Cost variation index of Memorandum of Agreement (IVC),

ii)a mechanism for the payment of outstanding positive balances of Addendum II and those determined in the previous subsection, during the year 2013;

iii)a procedure for the automatic update, and payment, of resulting cost variations following the sequence of the semesters already elapsed from January 1, 2013 to December 31, 2015.

iv)the execution of a new Addendum with CAMMESA including the amount of the generated receivables and the applicable interest until their actual cancellation.

Under the Renewal Agreement it was established a Cash Flow and an Investment Plan which Transener and Transba will execute during 2013 and 2014, taking into consideration the reception of the disbursements pursuant to the Addenda to be signed.In all cases, the Cash Flow and the Investment Plan will be aligned with Transener and Transba’s earning in each period.

The Investment Plan set forth in the Renewal Agreement estimates investments under the stated conditions for the years 2013 and 2014 amounting to approximately $ 286 million and $ 207 million, respectively, for Transener; and to $ 113 million and $ 100 million for Transba, respectively.

Lastly, the Renewal Agreement stablished that in case they are not renewed, as from January 1, 2016 CAMMESA will consider the values set forth by ENRE Resolutions No. 327/08 and 328/08 as remuneration for the services rendered by Transener and Transba, with the application of Section 4.2 of the Agreements, determined by the ENRE in the Instrumental Agreements and the Renewal Agreements.

In order to execute the Third CAMMESA Loan Extension, Transener and Transba have dismissed their filed legal actions regarding performance of the commitments undertaken in the Agreements and the Instrumental Agreements as at the date hereof. In case of breach of the commitments undertaken in the Agreements, the Instrumental Agreements and the Renewal Agreements, Transener and Transba will be entitled to resume and/or restart any actions deemed appropriate in furtherance thereof.

On October 25, 2013, Transba entered into an extension of the financing agreement (Addendum III) with CAMMESA, which stipulated as follows: i) the granting to Transba of a new loan in the amount of $ 324.8 million corresponding to receivables acknowledged by the SE and the ENRE on account of cost variations for the December, 2010- December, 2012 period; and iii) the assignment as collateral of the receivables on account of higher costs as at December 31, 2012 pursuant to the Renewal Agreement and the Agreement in order to pay off the amounts collectable for the application of the new agreed extensions.

F - 36

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Furthermore, on February 14, 2014 Transener entered into Addendum III with CAMMESA, which stipulated as follows: i) the granting to Transener of a new loan in the amount of $ 785.8 million corresponding to receivables acknowledged by the SE and the ENRE on account of cost variations for the December, 2010-December, 2012 period; and iii) the assignment as collateral of receivables on account of higher costs as at December 31, 2012 pursuant to the Renewal Agreement in order to pay off the amounts collectable for the application of the new agreed extensions.

Furthermore, on September 2, 2014, Transener and Transba executed with CAMMESA the Mutuum (Loan) Contracts for the implementation of the 2013 and 2014 Renewal Agreements (the “New Mutuum Contracts”), which stipulated as follows: i) that the Mutuum Contracts, together with their Addendums I, II and III timely executed with CAMMESA, would be deemed duly performed; ii) the granting to Transener and Transba of a new loan in the amount of $ 622.2 million and $ 240.7 million corresponding to receivables acknowledged by the SE and the ENRE on account of cost variations for the January 2013-May 2014 period; and iii) the assignment as collateral of the receivables recognized on account of higher costs as at May 31, 2014 pursuant to the Renewal Agreement in order to pay off the amounts collectable for the application of the executed New Mutuum Contracts.

On March 17, 2015 Transener and Transba executed with CAMMESA Addenda to the Mutuum (Loan) Contracts (New Addenda), by which it was agreed to grant new loans in the amounts of $ 563.6 million and $ 178.3 million to Transener and Transba, respectively, corresponding to: i) the outstanding of the Mutuum (Loan) Contracts as of January 30, 2015; and ii) receivables acknowledged by the SE and the ENRE on account of cost variations for the June 2014-November 2014 period. In addition, the assignment as collateral of the receivables recognized on account of higher costs as at November 30, 2014 pursuant to the Instrumental Renewal Agreement in order to cancel the amounts to be received by application of New Addenda signed.

On September 17, 2015, Transener and Transba entered into Addenda to the Renewal Agreements with the SE and ENRE approving the 2015 Economic and Financial Projection; providing for an investment plan for the year 2015 in the amount of $ 431.9 million and $ 186.6 million for Transener and Transba, respectively, and granting additional non-reimbursable resources for the execution of such investment plan.

 On November 25, 2015, Transener and Transba executed the new Loan Agreements (the New Agreements) with CAMMESA stipulating the granting of financing in the amount of $ 508,9 million and $ 317.6 million to Transener and Transba, respectively, corresponding to: i) credit claims acknowledged by the SE and the ENRE for cost variations during the December 2014-May 2015 period; and ii) amounts corresponding to Additional Investments provided for in the Addendums to the Renewal Agreements. Additionally, the assignment as security of credit claims for increased costs as of May 31, 2015 was agreed pursuant to the Instrumental Agreement's Renewal Agreement with the purpose of paying off the amounts receivable within the scope of all the new executed Loan Agreements.

F - 37

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

As of December 31, 2015, the results generated by the recognition of costs by the SE and the ENRE up to the amounts collected through mutual contracts have been accounted for in Transener and Transba’s financial statements. Consequently, Transener has recorded revenues from sales amounting to $ 908.1 million and $ 601.5 million, as well as accrued interest for $ 139.5 million and $ 200.9 million for the year ended December 31, 2015 and 2014, respectively. Likewise, Transba has disclosed revenues from sales amounting to $ 418.1 million and $ 248.5 million, and interest income amounting to $ 36.9 million and $ 80.5 million for the same periods, respectively. Liabilities for all disbursements received have been cancelled through the cession of receivables recognized for higher costs, pursuant to the Agreement and the Renewal Agreement.

2.3 Distribution

Edenor is subject to the regulatory framework provided under Law No. 24,065 and the regulations issued by the ENRE.

The ENRE is empowered to approve and control tariffs, and control the quality levels of the technical product and service, the commercial service and the compliance with public safety regulations, as provided for in the Concession Agreement. If the Distribution Company fails to comply with the obligations assumed, the ENRE will be entitled to apply the penalties stipulated in the Concession Agreement.

The Distribution Company’s obligations are, among others, to make the necessary investments and carry out the necessary maintenance works in order to ensure that the quality levels established for the provision of the service in the concession area will be complied with and that electricity supply and availability will be sufficient to meet the demand in due time, securing the sources of supply.

If Edenor repeatedly fails to comply with the obligations assumed in the Concession Agreement, the grantor of the concession will be entitled to foreclose on the collateral granted by the majority shareholders by means of the pledge of the Class A shares and sell them in a public bid. This, however, will not affect the continuity of the Holder of the concession. This situation may also occur if after the publication of the electricity rate schedule resulting from the RTI, EDENOR shareholders representing at least two thirds of the share capital, and/or the former Company shareholders do not submit their waivers to the rights to claim or abandon the actions filed as a consequence of Law 25,561, which in part depends on the decisions of third parties. At the date of issuance of these financial statements, there have been no events of non-compliance by the Company that could be regarded as included within the scope of this situation.

Furthermore, the Concession Agreement may be rescinded in the event of the Distribution Company undergoing bankruptcy proceedings. Additionally, if the Grantor of the Concession fails to discharge his obligations in such a manner that the Distribution Company is prevented from providing the service or the service is severely affected on a permanent basis, the Distribution Company may request, after demanding the regularization of such situation in a term of 90 days, that the agreement be rescinded.

F - 38

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

2.3.1 Electricity rate situation

2.3.1.1 Adjustment Agreement entered into between Edenor and the Federal Government

On September 21, 2005, Edenor entered into an Adjustment Agreement within the framework of the process of renegotiation of the Concession Agreement set forth in Law No. 25,561 and supplementary regulations, which was ratified on February 13, 2006.

The Adjustment Agreement provides for the following:

i)The implementation of a RTT effective as from November 1, 2005, including a 23% average increase in the distribution margin, which may not result in an increase in the average rate of more than 15%, and an additional 5% average increase in the distribution added value, allocated to certain specified capital expenditures;

ii)The requirement that during the term of said temporary tariff structure, dividend payment be subject to the approval of the regulatory authority;

iii)The establishment of a “social tariff” for the needy and the levels of quality of the service to be rendered;

iv)The suspension of the claims and legal actions filed by the Company and its shareholders in national or foreign courts due to the effects caused by the Economic Emergency Law;

v)The carrying out of a RTI which will result in a new tariff structure that will go into effect on a gradual basis and remain in effect for the following 5 years. In accordance with the provisions of Law No. 24,065, the ENRE will be in charge of such review;

vi)The implementation of a minimum investment plan in the electric network for an amount of $ 178.8 million to be fulfilled by the Company during 2006, plus an additional investment of $ 25.5 million should it be required;

vii)The adjustment of the penalties imposed by the ENRE that are payable to customers by way of discounts, which were notified by such regulatory agency prior to January 6, 2002 as well as of those that have been notified, or whose cause or origin has arisen in the period between January 6, 2002 and the date on which the Adjustment Agreement goes into effect through the date on which they are effectively paid, using, for such purpose, the average increase recorded in the Company’s distribution costs as a result of the increases and adjustments granted at each date;

viii)The waiver of the penalties imposed by the ENRE that are payable to the National State, which have been notified, or their cause or origin has arisen in the period between January 6, 2002 and the date on which the Adjustment Agreement goes into effect.

The payment term of the penalties imposed by the ENRE, which are described in paragraph vii above, is 180 days after the approval of the RTI in fourteen semiannual installments, which represent approximately two-thirds of the penalties imposed by the ENRE before January 6, 2002 as well as of those that have been notified, or whose cause or origin has arisen in the period between January 6, 2002 and the date on which the Adjustment Agreement goes into effect, subject to compliance with certain requirements.

F - 39

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Said agreement was ratified by the Federal Executive Power by means of executive order No. 1,957/06, signed by the President of Argentina on December 28, 2006 and published in the Official Gazette on January 8, 2007.  The aforementioned agreement stipulates the terms and conditions that, upon compliance with the other procedures required by the regulations, will be the fundamental basis of the Comprehensive Renegotiation of the Concession Agreement of the public service of electric power distribution and sale within the federal jurisdiction, between the Federal Executive Power and the holder of the concession.

Additionally, on February 5, 2007 the Official Gazette published ENRE Resolution No. 51/07 which approves the electricity rate schedule resulting from the RTT, applicable to consumption recorded as from February 1, 2007. This document provided for the following:

i.A 23% average increase in distribution costs, service connection costs and service reconnection costs in effect, except for the residential tariffs;

ii.An additional 5% average increase in distribution costs, to be applied to the execution of the works and infrastructure plan detailed in the Adjustment Agreement;

iii.Implementation of the MMC set forth in the Adjustment Agreement, which for the six-month period commenced November 1, 2005 and ended April 30, 2006, shows a percentage of 8.032%. This percentage would be applied to non-residential consumption recorded from May 1, 2006 through January 31, 2007;

iv.Invoicing in 55 equal and consecutive monthly installments of the differences arising from the application of the new electricity rate schedule for non-residential consumption recorded from November 1, 2005 through January 31, 2007 (paragraphs i) and ii) above) and from May 1, 2006 through January 31, 2007 (paragraph iii) above);

v.Invoicing of the differences corresponding to deviations between foreseen physical transactions and those effectively carried out and of other concepts associated with the MEM, such as the Specific fee payable for the Expansion of the Network, Transportation and Others;

vi.Presentation, within a period of 45 calendar days from the issuance of this resolution, of an adjusted annual investment plan, in physical and monetary values, in compliance with the requirements of the Adjustment Agreement.

Res. SE No. 434/2007 provided, among other things, that the obligations and commitments set forth in section 22 of the Adjustment Agreement be extended until the date on which the electricity rate schedule resulting from the RTI goes into effect, allowing the Company and its shareholders to resume the legal actions suspended as a consequence of the Adjustment Agreement if the new electricity rate schedule does not go into effect.

2.3.1.2 RTI

On July 30, 2008, the SE issued Resolution No. 865/08 which modified Resolution No. 434/07 and provided that the electricity rate schedule resulting from the RTI would go into effect in February 2009, which, due to the non-compliance therewith, has been resumed as from the issuance of Resolution No. 7 of the MEyM.

F - 40

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

The ENRE began the Tariff Structure Review Process with the issuance of Resolution No. 467/08. On November 12, 2009, Edenor made its revenue request presentation for the new period, which included the grounds and criteria based on which the request was made. As from that moment, Edenor made successive and reiterated presentations aimed at ending the aforementioned process as well as obtaining the new electricity rate schedule, filing a Preliminary Administrative Action before the Ministry of Federal Planning, Public Investment and Services in March 2012 and a petition for the immediate resolution thereof in October 2012. In Edenor’s opinion, this claim has come to an end due to the issuance of SE Resolution No. 250/13 dated May 2013.

Additionally, in June 2013, Edenor filed a complaint against the Federal Government claiming full compliance with the Adjustment Agreement and compensation for damages due to the non-compliance with the commitments stipulated therein. The complaint was amended so as to extend it in November 2013.

On December 4, 2015, Edenor requested the suspension of the procedural time-limits under the terms of section 157 of the Federal Code of Civil and Commercial Procedure, in accordance with the provisions of SE Resolution No. 32/15, and reiterated the request on February 16, 2016 due to the revocation of SE Resolution No. 32/15, as indicated below.

By means of MEyM Resolution No. 7/16, SE Resolution No. 32/15 was repealed and the ENRE was instructed to adopt measures, within its field of competence, to finish the RTI so that the rates resulting therefrom will come into effect before December 31, 2016.

Although in the last years, the Grantor of the Concession adopted palliative measures to allow for the operations to continue, such measures were partial and considered neither all the variables nor the essential elements of the rights and obligations deriving from the Concession Agreement.

In Edenor’s opinion, the RTI must include, in addition to the definitive Electricity Rate Schedules, a review of costs, the required quality levels and other rights and obligations that would lead to an updated Concession Agreement, which, in turn, must provide for the definitive treatment to be given to all those issues, about which a decision is still pending, resulting from the non-compliance with the Adjustment Agreement, including the remaining balances and other effects caused by the partial measures adopted.

These issues include, among other, the following:

i.The treatment to be given to the remaining balances received for the fulfillment of the Investment plan through the Loans for consumption (Mutuums) granted to cover the insufficiency of the funds deriving from the FOCEDE,

ii.The conditions for the settlement of the balance outstanding with CAMMESA at the date of issuance of Resolution 32/15, for which purpose Edenor has submitted a payment plan,

iii.The treatment to be given to the Penalties and Discounts determined prior and subsequent to the Adjustment Agreement.

F - 41

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

The Penalties and Discounts are determined by the ENRE when Edenor fails to comply with certain quality parameters stipulated in the Concession Agreement. The non-compliance with those parameters is indirectly caused by the insufficiency of the necessary funds to be allocated to the investments that would allow for the maintenance of the initially agreed-upon quality levels, due to the lack of a timely and proper adjustment of the Electricity Rate Schedule. In Edenor’s opinion the generation and accumulation of unpaid balances for this concept are not attributable to the Distribution Company inasmuch as the inaction and discretionary decisions of the Grantor of the Concession in the past have led to the deterioration of Edenor’s economic and financial equation, thus preventing it from complying with its basic and elemental obligations for the provision of the public service. 

iv.The establishment, on a mutually agreed basis, of new quality levels and a system of Penalties and Discounts that provides for an adequate transition period for the effective application of the new conditions,

v.The termination and liquidation of the FOCEDE in order to reach an agreement on the treatment to be given to the obligations assumed by the Fund and the transfer thereof to the trustee and beneficiary.

2.3.1.3 Electricity rate schedules

The SE issued Resolution No. 1.169/08 which approved the new seasonal reference prices of power and energy in the WEM. Consequently, the ENRE issued Resolution No. 628/08 which approved the values of the electricity rate schedule to be applied as from October 1, 2008. The aforementioned electricity rate schedule included the transfer of the increase in the seasonal energy price to tariffs, with the aim of reducing Federal Government grants to the electricity sector, without increasing Edenor’s distribution added value.

The purpose of the PUREE created by SE Resolution No. 415/04, is to work on the demand for electricity, promoting energy savings so as to generate surpluses that may be used by those users, like industries, whose energy needs increase as a consequence of the growth in the level of the economic activity.

As in previous years, SE Resolution No. 1,037/07, ratified by SE Note No. 1,383/08, continued to produce effects. The aforementioned resolution modified the earmarking of the funds resulting from the application of the PUREE, being it possible to deduct therefrom the amounts paid by Edenor as Company as Quarterly Adjustment Coefficient (“CAT”) implemented by Section 1 of Law No. 25,957, to calculate the total value of the FNEE.

By means of MEyM Resolutions Nos. 6/16 and 7/16, as from February 1, 2016 the current electricity rate schedule of Distribution companies is readjusted within the framework of the RTT, which is not an electricity rate schedule resulting from the RTI process but rather the adaptation of the existing one to the semiannual readjustment that was pending.

F - 42

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

2.3.1.4 Resolution MEyM No. 6/16 – Seasonal reference prices

By means of MEyM Resolution No. 6/16 the WEM summer quarterly rescheduling relating to the February 1-April 30, 2016 period is carried out.

The seasonal reference prices fixed by the aforementioned resolution are as follow:

-Power: $ 1,427.60/MW month

-Energy: $ 773.02/Mwh, $ 768.72/Mwh, $ 763.89/Mwh, in peak hours, other hours and off-peak hours, respectively.

With regard to residential utility customers, who are beneficiaries of the social tariff, the prices are as follow:

-Monthly consumption of up to 150 Kwh/month. $ 0,00 / Mwh.

-Monthly consumption exceeding 150 kwh/month:

i.If it is equal to or lower than the consumption recorded in the same month of 2015, the reference prices will be $ 31.39/Mwh, $ 27.09/Mwh, $ 22.26/Mwh, in peak hours, other hours and off-peak hours, respectively.

ii.If it is higher the consumption recorded in the same month of 2015, the reference prices will be $ 312.39 /Mwh, $ 317.09/Mwh, $ 312.26/Mwh, in peak hours, other hours and off-peak hours, respectively.

These are the prices which, together with those for power, are to be applied to the respective electricity rate schedules.

2.3.1.5 Resolution MEyM No. 7/16 and its effects

By MEyM Resolution No. 7/16 the Regulatory Authority for the ENRE is instructed to adjust, the distribution added value in electricity rate schedules, on account of the RTI, and to take all the necessary steps to carry out the RTI before December 31, 2016.

Furthermore, the aforementioned resolution provided for: (i) the cancellation of the PUREE (Note 2.3.16); (ii) the revocation of Energy Secretariat Resolution 32/15 as from the date on which ENRE Resolution that implements the electricity rate schedule comes into effect (Note 2.1.3.4 and 2.3.1.9); (iii) the suspension until further instruction of all the effects of the loans for consumption (mutuums) agreements entered into by and between the distribution companies and CAMMESA (Note 2.3.1.8); (iv) the implementation of the necessary actions to end the trusts created by ENRE Resolution No. 347/2012 (Note 2.3.1.7); (v) the restriction on the distribution of dividends in accordance with the provisions of clause 7.4 of the Adjustment Agreement.

2.3.1.6PUREE - MMC

On May 7, 2013, the SE issued Resolution No. 250/13 and subsequent notes, whereby it:

1. Authorized the values of the adjustments resulting from the MMC for the period May 2007 through January 2015, determined in accordance with Section 4.2 of the Adjustment Agreement, but without initiating the review process contemplated in the event of variations exceeding 5%.

2. Assessed the Company’s debt as of December 31, 2015 deriving from the application of the PUREE for the period May 2007 through January 2015.

F - 43

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

3. Authorized Edenor offset until December 2014 the debt indicated in paragraph ii) against and up to the amount of the receivables established in paragraph i), including interest, if any, on both amounts.

4. Instructed CAMMESA to issue LVFVD for the MMC surplus amounts after the offsetting process indicated in paragraph iii) has been carried out.

5. Authorized CAMMESA to receive LVFVD as part payment for the past due debts deriving from the economic transactions of the WEM.

6. Instructed the Company to assign the credits from the surplus LVFVD, if there were any, after having complied with that established in the preceding paragraph, to the trust created under the terms of ENRE Resolution No. 347/12 (FOCEDE).

The SE, if deemed timely and suitable, may extend, either totally or partially, the application of the aforementioned resolution and amplifying note pursuant to the information provided by the ENRE and CAMMESA. In this regard, on November 6, 2013, October 9, 2014 and December 18, 2014 it issued SE Notes No. 6,852/13, 4,012/14, 486/14 and 1,136/14 respectively.

Additionally, and in accordance with sections 8 and 9 of SE Resolution No. 250/2013 –which recognize the Company’s right to apply to the payment of its debts with the MEM the amount receivable deriving from the MMC for economic transactions, with charge to the Unified Fund– Edenor transferred in lieu of payment the trade liability it has with CAMMESA for energy purchases by applying the balance of the MMC receivable recognized by the ENRE, but not offset, in the periods covered by SE Resolution No. 250 and the extensions thereof.

The impacts of SE Resolution 250/13 and subsequent Notes on the statement of financial position are summarized below (in thousands of pesos):

	2013	2014	2015	Total
Other receivables - MMC	2,978,582	2,271,927	186,596	5,437,105
Other receivables - net interest MMC - PUREE	197,510	157,786	(309)	354,987
Other payables - PUREE	(1,661,105)	(574,010)	10,619	(2,224,496)
Trade payables - CAMMESA	(1,152,266)	(2,218,424)	(196,906)	(3,567,596)
	362,721	(362,721)	-	-

Furthermore, in November 2015, the SE issued Notes No. 2.097 and 2.157, which ordered the application of the MMC percentages of 6.20% and 9.05% as from May 1 and November 1, 2015, respectively.

As of December 31, 2015, Edenor recognized a total of $ 364.9 million for the aforementioned concept.

Pursuant to MEyM Resolution No. 7/16, as from February 1, 2016 the PUREE is cancelled and the Stimulus Plan (a system that rewards energy-saving efforts and results in a reduction of the previously mentioned wholesale electricity seasonal price), comes into effect.

F - 44

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

2.3.1.7 ENRE Resolution No. 347/12

On November 23, 2012, the ENRE issued Resolution 347 pursuant to which distribution companies were authorized, as from the issuance thereof, to include in the bills a fixed amount for small-demand (T1) customers and a variable amount for medium and large-demand (T2 and T3) customers, to be calculated on a percentage of power charges. Such amounts, which are clearly indicated in the bills sent to customers, constitute a special account, which is managed by a Trust, to be exclusively used for the execution of distribution infrastructure works and corrective maintenance of each distribution company’s facilities. This Trust will be administered by an Implementation Committee comprised of 5 members: 1 from the MEyFP, 2 from the MPFIPyS, 1 from CAMMESA and 1 from the ENRE.

As established in such Resolution, on November 29, 2012, Edenor, in its capacity as trustor, and Nación Fideicomisos S.A., as trustee, entered into a private Financial and Management Trust Agreement, whereby the Company, as settlor of the trust, agreed to assign and transfer to the Trustee the fixed amounts set forth by Resolution ENRE No. 347 that are effectively collected, which will constitute the trust assets. Such agreement was ratified and approved by Edenor Board of Directors on December 11, 2012.

On December 18, 2012, the Company and Nación Fideicomisos S.A., signed the respective Operating Manual, whose purpose is to implement, standardize, and enable the collection and management of the trust assets. On that date, the Company Board of Directors approved the Operating Manual and appointed its attorneys-in-fact to represent the Company before Nación Fideicomisos S.A. in issues related to the Trust and its Operating Manual.

On July 4, 2013, Edenor and Nación Fideicomisos S.A. signed an Addendum to the private Financial and Management Trust Agreement entered into by the parties on November 29, 2012.

In the aforementioned Addendum it is agreed that Nación Fideicomisos S.A., in its capacity as trustee, will issue VRD to be offered to the market, in accordance with the public offering system authorized by the CNV, for a nominal value of up to $ 312.5 million. The proceeds will be used to pay Edenor’s investment plan.

On July 4, 2013, VRDs for $ 250 million were issued through a private placement. A subsequent public offering of these debt securities, with the possibility of being paid-in in kind is estimated. The VRD will accrue interest at the Private Badlar rate plus a spread of 4% and will be amortized in 5 years with increasing installments.

F - 45

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

In this regard, said agreement stipulates that payment obligations under the VRD will be solely and exclusively the obligations of Nación Fideicomisos S.A. (to the extent that the trust assets are sufficient) and will not imply in any way whatsoever any guarantee or recourse against the Company, which in no case will be liable for the non-payment, whether total or partial, of any amount owed under the VRD or any other concept contemplated by the trust agreement duly signed. Moreover, and in view of the fact that up to now the only income of the trust derives from Edenor’s contributions and, also, that the VRD have accrued interest that will have to be paid by the trust assets, Edenor has decided to record a provision for an amount equivalent to the trust’s net financial charges, which has been recorded as other payables and charged to other operating expense.

Additionally, on January 3, 2014, by Resolution No. 3/2014 of the MPFIPyS, it was established that the investments to be made with the funds of the FOCEDE will be decided by the Management Control and Coordination Undersecretariat, which will provide the necessary instructions for the carrying out of the works and investments under the FOCEDE to the Implementation Committee of the trust created by ENRE Resolution No. 347/12 as well as to electricity distribution companies Edenor and Edesur.

By Resolution No. 266/14 dated January 24, 2014, a technical commission to participate and give advice to the Management Control and Coordination Undersecretariat on technical and economic matters as well as on other issues relating to the investments to be made with the FOCEDE funds was created. This commission will be comprised of one representative of the ENRE, one representative of the SE, one representative of the Public Works Secretariat, both under the authority of the MPFIPyS. The Economy and MEyFP and the National Comptroller’s Office will also be invited to participate.

In this regard, by Resolution No. 2 dated January 29, 2016, the ENRE resolved to discontinue as of January 31, 2016 the current trust mechanism for the management of the funds resulting from the application of ENRE Resolution No. 347/12, and instructed Edenor to open a checking account for the deposit of the funds that will be received as from February 1, 2016 from the application of the fixed amount to afford the investments approved by the ENRE. Additionally, the Company is required to submit to the ENRE a works plan, identifying which works of such plan will be financed with the funds received.

By MEyM Resolution No. 7/2016, the SE is instructed to direct the Execution Committee of the Trusts to discontinue the transfers of resources to Edenor, in the name and to the order of the Unified Fund of Law No. 24,065, as well as to adopt the necessary measures to terminate the Trusts.

At the date of issuance of these financial statements, Edenor is taking steps aimed at the termination of the trust and the transfer of the remaining trust assets. ..

2.3.1.8 Loans for consumption (mutuums) and assignments of secured receivables

Due to the delay in obtaining the RTI, which will make it possible to restore the economic and financial equation of the concession, Edenor lacks the necessary conditions to come to the financial market to make up the deficit of both its operations and the investment plans necessary to maintain the quality of the service, object of the concession. In order to deal with this situation, Edenor has obtained from the Federal Government a series of measures such as the issuance of ENRE Resolution No. 347/12 (Note 2.3.1.7) and SE Resolution 250 (Note 2.3.1.6), and the granting of loans for consumption (mutuums) to help it cope with its cash needs for specific purposes.

F - 46

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

The obligations deriving from this assistance are classified as other payables and the related costs as financial expenses, due to both the fact that they result from the lack of adjustment of the Electricity Rate Schedule, which depends exclusively on the Federal Government’s resolution, and the fact that such assistance has been granted under these special circumstances. Therefore, such obligations do not constitute financing decisions made by Edenor in the ordinary course of business. 

As instructed by MEyM Resolution No. 7/16, as from February 1, 2016 CAMMESA shall suspend -until further notice- all the effects of the loans for consumption (mutuums) agreements entered into, as well as the transfers of resources to Distribution companies on behalf and to the order of the FOCEDE. As previously mentioned, the new works plan will be exclusively financed with the funds collected from customers.

The loans for consumption (mutuums) granted up to December 31, 2015 are detailed below:

1) Extraordinary Investment Plan - Temporary insufficiency of the revenue deriving from the FOCEDE

Due to the measures adopted by the MPFIPYS and the fact that the funds of the FOCEDE were insufficient to cover the estimated disbursements under the investment plan, Edenor has requested of the respective authorities that it be provided with funding assistance, which has been called Extraordinary Investment Plan.

Consequently, on September 26, 2014, the SE, by Resolution No. 65/14, instructed CAMMESA to enter into a Loan for consumption (Mutuum) and assignment of secured receivables agreement with the Company for a total of $ 500 million to cover the Extraordinary Investment Plan as a consequence of the temporary insufficiency of the revenue deriving from Resolution ENRE No. 347/12, mentioned in caption 2.3.1.5 of this note. The aforementioned agreement was entered into on September 30, 2014. On December 18, 2014, said agreement was extended, as instructed by the SE to CAMMESA, for an additional amount of $ 159.4 million.

In the current fiscal year, the loan for consumption (mutuum) agreement was extended, as instructed by the SE to CAMMESA, for an additional amount of $ 2.2 billion.

As of December 31, 2015, the debt related to this concept amounts to $ 1.1 billion (comprised of $ 923.6 million principal and $ 176.2 million in accrued interest) which is disclosed in the other non-current payables account.

Furthermore, as security for the performance of the obligations assumed and the repayment of the funds granted, the Company agreed to assign and transfer in favor of CAMMESA, as from the end of the grace period that the SE will estipulate along with the methodology and terms for the reimbursement of the funds, the amounts receivable which the Company may have with the WEM up to the actual amount of the funds granted. At the date of issuance of these financial statements, Edenor does not have any amount receivable with the WEM.

2) Higher salary costs

On June 24, 2014, by Note No. 4012/14, the SE instructed CAMMESA to enter into a Loan for consumption (Mutuum) and assignment of secured receivables agreement with Edenor in order to pay the higher salary costs indicated in Note 6.2.2. The aforementioned agreement was entered into on July 10, 2014.

F - 47

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

The agreement will would be guaranteed by Edenor with the assignment of the future surplus LVFVD to be issued, as a result of the application of SE Resolution No. 250/13, as described in Note 2.3.1.3. At the date of issuance of these financial statements, Edenor does not have any surplus LVFVD.

The aforementioned SE Resolution No. 32/15 (Note 2.3.1.9) resolves that LVFVD be issued in favor of the Company for the amounts generated by the salary increases deriving from the application of Resolution No. 836/14 of the Ministry of Labor, Employment and Social Security for whose payment the Company received this Loan for consumption (mutuum); allowing for the offsetting thereof against the outstanding balances for this concept. The LVFVD were issued on July 16, 2015.

In this regard, Edenor made the pertinent recordings, fully canceling the $524.7 million liability for this concept, thus generating a positive result of $ 495.4 million related to the principal received, which is disclosed in the “Recognition of income on account of the RTI – SE Resolution No. 32/15” line item of the statement of comprehensive income , and a positive result of $ 29.3 million, related to interest accrued, which is disclosed in the “Financial expenses” line item of the statement of comprehensive income .

2.3.1.9 Resolution 32/15

The SE issued SE Res. No. 32/15, whereby it:

i.Grants a temporary increase in income to Edenor S.A. effective as from February 1, 2015, and on account of the RTI, in order for the Company to cover the expenses and afford the investments associated with the normal provision of the public service, object of the concession.

The additional income will arise from the difference between the “Theoretical electricity rate schedule” included in the resolution and the electricity rate schedule currently applied to each customer category, according to the ENRE’s calculations, which are to be informed to the SE and CAMMESA on a monthly basis. The above-mentioned funds will be contributed by the Federal Government and transferred to the Company by CAMMESA.

ii.Provides that, as from February 1, 2015, the funds related to the PUREE to which SE Resolution No. 745/05 refers will be regarded as part of Edenor’s income on account of the RTI and earmarked to cover the higher costs of the provision of the public service, object of the concession.

iii.Authorizes Edenor to offset, until January 31, 2015, the PUREE-related debts against and up to the amount of the MMC established receivables, including interest, if any, on both concepts.

iv.Instructs CAMMESA to issue LVFVD in favor of Edenor for the surplus amounts in favor of Edenor, resulting from the offsetting process indicated in the preceding paragraph, and for the amounts owed by Edenor under the Loans for consumption (mutuums) granted for higher salary costs.

v.Instructs CAMMESA to implement a payment plan to be defined with Edenor, with the prior approval of the SE, for the settlement of the remaining balances in favor of the MEM.

vi.Establishes that Edenor will neither distribute dividends nor use the income deriving from that which has been detailed in caption i) to repay loans to financial entities, restructure financial debts, acquire other companies, grant loans, or carry out other transactions that are not strictly related to the payment of its obligations with the WEM, the payment of salaries of Edenor’s own or hired personnel or the making of payments to suppliers of goods and/or services related to the provision of the public service of electricity distribution.

F - 48

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

vii.Provides that Edenor shall observe the provisions of clause 22.1 of the Adjustment Agreement and suspend any administrative claim and/or judicial action it may have brought against the Federal Government, the SE and/or the ENRE in relation to the compliance with clause 4.2 of the Adjustment Agreement and the provisions of the resolution’s clauses.

The impacts of SE Resolution No. 32/2015 on the statement of comprehensive income are summarized below (in thousands of pesos):

		2015
Other income
Additional increase from the difference between the electricity rate schedules (February-June/15) (1)	a)	3,961,378
Funds obtained from the PUREE	b)	568,220
Decrease in loans for consumption (Mutuums) granted for higher salary costs	d)	495,516
Higher cost recognition	c)	551,498
Total other income		5,576,612

⁽¹⁾As of December 31, 2015, the balance pending collection amounts to $ 650.9 million. At the date of issuance of this financial statement, there is neither balance collection.  

As of December 31, 2014 CAMMESA had claims against Edenor for net late payment charges and compensatory interest for a total of $ 214 million, which were not recorded by Edenor in the framework of IAS 37 provisions, because in its opinion they were not attributable to Edenor.

Additionally, and as established by the SE through SE Note No. 1208 dated June 29, 2015, the amounts owed to CAMMESA have been recalculated based on the new adopted criteria.  In that regard, on July 22, 2015, the new owed amounts were agreed upon, and CAMMESA issued the LVFVD established in captions iii) and iv) and the documents supporting that which had been agreed. The net result of this agreement generated a profit of $ 254.4 million that has been recorded in the “Financial expenses” line item within the statement of comprehensive income.

As from February 1, 2016, by MEyM Resolution No. 7/16, the aforementioned SE Resolution No. 32/15 was repealed and the application of the new electricity rate schedules came into effect. Additionally, and in relation to that which has been detailed in the preceding caption g) and as indicated in section 14 of SE Resolution No. 32/15, Edenor has requested the suspension of the procedural time-limits, about which no decision has yet been made by the Court.

2.3.2 Framework agreement

On January 10, 1994, Edenor, together with Edesur, the Federal Government and the Government of the Province of Buenos Aires entered into a Framework Agreement, whose purpose was to establish the guidelines under which Edenor is to supply electricity to low-income areas and shantytowns.

F - 49

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

On July 22, 2011, Edenor, the Federal Government, and the Government of the Province of Buenos Aires entered into an Addendum for the renewal for a term of four years (from January 1, 2011 through December 31, 2014) of the new Framework Agreement that had been signed on October 6, 2003. Such extension was approved on September 21, 2012 by Resolution No. 248/12 issued by the ENRE and ratified by Resolution No. 247 of the MPFIPyS.

With regard to the amount receivable Edenor has with the Province of Buenos Aires, on October 18, 2012 Edenor entered into an agreement for the settlement of non-financial obligations and subscription of Buenos Aires province Government Bonds, pursuant to which the Company agreed to receive an amount of $ 0.3 million in cash and subscribe Series B Bonds for a residual nominal value of $ 6.14 million, as settlement of the debt that as of December 31, 2010 such Province had with Edenor for the electric power supplied to low-income areas.

Due to the fact that at the date of these financial statements the approval of the new Framework Agreement for the period of January 1, 2015 through December 31, 2018 by the Federal Government and the Government of the Province of Buenos Aires is still in process, no revenue for this concept has been recognized in fiscal year 2015.

2.3.3 Penalities

2.3.3.1 General

The ENRE is empowered to control the quality levels of the technical product and service, the commercial service and the compliance with public safety regulations, as stipulated in the Concession Agreement. If the Distribution Company fails to comply with the obligations assumed, the ENRE will be entitled to apply the penalties stipulated in the aforementioned Agreement.

As of December 31, 2015 and 2014, Edenor has recognized in its financial statements the penalties accrued, whether imposed or not yet issued by the ENRE, related to the control periods elapsed as of those dates. Additionally, Edenor has applied the adjustment set forth in the temporary tariff structure as well as the adjustments established by the electricity rate schedules applied during fiscal year 2008 by Resolutions No. 324/08 and No. 628/08.

The ENRE Penalties and Discounts included in the Adjustment Agreement are adjusted as stipulated in such agreement.

With regard to the Penalties and Discounts subsequent to the Adjustment Agreement, adjusted in accordance with the temporary tariff structure and the adjustments established by the electricity rate schedules subsequently applied (Resolutions No. 324/08 and No. 628/08), as of December 31, 2015 they have been estimated based on Edenor’s estimate of the outcome of the previously described RTI process.

Furthermore, as of December 31, 2015, Edenor Management has considered that the ENRE has mostly complied with the obligation to suspend lawsuits aimed at collecting the penalties included in the Adjustment Agreement.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

2.3.3.2 Compensation payable to Customers

Based on the provisions of ENRE Resolution No. 1/14, the definitive amount of the compensation payable to customers by way of discounts, as a consequence of the power cuts occurred during the period began on December 16, 2013 and ended on the date on which the service was fully restored, totaled $ 85.7 million.  As of December 31, 2015, an amount of $ 75.9 million of such total has been reimbursed to customers, based on consumption recorded.

2.3.3.3 Discounts to customers

Edenor began to credit Customer bills issued as from December 22, 2015 for the penalties included in clauses 9.2.1 and 9.2.2 of the Adjustment Agreement, as well as the adjustments thereof (Note 2.3.1.1.vii), for $ 152.2 million. Edenor finished crediting customer bills for these amounts in the first two months of 2016. Additionally, an amount of $ 33.7 million in compensation and adjustments was made available to the customers who as of December 22, 2015 had no active service.

As of December 31, 2015, the liability for this concept amounts to $ 125.8 million, which is disclosed in the Current trade payables account.

2.3.3.4Payment agreements

From May, 2014 through December 31, 2015, Edenor entered into three payment plan agreements with the regulatory agency pursuant to which it agreed to pay the penalties that had been ratified by the judicial authority for a total of $ 85.7 million, plus interest for $ 84.2 million. As of the December 31, 2015, payment plan agreements Nos. 1 and 2 have been complied with in due time and proper manner. With regard to payment plan agreement No. 3, the outstanding balance amounts to $ 167.3 million, which is disclosed in the ENRE Penalties and Discounts line item of the Other payables account within current and non-current liabilities.

Furthermore, and owing to the setting of fees in favor of ENRE professionals who acted in execution proceedings, Edenor entered into two payment agreements for a total of $ 18.7 million, plus interest. As of December 31, 2015, the outstanding balances of principal and interest accrued under payment agreement No. 2 amounted to $ 19.1 million and $ 0.4 million, respectively, which will be paid in 60 installments. The first payment agreement has been complied with in due time and proper manner. They are disclosed in the other payables account within current and non-current liabilities.

2.3.4 Stabilization factor

By Note No. 2883 dated May 8, 2012 (reference Resolutions MEyFP No. 693/11 and MPFIPyS No. 1,900/11), the SE has implemented a mechanism whose objective is to keep the amounts billed to residential customers throughout the year stable, thereby minimizing the effects of the seasonal consumption of electricity.

This methodology applies to all residential customers, regardless of whether or not they receive Government grants on electricity rates, who may opt to adhere to this stabilization system.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Average consumption is determined based on the consumption recorded in the last six two-month periods. The stabilization factor arises from the difference between the aforementioned average consumption and the consumption recorded in the current two-month period. This value will be added to or subtracted from the two-month period charges, and the result obtained will be the amount to be paid before the corresponding taxes. The adjustments that are to be made in accordance with the differences between average consumption and recorded consumption will be reflected in the bill for the last two-month period of each calendar year.

The differences that arise as a consequence of comparing the annual average consumption to the consumption of the current two-month period will be recorded at the end of each period in the trade receivables balance sheet account, crediting or debiting the account, as the case may be, if the annual average consumption is higher or lower than the consumption of the current two-month period.

In this regard, by Note No. 119,098 dated January 18, 2016, the ENRE ordered the withdrawal from the stabilization system of all the users who were included therein, starting with the first bill preparation and issuance to be made in 2016.

2.3.5 Concession of the use of real property

Pursuant to the Bid Package, SEGBA granted Edenor the free use of real property for periods of 3, 5 and 95 years, with or without a purchase option, based on the characteristics of each asset, and the Company would be responsible for the payment of any taxes, charges and contributions levied on such properties and for the taking out of insurance against fire, property damage and third-party liability, to SEGBA’s satisfaction.

Edenor may make all kind of improvements to the properties, including new constructions, upon SEGBA’s prior authorization, which will become the grantor’s property when the concession period is over, and the Company will not be entitled to any compensation whatsoever. SEGBA may terminate the loan for use contract after demanding the performance by the Company of any pending obligation, in certain specified cases set forth in the Bid Package. At present, as SEGBA’s residual entity has been liquidated, these presentations and controls are made to the National Agency of Public Properties (ONABE).

2.4 Oil and gas

Amendment of the Argentine Hydrocarbons Law

On October 29, 2014, the National Congress enacted Law No. 27,007 amending Hydrocarbons Law No. 17,319. This Law incorporates new drilling techniques available in the oil industry, as well as changes mainly related to terms and extensions of exploration permits and exploitation concessions, canons and royalty rates, new legal concepts for the exploration and exploitation of unconventional hydrocarbons in the Continental Shelf and the Territorial Sea, and a promotion regime pursuant to Executive Order No. 929/13, among other key factors for the industry.

F - 52

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

The main changes introduced by Law No. 27,007 are detailed below:

a)Unconventional Hydrocarbons Exploitation

Conferred a legal status to the legal concept of “Hydrocarbons Unconventional Exploitation Concession”. The term “hydrocarbons unconventional exploitation” is defined as the extraction of liquid and/or gaseous hydrocarbons by unconventional stimulation techniques applied in reservoirs situated in geological formations of schist rock or slate (shale gas or shale oil), tight sands, tight gas, tight oil, coal bed methane and/or deposits characterized, in general, by the presence of low permeability rocks.

Holders of exploration permits and/or hydrocarbon exploitation concessions will be entitled to request a hydrocarbon unconventional exploitation concession to the enforcement authority pursuant to the following terms:

-The exploitation concessionaire may, within its area, request the subdivision of the existing area into new hydrocarbon unconventional exploitation areas and the granting of a hydrocarbon unconventional exploitation concession. Such request will be based on the development of a pilot plan seeking the commercial exploitation of the discovered reservoir pursuant to acceptable technical and economic criteria.

-Holders of a hydrocarbon unconventional exploitation concession also being holders of a preexisting and adjacent exploitation concession may request the unification of both areas as a single hydrocarbon unconventional exploitation concession provided they furnish convincing evidence of the geological continuity of both areas. Such request should be based on the development of a pilot plan.

b)Terms of the exploitation concessions and permits

Terms for exploration permits will be established in each call for bids issued by the enforcement authority according to the exploration’s purpose (conventional or unconventional) and based on the following:

i)Conventional Exploration: the basic term is divided into two three-year periods plus an optional extension of up to five years. In this way, the maximum extension for exploration permits is reduced from 14 to 11 years;

ii) Unconventional Exploration: the basic term is divided into two four-year periods plus an optional extension of up to five years, that is, reaching a maximum of 13 years; and

iii) Exploration in the Continental Shelf and the Territorial Sea: the basic term is divided into two three-year periods plus an optional extension of one year each.

F - 53

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Upon the expiration of the basic term, the exploration permit holder will decide whether to continue exploring the area or to revert it totally to the Government. The whole originally-granted area may be kept provided the obligations arising from the permit have been properly met. Upon the expiration of the basic term, the holder of the exploration permit will revert the whole area unless it exercises its right to use the extension period, in which case the reversion will be limited to 50% of the remaining area.

Exploitation concessions will have the following terms, which will be computed as from the granting resolution’s date:

i) Conventional Exploitation Concession: 25 years;

ii) Unconventional Exploitation Concession: 35 years; and

iii) Continental Shelf and Territorial Sea Exploitation Concession: 30 years.

Furthermore, the holder of an exploitation concession may, with a minimum one-year notice before the expiration of the concession, request the granting of indefinite extensions, for a 10-year term each, provided it has properly met its obligations as exploitation concessionaire, is actually producing hydrocarbons in the areas in question and files an investment plan consistent with the development of the concession.

The ban on simultaneously holding more than five exploration permits and/or exploitation concessions (whether directly or indirectly) has been lifted.

c)Concession Extension

Law No. 27,007 grants the Provinces having already started the concession extension process a 90-day term to finish it based on the conditions established for each of them. All subsequent extensions will be governed by the Argentine Hydrocarbons Law.

d)Awarding of areas

Law No. 27.007 calls for the drafting of a model invitation to bid to be jointly made by the SE and the provincial authorities, to which all calls for bids made by law enforcement authorities should adhere, and introduces a specific criterion for the award of permits and concessions on incorporating the specific parameter of “greater investment or exploration activity” as defining in the case of tie bids according, as applicable, to the National or Provincial Executive Branch’s duly supported criterion.

e)Canons and Royalties

The amended Argentine Hydrocarbons Law has updated the exploration and exploitation canons established by Executive Order No. 1454/2007. These canons may, in turn, be generally updated by the Executive Branch based on variations in the domestic market’s crude oil price.

F - 54

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

The updated values for each canon and royalty are detailed below:

i)Exploration Canon:

The holder of the exploration permit will pay the canon in advance on an annual basis for each square kilometer or its fraction based on the following scale:

-First period: $ 250 per km² or fraction;

-Second period: $ 1,000 per km² or fraction; and

-Extension: during the first year of the extension; $ 17,500/km² or fraction, with a 25% annual cumulative increase.

In this case, offsetting mechanisms will remain effective: the amount that the exploration permit holder should pay for the second period of the basic term and for the extension period may be readjusted by offsetting it with exploration investments actually made within the area, until reaching a minimum canon equivalent to 10% of the applicable canon per km² during the period, which will be payable in all cases.

ii)Exploitation Canon:

The holder of the exploitation permit will pay a canon which will consist of an annual advance payment of $ 4,500 per km² or its fraction based on the following scale:

iii)Royalties

Royalties are defined as the only revenue the jurisdictions holding title to the hydrocarbons will collect, in their capacity as grantors, from the production of hydrocarbons.

The 12% percentage the exploitation concessionaire should pay as royalties to the grantor on the proceeds derived from liquid hydrocarbons produced at wellhead will remain effective. The production of natural gas will bear a like percentage of the value of extracted and actually used volumes, and will be payable on a monthly basis.

Cash payment of royalties will be made based on the value of crude oil at wellhead less freight costs up to the base location for the definition of its commercial value. Payment in kind of royalties will only proceed when the concessionaire is assured a reasonable permanent reception.

The possibility to reduce royalties up to 5% taking into consideration productivity, conditions and wells location also remains effective.

In case of extension, additional royalties for up to 3% regarding the applicable royalties at the time of the first extension, up to a total maximum of 18%, will be paid for the following extensions.

F - 55

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

For the conduction of hydrocarbon conventional exploitation complementary activities as from the expiration of the granted concession and within the hydrocarbons unconventional exploitation concession, the enforcement authority may fix additional royalties of to 3% above the current royalties, up to a maximum 18%, as applicable.

The National or Provincial Executive Branch, as applicable, acting in its capacity as granting authority, may reduce up to 25% the amount corresponding to royalties applicable to the production of hydrocarbons during a term of 10 years after the conclusion of the pilot project in favor of companies requesting a hydrocarbon unconventional exploitation concession within a term of 36 months as from Law No. 27,007’s effective date.

Finally, with the National Hydrocarbon Investment Plan’s Strategic Planning and Coordination Committee’s prior approval, royalties may be reduced up to 50% for tertiary oil recovery, extra-heavy oil and offshore products in view of their productivity, location and other unfavorable economic and technical characteristics.

f)Extension Bond

Law No. 27,007 empowers the enforcement authority to provide for the payment of an exploitation concession extension bond, the maximum amount of which will result from multiplying proven reserves at the expiration of the concession by 2% of the average price applicable to the specific hydrocarbon during a term of 2 years before the granting of the extension.

g)Exploitation Bond:

The enforcement authority may provide for the payment of an unconventional exploitation concession extension bond, the maximum amount of which will result from multiplying proven reserves associated with the exploitation of conventional hydrocarbons at the expiration of the granted concession by 2% of the average basin price applicable to the specific hydrocarbons during a term of 2 years before the granting of the concession.

h)Transportation Concessions

Transportation concessions (which had so far been granted for 35 years) will be granted for the same term than that granted for the exploitation concession where it originates, with the possibility of receiving subsequent extensions for up to 10 years each. Thus, transportation concessions originating in a conventional exploitation concession will have a basic 25-year term, whereas those originating in an unconventional exploitation concession will have a basic 35-year term, each plus any extension terms which may be granted. After the expiration of these terms, title to the facilities will be transferred to the National or Provincial Government, as applicable, by operation of law and without any charges or encumbrances whatsoever.

F - 56

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

i)Uniform Legislation

Law No. 27,007 provides for two types of non-binding commitments between the National Government and the Provinces regarding tax and environmental issues:

i)Environmental Legislation: It provides that the National Government and the Provinces will seek to establish a uniform environmental legislation primarily aiming to apply the best environmental management practices to hydrocarbon exploration, exploitation and/or transportation with the purpose of furthering the development of the activity while properly protecting the environment.

ii)Tax System: It provides that the National Government and the Provinces will seek to adopt a uniform fiscal treatment encouraging the development of hydrocarbon activities in their corresponding territories in adherence with the following guidelines:

-The gross receipts tax rate applicable to the extraction of hydrocarbons will not exceed 3%;

-The freezing of the current stamp tax rate and the commitment not to charge with this tax any financial contracts entered into in order to structure investment projects and to guarantee and/or warrant investments; and

-The commitment by the provinces and its municipalities not to impose new taxes —or increase the existing ones— on permit and concession holders, with the exception of service compensation rates, improvement contributions and general tax increases.

j)Restrictions on the reservation of areas to National or Provincial Government-Controlled Companies

The amendment of the Argentine Hydrocarbons Law restricts the National Government and the Provinces from reserving new areas in the future in favor or public or mixed companies or entities, irrespective of their legal form. Thus, contracts entered into by provincial companies for the exploration and development of reserved areas before this amendment are safeguarded.

Regarding areas that have not been reserved in favor of public companies and that have not yet been awarded under partnership agreements with third parties, associative schemes may be used, in which case the participation of such companies during the development stage will be proportional to their investments. In this way, the “carry” system during the areas’ development or exploitation stage has been done away with. Such system has not been prohibited for the exploration stage.

k)Conventional and Unconventional Hydrocarbon Investment Promotion Regime

On July 11, 2013, the National Executive Branch passed Executive Order No. 929/2013, which established the Investment Promotion Regime for the Exploitation of Hydrocarbons –both conventional and unconventional (the “Promotion Regime”) with the purpose of encouraging investments destined to the exploitation of hydrocarbons and the legal concept of hydrocarbons unconventional exploitation concession.

F - 57

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Law No. 27.007 extends the benefits of the Promotion Regime to hydrocarbon projects involving a minimum US$ 250 million direct investment, assessed at the time the hydrocarbon exploitation investment project is presented, to be invested during its first 3 years. Before the amendment, the Promotion Regime benefits reached investment projects denominated in foreign currency for a minimum US$ 1,000 million amount during a term of 5 years.

Holders of exploration permits and/or hydrocarbons exploitation concessions, and/or third parties associated with such holders and registered with the National Registry of Hydrocarbon Investments submitting this kind of projects will enjoy the following rights as from the third year of their respective projects’ execution: (i) the right to freely market abroad 20% and 60% of the liquid and gaseous hydrocarbon production in the case of conventional and unconventional exploitation projects and in offshore projects, respectively, with a 0% export duty, if applicable, and (ii) the free availability of 100% of the foreign currency resulting from the exportation of these hydrocarbons, provided the applicable projects have involved a minimum US$ 250 million entry of foreign currency into the Argentine financial market.

During periods in which the national production of hydrocarbons is insufficient to meet domestic supply needs pursuant to Section 6 of the Argentine Hydrocarbons Law, the subjects covered by the Promotion Regime will have, as from the third year as from the execution of their respective investment projects, the right to obtain a price not lower than the reference export price (without computing the incidence of any applicable export duties) from the exportable liquid and gaseous hydrocarbon percentage produced under such projects.

Pursuant to these investment projects, Law No. 27,007 provides for two contributions payable to the producing provinces where the investment project is conducted: (i) the first one, payable by the project holder, for an amount equivalent to 2.5% of investment amount undertaken to be committed to corporate social responsibility projects, and (ii) the second contribution, payable by the National Government, which will be determined by the Committee based on the size and scope of the investment project and which will be destined to infrastructure projects.

As at the issuance hereof, PEPASA has not submitted any investment projects under the Promotion Regime.

Gas Market

Gas Plus Program – SE Resolution No. 24/08

Under this program, the main atraction for gas producers is the free availability and commercialization of the extracted gas. In order to qualify, the producer should submit an investment project in new gas areas, in areas which have not been in production since 2004, or in areas with complex geological characteristics of compact sands or low permeability. With the exception of new entities, companies should be up-to-date with the payment of the production installments fixed pursuant to the Producers’ Agreement to join this program.

F - 58

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

Natural Gas Surplus Injection Promotion Program (the “Program”)

On February 14, 2013 Resolution No. 1/13 was published in the Official Bulletin. This Resolution creates the Program, which aims to evaluate and approve projects furthering the national self-supply of hydrocarbons through a gas production increase and its infusion into the domestic market, as well as to generate higher levels of activity, investment and employment in this sector.

Before June 30, 2013, any person registered with the National Registry of Hydrocarbon Investments created by Executive Order No. 1277/12 may submit its project before the National Hydrocarbon Investment Plan’s Strategic Planning and Coordination Committee. The National Government undertakes to pay a monthly compensation resulting from: (i) the difference between the Surplus Injection price (US$ 7.5/MMBTU) and the price actually collected from the sale of the Surplus Injection, plus; (ii) the difference between the Base Price and the price received from the Adjusted Base Injection. These projects will be in force for a maximum term of 5 years, with the possibility for renewal.

On April 26, 2013, Committee’s Resolution No. 3/13 was published in the Official Bulletin, which regulates the Program and sets forth that any companies interested in participating in the Program should submit monthly affidavits to the Committee containing specifically-detailed documentation on injection, price, contracts, etc., so that they may, after meeting the methodology and terms specified therein, obtain the applicable compensation. Furthermore, the Resolution expressly prohibits natural gas purchase and sale operations between producers and provides special considerations regarding new high-risk projects, investments control, the evolution of reserves and the Program’s auditing mechanism.

On July 11, 2013, pursuant to Provision No. 15/13 of the Committee, the Company was registered with the National Registry of Hydrocarbon Investments.

PEPASA has submitted several projects to the Committee’s consideration. On August 7, 2013, pursuant to Resolution No. 27/13, the Committee approved a project for an increase in the total natural gas injection submitted by the Company, with retroactive effects to March 1, 2013.

On July 15, 2015, the Committee approved Resolution No. 123/15 defining the Rules applicable to Acquisitions, Sales and Assignments of Areas, Rights and Interests under the Program, which provides that companies acquiring, selling or assigning areas, rights or interests should submit the applicable presentation within a term of 10 business days after the transaction is made.

PEPASA has filed the applicable documentation required by such Resolution and in accordance with the Addendum to the Investment Agreement entered into with YPF in the Rincón del Mangrullo area.

Finally, on January 4, 2016, Executive Order No. 272/15 was passed, which dissolves the Committee created pursuant to Executive Order No. 1277/12 and provides that the powers assigned to this Committee will be exercised by the MEyM.

F - 59

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

As a result the above-mentioned regulatory changes, a delay in the collection of compensations has been verified. As of December 31, 2015, accumulated income recognized under this item amounts to $ 696.5 million, out of which $ 546.8 million have accrued during this fiscal year. As of the issuance of these financial statements, PEPASA has collected 100% of the Program’s compensations for the March – April, 2015 period for a total amount of $ 244.7 million.

Oil Market

As with the gas market, the oil market has also been affected by several resolutions.

 Resolution No. 394/2007 of the Ministry of Economy has provided for an increase in export retentions on liquid hydrocarbons, with a reference value of US$ 60.9 per barrel and a cut-off value of US$ 42 per oil barrel. The exporting producer’s income was thus limited to US$ 42 per crude oil barrel, despite the fact that its WTI value is higher than US$ 60.9 per barrel. 

On January 3, 2013, the Ministry of Economy issued Resolution No. 1/2013 increasing cut-off and reference values established by Resolution No. 394/07 from US$ 42 to US$ 70 and from US$ 60.9 to US$ 80 respectively, thus increasing oil-exporting companies’ revenue.

These regulations have entailed a decrease in the crude oil price in Argentina as compared with its international price.

Recently, on December 29, 2014, pursuant to Resolution No. 1077/2014, the Ministry of Economy abrogated Resolution No. 394/07 and its amending provisions in order to establish new export rates based on the crude oil’s international price, which is determined based on the reference Brent’s value on the month corresponding to the export less eight U.S. dollars per barrel (US$ 8/Bbl). Under this new system, the cut-off value is set at US$ 71/Bbl. That is, where the international price does not exceed US$ 71, the producer will pay export duties for 1% of that value. When the price is above US$ 80 (that is, an international price of $72/Bbl), variable deductions will be settled.

Finally, and with reference to the Petróleo Plus Program, on July 13, 2015 Executive Order No. 1330/15 canceling the Petróleo Plus Program and establishing the mechanism for the cancellation of incentives pending settlement was published in the official bulletin.

Crude Oil Production Promotion Program

On February 14, 2015, Res. No. 14/15 issued by the Committee was published in the official bulletin. This Resolution provided for the creation of the Crude Oil Production Promotion Program (the “Crude Oil Program”), which will be effective for a term of one year (extendable to another year).

Registration with this new Crude Oil Program is limited to subjects registered with the Oil Companies Registry, and requests may be submitted until April 30, 2015. The Crude Oil Program will be financed by the National Treasury.

F - 60

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 2: (Continuation)

The methodology for calculating this new Program’s stimulus is similar to that used by the Natural Gas Surplus Injection Promotion Program (created by Committee’s Resolution No. 1/13), as it grants a stimulus of US$ 2 or US$ 3 per crude oil barrel (depending on whether it will be destined to internal consumption or exportation) produced over its Base Production until reaching a maximum price depending on the type of crude oil (US$ 70 USD/BBL for Escalante and US$ 84/BBL for Medanito).

NOTE 3: BASIS OF PRESENTATION

These consolidated financial statements have been prepared in accordance with IFRS issued by the International Accounting Standards Board (IASB) and IFRIC. All the IFRSs in force as at the date of preparation of these consolidated financial statements have been applied. Additionally, the Company has applied the first phase of IFRS 9 “Financial Instruments” at the transition date.

The presentation in the consolidated statement of financial position makes a distinction between current and non-current assets and liabilities. Current assets and liabilities are assets expected to be realized or liabilities expected to be extinguished within a period of twelve months from the closing date of the period subject of the report, as well as those held for sale respectively. Additionally, the Group informs the cash flow from its operating activities using the indirect method. The fiscal year starts on January 1 and finishes on December 31 of each year. The economic and financial results are disclosed based on the fiscal year.

These consolidated financial statements are stated in Argentine pesos. They have been prepared under the historical cost convention, as modified by the measurement of certain financial assets and liabilities at fair value through profit and loss.

The preparation of these consolidated financial statements under IFRS requires estimates and assessments be performed affecting the amounts of assets and liabilities recorded and the contingent assets and liabilities disclosed as at the date of issuance of these consolidated financial statements, as well as the disclosure of income and expenses during such period. The areas involving a greater level of judgment and complexity or the areas in which assumptions and estimates are significant for the consolidated financial statements are described in Note 5.

These consolidated financial statements have been approved for issue by the Board of Directors dated March 9, 2016.

Comparative information

Balances as of December 31, 2014, included in these consolidated financial statements for comparative purposes, arise from the financial statements at that date. Certain reclassifications have been made to those financial statements to keep the consistency in the presentation with the amounts of the current year.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: ACCOUNTING POLICIES

The main accounting policies used in the preparation of these financial statements are explained below. Unless otherwise stated, these accounting policies have been consistently applied in all the years presented.

4.1Changes in accounting policies

4.1.1New provisions, modifications and interpretations which are not yet effective and have not been early adopted by the Company

- IFRS 15, “Revenue from Contracts with Customers", was issued in May 2014 and amended in July 2015 and applies to any annual reporting period beginning on or after January 1, 2018. This standard specifies how and when revenues should be recognized, and identifies the additional information the Company should disclose in its financial statements. The standard provides a single, principles based five-step model which will be applied to all contracts with customers. The Company is currently analyzing its effects; however, it estimates that its application will not have a significant impact on the Company’s operating results or financial position.

- IFRS 9 – “Financial Instruments”: This modification, which was issued in July 2014, covers all the phases of the IASB project to replace IAS 39 - “Financial Instruments: Recognition and Measurement”. These phases are the classification and measurement of instruments, impairment and hedging. This version adds a new impairment model based on expected losses and some minor modifications to the classification and measurement of financial assets. This new provision supersedes all previous versions of IFRS 9 and is effective for periods starting as from January 1, 2018. As at the transition date, the Company has adopted the first phase of IFRS 9 and is currently analyzing the impact of the second and third phases.

- IFRS 16 - Leases On 13 January 2016, the IASB published IFRS 16, ‘Leases’, which replaces the current guidance in IAS 17. IFRS 16 defines a lease as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration.

Under IFRS 16 lessees have to recognize a lease liability reflecting future lease payments and a ‘right-of-use asset’ for almost all lease contracts. This is a significant change compared to IAS 17 under which lessees were required to make a distinction between a finance lease (on balance sheet) and an operating lease (off balance sheet). IFRS 16 contains an optional exemption for certain short-term leases and leases of low-value assets; however, this exemption can only be applied by lessees.  The IFRS 16 is effective for annual reporting periods beginning on or after 1 January 2019.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

4.2Consolidation

a.Subsidiaries

These financial statements include those of the Company and the entities controlled by it. Subsidiaries are all entities over which the Company exercises control, which is generally accompanied by a percentage above 50% of the available voting rights. The Company controls an entity when it is exposed or entitled to variable returns in view of its involvement in the entity and has the capacity to affect these returns through its power over it. When determining whether the Company controls an entity, the existence and effect of potential voting rights which are currently exercisable or convertible are considered. The Company also evaluates the existence of control when it does not hold more than 50% of the voting rights but can direct financial and operating policies through a “de facto control”. The “de facto control” may arise under circumstances in which the number of the Group's voting rights compared with the number and dispersion of the stakes held by other shareholders grants the Group the power to direct financial and operating policies, etc. For PEPASA, decisions on financial and operating policies are taken by the Board Directors of PEPASA, which is formed in its mayority by the same directors of the Company. Subsidiaries are consolidated as from the date on which control is transferred to the Group and are de-consolidated as from the date such control ceases.

Main consolidation adjustments are the next:

i.elimination of balances between the Group companies, so that the financial statements disclose balances held with third parties and uncontrolled related parties.

ii.elimination of inter-company transactions between the Group companies, so that the financial statements disclose results with third parties and uncontrolled related parties.

iii.elimination of interest in equity and profit/loss and in the results of each year of the group companies

iv.recognition of assets and liabilities identified in process of business combination.

Accounting policies of subsidiaries have been modified, where necessary, to ensure consistency with the policies adopted by the Group.

b.Business combinations

Business combinations are accounted through the application of the acquisition method of accounting. The consideration for the acquisitions is measured at its fair value by calculating the sum, as at the acquisition date, of the fair value of the transferred assets, the incurred or taken on liabilities and the warrants issued by the Company and delivered in consideration of the control of the acquired business.

Acquisition-related costs are expensed as incurred. Identifiable assets acquired and liabilities assumed in a business combination are measured at their fair values at the acquisition date.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

Goodwill represents the excess of the aggregate of the acquisition cost, plus the amount of any non-controlling interest in the acquired entity and the fair value of the equity interest in the acquired entity held by the company (if any) over the net identifiable assets acquired and liabilities assumed, at the date of acquisition.

If as a result of the assessment, the net amount of identifiable assets acquired and liabilities assumed exceeds the sum of the acquisition cost, plus the amount of any non-controlling interest in the acquired entity and the fair value of the equity interest in the acquired entity held by the company (if any), this excess is accounted for immediately in profit and loss as a gain for the purchase of the business.

The Group has up to 12 months to finalize the accounting for a business combination. Where the accounting for a business combination is not complete by the end of the year in which the business combination occurred, the Group reports provisional amounts.

c.Changes in ownership interests in subsidiaries without change of control

Transactions with non-controlling interests that do not result in loss of control are accounted for as equity transactions – that is, as transactions with the owners in their capacity as owners. The difference between the fair value of any consideration paid/collected and the corresponding part of shares acquired/disposed on the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals to non-controlling interests are also recorded in equity.

d.Disposal of subsidiaries

When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value at the date when control is lost, with the change in the carrying amount recognized in a profit or loss. The fair value is the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset.

e.    Joint Arrangements

The Company applies IFRS 11 “Joint arrangements” to all its joint arrangements. Under IFRS 11, joint arrangements are classified as either joint ventures or joint operations depending on each investor’s contractual rights and obligations. A joint venture is a contractual arrangement whereby the parties that have joint control on the arrangement have rights to the net assets of the arrangement. A joint operation is a contractual arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

f.Interest in joint ventures

The Company accounts for its joint ventures using the equity method of accounting. Under this method, the interest is recognized at cost at the beginning and is subsequently adjusted by recognizing the portion that corresponds to the Company in the result obtained by the joint arrangements, after the acquisition date.

The Company recognizes in profit and loss its portion in the joint ventures results and in other comprehensive income its portion in other comprehensive results of the joint arrangements.

Accounting policies of the joint venture have been changed when necessary to ensure consistency with the policies adopted by the Group.

g.Participations in joint operations

The Company recognizes its direct right to the assets, liabilities, revenue and expenses in the different consortiums and joint venture for the prospecting, exploitation and production of hydrocarbons and its share of any jointly held or incurred assets, liabilities, revenue and expenses. This method requires disclosing its interests and obligations in each type of asset and liability respectively, under the terms of the agreement, as well as in the income, costs and expenses in each of the items of the consolidated financial statements.

Accounting policies applicable to joint operations have been modified and adapted, if applicable, to ensure consistency with the policies adopted by the Company.

h.Interest in associates

All associates are entities over which the Company does not exercise control but has significant influence, which is generally accompanied by a direct and indirect interest between 20% to 50% of voting rights, unless it can be clearly evidenced that this influence is non-existent. On the contrary, it is presumed that the investor does not exercise a significant influence if it directly or indirectly holds less than 20% of the voting rights in the associate, unless it can be clearly evidenced that this influence does exist.

The subsidiary PEPCA holds a 10% interest in CIESA. However, it exercises a significant influence on the operating and financial decisions affecting that company since it has the power to appoint a Titular Director.

Investments in associates are accounted for using the equity method of accounting. Under the equity method, the investment is initially recognized at cost, and the carrying amount is increased or decreased to recognize the investor’s share of profit or loss of the Investee after the date of acquisition. The Group’s share of post-acquisition profit or loss is recognized in the income statement, and its share of post- acquisition movements in Other comprehensive income is recognized in Other comprehensive income with a corresponding adjustment to the carrying amount of the investment.

Accounting policies of the associates have been changed or adapted where necessary to ensure consistency with the policies adopted by the Group.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

i.   Predecessor accounting

For business combinations under common control, the predecessor accounting method is used, whereby the acquirer recognizes assets and liabilities at the predecessor’s book value. No new goodwill is recognized for these transactions.

4.3Segment information

Operating segments are reported consistently with internal reports reviewed by the Executive Director.

The Executive Director, is the highest decision-making authority, is the person responsible for allocating resources and setting the performance of the entity’s operating segments, and has been identified as the person/ body executing the Company’s strategic decisions.

4.4Property, plant and equipment

All Property, Plant and Equipment for use in production or for administrative purposes are stated at historical cost less depreciation a less any accumulated impairment. Historical cost includes expenditure that are directly attributable to the acquisition of the items.

In accordance with the provisions of IAS 23 “Borrowing costs”, borrowing costs in relation to any given asset could be capitalized when such asset is in the process of production, construction, assembly or completion, and such processes, due to their nature, take long periods of time; those processes are not interrupted; the period of production, construction, assembly or completion does not exceed the technically required period;  the necessary activities to put the asset in condition to be used or sold are not substantially complete; and the asset is not in condition so as to be used in the production of other assets or startup, depending on the purpose pursued with its production, construction, assembly or completion.

Subsequent costs are included in the asset’s carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably and the investment will improve the condition of the asset beyond its original state. The carrying amount of those parts that are replaced is derecognized. It is a condition of an item of property, plant and equipment to continue to operate, to conduct periodic inspections for faults regardless of whether parts of the elements are replaced or not (major maintenance).  All other repairs and maintenance are charged to the income statement during the financial period in which they have been incurred.

Land is not depreciated. Machinery and generation equipment are depreciated under the unit of production method. Mining property is depreciated under the unit of production method in relation to proven and developed reserves and to prove and non-developed reserves.

Depreciation of other assets is calculated using the straight-line method.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

The main depreciation methods are described below:

Buildings: 50 years

Substations: 35 years

High voltage lines: 40 - 45 years

Medium voltage lines: 35 - 45 years

Low voltage lines: 30 - 40 years

Transformer centrals: 25 - 35 years

Meters: 25 years

Vehicles: 5 years

Furniture, fittings and communication equipment: 5- 20 years

Computer equipment and software: 3 years

Tools: 10 years

Gas Plant and Pipeline: 20 years

Works in progress are valued according to their degree of progress. Works in progress are recorded at cost, less any loss due to impairment, if applicable.

The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at least at each financial year-end.

An asset’s carrying amount is written down immediately to its recoverable amount if its carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing the proceeds with the carrying amount.

4.5Intangible assets

a.Goodwill

Goodwill is the result of the acquisition of subsidiaries. Goodwill represents the excess of the acquisition cost over the fair value of the equity interest in the acquired entity held by the company in the net identifiable assets acquired at the date of acquisition.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

For the purpose of impairment testing, goodwill acquired in a business combination is allocated from the acquisition date to each of the acquirer’s cash-generating units or group of CGUs that are expected to benefit from the synergies of the combination. Each unit or group of units that goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.

b.Concession arrangements

Concession arrangements corresponding to Edenor and hydroelectric generation plants Diamante and Nihuiles are not covered by the guidelines of IFRIC 12 “Service Concession Arrangements”.

These concession agreements meet the criteria set forth by the IFRSs and are amortized following the straight-line method based on each asset’s useful life, which corresponds to the life of each concession agreement.

The concession of Edenor, has a usesful life of 83 years, while the HIDISA and HINISA  has a usesful life of 30 years.

c.Identified intangible assets in acquired investments

Corresponds to intangible assets identified at the moment of the acquisition of companies from the distribution segment. Identified assets meet the criteria established in IFRS and are amortized by the straight-line method according to the useful life of each asset, considering the estimated way in which the benefits produced by the asset will be consumed.

d.Rights over arbitration proceedings

It corresponds to rights acquired by the Company to control, suspend and waive judicial claims.

As of December 31, 2014 proceedings’conclusion datescannot be accurately foreseen, it has been determined that they have an indefinite useful life (See Note 20)

4.6Biological assets

Biological assets comprise grape plantations and seed plots. These biological assets are measured on initial recognition and at the end of each reporting period, at its cost, which does not differ from its fair value less costs to sell.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

4.7Assets for oil and gas exploration

Expenses related to oil and natural gas exploration and evaluation are accounted for by the successful effort method. Costs are accumulated at the level of each field. Geological and geophysical costs are recorded as expenses as they are incurred. Costs directly associated to the exploration of wells and costs of exploration and acquisition of rights on real property are capitalized until the reserve determination is assessed. If the conclusion reached is that the discovery has no commercial viability, then those expenses are charged to results.

Capitalization is recognized in property, plant and equipment or in intangible assets according to the nature of the expense.

4.7.1 Development tangible and intangible assets

Disbursements for the building, installation and completion of infrastructures such as platforms, pipes and the drilling of wells with demonstrated commercial viability are capitalized as Property, Plant and Equipment and as intangible assets, depending on their nature. PEPASA recognized as mining property 50% of the investments in wells relating to the commitments undertaken in the first two phases and 35% of the investments in Lajas Formation under the agreement with YPF for Rincón del Mangrullo, and the remaining 50% and 65% as wells. Additionally, part of the investments made in wells relating to the commitment undertaken with Petrobras for El Mangrullo was recorded as mining property. When commercially viable reserves are found, exploration and evaluation assets are tested for impairment and transferred to development tangible or intangible assets. During the exploration and evaluation phase, no depreciation expenses are recognized for Property, Plant and Equipment or intangible assets.

4.7.2 Assets for oil and gas production

Assets for oil and gas production are tangible assets for exploration and evaluation and development expenses associated to production of proven reserves.

4.7.3 Assets retirement obligation

Estimated future costs of wells plugging and abandonment in the hydrocarbon areas, discounted at a rate estimated at the time of their initial measuring, are capitalized together with the assets originating them, and are depreciated using the unit-of-production method. Additionally, a liability is recorded for this item at the estimated value of discounted payables.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

4.7.4 Depreciation

Assets related to oil and gas production are depreciated following the production unit method. Production unit rates are based on developed reserves with proven viability, such as reserves of oil, gas and other mineral reserves that are expected to be recovered through existing facilities using the current operating methods. Oil and gas volumes are considered as produced once they are measured with the oil meters at the custody transfer points or at the sale transactions points at the output valve of the storage tank.

The depreciation is adjusted by changes in the estimates of proved developed reserves when such changes arise. PEPASA performs reserves estimates reviews, which are certified by independent engineers at least once a year.

4.7.5 Impairment – Assets for exploration and evaluation  

Assets for exploration and evaluation are subject to impairment tests whenever facts and circumstances suggest that an impairment in value may have occurred. An impairment loss is recognized for the amount in which the book value of the exploration and evaluation asset exceeds its recoverable amount. The recoverable amount is the higher of the value in use and the fair value less costs to sale of the exploration and evaluation assets. With the purpose of assessing the impairment, the exploration and evaluation assets subject to impairment tests are grouped together with the CGUs of the existing producing fields that are located in the same geographical region.

4.7.6 Impairment – Proven property for oil and gas production and intangible assets

Properties for oil and gas production and intangible assets whose commercial and technical viability has been proven are evaluated for impairment losses at the moment when facts or changes in circumstances suggest that the carrying amount could not be recoverable. An impairment loss is recognized for the amount in which the carrying value of the asset exceeds its recoverable amount. The recoverable amount is the higher of the value in use and the fair value less the cost to sale of the assets. With the purpose of assessing the impairment, the assets are grouped at the lowest level at which separate cash flows can be identified (CGUs).

4.8 Impairment of non financial assets

Assets that have an indefinite useful life - for example, goodwill or intangible assets not ready to use – are not subject to amortization and are tested annually for impairment.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized as the amount by which the asset´s carrying amount exceeds its recoverable amount. Recoverable amount is the higher amount of fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (CGUs).

Non-financial assets other than goodwill that have been impaired are reviewed at each reporting date for possible reversal of the impairment.

4.9 Foreign currency translation

4.9.1 Functional and presentation currency

Information included in the financial statements entities are measured in the functional and presentation currency of the Company, which is the currency of the primary economic environment in which the entity operates. The functional currency is Argentine peso, which is the Group’s presentation currency.

These financial statements have been prepared under the historical cost convention in nominal currency stablished in IFRS criteria applicable for non-hyperinflationary economies.

4.9.2 Transaction and balances

Foreign currency transactions are translated into the functional currency using the exchange rates as of at the date of the transaction. Foreign exchange gain and loss resulting from the settlement of any transaction and from the translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the income statement, unless they have been capitalized.

The exchange rates used are as follows: buying rate for monetary assets, selling rate for monetary liabilities, average rate at the end of the year for balances with related parties, and date-specific exchange rate for foreign currency transactions.

4.9.3 Subsidiaries

All subsidiaries functional currency is the peso, so there are no effects of foreign currency translation.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

4.10 Financial assets

4.10.1 Classification

The Company classifies its financial assets under the following categories: those to be measured subsequently at fair value and those to be measured at amortized cost. This classification depends on whether the financial asset is a debt instrument or an equity investment. For the asset to be measured at amortized cost, two conditions described below must be verified. The remaining financial assets are measured at fair value. IFRS 9 requires that all the investments in equity instruments are measured at fair value.

a.Financial assets at amortized cost

Financial assets are measured at amortized cost only if the following criteria have been met:

i.the objective of the Group’s business model is to hold the asset to collect the contractual cash flows;

ii.the contractual terms, on specified dates, have cash flows that are solely payments of principal and interest on the outstanding principal.

b.Financial assets at fair value

If any of the above mentioned criteria has not been met, the financial asset is measured at fair value through profit or loss.

All equity investments are measured at fair value. For equity investments that are not held for trading, the Group can irrevocably choose at the moment of the initial recognition to present changes in fair value through other comprehensive income. The decision of the Group was recognizing changes in fair value through profit or loss.

4.10.2 Recognition and measurement

Regular purchases and sales of financial assets are recognized on the trade-date, which is the date on which the Group commits to the purchase or sale of the asset. Financial assets are derecognized when the rights to receive cash flows from the investments have expired or have been transferred and the Group has transferred substantially all risks and rewards of ownership.

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

A gain or loss on a debt investment that is subsequently measured at fair value and is not part of a hedging relationship is recognized in profit or loss. A gain or loss on a debt investment that is subsequently measured at amortized cost and is not part of a hedging relationship is recognized in profit or loss when the financial asset is derecognized or impaired and through the amortization process using the effective interest rate method.

The Group subsequently measures all equity investments at fair value. When the Group elects to present the changes in fair value in other comprehensive income, such changes cannot be reclassified to profit or loss. Dividends from such investments continue to be recognized in profit or loss as long as they represent a return on investment.

The Company reclassifies financial assets if and only if its business model to manage financial assets is changed.

4.10.3 Impairment of financial assets

Assets carried at amortized cost

The Group assesses at the end of each reporting period whether there is objective evidence that a financial asset or group of financial assets measured at amortized cost are impaired. A financial asset or a group of financial assets are impaired and impairment losses are incurred only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset, and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.

Evidence of impairment may include indications that the debtors or a group of debtors are experiencing significant financial difficulty, default or delinquency in interest or principal payments, the probability that they will enter bankruptcy or other financial reorganization.

The amount of the impairment loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate. The carrying amount of the asset is reduced and the amount of the loss is recognized in the income statement. If the financial asset has a variable interest rate, the discount rate for the calculation of the impairment loss is the currently effective interest rate under the contract. As a practical expedient, the Group may measure impairment on the basis of an instrument’s fair value using an observable market price.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized (such as an improvement in the debtor’s credit rating), the reversal of the previously recognized impairment loss is recognized in the statement of comprehensive income.

4.10.4 Offsetting of financial instruments

Financial assets and liabilities are offset, and the net amount reported in the consolidated statements of financial position, when there is a legally enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

4.11 Trade and other receivables

4.11.1 Trade receivables

Trade receivables are amounts owed by customers for the sale of generated and distributed power, the sale of gas and liquid fuels and the provision of counseling services in the ordinary course of business.

Generation, Oil and Gas and Holding

Trade receivables and other receivables are recognized at fair value and subsequently measured at amortized cost, using the effective interest method.

Receivables from CAMMESA allocated to FONINVEMEM and Agreement 2014, documented as LVFVDs, have been valued at their amortized cost, the maximum value of which is their recoverable amount at the period’s closing date. The amortized cost has been determined based on the estimated future cash flows, discounted based on a rate reflecting the time value of money and the risks inherent to the transaction.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

In the generation and Oil and gas segments, the Company accounts a provision for doubtful accounts when there is objective evidence that the Company will not be able to collect all the amounts that are owed to it according to the original terms of those receivables, based on an individual analysis of the recoverability of loan portfolio.

Distribution

The receivables arising from services billed to customers but not collected as well as those arising from services rendered but unbilled at the closing date of each financial year are recognized at fair value and subsequently measured at amortized cost using the effective interest rate method. 

The receivables from electricity supplied to low-income areas and shantytowns are recognized, also in line with revenue, when the Framework Agreement has been renewed for the period in which the service was provided.

The amounts thus determined are net of an allowance for the impairment of receivables. Any debt arising from the bills for electricity consumption that remain unpaid 13 working days after their due dates for small-demand (tariff 1) customers and 7 working days after due date for medium and large-demand (tariff 2 and 3) customers is considered a delinquent balance. The uncollectibility rate is determined per customer category based on the historical comparison of collections made and delinquent balances of each customer group.

Additionally, and faced with temporary and/or exceptional situations, Edenor Management may redefine the amount of the allowance, specifying and supporting the criteria used in all the cases.

4.11.2 Other receivables

Other receivables are initially recognized at fair value and subsequently measured at amortized cost, using the effective interest method, and when significant, adjusted by the time value of the currency. The Company records impairment allowances when there is objective evidence that the Company will not be able to collect all the amounts owed to it in accordance with the original terms of the receivables.

The CMM amounts receivables, as well as the related income, are recognized to the extent that they have been approved by the ENRE and recognized by the SE by means of a Note or Resolution.

Where applicable, allowances for doubtful tax credits have been recognized based on estimates on their uncollectibility within their statutory limitation period, taking into consideration the Company’s current business plans.

4.12 Inventories

Inventories are measured at the lower of cost and net realizable value.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

Given that the Company's inventories are not goods held for sale, their valuation is considered as based on the purchase price, import duties (if applicable) and other taxes (not subsequently recoverable by tax authorities), transportation, storage and other costs directly attributable to the acquisition of those assets.

Cost is determined using the weighted average cost method.

The Company has classified materials and spare parts into current and non-current, depending on their ultimate purpose, the latter being those that can be used for maintenance or improvement on existing assets. The non-current part of materials and spare parts is shown under the heading “Property, plant and equipment”.

The carrying value of inventories, taken as a whole, does not exceed the recoverable amount at the end of each year.

4.13 Derivative financial instruments

Derivative instruments are initially recognized at their fair value on the derivative contract’s effective date. After their initial recognition, they are revalued at their fair value.

The Company partially hedges its exchange rate risk through the execution of forward contracts denominated in U.S. dollars.

 The accounting method used to recognize the resulting profit or loss depends on whether the derivative has been specifically designated as a hedging instrument, and, if so, on the nature of the item being hedged. The Company has not formally designated privately negotiated derivatives as hedging instruments. Therefore, changes in their value are disclosed in “Foreign currency exchange difference”, under “Other financial results”.

The fair value of derivative financial instruments traded in active markets is disclosed based on their quoted market prices. The fair value of financial instruments that are not traded in active markets is determined using different valuation techniques. The Company uses its critical judgment to select the most appropriate methods and to determine assumptions which are based mainly on the market conditions prevailing at the closing of each year.

During this fiscal year, the Company and its subsidiaries have traded: i) U.S. dollar purchase contracts with ROFEX for an amount of US$ 397.9 million at an average exchange rate of $ 12.137 to a U.S. dollar, with maturities between January and June 2016; ii) U.S. dollar sales contracts with ROFEX for an amount of US$ 21 million at an average exchange rate of $ 9.971 to a U.S. dollar and maturing in November 2015. In turn, the Company has entered into U.S. dollars future sales agreements with affiliates for US$ 70 million and US$ 21 million at an average exchange rate of $ 10.728 to a U.S. dollar and with maturities between January 2016 and June 2016.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

On December 14, 2015, in order to regularize U.S. dollar futures trading operations and eliminate the risk of breach of or challenge to agreed operations and pursuant to the powers granted by Section 4 of the “Rules applicable to U.S. Dollar Futures and Option Contracts”, Mercado a Término de Rosario S.A. and Argentina Clearing S.A., through their Communications No. 518 and 657, resolved as follows:

·To declare the “Operating Emergency of ROFEX Dollar Futures” regarding positions open as at December 14, 2015 on U.S. dollar futures contracts maturing up to and including June 2016 and agreed after September 29, 2015.

·To provide, regarding U.S. dollar purchasing future positions as at December 14, 2015 maturing up to and including June 30, 2016:  

a) the correction of the operation's original price by adding $ 1.25 per U.S. dollar for operations open as from September 30, 2015 and up to and including October 27, 2015;

b) the correction of the operation's original price by adding $ 1.75 per U.S. dollar for operations open as from October 28, 2015.

In furtherance of these measures, the Company renewed contracts for operations covered by the new price regulations. These modifications have had a negative economic impact of $ 18.8 million.

Additionally, through General Resolution No. 3,818, as amended by General Resolution No. 3.824 passed on December 23, 2015, the AFIP established a one-time withholding system applicable on the difference between the originally agreed price or that resulting from the novation resulting from the application of the “Declaration of Operating Emergency of ROFEX Dollar Futures” of each open contract and the “mark to market” adjustment price for the closing of trading operations on December 23, 2015. The fair value of contracts open as at December 31, 2015 amounts to a $   17.9 million liability position, which is disclosed under "Derivative Financial Instruments". These contracts are guaranteed with financial instruments with a fair value of $ 269.4 million and are disclosed under “Other current receivables”.

The economic impact of these operations resulted in a $ 471.8 million income, which is disclosed in “Foreign currency exchange difference”, under “Other financial results” of the Statement of Comprehensive Income.

4.14 Cash and cash equivalents

Cash and cash equivalents includes cash in hand, demand deposits with banking institutions and other short-term, highly liquid investments with original maturities not exceeding three months and subject to an insignificant risk of changes in value. If any, current account overdrafts are not disclosed under Cash and cash equivalents in the statement of cash flows since they are not part of the Company’s cash management.

F - 77

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

4.15 Shareholder´s equity

Equity’s movements have been accounted for in accordance with the pertinent decisions of shareholders' meetings and legal or regulatory standards.

a.Share capital

Share capital represents the capital issued, composed of the contributions that were committed and/or made by the shareholders and represented by shares that comprise outstanding shares at nominal value. Ordinary shares are classified as equity.

b.Additional paid in capital and other reserves

It includes:

(i)The portion of the collected price exceeding the face value of the shares issued by the Company, net of absorbed accumulated losses.

(ii)The difference between the fair value of the consideration paid/collected and the accounting value of the equity interest in the subsidiary acquired/sold/diluted which does not represent a loss of control or significant influence.

(iii)The difference between the proportional equity value registered before the merger of subsidiary CTG with subsidiaries EGSSA and EGSSAH and the value resulting from applying to the subsidiary’s merged equity interest, the new ownership share resulting from the exchange relationship.

c.Legal reserve

In accordance with the Argentine Commercial Companies Law No. 19550, 5% of the profit arising from the statement of comprehensive income for the year, prior years' adjustments, the amounts transferred from other comprehensive income and prior years' accumulated losses, must be appropriated to a legal reserve until such reserve equals 20% of the Company’s outstanding capital. When for any reason, the amount of this reserve will be shorter, dividends may not be distributed, until such amount is made.

d.Voluntary reserve

This reserve results from an allocation made by the Shareholders’ Meeting, whereby a specific amount is set aside to cover for the funding needs of projects and situations associated with Company policies.

e.Directors´option reserves

Corresponded to the reserve related to the share-based payments explained in 4.16 and Note 41

F - 78

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

f.Retained earnings (Acumulated losses)

Retained earnings comprise accumulated profits or losses without a specific appropriation; positive earnings can be distributable by the decision of the Shareholders' meeting, as long as they are not subject to legal restrictions. These earnings comprise prior years' earnings that were not distributed, the amounts transferred from other comprehensive income and prior years' adjustments, according to accounting standards.

In case of existence of negative retained earnings to be absorbed at the end of the year for consideration of the Shareholders' Meeting, the following order for appropriation of balances must be followed:

i)Reserved earnings

-Voluntary reserve

-Statutory reserve

-Legal reserve

ii)Capital contributions

iii)Additional paid in capital

iv)Other equity instruments (if feasible from the legal and corporate point of view)

v)Capital adjustment

vi)Share capital

g.Other comprehensive income (loss)

Includes actuarial gains and losses from the calculation of liabilities for defined benefit plans and their tax effects on subsidiaries.

h.Dividends distribution

Dividend distribution to Company shareholders is recognized as a liability in the consolidated financial statements in the year in which the dividends are approved by the Shareholders' Meeting.

4.16 Share-based payments

Agreement assignment opportunities

The Company entered into an Opportunities Assignment Agreement by which the Directors undertook to offer, on a priority basis, any investment opportunity above US$ 5 million they detect within the Company’s investment guidelines. In consideration of this commitment, the Company granted these executives warrants for up to 20% of the Company’s capital stock pursuant to the Warrants Issuance Agreements (as amended) that the Company entered into with each of these executives.

F - 79

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

The fair value of the services rendered in consideration of these warrants was recorded as an expense, and has been determined using the Black-Scholes-Merton model, which takes into consideration assumptions such as annual volatility, dividend yield and a risk-free interest rate denominated in U.S. dollars. Pursuant to the conditions prevailing at the time the agreements were entered into, no value has been attributed to the stipulated contractual adjustment clauses.

The total expense amount was determined by reference to the fair value of the granted warrants, against a reserve included in the Statement of Changes in Equity and accrued following the straight-line method in the term during which the Company received this service. In view of the difficulties to determine the value attributable to the contract since there are no comparable parameters in the market (first option provided for in IFRS 2 – “Share-based payments”), the Company has used the valuation of the options issued to determine the compensation amount to be recognized during the life of the contract.

In Note 41 to the financial statements the conditions of compensation, terms of enforceability and the main variables considered in the valuation model is detailed.

Compensation agreement Value Company

PEPASA has granted to certain officers a compensation for services (payable in cash) based on the share value appreciation.

This compensation is recorded pursuant to the guidelines set forth in IFRS 2. The fair value of the services received is measured through the appreciation of the share as from its initial public offering and includes both its intrinsic value (the share quotation value as at the closing date) and its value over time (the right to participate in future quotation increases until the date this right would be actually exercised). The Black-Scholes-Merton financial valuation model was used to make this estimate, and the enforceability of the remuneration was taken into consideration.

The fair value of the amount payable for the compensation plan is accrued and acknowledged as an expense, with the resulting increase in liabilities, during the period in which employees have an unconditional right to payment. Liabilities are revalued on each balance date and at the settlement date. Any change in the fair value of liabilities is disclosed in profit or loss.

In Note 46 to the financial statements the conditions of compensation, terms of enforceability and the main variables considered in the valuation model is detailed.

4.17 Trade payables and other payables

4.17.1 Trade payables

Trade payables are obligations to pay for goods or services that have been acquired in the ordinary course of business from suppliers. Trade payables are classified as current liabilities if payments fall due within one year or in a shorter period of time. Otherwise, they are classified as non-current liabilities.

Trade payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

F - 80

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

4.17.2 Customer guarantees

Customer guarantees are initially recognized at fair value and subsequently measured at amortized cost using the effective interest method.

In accordance with the Concession Agreement, Edenor is allowed to receive customer guarantees in the following cases:

i.When the power supply is requested and the user is unable to provide evidence of his legal ownership of the premises; 

ii.When service has been suspended more than once in one-year period;

iii.When the power supply is reconnected and the Company is able to verify the illegal use of the service (fraud).

iv.When the customer is undergoing liquidated bankruptcy or reorganization proceedings.

Edenor has decided not to request customer guarantees from residential tariff customers.

Customer guarantees may be either paid in cash or through the customer’s bill and accrue monthly interest at a specific rate of Banco de la Nación Argentina for each customer category.

When the conditions for which EDENOR  is allowed to receive customer guarantees no longer exist, the customer’s account is credited for the principal amount plus any interest accrued thereon, after deducting, if appropriate, any amounts receivable which EDENOR has with the customer.

4.17.3 Customer refundable contributions

Edenor receives assets or facilities (or the cash necessary to acquire or built them) from certain customers for services to be provided, based on individual agreements and the provisions of ENRE Resolution No. 215/12. These contributions are initially recognized as trade payables at fair value against Property, plant and equipment, and are subsequently measured at amortized cost using the effective interest rate method.

4.17.4 Other payables

The recorded liabilities for the debts with the FOCEDE (Note 2.3.1.6), the debts with the FOTAE, the penalties accrued, whether imposed or not yet issued by the ENRE (Note 2.3.3), the PUREE-related debts, and other provisions are the best estimate of the settlement value of the present obligation in the framework of IAS 37 provisions at the date of these financial statements.

The balances of ENRE Penalties and Discounts are adjusted in accordance with the regulatory framework applicable thereto and are based on Edenor’s estimate of the outcome of the RTI process described in Note 2, whereas the balances of the loans for consumption (mutuums) are adjusted by a rate equivalent to the monthly average yield obtained by CAMMESA from its short-term investments.

The compensation arrangements are recognized on the basis as described in Notes 4.16 and 4.27.

F - 81

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

The other liabilities recorded in other payables, including the Loans for consumption (Mutuums) with CAMMESA (Note 2.3.1.7), the Payment agreement with the ENRE (Note 2.3.3.4) and the advances for the execution of works, are initially recognized at fair value and subsequently measured at amortized cost.

4.18 Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently stated at amortized cost; any difference between the proceeds (net of transaction costs) and the redemption value is recognized as finance cost over the period of the borrowings, using the effective interest method.

4.19 Borrowing costs

General and specific borrowing costs directly attributable to the acquisition, construction or production of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use or sale, are added to the cost of those assets, until the time the assets are substantially ready for their intended use or sale.

All other borrowing costs are recognized in profit and loss in the period in which they have been incurred. 

4.20 Deferred revenues

Non-refundable customer contributions

Edenor receives assets or facilities (or the cash necessary to acquire or built them) from certain customers for services to be provided, based on individual agreements. In accordance with IFRIC 18 “Transfers of Assets from Customers”, the assets received are recognized by Edenor as Property, plant and equipment with a contra-account in deferred revenue, the accrual of which depends on the nature of the identifiable services, in accordance with the following:

i.Customer connection to the network: revenue is accrued until such connection is completed;

ii.Continuous provision of the electric power supply service: throughout the shorter of the useful life of the asset and the term for the provision of the service.

4.21 Employee benefits

Defined benefit plans

The Company operate various defined benefit plans. Typically defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors, such as age, years of service and compensation.

F - 82

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

The liability recognized in the balance sheet in respect to defined benefit plans is the present value of the defined benefit obligation at the end of the reporting period. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using future actuarial assumptions about demographic and financial variables that affect the determination of the amount of such benefits.

The Group's accounting policy for benefit plans is recognizing actuarial gains and losses from experience adjustments and changes in actuarial assumptions, in other comprehensive income (loss) in the period in which they arise. Past service costs are recognized immediately in the Statement of Comprehensive Income (loss).

4.22 Provisions and contingencies

Provisions were recognized in the cases in which, considering a present obligation in charge of the group, legal or constructive, arising from a past event, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate could be made of its amount.

The amount recorded as provisions is the best estimate of the resource outflow necessary to settle the present obligation, at the end of the reporting year, considering the pertinent risks and uncertainties. When a provision is measured using the estimated cash outflow for settling the present obligation, the amount recorded represents the present value of that cash flow. This present value is obtained applying a discount rate before taxes to reflect the market conditions, the time value of money and the risks specific to the obligation.

These provisions have been set up to cover potential contingent situations that could give rise to future obligations of payment. In estimating the amounts and probability of occurrence, the opinion of each Company’s legal advisors has been taken into account.

4.23 Revenue recognition 

Revenue is measured at the fair value of the consideration received or receivable, taking into account the estimate amount of any discount, thus determining the net amounts.

Ordinary revenue has been recognized when each and every of the following condition has been met:

i)the entity has transferred to the buyer all significant risks and rewards;

ii)the amount of revenue was reliably measured;

iii)it is probable that the entity will receive the economic benefits associated with the transaction;

iv)costs incurred or to be incurred in relation to the transaction have been reliably measured.

F - 83

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

4.23.1 Revenue

The revenue recognition criteria of the main activities of the Company include:

i.From the power generation activity: they are recognized as accrued comprising energy made available and generated energy.

During this fiscal year ended December 31, 2014, upon the meeting of condition (iii) above, generating subsidiaries have recognized as income the fair value of the remuneration corresponding to the section c) Res. SE N ° 406/03 and the portion of the Additional Remuneration to be allotted to the Trust accrued during fiscal year 2013 and 2014. This change results from the execution of the 2014 Agreement on October 27, 2014, whereby CTLL have undertaken to conduct a new generation Project which will be partially funded by CAMMESA.

During this fiscal year ended December 31, 2015, HIDISA and HINISA  have not recognized the Maintenance Remuneration —which is to be allocated exclusively to the financing of major maintenance tasks— as income since the condition that the entities may probably receive the economic benefits associated with the transaction has not been met, as the major maintenance works to be financed with the LVFVDs to be issued by CAMMESA are subject to approval by the SE and, therefore, there is no reasonable certainty that these companies will collect the generated receivables.

Additionally during this fiscal year, generating subsidiaries have not recognized revenues of Remuneration FONINVEMEM 2015-2018 until the approval of investment projects.

ii.From the electricity distribution activity: Revenue from the electricity provided by Edenor to low-income areas and shantytowns is recognized to the extent that the Framework Agreement has been renewed for the period in which the service was rendered.

Revenue from operations is recognized on an accrual basis and derives mainly from electricity distribution. Such revenue includes both the electricity supplied, whether billed or unbilled at the end of each year, which has been valued on the basis of applicable tariffs, and the charges resulting from the application of SE Resolution No. 347/12 (Note 2.3.1.7).

Edenor also recognizes revenue from other concepts included in distribution services, such as new connections, reconnections, rights of use on poles, transportation of electricity to other distribution companies, etc.

iii.From exploration and exploitation of oil and gas activity: Revenues from sales of crude oil, natural gas and liquefied petroleum gas are recognized on the transfer of title in accordance with the terms of the related contracts, which is when the customer has taken title and assumed the risks and benefits, prices have been determined and collectibility is reasonably assured.

F - 84

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

4.23.2 Other Income

i.Recognition of higher cost.

The recognition of higher costs (Note 2.3.1.6) not transferred to the tariff, as well as the recognition established by SE Resolution No. 32/15 fall within the scope of IAS 20 “Accounting for Government Grants and Disclosure of Government Assistance” as they imply a compensation to cover the expenses and afford the investments associated with the normal provision of the public service, object of the concession.

Their recognition is made at fair value when there is reasonable assurance that they will be collected and the conditions attached thereto have been complied with, i.e. provision of the service in the case of the recognition established in SE Resolution No. 32/15, and the ENRE’s approval and the SE’s recognition, by means of a Note or Resolution, in the case of the recognition of higher costs (Note 2.3.1.6).

As for the income deriving from the funds to which SE Res. No. 745/05 refers (Note 2.3.1.6), it is recognized on the basis of amounts billed.

Such concepts have been disclosed in the “Recognition of income on account of the RTI – Resolution 32/15” and “Higher Costs Recognition - SE Resolution 250/13 and subsequent Notes” line items of the statement of comprehensive income as of December 31, 2015 and 2014, recognizing the related tax effects. There have been no unfulfilled conditions or any other related contingencies.

ii.Recognition of compensation for injection of surplus gas – Resolution No. 1/13

The recognition of income for the injection of surplus gas is covered by IAS 20 since it involves a compensation as a result of the production increase committed by PEPASA.

Its recognition is made at its fair value when there is reasonable assurance that it will be collected and that the conditions required have been complied.

This item has been disclosed under Compensation for Surplus Gas Injection - Resolution No. 1/13, Under other operating income, in the comprehensive income (loss) statement.

4.23.3 Interest and dividend income

Dividend income is recognized when the right to receive payment has been established. Interest income is recognized using the effective interest method. They are recorded on a temporary basis, with reference to the outstanding principal and the applicable effective rate.

This income is recognized as long as it is probable that the entity receives the economic benefits associated with the transaction and the amount of the transaction has been reliably measured.

F - 85

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

4.24 Income tax and tax on asset

4.24.1 Current and deferred income tax

The tax expenses for the period include current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity. In this case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognized, using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if they come from the initial recognition of goodwill; or if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at time of the transaction affects neither accounting nor taxable profit or loss.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available and can be used against temporary differences.

Deferred income tax is provided on temporary differences from investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset the recognized amounts and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Current and deferred tax assets and liabilities have not been discounted.

4.24.2 Minimum notional income tax

The Company calculates the minimum notional income tax by applying the current 1% rate on computable assets at the end of the year. This tax complements income tax. The Company’s tax obligation for each year will be the higher of the two taxes. If in a fiscal year, however, minimum notional income tax obligation exceeds income tax liability, the surplus will be computable as a payment in advance of income tax through the next ten years.

F - 86

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 4: (Continuation)

As of the closing date hereof, the Company’s Management analyzed this receivable’s recoverability, and allowances are created in as long as it is estimated that the amounts paid for this tax will not be recoverable within the statutory limitation period taking into consideration the Company’s current business plans. The Company’s Management will evaluate the evolution of this recoverability in future fiscal years.

4.25 Balances with related parties

Receivables and liabilities with related parties are initially recognized at fair value and subsequently measured at amortized cost.

4.26 Assignments of use

The assignments of use in which a significant portion of the risks and rewards deriving from ownership are kept by the lessor are classified as operating. At present, Edenor only has lease agreements that are classified as operating.

As assignor: The payments with respect to operating assignments of use are recognized as operating expenses in the statement of comprehensive income (loss) on a straight-line basis throughout the term of the assignment.

As assignee: The assignments of use in which the Company does not transfer substantially all the risks and rewards of the ownership of the asset are classified as operating assignments of use.

The collections with respect to operating assignments of use are recognized as income in the statement of comprehensive income (loss) on a straight-line basis throughout the term of the assignment.

4.27Variable Compensation to Certain Officers

PEPASA has granted its Corporate Directors an Annual Variable Compensation (the ‘EBDA Compensation’) for the performance of technical and administrative duties amounting to 7% of the EBDA (EBITDA less paid income tax, less total net financial costs, less interest on its own capital, considering an annual 10% dollar-denominated rate) accrued for each fiscal year, as disclosed in the corresponding financial statements approved by the applicable General Ordinary Shareholders Meeting.

The Company recognizes a provision (liability) and an expense for this EBDA Compensation based on the previously mentioned formula

4.28 Assets classified as held for sale and associated liabilities

The subsidiaries’ assets and liabilities that have been made available for sale are classified as Assets available for sale and associated liabilities when the carrying amount will be mainly recovered through a sale transaction, and this transaction is regarded as highly probable. These assets are valued at the lower of the carrying amount and fair value less costs of disposal. The amounts recognized in profit or loss corresponding to discontinued operations have been included in a single line item of the Company’s consolidated statement of comprehensive income (loss) called "Discontinued operations".

NOTE 5: CRITICAL ACCOUNTING ESTIMATES AND JUDGMENTS

The preparation of financial statements requires the Company’s Management to make future estimates and assessments, to apply critical judgment and to establish assumptions affecting the application of accounting policies and the amounts of disclosed assets and liabilities, and income and expenses.

F - 87

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 5: (Continuation)

The applied estimates and accounting judgments are evaluated on a continuous basis and are based on past experiences and other reasonable factors under the existing circumstances. Actual future results might differ from the estimates and evaluations made at the date of preparation of these consolidated financial statements. The estimates which have a significant risk of producing adjustments on the amounts of the assets and liabilities during the following year are detailed below:

5.1 Impairment of long-lived assets

Long-lived assets, including identifiable intangible assets, are reviewed for impairment at the lowest level for which there are separately identifiable cash flows (CGU). 

Most of the main subsidiaries or joint ventures of the Company are a CGU, as they have only one power generation plant (generation segment), a power transmission network (transmission segment) or one concession area for the distribution of electricity (distribution segment) and areas of exploration and exploitation of oil and gas (oil and gas segment). Consequently, each subsidiary and joint venture in these segments represents the lowest level of composition of assets generating independent cash flows.

i)Assets subject to depreciation / amortization are reviewed for impairment when facts or circumstances show that the carrying amount may not be recoverable.

ii)Goodwill: In accordance with the applicable accounting policies, goodwill is tested for impairment annually. The amounts recoverable from CGUs are determined based on the calculations of its value in use.

iii)Intangible assets: Intangible assets having an indefinite useful life are not amortized. Intangible assets having an indefinite useful life are tested for impairment by comparing their recoverable amount with their book value: (i) annually; and (ii) at any time, if there is any indication that they may have been impaired.

In order to evaluate if there is evidence that a CGU could be affected, both external and internal sources of information are analyzed.  Specific facts and circumstances are considered, which generally include the discount rate used in the estimates of the future cash flows of each CGU and the business condition as regards economic and market factors, such as the cost of raw materials, oil and gas, the regulatory framework for the energy industry (mainly the RTI / CMM and recognition of expected prices), the projected capital investments and the evolution of the energy demand.

An impairment loss is recognized when the book value of the asset exceeds its recoverable value. The recoverable amount is the higher of the value in use and the fair value less costs of disposal. Any impairment loss will be distributed (to reduce the book value of the CGU's assets) in the following order:

F - 88

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 5: (Continuation)

(a) first, to reduce the book value of goodwill assigned to the CGU, and

(b) then, to the other assets in the cash generating unit (or group of units), prorated for the carrying amount of each asset in the unit (or group of units), taking into account not to reduce the carrying amount of the asset below the higher of its fair value less costs of disposal, its value in use or zero value.

(c) any impairment loss which may not be allocated to the specific asset will be proportionately distributed among the remaining assets making up the CGU.

The value in use of each CGU is estimated on the basis of the present value of  future net cash flows that these units will generate. The Company Management uses approved budgets up to one year for its cash flow projections extrapolated into a term consistent with the assets’ remaining useful life, taking into consideration the appropriate discount rates. In order to calculate the fair value less the costs to sale, the Company Management uses the estimated value of the future cash flows that a market participant could generate from the appropriate CGU, and deducts the necessary costs to carry out the sale of the corresponding CGU.

The Company Management is required to make judgments at the moment of the future cash flow estimation. The actual cash flows and the values may differ significantly from the expected future cash flows and the related values obtained through discount techniques.

Non-financial assets other than goodwill which have suffered impairment in the past are reviewed for a possible reversal of the impairment as at the closing date of the fiscal year.

(a)Reversal of Property, Plant and Equipment Impairment in CPB

As from January 2012, CAMMESA, at the direction of the ES, remuneration adjustments stablished by the “2008 – 2011 Agreement” in November, 2010 were cancelled. Furthermore, in the case of CPB, another change in the regulatory framework prevented the Company from continuing operating in the fuel oil purchase business, an activity which allowed it to obtain a margin on the fuel it acquired for generation purposes. Both measures have had a negative effect on the company’s generation of funds, which were insufficient to meet growing operating costs. The deterioration of CPB’s economic and financial situation, evidenced by operating losses, negative cash flows and a working capital deficit, resulted in a decrease in the plant’s reliability since it lacked the sufficient resources to continue bringing about the improvements necessary to keep the operating levels met during fiscal year 2011.

Therefore, as at September 30, 2012, CPB recorded an impairment loss amounting to $ 108.3 million for its Property, Plant and Equipment —which, net of the effect of the income tax, amounted to $ 70.4 million— as a result of the assessment of their recoverable value. 

F - 89

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 5: (Continuation)

Impairment loss charges have been distributed on a pro rata basis in order to reduce the book value of the assets composing the CGU, taking into consideration the book value of each of the unit’s assets. After recognizing the impairment loss, the asset’s depreciation charges have been adjusted during the following fiscal years to systematically distribute its reviewed book value less any possible residual value through its remaining useful life.

Previously impaired non-financial assets are reviewed for a possible reversal of the impairment at each reporting date.

With the implementation of SE Resolution No. 95/13 and its amendment SE Resolution No. 529/14 —which defined a new remuneration scheme for the industry as from February 2013 and the later update of remunerative values effective as from February 2014, respectively— and the granting of financing by CAMMESA under advantageous conditions to CPB, which will allow to afford the cost of the capital investments necessary to recover the company’s plant operating capacity (Note 21.1.3), CPB´s projections regarding the recoverability of its Property, Plant and Equipment and its deferred tax assets have been modified.

As of September 30, 2014, CPB’s management reevaluated its discounted cash flows considering a revenue increase exceeding by 10% cost increases as from the year 2017 (on account of the recognition of cost mismatches in respect to past income) and that tariff increases will be granted to offset future cost increases.

The remaining assumptions are detailed below:

i.Actual discount rate: 9.9%.

ii.Growth rate: 0%.

iii.Plant’s availability factor: 86% on average, considering the execution of major maintenance works in the generating units.

iv.The collection of the maximum remuneration provided for fixed costs based on the provisions of item iii.

v.The fulfilment of the capital investments necessary to recover the plant’s operating capacity under normal availability conditions will take place during the next two years and will receive CAMMESA’s permanent financing, which will be repaid under the conditions detailed in Note 20.1.3.

In the light of the above conclusions, CPB CGU’s value in use determined based on the present value of future net cash flows was $ 274.4 million higher than its book value. Therefore, CPB as of December 31, 2014 recovered the above-mentioned impairment losses which, net of accumulated depreciation, amounted to $ 88.4 million (recognized under “Reversal of Impairment of Property, Plant and Equipment” in the Statement of Comprehensive Income) and, net of the effect of the income tax, amounted to $ 57.5 million. The affected Property, Plant and Equipment items were: lands, buildings, machines and generation equipment.

F - 90

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 5: (Continuation)

At the date of these financial statements CPB has not identified any events or circumstances indicate that the book value as of December 31, 2015 may not be recoverable.

(b)Test of impairment of property, plant and equipment and intangible assets associated with the subsidiary Edenor

As at December 31, 2011, the Company has recorded impairment losses associated with Edenor’s consolidated assets resulting from the assessment of their recoverable value. Depreciation losses totaled up $ 647.7 million which, net of the effect of the income tax, amounted to $ 421 million.

Due to the implementation of ENRE Resolution No. 1/16, which established an increase in income as from February 1, the projections concerning the recoverability of property, plant and equipment made by EDENOR, have been updated.

The value in use is determined based on projected and discounted cash flows, using discount rates that reflect the time value of money and the specific risks of the assets considered.

Cash flows are prepared on the basis of estimates concerning the future performance of certain variables that are sensitive to the determination of the recoverable amount, among which the following can be noted: (i) nature, opportunity and modality of electricity rate increases and/or cost adjustment recognition; (ii) demand for electricity projections; (iii) evolution of the costs to be incurred; (iv) investment needs in accordance with the service quality levels required by the regulatory authority, and (v) macroeconomic variables, such as growth rates, inflation rates and foreign currency exchange rates.

The future increase in electricity rates used by Edenor to assess the recoverability of its long-lived assets as of December 31, 2015  is based on the rights to which the Company is entitled, as stipulated in the Concession Agreement and the agreements described in Note 2 to these financial statements. Furthermore, the actions taken to maintain and guarantee the provision of the public service, the presentations made before regulatory authorities, the status quo of the discussions that are being held with government representatives, the announcements made by government officials concerning possible changes in the sector’s revenues to restore the economic and financial equation, and certain adopted measures, such as those described in Notes 2.3.3, 2.3.5 and 2.3.6 to these financial statements, have also been considered. Edenor Management estimates that it is reasonable to expect that new increases in revenues will be obtained as from 2017 as a result of the carrying out during 2016 of the RTI.

Edenor has made its projections under the assumption that it will obtain better electricity rates, in addition to the adjustments on account of the VAD provided for by Resolution No. 7/2016. However, due to the complexity of the RTI process Edenor Management may not ensure that the future performance of the variables used to make its projections will be in line with what it has estimated at the date of preparation of these financial statements.

In order to contemplate the estimation risk contained in the projections of the aforementioned variables, Edenor has considered three different probability-weighted scenarios. Although in all of them it is estimated that Edenor will succeed in reaching an acceptable agreement with the Government resulting in a gradual tariff increase, Edenor has considered different timing and magnitude of an increase in the VAD.

F - 91

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 5: (Continuation)

The scenarios that have been considered are the following:

a) Scenario called Pessimistic scenario: in this scenario, Edenor assumes modest electricity rate increases as from 2017 as a result of the gradual implementation of the RTI. A five-year term payment plan is established for the penalties owed to customers, whereas those owed to the ENRE are waived. The debt with CAMMESA (for energy and loans for consumption), including interest, is paid in 4 years. Probability of occurrence assigned 20%.

b) Scenario called Intermediate scenario: in this case, Edenor assumes reasonable electricity rate increases as from 2017 as a result of the gradual implementation of the RTI. A five-year term payment plan is established for the penalties owed to customers, whereas those owed to the ENRE are waived. The debt with CAMMESA (for energy and loans for consumption), including interest, is paid in 10 years with funds deriving from a specific charge included in electricity bills. Probability of occurrence assigned 65%.

c) Scenario called Optimistic scenario: in this case, Edenor assumes increases in its remuneration, in addition to the ones recognized in the Intermediate scenario, as from 2017 as a result of the gradual implementation of the RTI. A five-year term payment plan is established for the penalties owed to customers, whereas those owed to the ENRE are waived. The debt with CAMMESA (for energy and loans for consumption) is waived as part of the Concession Agreement renegotiation process. Probability of occurrence assigned 15%.

Edenor has assigned to these three scenarios the previously described percentages of probability of occurrence based mainly on experience and considering the present economic and financial situation, the status quo of the conversations that are being held with the Federal Government and the need to maintain the public service, object of the concession, in operation.

In all the scenarios a different after tax discount rate (WACC) in pesos has been used for each year of the projection. For the first 5 years, the average of these rates is 31%.

Sensitivity analysis:

The main factors that could result in impairment charges in future periods are: i) a distortion in the nature, opportunity and modality of the electricity rate increases and recognition of cost adjustments, ii) the development of the costs to be incurred, and iii) the investment needs in accordance with the service quality levels required by the regulatory authority in the RTI, among other factors. These factors have been taken into account in the aforementioned weight of scenarios. Due to the inherent uncertainty involved in these assumptions, the Company estimates that any sensitivity analysis that considers changes in any of them considered individually could lead to distorting conclusions.

Based on the conclusions previously mentioned, the valuation of property, plant and equipment, taken as a whole, does not exceed its recoverable value, which is measured as the value in use as of December 31, 2015.

F - 92

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 5: (Continuation)

Furthermore, the management understands that although these estimates may show an increase in the CGU’s value, actual measurements obtained so far are not sufficient to consider a sustainable recovery which can be confirmed with the conclusion of the RTI expected to be completed during 2016, and consequently evaluate the possible reversal of the impairment loss recognized by the Company during fiscal year 2011.

5.2 Current and deferred Income tax / Minimum notional income tax

A great level of judgment is required to determine the income tax provision since the Company Management has to regularly assess the positions stated in the tax returns as regards those situations where the applicable tax regulations are subject to interpretation and, if necessary, establish provisions according to the estimated amount that the Company will have to pay to the tax authorities. When the final tax result of these items differs from the amounts initially acknowledged, those differences will have an effect on the income tax and on the deferred tax provisions in the fiscal year when such determination is made.

A significant degree of judgment is required to determine the income tax provision. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for eventual tax claims based on estimates of whether additional taxes will be due in the future.

Deferred tax assets are reviewed at each reporting date and reduced in accordance with the probability that the sufficient taxable base will be available to allow for the total or partial recovery of these assets. Deferred tax assets and liabilities are not discounted. In assessing the realization of deferred tax assets, Management considers that it is likely that a portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income in the periods in which these temporary differences become deductible. To make this assessment, Management takes into consideration the scheduled reversal of deferred tax liabilities, the projections of future taxable income and tax planning strategies.

5.3 Provisions

The Company is subject to several lawsuits, complaints and other legal proceedings, including customers’ claims, where a third party seeks the payment of damages, reimbursement for losses or compensation. The Company’s potential liability as regards these claims, lawsuits and other legal proceedings cannot be estimated for sure. The Company Management, with the assistance of its legal counselors (lawyers) regularly reviews the status of each important proceeding and assesses its potential financial exposure.

If the loss derived from a lawsuit or legal proceeding is deemed probable and the amount can be reasonably estimated, the Company establishes allowance provision.

F - 93

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 5: (Continuation)

The provision for contingent losses reflect a reasonable estimation that losses will be incurred, based on information available to the Management at the consolidated financial statements date, and taking into account our litigation and resolution/settlement strategies. These estimates are prepared mainly with the help of legal counsel. However, if the Company Management estimates are incorrect, current provisions might be inadequate and derive in a charge to profits that could have an adverse effect on the balance sheet, comprehensive income (loss) statement, statements of changes in equity and cash flows.

5.4 Asset retirement obligation

The obligations relating to the decommissioning of wells after completion of the operations PEPASA´s management to make estimates about the costs of abandonment in the long-term and the time remaining until the abandonment. Notably, technology, costs and policy, security and environmental considerations are, continually changing, which may result in differences between the actual future costs and estimates.

Estimated future costs of wells plugging and abandonment in the hydrocarbon areas, discounted at a rate estimated at the time of their initial measuring, are capitalized together with the assets originating them, and are depreciated using the unit-of-production method. Additionally, a liability is acknowledged for this item at the estimated value of discounted payables.

5.5 Allowance for doubtful accounts

The Group is exposed to losses for uncollectible receivables. The Company Management estimates the final collectability of the accounts receivable.

The allowance for the impairment of accounts receivable is assessed based on the historical level of both the balances written off as an expense and the default balances. Additionally, Edenor Management records an allowance applying an uncollectibility rate for each customer category, tariff, customers included in the Framework Agreement, and customers not included in the Framework Agreement.

In order to estimate collections related to the energy generation segment we mainly consider the ability of CAMMESA to meet its payment obligations to generators, and the resolutions issued by ES, which allow the Company to collect its credits with CAMMESA through different mechanisms.

Additionally, Management analyzes the allowance for uncollectible receivables of the remaining accounts receivables of the segment based on an individual analysis of recoverability of receivables of the WEM debtors.

Future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in the assessment for each year.

F - 94

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 5: (Continuation)

5.6 Defined benefit plans

The liability recognized by the Company is the best estimate of the present value of the cash flows representing the benefit plan obligation at the closing date of the year. Cash flows are discounted using actuarial assumptions about demographic and financial variables that affect the determination of the amount of such benefits. Such estimate is based on actuarial calculations made by independent professionals in accordance with the projected unit credit method.

5.7 ENRE Penalties and Discounts

Edenor considers its applicable accounting policy for the recognition of ENRE penalties and discounts critical because it depends on penalizable events, which are valued on the basis of management best estimate of the expenditure required to settle the present obligation at the date of these financial statements. The balances of ENRE penalties and discounts are adjusted in accordance with the regulatory framework applicable thereto and have been estimated based on Edenor’s estimate of the outcome of the RTI process described in Note 2.

5.8 Going concern status

The co-controlled company Citelec has prepared their consolidated financial statements in accordance with the accounting principles applicable to a going concern, assuming that the companies will continue to operate normally. Therefore, they do not include the effects of the adjustments or reclassifications, if any, that might be necessary to make as a consequence of the situation described in Note 42, as well as its impact on the financial statements of the Group.

The management considers that this uncertainty regarding its the company under common control Citelec does not affect its capacity to continue operating on an ordinary basis, as described in Note 42.

5.9 Revenue recognition

In the distribution business, revenue is recognized on an accrual basis upon delivery to customers, which includes the estimated amount of unbilled distribution of electricity at the end of each year. We consider our accounting policy for the recognition of estimated revenue critical because it depends on the amount of electricity effectively delivered to customers which is valued on the basis of applicable tariffs. Unbilled revenue is classified as current trade receivables.

5.10 Oil and Gas Reserves

Reserves are oil and gas volumes (expressed in oil-equivalent m3) originated from or associated with any economic income in the areas where PEPASA operates and over which it holds exploration and exploitation rights.

F - 95

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 5: (Continuation)

Crude oil and gas reserves estimates are an essential part of PEPASA’s decision-making process. Crude oil and gas reserves volumes are taken into consideration in the calculation of depreciation -by using the production unit ratio- and to evaluate exploration and exploitation asset investments’ recoverable amounts.

Reserves estimates have been prepared by PEPASA technical staff, and are based on the technological and economic conditions prevailing as of December 31, 2015 taking into consideration their economic evaluation and the expiration of the concession to determine their recoverability period.

These estimates are adjusted every time changes in the evaluated aspects so justify, or at least once a year.

There are numerous factors giving rise to uncertainty regarding the estimate of proven and not proven reserves and of future production profiles, prices and development costs, several of which are beyond the producer’s control. The reserves calculation procedure is a subjective process for estimating the crude oil and natural gas recoverable from the subsoil which involves a high degree of uncertainty. This reserves estimate is prepared based on the quality of the geological and engineering information available as at that date, as well as its interpretation.

NOTE 6: FINANCIAL RISK MANAGEMENT

6.1 Financial Risk Factors

The Company’s activities are subject to several financial risks: market risk (including the exchange rate risk, the interest rate risk and the price risk), credit risk and liquidity risk.

Financial risk management is encompassed within the Company’s global policies focused on the uncertainty of certain financial markets, and aims to minimize potential adverse effects on its financial return. Financial risks are those derived from financial instruments the Company is exposed to during or at the closing of each fiscal year. The Company uses derivative instruments to hedge certain risks when it deems it necessary according to its risk management internal policies.

Financial risk Management is controlled by the Financial Department, which identifies, evaluates and covers financial risks. Risk Management systems and policies are reviewed on a regular basis to reflect changes in market conditions and the Company activities.

This section includes a description of the main risks and uncertainties which may adversely affect the Company’s strategy, performance, operational results and financial position.

F - 96

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

6.1.1 Market risks

Exchange rate risk

The Company, through its subsidiaries in the Generation segment, collects a meaningful part of its income in Argentine pesos pursuant to tariffs which are indexed to U.S. dollars, as is the case of income resulting from the Supply Agreement entered into between CTLL and the SE or EGSSA and the SE (actually merged with CTG), pursuant to Resolution No.  220/07, or CTG’s Energy Plus agreements. The other part of its operating flows expressed in Argentine pesos are not indexed to the U.S. dollar, and comprise income from hydroelectric and thermal generators that do not have Energy Plus or Supply Agreements with the SE pursuant to Resolution No. 220/07. On the other hand, most of the financial debt of the subsidiaries of the Generation segment is denominated in pesos keeping a lower portion of debt denominated in US dollars (a 13.5% as of December 31, 2015 approximately), which exposes them to the risk of loss on a devaluation of the peso.

Therefore, as there is not a strong currency mismatch between the operating generation of funds and financial debt, the risk of foreign-currency exchange rate fluctuations is reasonably hedged. However, in case such risk is not adequately hedged by business operations, as of December 31, 2015, CTLL has conducted forward transactions to purchase U.S. Dollars with pesos for US$ 72 million at an average exchange rate of $ 14.18 to a U.S. dollar, with maturities between January and June, 2016.

However, as the subsidiaries receive most of its income from CAMMESA, which during the past year has incurred in significant delays in its payment terms. A significant part of the transactions are denominated in U.S. dollars, they are billed in Argentine pesos and converted at the exchange rate effective during the month in which they are perfected. For the income from the Supply Contracts under Res. SE No. 220/07, this amount in pesos is collected from CAMMESA, on average, 100 days afterward, but the difference in the exchange rate is recognized by CAMMESA only until the expiration date, about 45 days. In case there is a strong devaluation between the billing and the collection date, as was the case during the months of January 2014 to December 2015, the U.S. dollars collectable by the Company may be severely reduced, thus limiting the effectiveness of its exchange rate hedge.

Additionally, as part of the Work Technological Update 2015-2016, CPB assumed different commitments with foreign suppliers, which are mostly denominated in foreign currencies (mainly euros and dollars) and will be funded through mutual and Assignment in Guarantee Contract subscribed with CAMMESA during the month of April 2014. In addition, a substantial portion of its financial debt with related companies is denominated in US dollars.

F - 97

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

In the distribution segment, Edenor´s exposure to currency risk relates to the collection of its revenue in pesos, in conformity with regulated electricity rates that are not indexed in relation to the US dollar, whereas a significant portion of its existing financial liabilities is denominated in US dollars. Therefore, Edenor is exposed to the risk of a loss resulting from a devaluation of the peso. Edenor may hedge its currency risk trying to enter into currency fowards. Nevertheless, at the date of issuance of these financial statements, it has not been able to hedge its exposure to the US dollar under terms it may consider viable.

If Edenor continued to be unable to effectively hedge all or a significant part of its exposure to currency risk, any devaluation of the peso could significantly increase its debt service burden, which, in turn, could have a substantial adverse effect on its financial and cash position (including its ability to repay its Corporate Bonds) and the results of its operations.

In the Oil and Gas segment, part of the PEPASA's income is denominated in U.S. dollars but collectable in pesos. Most of the financial debt of PEPASA is denominated in pesos and a portion of its debt is denominated in U.S. dollars but is payable in pesos indexed relative to the U.S. dollar (12%). PEPASA contracted investment commitments and operating expenses are denominated in dollars. As there isn’t a strong currency mismatch between the generation of own funds and the undertaken expenses, the risk of foreign-currency exchange rate fluctuations is reasonably hedged. However, as of December 31, 2015, PEPASA has conducted forward transactions to purchase U.S. Dollars with pesos for US$ 83 million at an average exchange rate of $ 14.08 to a U.S. dollar, with maturities between January and June, 2016.

On December 17, 2015, the Argentine peso underwent a devaluation of approximately 40% that affected not only the economic context in which the Company operates but also its results in these financial statements.

At the date of issuance of these financial statements, the devaluation of the Argentine peso increased, as compared to its value at year-end, by approximately 17%. This variation would generate a negative impact of $ 369 million. Those impacts have been determined without considering the effects of the hedging contracts.

The following table shows the Company’s exposure to the exchange rate risk for financial assets and liabilities denominated in a currency different from the Company’s functional currency.

F - 98

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

	Type	Amount of foreign currency	Exchange rate (1)	Total 12.31.2015	Total 12.31.2014
ASSETS
NON CURRENT ASSETS
Other receivables
Third parties	U$S	85,703	12.940	1,108,998	3,530,984
Total non current assets				1,108,998	3,530,984
CURRENT ASSETS
Financial assets at fair value through profit and loss	U$S	95,331,357	12.940	1,233,587,761	118,252,993
Trade and other receivables
Related parties	U$S	549,573	12.990	7,138,953	10,089,975
Third parties	U$S	24,754,018	12.940	320,316,983	18,439,637
	EUR	10,016	14.068	140,909	521,398
	CHF	39,930	12.895	514,916	-
	£	-	19.052	-	96,987
	U$	17,423	0.432	7,528	-
Cash and cash equivalents	U$S	28,946,258	12.940	374,564,573	133,809,244
	EUR	12,890	14.068	181,342	147,584
	U$	151,985	0.432	65,670	14,508
Total current assets				1,936,518,635	281,372,326
Total assets				1,937,627,633	284,903,310
LIABILITIES
NON CURRENT LIABILITIES
Borrowings
Related parties	U$S	(1,009,362)	12.990	(13,111,615)	(169,766,242)
Third parties	U$S	(214,688,564)	13.040	(2,799,538,870)	(1,802,303,741)
Total non current liabilities				(2,812,650,485)	(1,972,069,983)

F - 99

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

	Type	Amount of foreign currency	Exchange rate (1)	Total 12.31.2015	Total 12.31.2014
CURRENT LIABILITIES
Trade and other payables
Third parties	U$S	(73,519,019)	13.040	(958,687,995)	(405,629,479)
	EUR	(1,693,714)	14.210	(24,067,178)	(23,059,419)
	£	-	19.061	-	(1,161,726)
	CHF	(30,321)	12.906	(396,733)	(262,367)
	NOK	(68,200)	1.488	(101,464)	(78,830)
	U$	(25,310)	0.432	(10,936)	(11,942)
Borrowings
Related parties	U$S	(10,067)	12.990	(130,776)	(269,697,740)
Third parties	U$S	(23,890,393)	13.040	(311,531,217)	(83,237,348)
Salaries and social security payable
Third parties	U$	(905,624)	0.432	(391,304)	(209,039)
Total current liabilities				(1,295,317,603)	(783,347,890)
Total liabilities				(4,107,968,088)	(2,755,417,873)
Total liabilities and equity				(2,170,340,455)	(2,470,514,563)
(1) The exchange rates used correspond to December 31, 2015 released by the National Bank for U.S. dollars (U$S), euro (EUR), sterling pounds (£) swiss francs (CHF), norwegian kroner (NOK) and uruguayan pesos (U$). For balances with related parties, the exchange rate used is the average.

The Company estimates that provided all other variables remain constant, a 10% revaluation/(devaluation) of each foreign currency as compared to the Argentine peso would generate the following increase/(decrease) in the fiscal year’s in absolute values:

	Argentine pesos
Currency	12.31.2015	12.31.2014
U.S dollar	214,628,321	244,651,172
Euros	2,374,493	2,239,044
Sterling Pound	-	106,474
Norwegian kroner	10,146	7,883
Swiss francs	11,818	26,237
Uruguayan peso	32,904	20,647
Variation of the result for the year	217,057,682	247,051,456

Price risk

The Company’s investments in quoted and unquoted equity securities are subject to the risk of change in the market prices resulting from the uncertainties as to the future value of those securities.

F - 100

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

The Company is exposed to the price risk on its fiduciary ownership of 40% of CIESA’s shares which is calculated based on the market values of ADRs TGS. However, the Company considers that the price fluctuation risk in the securities market is low, since once the pending regulatory approval is obtained, the Shares held in Trust will be transferred to the Company, which will allow to exercise an indirect joint control of TGS. On the other hand, the Company is not exposed to commodities price risks. Additionally, the Company has investments in Government securities which are exposed to the risk of a significant change in market prices.

The following table shows the Company’s exposure to the price risk for the previously mentioned financial assets:

Financial assets	12.31.2015	12.31.2014
Shares	175	61,629,484
Government securities	1,566,785,757	237,068,910
Trust	2,554,544,826	962,942,332
Total	4,121,330,758	1,261,640,726

The Company estimates that provided all other variables remain constant, a 10% revaluation/(devaluation) of each quotation would generate the following increase/(decrease) in the fiscal year’s income:

	Increase (decrease) of the result for the year
Financial assets	12.31.2015	12.31.2014
Shares	18	6,162,940
Government securities	156,678,576	23,706,891
Trust	255,448,323	95,879,913
Variation of the result of the year	412,126,917	125,749,744

Hydrocarbon Price Risk

PEPASA operations are impacted by several factors beyond its control, including, but not limited to, variations in product market prices, Governmental regulations on prices, taxes and other levies, and royalties.

PEPASA is not significantly exposed to the hydrocarbon price risk mainly because, on account of regulatory, economic, governmental and other policies, domestic prices are not directly affected by short-term price variations in the international market.

During the fiscal years ended December 31, 2015, gas sales represented 96.3% of PEPASA's revenues from sales. Although it is regulated, fluctuations in the oil price do not substantially affect PEPASA's results.

F - 101

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

Since the domestic production of gas is insufficient to meet the demand, there is a need to import gas and liquid fuels. The decline in the price of oil and LNG resulted in lower prices for the LNG and the gas from Bolivia. During the first months of 2016, LNG prices are below the value of 7.5 US$/MM Btu for the Gas Plan, but above the prices paid to producers for volumes not covered by such plan. Additionally, the prices for imported liquid fuels (gas substitutes) are higher than the Gas Plan prices. In view of this situation, a downward revision of Gas Plan prices as a result of the decline in LNG import prices is not expected.

During the fiscal year 2015, 50% of gas were imported for LNG. Imported gas accounted for 25% of the annual consumption. The average price of these imports was US$ 8.6/MM Btu. No significant reduction in import volumes is expected in the short term.

In the fiscal years ended December 31, 2015, 2014 and 2013, PEPASA has not used derivative financial instruments to hedge risks associated with fluctuations in hydrocarbon prices.

Interest rate risk

Borrowings at variable rates exposes the Company to the interest rate risk on its cash flows due to the possible volatility they may experience, as it has happened throughout 2014 and 2015. Borrowings at fixed rates exposes the Company to the interest rate risk on the fair value of its liabilities, since they may be considerably higher than variable rates. As at December, 31, 2015, approximately 86.5 % of the loans were granted at a variable interest rate, based on the Private Badlar and Private Badlar corrected rate plus an applicable margin corrected. The remaining liabilities were agreed at fixed interest rates, denominated in U.S. dollars (82.9% of the total fixed rate debt). Borrowings at variable rates are denominated in pesos.

The Company seeks to mitigate its interest-rate risk exposure through the analysis and evaluation of (i) the different liquidity sources available in the financial and capital market, both domestic and (if available) international; (ii) interest rates alternatives (fixed or variable), currencies and terms available for companies in a similar sector, industry and risk than the Company; (iii) availability, access and cost of interest-rates hedge agreements. On doing this, the Company evaluates the impact on profit or losses resulting from each strategy over the obligations representing the main interest-bearing positions.

During the fiscal year ended December 31, 2015, the Private Badlar rate, the reference rate used by the Company for an important part of its financial liabilities, has remained constant during most of the year and then, towards its end, has increased significantly from an average 21% during the first nine months until reaching 30% during the last term, and was later stabilized at around 26%.

In case the fluctuations in variable interest rates become more significant, the Company may mitigate such risk, for example, through interest rate hedge agreements. In the case of fixed rates and in view of the market’s current conditions, the Company considers that the risk of a significant decrease in interest rates is low and, therefore, does not foresee a substantial risk in its indebtedness at fixed rates.

F - 102

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

Any significant increase in the variable interest rates at which the Company holds a significant portion of its existing financial debt may result in a significant increase in its financial burden which, in turn, may have a material adverse effect on its operating results and assets and financial position.

The following chart shows the breakdown of the Company’s borrowings classified by interest rate and the currency in which they are denominated:

	12.31.2015	12.31.2014
Fixed interest rate:
Argentine pesos	635,081,460	129,933,527
U.S dollar	3,084,003,580	2,223,975,162
Subtotal loans granted at a fixed interest rate	3,719,085,040	2,353,908,689
Floating interest rates:
Argentine pesos	4,082,587,531	2,090,074,426
Subtotal loans granted at a floating interest rate	4,082,587,531	2,090,074,426
Non interest accrues
U.S dollar	40,308,898	101,029,909
Argentine pesos	150,427,644	25,558,669
Subtotal no interest accrues	190,736,542	126,588,578
Total borrowings	7,992,409,113	4,570,571,693

Based on the conducted simulations, and provided all other variables remain constant, a 10% increase/decrease in variable interest rates would generate the following (decrease)/increase in the fiscal year's income:

	12.31.2015	12.31.2014
Floating interest rates:
Argentine pesos	110,254,660	50,398,813
Variation of the result for the year	110,254,660	50,398,813

6.1.2 Credit risk

Credit risk results from cash and cash equivalents, deposits in banks and financial institutions, and derivative financial instruments, as well as the customers and CAMMESA’ credit exposure, which includes outstanding balances of accounts receivable and the committed transactions. Regarding banks and financial institutions, only high credit quality institutions are accepted. If there are no independent risk ratings, the risk control area evaluates the customer’s creditworthiness, past experiences and other factors.

Individual credit limits are set according to the limits defined by the Board of Directors based on internal or external ratings approved by the Finance Division.

F - 103

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

Electric power generators collect through CAMMESA payments corresponding to the new remuneration scheme implemented through SE Resolution No. 95/13 at the beginning of 2013 and updated by Res. SE No. 529/14 and Res. SE No. 482/15. On the other hand, there is an deficit between payments collected by CAMMESA and receivables from the generating companies in respect to this entity. This is due to the fact that the price collected by CAMMESA regarding the electric power marketed in the Spot Market is regulated by the National Government, and is lower than the generation cost that CAMMESA has to reimburse to generators. The National Government has been filling this gap through contributions by the Treasury. However, in January 2016, certain resolutions issued by MEyM transferred more of the price of electricity to end users, which could help to alleviate the deficit mentioned. Anyway, it cannot be guaranteed that CAMMESA will continue making payments to generators, both regarding the energy and the power sold.

Besides, the default in the payment of WEM’s electricity power purchases by electric power distribution service providers has considerably increased in the last years. This has increased the WEM’s deficit and affected (both regarding payment terms and payable volume) -and may possibly affect even more- CAMMESA’s payment capacity to WEM’s creditors (basically generation and transportation companies) and their income. Furthermore, in January 2016, the MEyM passed several resolutions adjusting income received by electricity distribution companies which may help relieve such deficit.

The impossibility by CAMMESA to pay the generators’ receivables may have a substantially adverse effect on their cash income and, consequently, on the result of their operations and financial situation which, in turn, may adversely affect the Company’s repayment capacity.

Furthermore, with the implementation of the new regulatory framework, the SE has suspended the renewal and execution of new agreements in the WEM’s MAT (with the exception of Energy Plus contracts), also providing that the demand unmet by generators would be supplied directly by CAMMESA.Generators will provide their power and energy to the Spot Market at the prices set by the SE Resolution No. 482/15.

With regard to the consolidated financial claims with CAMMESA, it should be pointed out that the Company, through CTLL, has entered into an agreement with the SE undertaking to develop a new generation investment project, with partial financing from CAMMESA which can be repaid, at CTLL option, by applying the following receivables:i) LVFVDs pursuant to SE Resolution No. 406/03, Section 4.c, not committed under other agreements; ii) receivables from the Additional Remuneration to the Trust issued until December 31, 2015.

In the case of Edenor, as of December 31, 2015 and 2014, default trade receivables amounted to approximately $ 209.3 million and $ 229.3 million, respectively. As of December 31, 2015 and 2014, financial statements included provisions for $ 79.3 million and $ 84.6 million, respectively. Failure to collect receivables in the future may have an adverse effect on Edenor's financial situation and operating results which, in turn, may negatively impact its capacity to repay borrowings, including the cancellation of its Corporate Bonds.

F - 104

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

Also, part of the gas produced by PEPASA is purchased by CAMMESA. With respect to CAMMESA there is no assurance that it will make the payments established in the times and ways agreed. The inability of PEPASA to charge their claims could have a material adverse effect on our revenues and, consequently, on the results of operations and financial condition.

Additionally, our Natural Gas Promotion Program compensation depends on the Argentine Government's ability and willingness to pay. As at the issuance of these financial statements, the Company has collected compensations for the March 2013- April 2015 period, and has outstanding receivables in the amount of $ 451.8 million corresponding to the May-December 2015 period. We may not guarantee that the Company receives properly payments ofthe offered compensations in the future which could cause a potential claim to the argentine government.

The Company’s maximum exposure to the credit risk results from the accounting value of each financial asset in the financial statements after deducting all applicable allowances and provisions.

6.1.3 Liquidity risk

Liquidity risk is the risk that the Company does not have enough funds to meet all its obligations, whether of an economic, industrial or commercial mature. The cash flow projection is made by the Financial Department.

The Company Management supervises updated projections on liquidity requirements to guarantee there is enough cash to meet operating needs while keeping at all times a sufficient margin for unused credit facilities. In this way, the aim is that the Company does not breach indebtedness levels or the Covenants, if applicable, of any credit facility. Such projections take into consideration the Company’s debt financing plans, the meeting of the covenants and, if applicable, the external regulatory or legal requirements such as, for example, restrictions on the use of foreign currency.

Excess cash kept by operating entities and balances above working capital Management requirements corresponding to the segments of generation, oil and gas and holding and others, are managed by the Company’s Treasury Department, which invests excess cash in term deposits, mutual funds and marketable securities, selecting instruments having proper currencies and maturities, and an adequate credit quality and liquidity so as to provide a sufficient margin as determined in the previously mentioned projections.

The Company keeps its sources of financing diversified between banks and the capital market, and it is exposed to the refinancing risk at maturity.

During 2015, the Company continued mitigating its liquidity risk from the Generation segment through:

F - 105

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

i)An improvement in CTLL financial debt maturities profile and the reduction of its financing cost, mainly based on the issuance in October 2015 of Class C Corporate Bonds maturing in 2017 and the early cancellation of the syndicated borrowing received in November 2014;

ii)The refinancing of maturities of CTG’s financial debt of the year 2015 through the issuance of Class 6 Corporate Bonds, the proceeds of which were allotted to the cancellation of Class 4 Corporate Bonds maturing in March, 2015 and the early cancellation of the syndicated borrowing originally granted by CTG in February 2013. With this issuance, all outstanding peso-denominated Class 5 and 6 Corporate Bonds will finally mature in September 2016;

iii)Disbursements obtained by CPB through the execution of a Loan and Receivables Assignment Agreement between CPB and CAMMESA aiming to finance the 2015-2016 Technological Upgrade Work for a peso-denominated amount to be determined based on the disbursements made by CAMMESA and their respective exchange rates, for a maximum amount of US$ 82.6 million plus VAT and nationalization costs.

On the other hand, it should be pointed out that refinancing capabilities and terms are always dependent on the prevailing conditions at the time of renewal; therefore, there is limited leeway for reducing such risk.

F - 106

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

In the Oil and Gas segment, during the fiscal year 2015, PEPASA, has managed to mitigate its liquidity risk through an improvement in its financing structure, mainly based on the extension of the Corporate Bonds Programs and entering into a syndicated borrowing agreement with 18 months grace and final maturity in January 2019.

In addition and in order to continue to expand its sources of financing, PEPASA updates the amounts to VCP and Corporate Bonds Programs, as well as the possibility of a capital increase of up to $ 400 million through the issue of new ordinary shares.

The following table includes an analysis of the Company financial liabilities, grouped according to their maturity dates and considering the period remaining until their contractual maturity date from the date of the financial statements. Derivative financial liabilities are included in the analysis if their contractual maturities are essential for the understanding of the cash flow calendar. The amounts shown in the table are the contractual undiscounted cash flows.

As of December 31, 2015	Trade and other payables	Borrowings	Total
Less than three months	6,339,768,736	293,947,236	6,633,715,972
Three months to one year	312,716,673	1,909,665,250	2,222,381,923
One to two years	216,869,471	2,220,088,942	2,436,958,413
Two to five years	90,022,948	3,794,612,056	3,884,635,004
More than five years	-	2,535,360,818	2,535,360,818
Without established term	2,391,877,538	-	2,391,877,538
Total	9,351,255,366	10,753,674,302	20,104,929,668
As of December 31, 2014	Trade and other payables	Borrowings	Total
Less than three months	4,129,650,839	317,105,956	4,446,756,795
Three months to one year	317,765,237	1,209,975,119	1,527,740,356
One to two years	162,974,205	1,203,307,509	1,366,281,714
Two to five years	207,515,000	2,543,661,242	2,751,176,242
More than five years	-	3,174,703,163	3,174,703,163
Total	4,817,905,281	8,448,752,988	13,266,658,269

6.2. Concentration risk factors

6.2.1 Related to customers

Distribution segment’s receivables derive primarily from the sale of electric power.

F - 107

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

No single customer accounted for more than 10% of sales for the years ended December 31, 2015 and 2014. The collectability of trade receivables balances related to the Framework Agreement, which amount to $ 73.1 million and $ 75.8 million at December 31, 2015 and 2014, respectively, as disclosed in Note 2 (Framework Agreement) is subject to compliance with the terms of such agreement.

6.2.2 Related to employees who are union members

On June 8, 2015 an agreement was entered into between the Ministry of Labor, Employment and Social Security; Edesur; the Luz y Fuerza Union of the City of Buenos Aires, the Association of Senior Personnel of Power Companies; and Edenor pursuant to which the following was established:

a) A gradual salary increase until April 30, 2016, amounting to a 16% from May 1, 2015; a non-cumulative 11.8% from September 1, 2015;

b) and an 11.9% increase for the May 2016 - October 2016 period, to be calculated based on compensations effective in April 2016.

6.3 Capital risk Management

On managing capital, the Company aims to safeguard its capacity to continue operating as an on-going business with the purpose of generating return for its shareholders and benefits to other stakeholders, and keeping an optimal capital structure to reduce the cost of capital.

To keep or adjust its capital structure, the Company may adjust the amount of the dividends paid to its shareholders, reimburse capital to its shareholders, issue new shares, conduct stock repurchase programs or sell assets to reduce its debt.

In line with industry practices, the Company monitors its capital based on the leverage ratio. This ratio is calculated by dividing the net debt by the total capital. The net debt equals the total borrowings (including current and non-current borrowing) less cash and cash equivalents and current financial assets at fair value through profit and loss. The total capital corresponds to the equity attributable to owners of the company as shown in the statements of financial position, plus the net debt.

F - 108

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

Financial leverage ratios as at December 31, 2015 and 2014 were as follows:

	12.31.2015	12.31.2014
Total borrowings	7,992,409,113	4,570,571,693
Less: cash and cash equivalents, and financial assets at fair value through profit and loss	(4,597,617,426)	(1,363,811,233)
Net debt	3,394,791,687	3,206,760,460
Total capital attributable to owners	10,385,380,791	6,127,168,353
Leverage ratio	32.69%	52.34%

6.4 Fair value estimation

The Company classifies the fair value measurements of financial instruments using a fair value hierarchy, which reflects the relevance of the variables used to perform those measurements. The fair value hierarchy has the following levels:

-Level 1: quoted prices (not adjusted) for identical assets or liabilities in active markets.

-Level 2: data different from the quoted prices included in Level 1 observable for the asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from prices).

-Level 3: Asset or liability data not based on information that can be observed in the market (i.e., unobservable data).

The following table shows the Company’s financial assets and liabilities measured at fair value as of December 31, 2015 and 2014:

F - 109

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

As of December 31, 2015	Level 1	Level 2	Level 3	Total
Assets
Financial assets at fair value through profit and losss
Corporate securities	13,428,727	-	-	13,428,727
Government securities	1,590,353,006	-	-	1,590,353,006
Shares	175	-	70,630	70,805
Trust	-	2,554,544,826	-	2,554,544,826
Investment funds	2,500,804,849	-	-	2,500,804,849
Cash and cash equivalents
Investment funds	93,487,871	-	-	93,487,871
Derivative financial instruments	-	197,150	-	197,150
Other receivables
Investment funds as collateral	268,738,961	-	-	268,738,961
Total assets	4,466,813,589	2,554,741,976	70,630	7,021,626,195
Liabilities
Derivative financial instruments	-	18,081,410	-	18,081,410
Total liabilities	-	18,081,410	-	18,081,410
As of December 31, 2014	Level 1	Level 2	Level 3	Total
Assets
Financial assets at fair value through profit and losss
Corporate securities	505,553	-	-	505,553
Government securities	235,522,555	1,546,355	-	237,068,910
Shares	61,629,484	-	70,630	61,700,114
Trust	-	962,942,332	-	962,942,332
Investment funds	729,373,180	-	-	729,373,180
Cash and cash equivalents
Investment funds	135,536,579	-	-	135,536,579
Other receivables
Investment funds as collateral	53,238,417	-	-	53,238,417
Total assets	1,215,805,768	964,488,687	70,630	2,180,365,085
Liabilities
Derivative financial instruments	-	47,880,462	-	47,880,462
Total liabilities	-	47,880,462	-	47,880,462

F - 110

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 6: (Continuation)

The value of the financial instruments negotiated in active markets is based on the market quoted prices as of the date of these consolidated financial statements. A market is considered active when the quoted prices are regularly available through a stock exchange, broker, sector-specific institution or regulatory body, and those prices reflect regular and current market transactions between parties that act in conditions of mutual independence. The market quotation price used for the financial assets held by the Company is the current offer price. These instruments are included in level 1.

The fair value of financial instruments that are not negotiated in active markets is determined using valuation techniques. These valuation techniques maximize the use of market observable information, when available, and rely as little as possible on specific estimates of the Company. If all significant variables to establish the fair value of a financial instrument can be observed, the instrument is included in level 2.

If one or more variables used to determine the fair value cannot be observed in the market, the financial instrument is included in level 3.

The techniques used for the measurement of assets at fair value with changes in income, classified as Level 2, are detailed below:

- Government securities: based on the present value of contractual cash flows, applying a discount rate derived from other similar debt securities’ observable market prices.

- Trusts: They were determined based on the measurement of the underlying assets and liabilities’ fair value, corresponding to 40% of CIESA’s shares. To determine this value, a measurement of the fair value of CIESA’s assets and liabilities was performed. CIESA’s main asset is its stake in TGS, which has been measured at the value of this company’s American Depositary Receipt.

- Derivative Financial Instruments: calculated from variations between market prices at the closing date of the year, and the amount at the time of the contract.

NOTE 7: INVESTMENTS IN SUBSIDIARIES

(a) Subsidiaries information

Unless otherwise indicated, the capital stock of the subsidiaries consists of common shares, each granting the right to one vote. The country of the registered office is also the principal place where the subsidiary develops its activities.

F - 111

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 7: (Continuation)

			12.31.2015	12.31.2014
	Country	Main activity	% Participation	% Participation
BLL	Argentina	Winemaking	100.00%	100.00%
CTG	Argentina	Generation	90.42%	90.42%
CTLL	Argentina	Generation	100.00%	100.00%
IEASA	Argentina	Investment	100.00%	100.00%
INDISA	Argentina	Investment	91.60%	91.60%
INNISA	Argentina	Investment	90.27%	90.27%
IPB	Argentina	Investment	100.00%	100.00%
PACOSA	Argentina	Distributor	100.00%	100.00%
PEPASA	Argentina	Oil	49.60%	49.74%
PEPCA	Argentina	Investment	100.00%	100.00%
PISA	Uruguay	Investment	100.00%	100.00%
PP	Argentina	Investment	100.00%	100.00%
PP II	Argentina	Investment	100.00%	100.00%
Transelec	Argentina	Investment	100.00%	100.00%

⁽¹⁾ On January 8, 2014, PEPASA shareholders subscribed 17.8 million of new shares in the exercise of their preemptive rights and 41.9 million of new shares in the exercise of their accretion rights. The Company holdings were thus reduced to 50%. During the years 2014 and 2015, the Company sold PEPASA shares, reducing its interest to 49.74% and 49.60% respectively. However, the necessary conditions to keep PEPASA’s control are met.

(b) Summarised financial information for each subsidiary that has significant non-controlling interest

Non-controlling interests in subsidiaries are not significant for the Company, except for Edenor, a company which is indirectly controlled through IEASA, with a 51.54% equity interest.

Edenor

The subsidiary is registered in Argentina, which is also the principal place where it develops its activities.

F - 112

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 7: (Continuation)

i.Summary statement of financial position

	12.31.2015	12.31.2014
Non Current
Total non current assets	9,113,613,499	6,989,315,674
		-
Borrowings	2,460,975,397	1,598,442,363
Other non current liabilities	3,316,579,611	2,313,254,275
Total non current liabities	5,777,555,008	3,911,696,638
Current
Cash and cash equivalents	128,951,624	179,079,613
Other current assets	3,738,364,002	1,461,672,975
Total current assets	3,867,315,626	1,640,752,588
Borrowings	48,797,824	33,960,526
Other current liabilities	5,629,526,622	4,299,413,388
Total current liabilities	5,678,324,446	4,333,373,914
Equity	1,525,049,671	384,997,710

ii.Summary statement of comprehensive income (loss)

	12.31.2015	12.31.2014	12.31.2013
Revenue	3,802,161,917	3,598,376,178	3,440,690,501
Depreciation	(281,407,098)	237,639,289	212,148,353
Interest income	96,225,288	238,973,376	287,067,095
Interest expense	(429,898,500)	(576,503,676)	(494,541,438)
Profit (Loss) for the year before tax	1,326,174,138	(934,072,460)	823,750,628
Income tax	(183,731,408)	154,356,112	44,116,566
Profit (Loss) for the year	1,142,442,730	(779,716,348)	867,867,194
Discontinued operations	-	-	(95,108,875)
Other comprehensive loss	(2,390,769)	(11,584,911)	(13,618,222)
Total comprehensive income (loss) of the year	1,140,051,961	(791,301,259)	759,140,097

F - 113

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 8: INVESTMENTS IN JOINT VENTURES

	Note	12.31.2015	12.31.2014	12.31.2013
At the beginning of the year		226,894,893	188,644,285	192,315,761
Capital increase	35.g	475,000	-	1,198,435
Other increases		-	6,171,366	-
Other decreases		(13,568,371)	-	-
Share of profit		9,277,768	34,208,368	(4,799,349)
Participation in other comprehensive income		839,661	(2,129,126)	(70,562)
At the end of the year		223,918,951	226,894,893	188,644,285

The Company has a co-controlling interest in Citelec, Transener’s controlling company.

The Company’s equity in Citelec is 50%, and the latter holds 52.65% of the interests in Transener. This means that Pampa Energía indirectly holds 26.33% of the interests in Transener. The stock capital is composed of common shares, each granting the right to one vote. It is registered in Argentina, which is also the principal place where it develops its activities.

For the valuation of interest in joint venture, its consolidated financial statements as of December 31, 2015 have been used, which disclose the following items: Capital Stock in the amount of $ 554.3 million, profit for the year in the amount of $ 26.7 million and Shareholders’ Equity in the amount of $ 722.6 million.

The following chart includes a reconciliation of the equity method value and the book value of the Company’s interest in it:

	12.31.2015	12.31.2014	12.31.2013
Equity method	177,963,736	163,314,574	127335695
Adjustments (1)	45,955,215	63,580,319	61308590
Total investments in joint ventures	223,918,951	226,894,893	188,644,285

⁽¹⁾  Includes adjustments for repurchase of corporate bonds and depreciation of property, plant and equipment.

F - 114

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 8: (Continuation)

i.Summary consolidated statement of financial position

	12.31.2015	12.31.2014
Non current
Total non current assets	1,760,421,668	1,605,270,566
	-	-
Borrowings	1,234,822,563	955,667,363
Other non current liabilities	231,393,857	219,436,744
Total non current liabities	1,466,216,420	1,175,104,107
Current
Cash and cash equivalents	591,952,625	330,114,038
Other current assets	602,936,441	519,478,559
Total current assets	1,194,889,066	849,592,597
Loans	278,946,317	147,212,304
Other current liabilities	487,579,823	477,540,661
Total current liabities	766,526,140	624,752,965
Non-controlling interest	367,505,789	328,865,404
Total Equity (Owners)	355,062,385	326,140,687

ii.Summary consolidated statement of comprehensive income (loss)

	12.31.2015	12.31.2014	12.31.2013
Sales	1,946,843,329	1,476,888,470	873,761,354
Depreciation	(90,857,640)	(86,374,111)	83,889,462
Interest income	387,523,443	452,249,248	345,957,761
Interest expense	(122,813,236)	(117,842,289)	(83,121,779)
Profit for the year before income tax	101,375,540	256,076,336	(5,054,064)
Income tax	(37,686,499)	(102,843,457)	1,665,245
Profit for the year	63,689,041	153,232,879	(3,388,819)
Owners of the company	26,667,376	76,206,155	(3,333,089)
Non-controlling interest	37,021,665	77,026,724	(55,730)
Other comprehensive profit (loss)	3,298,040	(8,439,021)	(267,039)
Total comprehensive profit of the year	66,987,081	144,793,858	(3,655,858)

NOTE 9: INVESTMENTS IN ASSOCIATES

	12.31.2015	12.31.2014	12.31.2013
At the beginning of the year	133,169,584	134,774,654	132,546,155
Share of loss	(9,932,259)	(1,605,070)	2,228,499
At the end of the year	123,237,325	133,169,584	134,774,654

F - 115

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 9: (Continuation)

The Company holds an interest in only one associated company. Through PEPCA, the Company has a 10% interest in CIESA, a company holding 51% of TGS’s capital stock. TGS is the most important gas transportation company in the country, and it operates the biggest pipeline system in Latin America. In turn, it is the leading company in the production and marketing of natural gas liquids both for the domestic and the export market. It also provides comprehensive solutions in the natural gas area and, since 1998, TGS has also landed in the telecommunications area through its subsidiary Telcosur S.A.

The capital stock of the associated company is composed of common shares, each granting the right to one vote. The associated company is registered in Argentina, which is also the principal place where it develops its activities.

For the valuation of its interest in the associate, financial statements as of December 31, 2015 have been used, which disclose the following items: Capital Stock in the amount of $ 638.8 million, loss for the year in the amount of $ 115.4 million and Shareholders’ Equity in the amount of $ 1,119 million.

The following chart includes a reconciliation of the equity method value and the book value of the Company’s interest in them:

	12.31.2015	12.31.2014	12.31.2013
Equity method	88,417,829	98,350,088	99,955,158
Adjustments (1)	34,819,496	34,819,496	34,819,496
Total investments in associates	123,237,325	133,169,584	134,774,654

⁽¹⁾ Includes the increased value of investments in associated companies.

F - 116

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 9: (Continuation)

i.Summary statement of financial position

	12.31.2015	12.31.2014
Non current
Total non current assets	4,512,968,600	4,315,905,067
	-	-
Borrowings	2,895,699,292	2,168,053,320
Other non current liabilities	559,514,632	424,589,373
Total non current liabities	3,455,213,924	2,592,642,693
Current
Cash and cash equivalents	888,372,789	1,026,978,373
Other current assets	1,343,872,211	1,115,478,627
Total current assets	2,232,245,000	2,142,457,000
Borrowings	456,885,000	553,159,000
Other current liabilities	897,312,000	1,178,538,650
Total current liabities	1,354,197,000	1,731,697,650
Non-controlling interest	1,051,624,600	1,150,520,693
Total Equity (owners of the company)	884,178,076	983,501,031

ii.Summary statement of comprehensive income (loss)

	12.31.2015	12.31.2014	13.31.2013
Sales	4,226,569,000	4,303,971,000	2,864,986,000
Depreciation	(262,068,000)	(255,662,000)	(242,917,000)
Interest income	162,356,000	262,297,000	163,293,000
Interest expense	(355,022,000)	(321,738,000)	(230,864,000)
(Loss) Profit for the year before income taxe	(201,387,982)	76,609,670	138,484,000
Income tax	102,065,853	(92,660,373)	(93,248,000)
Loss for the year	(99,322,130)	(16,050,703)	22,284,986

F - 117

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 10: PROPERTY, PLANT AND EQUIPMENT

	Original Values
Type of good	At the beginning	Increases	Decreases	Reversal of impairment	Transfers	At the end
Land	24,568,246	-	-	-	-	24,568,246
Buildings	369,648,826	-	(17,495,775)	-	40,453,704	392,606,755
Generation equipment and machinery	2,310,992,875	2,747,339	(273,882,461)	-	107,230,830	2,147,088,583
Work and compulsory work performed	7,533,912	-	-	-	-	7,533,912
High, medium and low voltage lines	2,477,342,509	9,598,783	(19,367,608)	-	733,052,521	3,200,626,205
Substations	1,068,956,758	-	-	-	230,026,186	1,298,982,944
Transforming chamber and platforms	608,521,395	-	(200,002)	-	184,320,346	792,641,739
Meters	711,410,784	-	-	-	94,816,968	806,227,752
Wells	462,012,725	101,922,693	(1,189,649)	-	561,161,642	1,123,907,411
Casks	89,571	-	-	-	-	89,571
Mining property	334,147,113	470,365,247	-	-	-	804,512,360
Gas plant	4,156,943	7,407,108	-	-	182,214,358	193,778,409
Vehicles	131,665,346	124,628,055	(779)	-	583,116	256,875,738
Furniture and fixtures and software equipment	161,524,463	30,486,646	(104,946)	-	1,357,023	193,263,186
Communication equipments	57,932,395	139,474	(6,900)	-	446,443	58,511,412
Materials and spare parts	236,683,467	126,050,640	(40,996,168)	-	3,615,869	325,353,808
Tools	30,157,577	2,528,985	(6,780)	-	704,992	33,384,774
Civil works	2,696,068	-	-	-	-	2,696,068
Work in progress	2,201,233,541	4,579,481,279	(5,459,587)	25,259,957	(1,934,998,204)	4,865,516,986
Advances to suppliers	218,768,681	792,535,246	(1,720,546)	-	(204,985,794)	804,597,587
					-
Total at 12.31.2015	11,420,043,195	6,247,891,495	(360,431,201)	25,259,957	-	17,332,763,446
Total at 12.31.2014	8,616,516,627	2,709,178,057	(53,247,115)	147,595,626	-	11,420,043,195

F - 118

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 10: (Continuation)

	Depreciation					Net book values
Type of good	At the beginning	Decreases	Reversal of impairment	For the year	At the end	At the end	At 12.31.2014
Land	-	-	-	-	-	24,568,246	24,568,246
Buildings	(79,986,503)	1,763,679	-	(18,906,868)	(97,129,692)	295,477,063	289,662,323
Generation equipment and machinery	(497,494,132)	50,842,826	-	(117,874,462)	(564,525,768)	1,582,562,815	1,813,498,743
Work and compulsory work performed	(3,610,765)	-	-	(415,147)	(4,025,912)	3,508,000	3,923,147
High, medium and low voltage lines	(659,482,619)	15,969,428	-	(109,412,224)	(752,925,415)	2,447,700,790	1,817,859,890
Substations	(249,330,673)	-	-	(41,098,577)	(290,429,250)	1,008,553,694	819,626,085
Transforming chamber and platforms	(149,731,976)	85,479	-	(25,618,323)	(175,264,820)	617,376,919	458,789,419
Meters	(228,200,710)	-	-	(41,935,046)	(270,135,756)	536,091,996	483,210,074
Wells	(123,718,574)	-	-	(178,860,182)	(302,578,756)	821,328,655	338,294,151
Casks	(37,126)	-	-	(17,913)	(55,039)	34,532	52,445
Mining property	(40,579,609)	-	-	(77,113,865)	(117,693,474)	686,818,886	293,567,504
Gas plant	(593,369)	-	-	(19,011,569)	(19,604,938)	174,173,471	3,563,574
Vehicles	(38,768,503)	779	-	(33,583,541)	(72,351,265)	184,524,473	92,896,843
Furniture and fixtures and software equipment	(85,856,034)	95,106	-	(21,148,601)	(106,909,529)	86,353,657	75,668,429
Communication equipments	(31,987,738)	-	-	(3,199,472)	(35,187,210)	23,324,202	25,944,657
Materials and spare parts	-	-	-	-	-	325,353,808	236,683,467
Tools	(11,186,178)	6,780	-	(2,848,196)	(14,027,594)	19,357,180	18,971,399
Civil works	(1,378,711)	-	-	(137,244)	(1,515,955)	1,180,113	2,696,068
Work in progress	-	-	-	-	-	4,865,516,986	2,199,854,830
Advances to suppliers	-	-	-	-	-	804,597,587	218,768,681
Total at 12.31.2015	(2,201,943,220)	68,764,077	-	(691,181,230)	(2,824,360,373)	14,508,403,073
Total at 12.31.2014	(1,713,855,268)	8,758,089	(59,188,922)	(437,657,119)	(2,201,943,220)		9,218,099,975

F - 119

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 10: (Continuation)

Borrowing costs capitalized in the book value of property, plant and equipment during the year ended December 31, 2015 and 2014 amounted to $ 271.6 and $ 156 million respectively.

Labor costs capitalized in the book value of property, plant and equipment during the year ended December 31, 2015 and 2014 amounted to $ 433.8 and $ 123.9 million respectively.

Edenor acquisition of real property:

On October 7, 2015, Edenor Board of Directors approved the acquisition of a real property with the aim of concentrating centralized functions and reducing rental costs and the risk of future increases, for a total amount of $ 439.2 million, which, as of December 31, 2015, is fully paid.

As security for the amount paid, Edenor has received a surety bond from the seller.

Disclosed in the line “Advance to suppliers”.

NOTE 11: INTANGIBLE ASSETS

	Original values
Type of good	At the beginning	Decreases	At the end
Concession agreements	950,767,632	-	950,767,632
Goodwill	5,627,370	-	5,627,370
Rights over arbitration proceedings	108,754,000	(108,754,000)	-
Intangibles identified in acquisitions of companies from the distribution segment	8,834,040	-	8,834,040
Total at 12.31.2015	1,073,983,042	(108,754,000)	965,229,042
Total at 12.31.2014	1,073,983,042	-	1,073,983,042

	Amortization
Type of good	At the beginning	For the year	At the end
Concession agreements	(194,973,412)	(27,253,704)	(222,227,116)
Goodwill	-	-	-
Rights over arbitration proceedings	-	-	-
Intangibles identified in acquisitions of companies from the distribution segment	(6,625,531)	(2,208,509)	(8,834,040)
Total at 12.31.2015	(201,598,943)	(29,462,213)	(231,061,156)
Total at 12.31.2014	(172,136,729)	(29,462,214)	(201,598,943)

F - 120

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 11: (Continuation)

	Net book values
Type of good	At the end	At 31.12.2014
Concession agreements	728,540,516	755,794,220
Goodwill	5,627,370	5,627,370
Rights over arbitration proceedings	-	108,754,000
Intangibles identified in acquisitions of companies from the distribution segment	-	2,208,509
Total at 12.31.2015	734,167,886
Total at 12.31.2014		872,384,099

NOTE 12: BIOLOGICAL ASSETS

Non current	12.31.2015	12.31.2014
Grape-producing plantations	1,853,667	1,894,481
	1,853,667	1,894,481
Current
Grape growing crop	245,361	198,470
	245,361	198,470

NOTE 13: FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT AND LOSS

Non current	12.31.2015	12.31.2014
Shares	70,630	70,630
Government securities	23,567,249	-
Trusts	2,554,544,826	962,942,332
Total non current	2,578,182,705	963,012,962
Current
Government securities	1,566,785,757	237,068,910
Corporate securities	13,428,727	505,553
Shares	175	61,629,484
Investment funds	2,500,804,849	729,373,180
Total current	4,081,019,508	1,028,577,127

F - 121

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 14: DEFERRED TAX ASSETS AND LIABILITIES

The composition of the deferred tax assets and liabilities is as follows:

	12.31.2014	Profit (loss)	Other comprehensive income (loss)	12.31.2015
Tax los-carryforwards	115,375,625	(83,771,412)	-	31,604,213
Trade and other receivables	34,497,413	18,576,230	-	53,073,643
Derivative financial instruments	2,063,417	(2,063,417)	-	-
Financial assets at fair value through profit and loss	2,463,777	5,469,550	-	7,933,327
Trade and other payables	347,324,494	(13,981,811)	-	333,342,683
Salaries and social security payable	23,978,717	(1,191,944)	-	22,786,773
Defined benefit plans	78,171,676	30,135,284	383,524	108,690,484
Provisions	50,152,653	83,866,210	-	134,018,863
Taxes payable	31,430,789	17,834,853	-	49,265,642
Other	196,644	122,189	-	318,833
Deferred tax asset	685,655,205	54,995,732	383,524	741,034,461
Property, plant and equipment	(623,497,888)	(86,371,293)	-	(709,869,181)
Intangible assets	(236,676,501)	7,314,500	-	(229,362,001)
Trade and other receivables	(176,859,967)	(89,425,764)	-	(266,285,731)
Financial assets at fair value through profit and loss	(15,121)	(48,522,963)	-	(48,538,084)
Borrowings	(25,508,300)	1,250,837	-	(24,257,463)
Other	-	(2,030,101)	-	(2,030,101)
Deferred tax liabilities	(1,062,557,777)	(217,784,784)	-	(1,280,342,561)

F - 122

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 14: (Continuation)

	12.31.2013	Profit (loss)	Other comprehensive income (loss)	12.31.2014
Tax los-carryforwards	136,235,830	(20,860,205)	-	115,375,625
Trade and other receivables	43,379,702	(8,882,289)	-	34,497,413
Derivative financial instruments	-	2,063,417	-	2,063,417
Financial assets at fair value through profit and loss	1,314,135	1,149,642	-	2,463,777
Trade and other payables	224,077,730	123,246,764	-	347,324,494
Salaries and social security payable	4,320,300	19,658,417	-	23,978,717
Defined benefit plans	50,775,875	16,632,284	10,763,517	78,171,676
Provisions	35,350,925	14,801,728	-	50,152,653
Taxes payable	37,289,313	(5,858,524)	-	31,430,789
Other	253,084	(56,440)	-	196,644
Deferred tax asset	532,996,894	141,894,794	10,763,517	685,655,205
Property, plant and equipment	(577,908,963)	(45,588,925)	-	(623,497,888)
Intangible assets	(243,991,000)	7,314,499	-	(236,676,501)
Trade and other receivables	(33,379,506)	(143,480,461)	-	(176,859,967)
Borrowings	(28,448,004)	2,939,704	-	(25,508,300)
Financial assets at fair value through profit and loss	(2,465,940)	2,450,819	-	(15,121)
Other	(150,850)	150,850	-	-
Deferred tax liabilities	(886,344,263)	(176,213,514)	-	(1,062,557,777)

Deferred tax assets and liabilities are offset in the following cases: a) when there is a legally enforceable right to offset tax assets and liabilities; and b) when deferred income tax charges are associated with the same fiscal authority. The following amounts, determined after their adequate offset, are disclosed in the statement of financial position:

	12.31.2015	12.31.2014
Deferred tax asset	52,279,953	93,681,916
Deferred tax liabilities	(591,588,053)	(470,584,488)
Net deferred tax liabilities	(539,308,100)	(376,902,572)

The analysis for deferred tax assets and liabilities is as follows:

	12.31.2015	12.31.2014
Deferred tax asset
To be recovered in more than 12 months	418,100,378	679,533,469
To be recovered in less than 12 months	322,934,083	7,303,616
Deferred tax asset	741,034,461	686,837,085
Deferred tax liabilities
Payable in more than 12 months	(1,125,315,932)	(1,048,920,689)
Payable in less than 12 months	(155,026,629)	(14,818,968)
Deferred tax liabilities	(1,280,342,561)	(1,063,739,657)
Net deferred tax liabilities	(539,308,100)	(376,902,572)

F - 123

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 15: Trade and Other receivables

Non Current	Note	12.31.2015	12.31.2014
Res. No. 406/03 Inc c) CAMMESA consolidated receivables	2	650,774,473	553,279,918
Present value discount	2	(22,213,693)	(34,635,539)
Additional Remuneration Trusts Res. No. 95/13	2	275,943,978	138,977,852
Present Value discount Res. No. 406/03 inc. c)	2	(15,773,172)	(17,156,517)
Trade receivables, net		888,731,586	640,465,714
Tax credits:
- Value added tax		31,029,398	14,610,909
- Sales tax		21,799,934	16,183,868
- Income tax and minimum notional income tax		382,687,758	295,302,026
- Tax on banking transactions		21,715,623	16,093,219
- Allowance for tax credits		(259,762,595)	(107,111,954)
Related parties	35.l	7,064,978	7,366,313
Expenses paid in advance		2,286,129	-
Financial credit		72,656,306	71,191,721
Other		1,188,173	741,077
Other receivables, net		280,665,704	314,377,179
Total non current		1,169,397,290	954,842,893
Current
Receivables from energy distribution (1)		1,019,519,648	945,666,193
Receivables from MAT		83,439,503	48,626,021
CAMMESA		1,278,859,093	1,004,349,392
Res. No. 406/03 Inc. c) CAMMESA consolidated receivables	2	10,250,804	10,905,524
Maintenance remuneration	2	79,059,069	94,253,852
Receivables from gas sales		167,462,419	38,783,748
Debtors in litigation		22,924,028	21,965,685
Receivables from administrative services		6,254,173	15,174
Related parties	35.l	6,730,859	9,627,015
Other		710,057	2,814,648
Allowance for doubtful accounts		(87,516,886)	(91,117,582)
Trade receivables, net		2,587,692,767	2,085,889,670

⁽¹⁾Net of stabilization factor.

F - 124

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 15: (Continuation)

	Note	12.31.2015	12.31.2014
Tax credits:
- Value added tax		492,859,652	215,042,937
- Sales tax		8,231,845	5,405,113
- Income tax and minimum notional income tax		260,349	369,418
- Withholding of social security contributions		869,674	3,138,459
- Other tax credits		263,055	159,957
- Allowance for tax credits		(443,955)	(443,955)
Advances to suppliers		50,628,100	14,183,290
Advances to employees		2,321,469	2,547,431
Related parties	35.l	14,726,068	9,821,990
Prepaid expenses		40,980,120	34,785,413
Receivables from electric activities		65,693,920	48,581,474
Financial credit		19,332,315	6,657,699
Guarantee deposits		277,692,711	389,927,105
Judicial deposits		10,482,353	11,900,401
Credit with FOCEDE(1)		49,536,128	-
Credits for Compensation of Excess Gas Injection Resolution No. 1/13		451,798,679	80,677,392
Credit from income recognition on account of the RTI - SE Res. 32/15	2	650,937,684	-
Receivables from the sale of financial instruments		56,191,064	28,701,997
Contributions to receive non-operating partners		6,670,703	1,646,774
Receivables from arbitral proceedings	37	189,656,038	-
Other		12,314,385	4,186,073
Allowance for other receivables		(54,049,593)	(39,766,643)
Other receivables, net		2,346,952,764	817,522,325
Total current		4,934,645,531	2,903,411,995

⁽¹⁾As of December 31, 2015, the net position held by Edenor with the FOCEDE is comprised of the following (in thousands of pesos):

	12.31.2015
Fixed charge Res. No. 347/12 collected from customers and not transferred	(7,204)
Funds received in excess that transferred to FOCEDE fixed charge Res. No. 347/12	191,722
Outstanding receivables from extraordinary investment plan	18,281
Provision for FOCEDE expenses	(153,263)
	49,536

F - 125

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 15: (Continuation)

Book value of current trade and other financial receivables is similar to their fair value due to their short-term maturity.

Trade receivables and other long-term financial other receivables are measured at amortized cost, which does not differ materially from its fair value.

At December 31, 2015 and 2014, trade receivables that were past due amounted to $ 541.3 million and $ 534.5 million, respectively, which were due and net for an allowance for doubtful accounts of $ 87.5 million, and $ 91.1 million respectively. The ageing analysis of these trade receivables is as follows:

	12.31.2015	12.31.2014
Less than three months	222,870,134	188,809,908
Three to six months	43,697,533	46,444,144
Six to nine months	54,061,674	25,181,215
Nine to twelve months	218,727,774	20,894,231
More than twelve months	1,958,531	253,144,269
Total past due trade receivables	541,315,646	534,473,767

The movements in the allowance for the impairment of trade receivables are as follows:

	12.31.2015	12.31.2014
At the beginning	91,117,582	77,200,000
Allowance for impairment	26,175,512	21,895,011
Decreases	(28,948,185)	(7,323,802)
Reversal of unused amounts	(828,023)	(653,627)
At the end of the year	87,516,886	91,117,582

The movements in the allowance for the impairment of other receivables are as follows:

	12.31.2015	12.31.2014
At the beginning	147,322,552	114,078,973
Allowance for impairment	170,283,109	41,229,175
Decreases	(3,320,265)	(6,146,779)
Reversal of unused amounts	(29,253)	(1,838,817)
At the end of the year	314,256,143	147,322,552

F - 126

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 16: INVENTORIES

Current	12.31.2015	12.31.2014
Materials and spare parts	209,653,574	118,269,392
Advances to suppliers	15,742,632	17,193,358
Other	66,584	108,110
	225,462,790	135,570,860

NOTE 17: CASH AND CASH EQUIVALENTS

	12.31.2015	12.31.2014
Cash	6,691,803	2,813,079
Banks	416,099,909	190,036,431
Checks to be deposit	318,335	1,995,932
Time deposits	-	4,852,085
Investment funds	93,487,871	135,536,579
	516,597,918	335,234,106

NOTE 18: SHARE CAPITAL

As of December 31, 2014, the Company´s share capital consisted of 1,314,310,895 common shares in book-entry form with a face value of  $ 1 each and each granting the right to one vote.

On December 1, 2015, due to the exercise of all stock options granted to executives in consideration for the Opportunities Assignment Agreement, the Company issued 381,548,564 new ordinary shares (see Note 41).

Consequently, as of December 31, 2015, the Company’s share capital consists of 1,695,859,459 common shares in book-entry form with a face value of $ 1 each and each granting the right to one vote.

Publicly traded shares

The Company’s shares are listed for trading on Buenos Aires Stock Exchange, forming part of the Merval Index.

Also, on August 5, 2009, the SEC authorized the Company for the registration of ADSs representing 25 common shares each. On October 9, 2009, the Company started to market its ADSs on the NYSE.

The listing of the ADSs with the NYSE is part of the Company’s strategic plan to increase its liquidity and the volume of its shares.

F - 127

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 19: TRADE AND OTHER PAYABLES

Non Current	Note	12.31.2015	12.31.2014
Suppliers		-	364,852
Customer contributions		105,757,067	118,297,671
Funding contributions for substations		51,700,000	51,700,000
Customer guarantees		67,509,328	60,742,930
Trade payables		224,966,395	231,105,453
ENRE Penalties and discount		1,004,043,366	1,032,193,134
Loan (mutuum) with CAMMESA		1,099,759,655	506,753,360
Compensation agreements		81,926,024	33,741,205
Liability with FOTAE		155,752,325	105,640,700
Payment agreement ENRE (2.3.1.4)		132,322,192	-
Other payables		2,473,803,562	1,678,328,399
Total non current		2,698,769,957	1,909,433,852
Current
Suppliers		2,485,463,744	1,408,516,910
CAMMESA		3,360,446,454	2,562,949,421
Customer contributions		147,775,331	148,075,761
Discount to customers (Note 2.3.1.3)		125,808,507	-
Funding contributions substations		23,506,274	18,431,955
Canons and royalties		5,539,336	5,648,300
Customer advances		32,552,896	1,199,336
Customer guarantees		1,048,184	1,540,082
Related parties	35.l	1,856,925	384,534
Trade payables		6,183,997,651	4,146,746,299
PUREE		-	17,521,570
ENRE Penalties and discount		62,719,588	70,588,565
Related parties	35.l	124,680,713	2,705,669
Advances for works to be executed		31,467,068	10,650,017
Guarantees enforcerd		-	170,912,175
Liability with FOCEDE (1)		-	85,386,048
Compensation agreements		192,108,317	27,805,216
Payment agreements with ENRE (Note 2.3.1.4)		54,044,821	-
Other		3,467,251	4,155,733
Other payables		468,487,758	389,724,993
Total current		6,652,485,409	4,536,471,292

F - 128

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 19: (Continuation)

⁽¹⁾As of December 31, 2014, the net position of Edenor with the FOCEDE is comprised of the following (in thousands of pesos):

	12.31.2015
Fixed charge Res. No. 347/12 collected from customers and not transferred	6,105
Funds received in excess that transferred to FOCEDE fixed charge Res. No. 347/12	74,713
Outstanding receivables from extraordinary investment plan	(93,133)
Provision for FOCEDE expenses	97,701
Total liability with FOCEDE	85,386

The fair values of non-current customer contributions as of December 31, 2015 and 2014 amount to $ 127.1 million and $ 109.9 million, respectively. The fair values are determined based on estimated discounted cash flows in accordance with a market rate for this type of transactions. This fair value is classified as level 2.

The book value of other non-current financial liabilities approximates its fair value due to valuation characteristics detailed in note 46.

The book value of other financial liabilities included in trade and other payables approximates their fair value.

NOTE 20: BORROWINGS

Non Current	Note	12.31.2015	12.31.2014
Financial borrowings		717,019,046	431,008,461
Corporate bonds		4,479,682,941	2,743,759,769
CAMMESA financing		1,466,951,996	418,817,373
Related parties	35.l	21,092,258	193,403,000
		6,684,746,241	3,786,988,603
Current
Bank overdrafts		436,214	52,941,170
VCP		235,987,129	207,923,095
Financial borrowings		82,144,024	153,635,113
Corporate bonds		799,017,535	99,385,972
CAMMESA financing		10,477,887	-
Related parties	35.l	179,600,083	269,697,740
		1,307,662,872	783,583,090

The maturities of the Company’s borrowings (excluding finance lease liabilities) and its exposure to interest rates are as follow:

F - 129

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

Fixed rate	12.31.2015	12.31.2014
Less than one year	497,660,316	324,219,366
One to two years	533,383,482	78,577,535
Two to five years	507,805,402	237,716,203
Up to five years	2,180,235,840	1,702,907,209
	3,719,085,040	2,343,420,313
Floating rates
Less than one year	646,027,773	333,052,096
One to two years	818,470,962	632,846,695
Two to five years	2,618,088,796	771,567,518
Up to five years	-	363,096,493
	4,082,587,531	2,100,562,802
Non interest accrues
Less than one year	163,974,783	126,311,628
One to two years	(13,962,221)	(2,440,221)
Two to five years	40,723,980	2,717,171
	190,736,542	126,588,578

As of December 31, 2015 and 2014, the fair values of the Company’s non-current borrowings (Corporate Bonds) amount approximately to $ 5,159.33 million and $ 3,023.5 million, respectively. Such values were calculated on the basis of the determined market price of the Company’s corporate notes at the end of each year.

The carrying amounts of current borrowings approximates their fair value due to their short-term maturity.

Financial borrowings and CAMMESA financing approximate their fair value as they are subjected to a variable rate.

The other fair values are based on the present value of contractual cash flows using a discount rate derived from observable market prices of other similar debt instruments plus the corresponding credit risk. Fair values determinated in that way are within hierarchical level 2.

During the years ended December 31, 2015 and 2014, the Company and its subsidiaries acquired its own corporate bonds or corporate bonds of various subsidiaries at their respective market value for a total face value of US$ 13.8 million and US$ 203.2 million, respectively. Due to these debt-repurchase transactions, the Company and its subsidiaries recorded a gain of $ 9.9 million and $ 47.1 million in the year ended December 31, 2015 and 2014, respectively, disclosed under the line “Result from repurchase of corporate bonds” within Other financial results.

F - 130

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

On February 2, 2016, Edenor has repurchased at market prices the “class 9, fixed rate par Corporate Notes” due 2022 for a nominal value of U$S 0.3 million.

Below are described the main characteristics of the indebtedness of the Group:

20.1 Generation

20.1.1 CTLL

CAMMESA Financing

Major maintenance

On March 5, 2015, CTLL executed a loan agreement with CAMMESA to finance a major maintenance of the unit LDLATG02 for a total amount in pesos equivalent to US$ 11.8 million and $ 7.2 million, in both cases plus VAT and costs of nationalization.

The financing will be repaid in 36 monthly, equal and consecutive installments, with the application of the mean yield obtained by CAMMESA from its financial placements with the WEM and maturing as from the economic transaction for the month following the conclusion of the works, with the possibility to extend such period for an additional 12-month term in case the Maintenance Remuneration accrued during such period is insufficient to cancel the financing. The Additional Remuneration will be allocated to the repayment of the granted financing. Should it be necessary to request the 12-month extension, besides applying the Additional Remuneration to the cancellation of the installment, the Direct Additional Remuneration accrued by CTLL in the corresponding month will also be applied.

After unit LDLATG02's maintenance was completed, the unit became operative on December 21, 2014.

CTLL later requested the execution of an Addendum to the Loan Agreement to conduct the maintenance of unit LDLATG03. On August 20, 2015, Addendum I to this Agreement was executed, which extended the financing to an amount equivalent in pesos to U$ 4.8 million and $ 18.2 million, in both cases plus VAT, nationalization and logistics costs. Maintenance of unit LDLATG03 finished on June 1, 2015, as from which date the unit became operative again.

Based on the modifications introduced to Addendum I, CTLL guarantees a minimum 80% availability from both units up to the total cancellation of the Financing. If the availability commitment is not met in a certain month, the repayment of the installment will not be limited to the Maintenance Remuneration amount and, if applicable, the difference between it and the Direct Additional Remuneration, but the whole installment will be payable.

F - 131

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

Later, an extension of the loan was requested in order to include the execution of unit LDLATG01's overhaul, upgrade and refurbishment in the amount of US$ 13 million and $ 17.8 million , in both cases plus VAT, nationalization and logistics costs,  and withholdings to be imposed on foreign contractors. The extension was approved pursuant to SSETT y DEE Note No. 52/16; however, as of the issuance of hereof the applicable Addendum has not yet been entered into.

As of the issuance of these financial statements, CTLL has received partial advances in the amount of $ 191.7 million, which are disclosed under “Loans”, net of the Maintenance Remuneration collected by CTLL.

2014 Agreement

As at the date hereof, the power plant expansion projects, which consist of the installation of a new 105 MW high-efficiency gas turbine, are in their final construction stages. Early in February 2016, the proper operation of the systems finished verified, final checkups (in an operating condition) and contractual and commercial test performed, and the unit's commissioning is expected to take place halfway through March.

Regarding the two engine generators (8 MW each), on September 15, 2015, CTG accepted an offer by CTLL for the purchase of the MAN Diesel B&W engines (model 18V32/40PGI) and supplementary equipment, and the transfer of ownership was thus perfected. The price for the engines amounted to US$ 5 million.

Additionally, on September 11, 2015 and September 18, 2015, agreements were entered into with suppliers Man Turbo & Diesel SE and Empresa Walter Rittner S.A., respectively, main contractors of the project. Man Turbo & Diesel SE will provide the goods and services necessary for the conversion of the engines, and Empresa Walter Rittner S.A. will be responsible for installing them and providing auxiliary services.

On November 23, 2015, CTLL received a partial advance from CAMMESA in the amount of $75.2 million to cancel the amounts corresponding to the purchase of the engine generators which will make up the Project and the advances required by contractors for their installation and start-up.

As of the date hereof, the soil study has been completed and the engineering stage is still in course, the commissioning being expected for the first quarter of 2017. Additionally, the Company is conducting all necessary procedures to obtain the applicable environmental certificates, and to request access to the WEM and purchases of main equipment.

As at the issuance hereof, CTLL has received partial advances in the amount of $ 735.7 million pursuant to the Financing Agreement. Furthermore, CTLL has made payments in the amount of $ 758.19 million under the Supply and Construction Agreement.

F - 132

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

Corporate Bonds

Early Redemption of 2018 Corporate Bonds

CTLL has canceled all of its 2018 Corporate Bonds through several partial redemptions —the first one on September 26, 2014 and the last one on December 2, 2014.

For the whole redemptions, CTLL has paid: (i) $ 1,595.1 million (equivalent to US$ 188 million converted at the reference exchange rates applicable corresponding to each partial redemption), as principal; (ii) $ 25.4 million, (equivalent to US$ 3 million converted at the reference exchange rates applicable corresponding to each partial redemption), as interest, and (iii) $ 40.4 million (equivalent to US$ 4.8 million converted at the reference exchange rates applicable corresponding to each partial redemption), as additional payment, all conversions being made at the reference exchange rates applicable to each partial redemption.

CTLL has financed these redemptions with the issuance of Class 2, 3 and 4 Corporate Bonds in the domestic market for approximately $ 401 million, the execution of a syndicated borrowing in the amount of $ 450 million, the taking of borrowing from affiliates for approximately $ 284 million, the sale of 2018 Corporate Bonds held in CTLL’s portfolio in the amount of $ 198 million, and the balance with short-term financial borrowings and current bank overdrafts, as well as with cash and cash equivalents and financial assets at fair value.

Issuance of Class 1, 2, 3 and 4 Corporate Bonds

Under the Simple Corporate Bonds Program (that is, corporate bonds non-convertible into shares) for up to US$ 350 million (or its equivalent value in other currencies), on October 30, 2014 CTLL issued the following Corporate Bonds:

F - 133

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

-Class 1: CTLL resolved to cancel the tender.

-Class 2: for a face value of $ 96.4 million accruing interest at the Private Badlar rate plus a 400 basic points spread. The principal will be fully repaid at maturity on April 30, 2016, and interest will be repaid on a quarterly basis.

-Class 3: for a face value of $ 50.8 million accruing interest at the Private Badlar rate plus a 500 basic points spread. The principal will be amortized in three installments maturing on April 30, 2017 (33.34%), July 30, 2017 (33.33%) and October 30, 2017 (33.33%), and interest will be repaid on a quarterly basis.

-Class 4: for a face value of US$ 29.9 million at a $ 8.4917 exchange rate and a 6.25% annual nominal fixed rate. Principal will be amortized in whole on October 30, 2020. Interest accruing on the principal outstanding as at October 31, 2016 will be compounded quarterly. Interest accruing on the principal outstanding between November 1, 2016 and the maturity date will be paid on a quarterly basis.

The proceeds from the placement of new corporate bonds were used entirely to early 2018 rescue corporate bonds.

Creation of a new Corporate Bonds Program and issuance of Classes B and C Corporate Bonds

On July 7, 2015, CTLL created a new Simple Corporate Bonds Program (that is, corporate bonds not convertible into shares) for up to US$ 350 million (or its equivalent in other currencies) (the “Program”).

Under such Program, on August 6, 2015, CTLL issued Class C Corporate Bonds in the amount of $ 258 million maturing 21 months as from their issuance date and will accrue interest at a 27.75% fixed rate during the first 6 months as from their issuance date and at the Private Badlar rate plus a 450 basis points spread during the remaining 15 months. CTLL resolved to cancel the tender for Class B Corporate Bonds.

Net funds resulting from this placement will be allocated to the partial early cancellation of the Syndicated Loan.

Issuance of Class A and E Corporate Bonds – Subsection k)

On October 5, 2015, CTLL issued Class A Corporate Bonds in the amount of $ 282.4 million and maturing 36 months as from their issuance date and accrue interest at the Private Badlar rate. On November 13, 2015, CTLL issued an aggregate principal amount of $ 575.2 million of its Class E Corporate Bonds, maturing 60 months after their issuance date and paying a variable monthly coupon at the Private Badlar rate. On September 18, 2015 and November 6, 2015, the National Superintendence of Insurance ("SSN") classified Class A and E Corporate Bonds, respectively, as productive investments computable under Section 35.8.1 subsection k) of the Insurance Activity General Rules and Regulations (SSN Resolution No. 21.523/1992).

F - 134

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

Funds derived from the issuance of Corporate Bonds will be destined to: (i) medium- and long-term infrastructure or productive projects in the Republic of Argentina, and (ii) the payment of working capital within the country regarding projects and investments mentioned in item “(i)” preceding. CTLL plans to use such net funds to finance part of the 121 MW expansion works it is currently conducting under the described “Availability Increase Project”.

Syndicated Borrowing

On November 11, 2014, in line with CTLL’s financial strategy of improving its financing cost and structure, CTLL’s Board of Directors approved a new indebtedness consisting of a syndicated borrowing in the amount of up to $ 450 million (the “Syndicated Loan”) with the Banco de Crédito y Securitización S.A., Banco Hipotecario S.A., Industrial and Commercial Bank of China S.A and Citibnak S.A. (the “Banks”) seeking to refinance existing financial liabilities. The borrowing’s main terms and conditions are described below:

-Amortization: eight installments representing 11% of the indebtedness each, and a last installment for the remaining 12%, all of them payable on a quarterly and consecutive basis, the first one maturing twelve months as from the borrowing’s disbursement date.

-Compensatory Interest: at the adjusted Private Badlar rate plus a 575 basis points spread, payable on a quarterly basis.

-Guarantees:

i)CTLL will issue sight bills to each of the Banks to guarantee the outstanding principal and interest in accordance in the proportion of their share in the borrowing;

ii)The Company will act as joint and several obligor and main debtor of each and all payment obligations taken on by CTLL with the Banks, and will provide guarantee for all bills;.

-Subordination: the agreement contemplates the subordination of certain debts CTLL holds with PISA to the indebtedness to be taken with the Banks.

The net proceeds from the syndicated loan were used in its entirety for corporate bonds bail early 2018.

On August 13, 2015, CTLL partially canceled the Syndicated Loan in the amount of $ 260 million plus all interest accrued as of that date. The repayment was made out of Class C Corporate Bonds funds. On October 15, 2015, CTLL canceled the remaining principal balance in the amount of $ 190 million plus all interest accrued as of that date. The repayment was made out of CTLL's own funds.

F - 135

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

20.1.2 CTG

Corporate bonds

On July 25, 2007, CTG finished the restructuring process for its outstanding Series “A” and “B” Corporate Bonds at 2% with maturity in 2013; having obtained an 88.7% acceptance rate on the total debt under restructuring (“2013 Bonds”).

The mentioned restructuring consisted on the swap of the previous debt securities for a combination of cash payments and the issuance of new simple Corporate Bonds for a nominal value of US$ 22 million at a 10.5% rate, which will be payable on March 11 and September 11 of each year and maturing in September 2017 (“2017 Bonds”).

In June and July 2009, and in January, March and May 2011, CTG purchased under successive transactions at market prices, its 2017 Bonds for a total of US$ 18.2 million and US$ 0.8 million of nominal value, respectively. As of December 31, 2015 CTG maintains all the 2017 Bonds repurchased.      

The remaining 2017 Bonds outstanding as of December 31, 2015 total a nominal value of US$ 3.1 million.

The main limitations taken on by CTG regarding 2017 Bonds are as follows: (i) limitation on indebtedness, and (ii) limitation on levies. As of December 31, 2014, CTG was in full compliance of all its commitments undertaken under the 2017 Bonds.

Corporate Bonds Programme

Under the Simple Corporate Bonds Program (not convertible into shares) for up to US$ 50 million (or the equivalent amount in other currencies) dated February 13, 2013, on March 6, 2013 CTG issued Class 3 and 4 corporate bonds for a nominal value of $ 36.7 million and U$S 9.5 million (converted to an initial exchange rate of $ 5.0448 / U$S) at the Private Badlar rate plus 400 basic points and at the fixed rate of 3%, finally maturing on March 6, 2014 and March 6, 2015, respectively. Interest were payable on a quarterly basis. Funds resulting from the issuance of these corporate bonds were allocated entirely to debt refinancing.

On March 6, 2014, CTG issued Class 5 Corporate Bonds for a face value of $ 60.1 million accruing interest at the Private Badlar rate plus a 500 basic points spread. Principal will be amortized in two equal consecutive installments due on June 6, 2016 and September 6, 2016, and interest will be payable on a quarterly basis.

Class 5 Corporate Bonds have been subscribed in kind through the delivery of Class 3 and Class 4 Corporate Bonds for $ 1.8 million and $ 19.1 million, respectively (an amount equivalent to US$ 2.5 million). The outstanding balance of Class 3 Corporate Bonds was wholly cancelled on March 6. After the issuance of Class 5 Corporate Bonds, outstanding Class 4 Corporate Bonds, net of CTG’s portfolio holdings, amount to US$ 7 million.

F - 136

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

After cancelling the principal and interest of Class 3 Corporate Bonds and discounting Class 4 Corporate Bonds presented for the swap, the net inflow amounted approximately $ 1.4 million that were allocated to the prepayment of bank loans.

Lastly, on March 6, 2015 CTG issued Class 6 Corporate Bonds for a face value of $ 91 millon maturing within a term of 18 months and accruing interest at a 28% annual nominal fixed rate during the first nine months and at the Private Badlar rate plus a 500 basis points spread during the remaining nine months. Interest will be payable on a quarterly basis.

With the net proceeds of such issue, CTG proceeded to cancel the principal and interest of the Class 4 Corporate Bonds and partially prepay the bank loan mentioned below.

Bank borrowings

On February 28, 2013, CTG renewed, under a syndicated borrowing, the open credit facilities for a total amount of $ 78.7 million with Banco Hipotecario S.A., ICBC, Santander Rio S.A. and Citibank N.A, which was amended by the first amendment to the syndicated loan agreement dated December 20, 2013 (the "Amendment"). This borrowing was payable in two tranches, one in the amount of $ 61.3 million at the Private BADCOR rate plus 500 basis points, and another in the amount of $ 17.4 million accruing interest at a 29% annual nominal fixed rate. The borrowing will be paid off in ten quarterly consecutive installments, the first one becoming due six months from the amendment date. The first seven amortization payments will be for an amount equivalent to 60.96% of the principal; the eighth and ninth payments for an amount equivalent to 25.4% of the principal, and the last one will be made thirty-six months as from the amendment date

On the other hand, if a CTG bond is issued before April 15, 2014, net funds from the placement for up to $ 24 million will be allocated to the early cancellation of the syndicated borrowings based on its maturity in chronological order. With the net proceeds from the placement of corporate bonds Class 5 on March 2014, CTG proceeded to prepay $ 1.4 million of syndicated loan capital.

Subsequently, on July 23, 2014, CTG has:

(i)partially prepaid the borrowings for an amount equivalent to $ 18 million —out of which $ 14 million were applied to the cancellation of principal installments of the variable tranche and $ 4 million to the cancellation of principal installments of the fix tranche in chronological order based on their maturity dates.

(ii)paid accrued interest in the amount of $ 7.1 million and the outstanding from the first amortization installment for $ 4.6 million in accordance with the defined payment schedules; and

Last, on March 20, 2015, CTG prepaid in full the syndicated loan for an amount equivalent to $ 58.8 million of net proceeds from the issuance of Class 6 Corporate Bonds and equity.

F - 137

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

CAMMESA Financing

On May 18, 2015, CTG entered into a loan agreement with CAMMESA for the purpose to finance TV11 unit's maintenance in a peso-denominated amount equivalent to US$ 10.3 million plus VAT and nationalization costs.

This financing will be repaid in 36 monthly and consecutive installments, with the application of the average yield obtained by CAMMESA from its financial placements with the WEM, maturing as from the economic transaction corresponding to the month following the completion of the works with the possibility of extending this period to twelve months in case the Maintenance Remuneration accrued in that period is not sufficient to cancel funding. The Maintenance Remuneration will be allocated to the payment of the granted financing. In case it is necessary to use additional period of twelve months mentioned above, in addition to applying the Maintenance Remuneration for cancellation of the installment should be applied Additional Remuneration Direct accrued by CTG in the relevant month.

CTG guarantees an 80% net capacity minimum availability as from the month following the unit's entry into service and until the termination of the repayment period.

As of the issuance of these financial statements, CTG has received partial advances in the amount of $ 8 million, which are disclosed under trade and other receivables, netting the credit for Maintenance Remuneration.

20.1.3 CPB

CAMMESA Financing

On March 21, 2011, CPB entered into a borrowing agreement with CAMMESA to finance a construction project that will increase the power output of steam turbine units of CPB, for a total amount of $ 56.8 million, in accordance to ES Resolution No. 146/02 and Notes 6157/10 and 7375/10. On January 27, 2012, CPB executed an addendum to the loan agreement entered into with CAMMESA which modified the financing amount, which current amounts to $ 69.6 million.

The collected amounts will be returned in 48 monthly, equal and consecutive installments, which will include interest resulting from the application of a rate equivalent to the average yield obtained by CAMMESA from its WEM’s financial placements, the first installment maturing on the month immediately following the works’ conclusion, estimated for the month of June, 2011. Installments will be paid by WEM pursuant to the provisions of ES Notes No. 6157/10 and 7375/10, which distribution among demanding agents will be made based on the applicable criteria determined by the ES.

F - 138

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

During May 2011, CPB conclude the committed works, and from July, the units were subject to minimum availability control established by the loan agreement signed with CAMMESA.

During June 2015, in accordance with amortization as defined in the loan agreement with CAMMESA, the loan is fully canceled.

CAMMESA Financing II

On January 8, 2013, CPB signed a borrowing agreement with CAMMESA stipulating the terms for the financing of certain repair work delayed in units BBLATV29 and BBVLATV30 for an amount of $ 19.9 million plus the added-value tax pursuant to ES Resolution No. 146/02 so as to cover 70% of those maintenance costs.  Then, increased financing to $ 32.7 million plus the added-value tax in order to expand to cover 100% of maintenance costs.

The requested amount will be paid back in 18 monthly, which will bear a rate equivalent to the average yield derived by CAMMESA from its financial placements, the first installment being due the month after the last partial advance is made or 12 months after the first advance, whichever occurs earlier.

On April 9, 2014, CAMMESA notified CPB of the authorization granted by the ES to apply the LVFVDs corresponding to January 2008-June 2011 period, including accrued interest, to the cancellation of the loan. On April 15, 2014, CPB implements the cession of the LVFVD mentioned.

On April 24, 2014, the compensation of the mentioned financing was performed in the amount of $ 39.5 million of principal and $ 11.3 million of accrued interest (VAT included) with the issuance of the commercial documents by CAMMESA.

As a result of this compensation, as of December 31, 2014 CPB recognized income before taxes in the amount $ 35.3 million resulting from the revaluation of the affected LVFVDs, which were disclosed under "Other Financial Results" of the statement of comprehensive income (Loss).

Financing of Major Maintenance Works

During the month of April, 2014, the Borrowing and Receivables Assignment Agreement was entered into between CPB and CAMMESA to finance the 2015-2016 Technological Upgrade Work for an estimated total amount of US$ 82.6 million plus VAT and nationalization costs. The final amount of the financing will be determined based on the actual disbursements made by CAMMESA.

On May 18, 2015 and in answer to the requests filed by CPB, ES Note No. 1129/15 authorized the extension of the financing in the amount of US$ 7.2 million plus VAT and nationalization costs to fund the replacement of boiler burners which were not estimated in the original schedule. As at the date hereof, the Addendum to the Loan Agreement dated April 8, 2014 has not been perfected.

F - 139

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

The investment plan aims to improve the units' reliability and availability, and so far the following progress has been made:

i)  Seasonal maintenance tasks have been performed in both units: on TV30 in 2014, and on TV29 early in 2015.

ii) As from August 31, 2015, CPB started the overhaul of generating unit TV29. The work scope included the following:

a) Review (“Overhaul”) of the main and ancillary equipment.

b) Repair, adjustment and replacement of spare parts (“Refurbishment”)

c) Replacement due to obsolescence (“Upgrade”) of equipment and systems

Regarding items a) and b), maintenance tasks were executed on equipment which had not been previously replaced, such as the turbine, generator, boiler, pumps, heat exchangers, valves, filters, tasks, pressure vessels and other equipment.

As regards item c), some of the equipment which was wholly replaced was the following:

 -  Boiler burners. The original three-fuel burners were replaced by newly-designed and reduced NOx dual-fuel burners.

-  Burners Monitoring System (“BMS-BPS”). The original solid-state electronic system was replaced by a programmable system with a SILIII safety level.

-  Generator's excitation system. The original system was replaced by a solid-state static system.

-   Turbine Control System (“TCS”). The original system was replaced by a programmable digital system. The hydraulic system was replaced by a newly-designed system.

-   Turbine generator unit's electrical protection system. The original relay system was replaced by a digital latest-generation system.

-   Boiler superheater tubes. All the tubes of superheater No. 2 were replaced.

The provisional reception of the main project contracts took place on December 10, 2015; on that date, the commissioning period started, and the synchronization took place on January 14, 2016. Tests and adjustments have been carried out since that date. During this process, a breakdown occurred in the excitation transformer, and tasks are being conducted to solve the problem; in this sense, it is estimated that its commissioning will take place early in March.

F - 140

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

Even though the project was originally scheduled for a term of 27 months ending in July 2016, CAMMESA did not authorize TV30's overhaul, upgrade and refurbishment for this period, so the task was postponed for the September-December 2016 period.

As of the issuance of these financial statements, the amounts committed under the main  executed agreements amount to US$ 102.2 million, out of which US$ 64.7 million have been canceled. These amounts do not include taxes, duties or nationalization costs.

The financing will have a twelve-month grace period as from the month following the last partial advance by CAMMESA, or 24 months after the execution of the loan, whichever occurs earlier, and this term may be extended for up to six months in case a delay in the execution of maintenance works of BBLATV 30 Unit is verified according to the dates specified in the schedule. Likewise, the financing will be repaid in 48 monthly, equal and consecutive installments, with the application of the mean yield obtained by CAMMESA from its financial placements.

The UMA will range from 80% to 83% depending on the month, and will be calculated as an average of the last three rolling months, including the month concerned as the last month of the quarter. To such effect, only the net power of units having performed the major maintenance will be assessed, excluding maintenance works authorized and programmed by CAMMESA.

The Maintenance Remuneration will be destined to the early cancellation of the granted financing. Should the Maintenance Remuneration be insufficient to cancel the amount of each installment and provided CPB meets the UMA, the balance payment obligation will be limited to 50% of the FRD. In case is not met, CPB will have to pay the whole applicable installment on the stipulated maturity date.

The FRD will be calculated based on the operating results plus Property, Plant and Equipment depreciations, net of:

(i)Additional Remuneration trust Res. No. 95/13;

(ii)Investments in Property, Plant and Equipment;

(iii)Taxes not included in operating results;

(iv)Variation in uncollected Delta receivables with CAMMESA;

(v)The Maintenance Remuneration.

F - 141

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

In accordance with what has been previously stated, if at each installment’s maturity date the funds asigned to its cancellation are insufficient to fully cancel it, the uncancelled balance will be distributed pro rata among the remaining installments, provided the UMA has been met. If this situation occurs in the last installment, it will be successively deferred until its full cancellation.

In order to guarantee the granted financing, CPB has assigned to CAMMESA 100% of its current and future receivables, whether accrued or to be accrued, in connection with the operations conducted and to be conducted with the WEM, excluding those which had already been assigned to third parties before the conclusion of this agreement or included in contracts entered into pursuant to the 2008-2011 Agreement, as well as those included in the assignment as collateral provided for in the borrowing agreement under ES Note No. 6157/10 and in the assignment as collateral set forth in the borrowing agreement entered into by the parties on January 8, 2013, until the financing limit.

As of the issuance of these financial statements, CPB has received partial advances from CAMMESA in the amount of $ 757.9 million, out of which $ 175.1 million have been early canceled with receivables generated by the Maintenance Remuneration. Also, CPB has not generated a positive FRD for the early cancellation of the financing.

20.2 Oil and gas

20.2.1 PEPASA

VCPs Global Programme

On July 27, 2011, at PEPASA’s Extraordinary General Meeting of Shareholders, the creation of a VCP global program was approved for a maximum amount of $ 200 million or its equivalent in other currencies, pursuant to which PEPASA may issue short-term Corporate Bonds (simple, non-convertible into shares), promissory notes or short-term securities with common, special and/ or floating security and/ or any other guarantee (including, although not limited to, third-party guarantees), whether subordinated or not.

On April 24, 2014 and July 2, 2015, PEPASA modified VCP Program increasing it up to the amount of U$S 40 million and U$S 70 million, and or its equivalent in other currencies, respectively.

F - 142

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

As of December 31, 2015, PEPASA had issued the following series of VCP:

Serie	Issuance date	Nominal Amount	Interest Rate	Payment:
				Capital	Interest
1	October 6, 2011	46,654,990	Badlar + 3.5%	360 days	Quaterly
2	May 11, 2012	32,564,000	Badlar + 2.75%	360 days	Quaterly
3	October 3, 2012	34,396,246	Badlar + 4.25%	360 days	Quaterly
4		USD 6,520,523	4.25%	360 days	Quaterly
5	March 27, 2013	77,821,661	Badlar + 2.99%	365 days	Quaterly
6		USD 4,342,138	0.01%	365 days	Quaterly
7	October 3, 2013	65,400,000	Badlar + 4%	365 days	Quaterly
8	April 28, 2014	122,950,000	Badlar + 3.95%	365 days	Quaterly
9	October 3, 2014	76,450,000	Badlar + 3.95%	365 days	Quaterly
11	Februry 26, 2015	89.940.000	28%	365 days	Quaterly
12	April 30, 2015	137.000.000	28,5%	365 days	Quaterly

As of December 31, 2015, outstanding Series 11 and 12 VCPs amounted to $ 235.5 million, including principal and interest.

Resources gathered through the issuance of these VCPs have been destined to investments in fixed assets, the payment of working capital and/ or the refinancing of liabilities.

Corporate Bonds Programme

On May 10, 2013, PEPASA’s Shareholders’ Meeting approved the terms and conditions of the Simple Corporate Bonds Program (non-convertible into shares) for up to US$ 100 million (or its equivalent in other currencies). On April 24, 2014, and July 2, 2015, PEPASA modificated the Program increasing the amount up to US$ 125 million and US$ 250 or its equivalent in other currencies, respectively.

F - 143

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

At the date of issuance of these financial statements, PEPASA has issued the following series of Corporate Bonds:

Serie	Issuance date	Nominal Amount	Interest rate	Payment:
				Capital	Interest
1	June 28, 2013	254,810,000	Badlar + 3%	3 years	Quaterly
2	June 6, 2014	525,362,500	Badlar	3 years	Quaterly
3	February 26, 2015	51,027,777	Badlar + 5%	1 year and 9 months	Quaterly
4	February 26, 2015	U$S 18,549,000	5%	1 year and 9 months	Quaterly
5	April 30, 2015	49,870,000	Badlar + 4,5%	1 year and 6 months	Quaterly
6	February 3, 2016	309,874,000	Badlar + 5%	1 year and 3 months	Quaterly

Series 1 and 2 are aimed at making productive investments computable under Section 35.k) of the Insurance Activity General Rules and Regulations.

The remaining funds will be destined to investments in physical assets and/or the payment of working capital.

Syndicated Loan

On July 27, 2015, PEPASA entered into a syndicated loan agreement for the amount of $ 765 million with Banco Hipotecario S.A., BACS Banco de Crédito y Securitización S.A., Industrial and Commercial Bank of China (Argentina) S.A. and Citibank N.A, Argentine branch.

Its main terms and conditions are described below:

-Interest: Private Badlar corrected rate plus a 5.75% spread for an amount of $ 615 million, and a 30% fixed rate for an amount of up to $ 150 million;

-Amortization: it will be amortized in 10 quarterly and consecutive installments, the first one being payable upon the expiration of the term of 15 months as from the disbursement date. The first two installments will represent 5.25% of the principal; the third one, 7.5% of the principal; the fourth one, 11.5% of the principal; and, as from the fifth to the tenth installment, 11.75% of the principal. These amortization conditions will apply to the variable-rate and fixed-rate loan;

-Guarantees: PEPASA will issue promissory notes to each of the banks to guarantee the outstanding principal and interest in the proportion of their share in the loan.

F - 144

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

Net funds resulting from the syndicated loan will be applied by PEPASA to the expenses foreseen under the Investment Agreement with YPF.

As of December 31, 2015, PEPASA has complied with all covenants stipulated in the agreement.

20.3 Distribution

20.3.1 Edenor

Corporate bonds programs

The Company is included in a Corporate Bonds program, the relevant information of which is detailed below:

Debt issued in United States dollars

				Millons of U$S			Millons of $
Corporate Bonds	Class	Rate	Year of Maturity	Debt structure at 01.01.2015	Debt Purchase 2015 (2)	Debt structure at 12.31.2015	Debt structure at 12.31.2015
Fixed Rate Par Note	7	10.50	2017	14.8	-	14.8	192.5
Fixed Rate Par Note (1)	9	9.75	2022	172.2	(9.2)	163.0	2,148.6
Total				186.9	(9.2)	177.7	2,341.1
				Millons of U$S			Millons of $
Corporate Bonds	Class	Rate	Year of Maturity	Debt structure at 01.01.2014	Debt Purchase 2014 (2)	Debt structure at 12.31.2014	Debt structure at 12.31.2014
Fixed Rate Par Note	7	10.50	2017	14.8	-	14.8	126.2
Fixed Rate Par Note (1)	9	9.75	2022	186.1	(13.9)	172.2	1,472.2
Total				200.9	(13.9)	186.9	1,598.4

(1)Net of issuance expenses.

(2)Includes collection, through the trust, of proceeds from subsidiary sales and collection of financial receivables with related companies. On March 27, 2014, Corporate bonds that EDENOR held in its portfolio were written off.

The main covenants are the following:

i)Negative Covenants

The terms and conditions of the Corporate Notes include a number of negative covenants that limit EDENOR’s actions with regard to, among others, the following:

F - 145

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

- encumbrance or authorization to encumber its property or assets;

- incurrence of indebtedness, in certain specified cases;

- sale of Edenor’s assets related to its main business;

- carrying out of transactions with shareholders or related companies;

- making certain payments (including, among others, dividends, purchases of Edenor’s common shares or payments on subordinated debt).

ii)Suspension of Covenants:

Certain negative covenants stipulated in the terms and conditions of the Corporate Notes will be suspended or adapted if:

- Edenor’s long-term debt rating is raised to Investment Grade, or

- Edenor’s Level of Indebtedness calculated on the shareholders' equity is equal to or lower than 2.5.

If Edenor subsequently losses its Investment Grade rating or its Level of Indebtedness is higher than 2.5, as applicable, the suspended negative covenants will be once again in effect.

At the date of issuance of these financial statements, the previously mentioned ratios have been complied with.

20.4 Holding and others

20.4.1 PESA

TGS Financing

On October 6, 2011, TGS granted the Company a borrowing/financing amounting to US$ 26 million to make the payment necessary to acquire the rights to control, suspend and waive Enron Creditors Recovery Corp. and Ponderosa Assets LLP against the Republic of Argentina before the International Centre for Settlement of Investment Disputes of the World Bank (”CIADI”) (the “Arbitration Proceeding”) pursuant to the Call Option Agreement entered into between the Company, Inversiones Argentina II and GEB Corp. (the “ICSID Contract”).

F - 146

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 20: (Continuation)

After several postponements, on April 26, 2013, the parties agreed on the following amendments to the financing agreement:

i)The maturity date will be October 6, 2014, automatically extendable for a single additional period of one year,

ii)The financing will be paid at maturity or in advance through the full and unconditional assignment to TGS of all PESA’s rights and obligations under the ICSID Agreement in case, on or before the maturity date: (a) TGS has received a 20% increase on its tariff chart and that increase remains effective pursuant to the Transitory Agreement approved by Order No. 1918/09 of the National Executive Branch, or (b) the following has been granted to TGS and remains effective: (x) the tariff adjustment set forth in the Agreement initialized by TGS and approved by its Board of Directors on October 5, 2011, or (y) any other compensatory system implemented through any tariff review system or mechanism hereinafter replacing those currently in force under Economic Emergency Law No. 25,561 of the Republic of Argentina and having an equivalent economic effect on TGS.

iii)Principal will bear compensatory interest at a 6.8 % annual nominal rate plus VAT

On January 12, 2015, the parties agreed to extend the suspension of mentioned exhibition proceeding for six months as from that date.

During September 2015, the condition stipulated in the loan agreement granted by TGS has been met, which required its compulsory cancellation through the full and unconditional assignment of all the ownership rights and liabilities held by the Company under the Arbitration Proceeding.

On October 7, 2015, all rights under the Arbitration Proceeding were assigned to a trust formed abroad to TGS and consequently, on that date the effects of the transaction were recognized according to the following breakdown:

Loan principal balance	242,372,000
Interest and taxes	81,795,769
Total TGS loan	324,167,769
Rights over arbitration proceedings	108,754,000
Gain from discharge/cancellation of TGS loan	215,413,769

F - 147

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 21: DEFERRED REVENUE

Non current	12.31.2015	12.31.2014
Customer contributions not subject to repayment	153,815,820	109,089,120
	153,815,820	109,089,120
Current
Customer contributions not subject to repayment	763,684	763,684
	763,684	763,684

NOTE 22: SALARIES AND SOCIAL SECURITY PAYABLE

Non current	12.31.2015	12.31.2014
Seniority - based bonus	73,715,803	59,742,127
Early retirements payable	6,323,535	3,116,180
	80,039,338	62,858,307
Current
Salaries and social security contributions	231,789,446	195,696,094
Provision for vacations	354,198,787	295,534,685
Provision for gratifications	55,298,077	39,765,102
Provision for annual bonus for efficiency	241,174,433	192,092,861
Early retirements payable	4,507,072	2,186,156
	886,967,815	725,274,898

F - 148

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 23: DEFINED BENEFITS PLANS

The following are the benefits that the Company granted to certain employees under the existing collective union agreements:

a)seniority bonus to be granted to personnel with certain number of years of service;

b)a bonus for all workers having accumulated years of services with contributions to obtain the regular retirement payment.

The amounts and conditions vary depending on the collective bargaining agreement and for employees who are not union members.

The movement in the defined benefit obligation over the year is as follows:

	12.31.2015	12.31.2014	12.31.2013
Liabilities at the beginning	223,347,647	145,073,927	142,749,594
Current services cost	36,010,995	15,674,883	5,147,032
Cost for interest	83,562,352	55,955,929	27,877,079
Discontinued operations	-	-	(45,299,718)
Actuarial losses (gains)	3,300,596	24,829,850	27,764,805
Benefit payments	(35,677,351)	(18,186,942)	(13,164,865)
Liabilities at the end	310,544,239	223,347,647	145,073,927

The detail of the obligation for defined benefit plans by segment is as follows:

	12.31.2015	12.31.2014	12.31.2013
Generation	77,867,255	62,425,518	42,382,871
Distribution	232,676,984	160,922,129	102,691,056
Total	310,544,239	223,347,647	145,073,927

As of December 31, 2015 and 2014, the Company carried no assets related to defined benefits plans.

The details of the charge acknowledged in the Comprehensive Income (Loss) Statement is the following:

	12.31.2015	12.31.2014	12.31.2013
Current services cost	36,010,995	15,674,883	5,147,032
Cost for interest	83,562,352	55,955,929	27,877,079
Actuarial losses	2,204,814	1,532,583	730,605
Actuarial loss through other comprehensive income	1,095,782	23,297,267	27,034,200
Total cost	122,873,943	96,460,662	60,788,916

The obligations for defined benefit plans expected are:

F - 149

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 23: (Continuation)

	12.31.2015
Less than one year	46,089,380
One to two years	20,510,159
Two to three years	24,850,965
Three to four years	24,189,261
Four to five years	30,226,625
Up to five years	141,084,965

The actuarial assumptions used were as follows:

	12.31.2015	12.31.2014	12.31.2013
Discount rate	6%	6%	6%
Salaries increase	2%	2%	2%
Average inflation	32%	32%	25%

The annual 6% real discount rate is reasonable considering the market rates for Argentine government bonds as of December 31, 2010. The IRR of Argentine government bonds has been significantly influenced, since mid-2011, by the global macroeconomic context, and the probability of default thereon is expected to be higher than the credit risk of large corporations. Subsequently, the rates increased due to a significant increase of the risk of default, unrelated to the risk of well-established firms whose risk of default on their obligations has not changed in such proportion.

The following information shows the effect of a variation in the discount rate and salaries increase on the obligation amount:

	12.31.2015
Discount rate: 5%
Obligation	333,224,324
Variation	22,680,085
	7.30%
Discount rate: 7%
Obligation	290,930,189
Variation	(19,614,050)
	(6.32%)
Salaries increase: 1%
Obligation	292,255,295
Variation	(18,288,944)
	(5.89%)
Salaries increase: 3%
Obligation	331,342,940
Variation	20,798,701
	6.70%

F - 150

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 23: (Continuation)

Estimates based on actuarial techniques imply the use of statistical tools, such as the so-called demographic tables used in the actuarial valuation of the Company active personnel.

In order to determine the mortality of the Company active personnel, the “1971 Group Annuity Mortality” table has been used. In general, a mortality table shows for each age group the probability that a person in any such age group will die before reaching a predetermined age. Male and female mortality tables are elaborated separately inasmuch as men and women’s mortality rates are substantially different.

In order to estimate total and permanent disability due to any cause, 80% of the “1985 Pension Disability Study” table has been used.

In order to estimate the probability that the Company active personnel will leave the Company or stay therein, the “ESA 77” table has been used.

Liabilities related to the above-mentioned benefit plans have been determined contemplating all the rights accrued by the beneficiaries of the plans up to the closing date of the year ended December 31, 2015.

These benefits do not apply to key management personnel.

F - 151

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 24: TAX LIABILITIES

Non current	12.31.2015	12.31.2014
Value added tax	95,700,492	77,286,956
Income tax provision, net of witholdings and advances	102,871,269	63,685,209
Minimum notional income tax provision, net of witholdings and advances	168,896,460	118,700,596
Sales tax	4,250,033	1,766,628
Payment plans	15,380,012	17,769,495
Other	1,364,738	2,022,829
	388,463,004	281,231,713
Current
Income tax provision, net of witholdings and advances	92,386,069	15,192,552
Minimum notional income tax provision, net of witholdings and advances	46,563,652	16,393,289
Value added tax	29,170,820	24,805,453
Municipal, provincial and national contributions	73,804,583	67,999,068
Personal assets tax provision	26,219,494	8,686,056
Payment plans	3,052,584	2,802,592
Municipal taxes	44,293,674	40,327,928
Tax withholdings to be deposited	280,992,443	43,827,166
Stamp tax payable	9,590,568	9,590,568
Other	4,038,586	2,303,950
	610,112,473	231,928,622

F - 152

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 25: PROVISIONS

	12.31.2015
	For contingencies	Asset retirement obligation	Total
Non Current
At the beginning of the year	116,904,454	2,623,202	119,527,656
Increases	149,179,441	46,543,290	195,722,731
Decreases	(1,471,412)	-	(1,471,412)
At the end of the year	264,612,483	49,166,492	313,778,975
	12.31.2015
	For contingencies
Current
At the beginning of the year	24,170,912
Increases	78,970,903
Decreases	(32,550,249)
At the end of the year	70,591,566
	12.31.2014
	For contingencies	Asset retirement obligation	Total
Non Current
At the beginning of the year	89,775,416	1,761,146	91,536,562
Increases	38,129,133	862,056	38,991,189
Reclassifications	(4,510,478)	-	(4,510,478)
Reversal of unused amounts	(603,634)	-	(603,634)
Decreases	(5,885,983)	-	(5,885,983)
At the end of the year	116,904,454	2,623,202	119,527,656
	12.31.2014
	For contingencies
Current
At the beginning of the year	11,167,430
Increases	56,636,476
Reclassifications	4,510,478
Decreases	(48,143,472)
At the end of the year	24,170,912

F - 153

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 25: (Continuation)

	12.31.2013
	For contingencies	Asset retirement obligation	Total
Non Current
At the beginning of the year	86,733,374	881,711	87,615,085
Increases	14,637,856	879,435	15,517,291
Decreases	(8,299,769)	-	(8,299,769)
Discontinued operations	(3,296,045)	-	(3,296,045)
At the end of the year	89,775,416	1,761,146	91,536,562
	12.31.2013
	For contingencies
Current
At the beginning of the year	10,454,156
Increases	21,933,590
Decreases	(17,058,944)
Discontinued operations	(4,161,372)
At the end of the year	11,167,430

F - 154

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 26: REVENUE

	12.31.2015	12.31.2014	12.31.2013
Sales of energy to the SPOT Market	1,072,149,819	1,013,970,810	597,361,773
Sales of energy for the Resolution No. 220/07	918,105,862	777,074,476	375,122,985
Sales of energy to MAT	1,540,301	88,016,383	468,072,318
Energy plus sales	470,115,211	376,721,231	267,833,254
Other sales	11,311,521	19,672,330	20,942,816
Generation subtotal	2,473,222,714	2,275,455,230	1,729,333,146
Energy sales (1)	3,720,442,988	3,536,146,761	3,393,759,304
Right of use of poles	76,416,604	57,462,917	41,537,592
Connection and reconnection charges	5,302,325	4,766,500	5,393,605
Distribution subtotal	3,802,161,917	3,598,376,178	3,440,690,501
Gas sales	812,647,779	267,607,266	116,396,140
Oil and liquid sales	34,866,520	21,913,631	18,676,492
Oil and gas subtotal	847,514,299	289,520,897	135,072,632
Administrative services sales	21,872,401	29,000,109	20,985,911
Other sales	854,832	753,001	1,214,398
Holding and others subtotal	22,727,233	29,753,110	22,200,309
Intersegment sales	15,155,270	11,540,096	7,696,962
Total revenue	7,160,781,433	6,204,645,511	5,334,993,550

⁽¹⁾ Includes revenue from the application of SE Resolution No. 347/12 for $ 535.5 million and $ 508.1 million for the year ended December 31, 2015 and 2014, respectively.

F - 155

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 27: COST OF SALES

	12.31.2015	12.31.2014	12.31.2013
Inventories at the beginning for the year	135,570,860	114,615,289	107,342,562
Plus: Charges for the year
Purchases of inventories and of energy	2,112,676,027	1,900,340,148	2,056,829,052
Salaries and social security charges	2,196,486,036	1,628,222,919	975,865,640
Fringe benefits	36,380,012	23,290,505	13,566,377
Accrual of defined benefit plans	96,511,517	58,973,854	25,808,193
Fees and compensation for services	585,998,669	754,831,570	696,973,646
Property, plant and equipment depreciations	640,500,673	401,421,064	309,105,669
Intangible assets amortization	29,462,213	29,462,214	39,481,210
Depreciation of biological assets	40,815	40,815	40,815
Gas consumption	88,382,701	151,533,463	147,490,706
Purchase of energy	212,401,703	243,636,169	546,124,382
Fuel consumption	-	-	29,316,309
Transport of energy	16,277,810	28,166,193	24,815,156
Material consumption	297,102,048	251,200,852	162,592,701
Penalties	260,433,537	245,211,708	305,777,489
Fitting oil	3,471,687	3,399,074	-
Maintenance	127,624,724	84,712,678	100,545,265
Canons and Royalties	138,679,735	67,558,760	45,569,871
Gas production	138,296,404	36,577,860	11,568,867
Rental and insurance	79,417,582	57,523,491	51,611,895
Surveillance and security	52,735,805	35,142,150	22,520,858
Taxes, rates and contributions	24,904,989	14,547,451	16,459,783
Communications	14,551,171	13,770,143	8,189,542
Water consumption	9,327,728	7,073,624	-
Other	21,018,879	13,398,574	20,293,547
Subtotal	5,070,006,438	4,149,695,131	3,553,717,921
Less: Inventories at the end of the year	(225,462,790)	(135,570,860)	(114,615,289)
Total cost of sales	7,092,790,535	6,029,079,708	5,603,274,246

F - 156

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 28: SELLING EXPENSES

	12.31.2015	12.31.2014	12.31.2013
Salaries and social security charges	310,826,478	255,959,037	185,161,944
Fringe benefits	286,672	182,540	153,771
Accrual of defined benefit plans	12,331,517	6,869,206	3,727,606
Fees and compensation for services	332,955,352	264,899,163	200,276,881
Compensation agreements	74,285,216	19,291,337	1,907,959
Property, plant and equipment depreciations	34,956,294	18,562,317	9,301,600
Taxes, rates and contributions	94,902,351	64,474,833	93,399,242
Communications	58,735,883	39,088,308	32,628,934
Penalties	24,371,291	18,360,000	52,700,000
Doubtful accounts	27,316,872	24,717,807	55,653,050
Surveillance and security	839,450	201,120	552,808
Other	874,657	754,679	665,637
Total selling expenses	972,682,033	713,360,347	636,129,432

NOTE 29: ADMINISTRATIVE EXPENSES

	12.31.2015	12.31.2014	12.31.2013
Salaries and social security charges	526,612,767	376,464,741	245,648,385
Fringe benefits	16,207,755	11,575,551	8,545,262
Accrual of defined benefit plans	12,935,127	7,320,335	4,218,917
Fees and compensation for services	293,942,819	220,815,364	140,208,466
Compensation agreements	100,991,563	25,576,205	6,995,852
Director's and Syndicate fees	43,748,959	21,605,223	18,819,985
Reserve for directors’ options	-	6,709,014	8,945,352
Property, plant and equipment depreciations	15,724,263	17,673,738	15,823,013
Intangible assets amortization	-	-	1,038,924
Material consumption	23,047,185	13,122,325	7,737,331
Maintenance	3,209,269	2,803,699	1,723,604
Transport and per diem	6,009,626	6,238,351	3,486,066
Rental and insurance	76,590,708	52,489,107	33,777,439
Surveillance and security	26,027,785	16,681,972	11,746,010
Taxes, rates and contributions	45,415,846	26,483,704	32,974,034
Communications	9,055,126	7,585,001	5,416,538
Advertising and promotion	19,041,458	10,369,097	7,664,017
Other	20,825,819	13,945,289	7,103,898
Total administrative expenses	1,239,386,075	837,458,716	561,873,093

F - 157

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 30: OTHER OPERATING INCOME AND EXPENSES

Other operating income	Note	12.31.2015	12.31.2014	12.31.2013
Insurance recovery		43,560	6,358,656	245,975,559
Recovery of expenses		6,943,308	13,765,053	10,922,850
Recovery of receivables		1,480,059	51,317,039	4,835,714
Recovery of allowance for tax credits		494,045	1,375,717	13,751,536
Recovery of other operating costs		-	-	13,002,003
Gain from discharge/cancellation of TGS Loan	20	215,413,769	-	-
Recognition of Agreement March		-	-	85,177,042
Surplus Gas Injection Compensation Res. No. 1/13		546,774,869	127,147,619	22,572,407
Income recognition for arbitral proceedings	37.2	74,770,949	-	-
Recovery of tax on gross income		-	37,943,970	-
Commissions on municipal tax collection		14,775,428	12,040,378	8,638,401
Dividends earned		4,486,563	6,226,319	6,876,038
Services to third parties		53,621,223	33,304,599	21,699,983
Profit of property, plant and equipment sale		33,760	5,596,699	403,000
Client severance		-	5,070,000	-
Recovery of penalties		7,170,518	-	-
Advance payments received for subsidiaries sales agreement		-	-	8,868,000
Other		14,669,985	11,829,808	23,497,497
Total other operating income		940,678,036	311,975,857	466,220,030
Other operating expenses
Provision for contingencies		(228,150,344)	(96,426,420)	(36,571,446)
Voluntary retirements - bonus		(43,192,457)	(24,985,431)	(15,875,775)
Decrease in property, plant and equipment		(8,790,549)	(24,236,319)	(13,807,236)
Indemnities		(11,801,084)	(8,202,312)	(4,924,296)
Decreaeses in intangible assets		-	-	(1,188,984)
Allowance for uncollectible tax credits		(95,329,238)	(4,277,247)	(10,088,463)
Net expense for technical functions		(12,899,848)	(16,235,590)	(15,540,678)
Tax on bank transactions		(176,436,692)	(109,751,805)	(84,186,431)
Other expenses FOCEDE		(59,563,107)	(97,701,000)	-
Cost for services provided to third parties		(52,420,500)	(25,265,225)	(9,035,156)
Other operating costs from contract termination		-	(11,366,548)	-
Compensation agreements		(48,324,168)	(16,678,879)	-
Donations and contributions		(6,902,455)	(4,674,148)	(3,078,609)
Other		(10,591,004)	(7,273,952)	(9,814,000)
Total other operating expenses		(754,401,446)	(447,074,876)	(204,111,074)

F - 158

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 31: FINANCIAL RESULTS

Finance income	12.31.2015	12.31.2014	12.31.2013
Commercial interest	238,894,211	222,687,554	93,797,636
Financial interest	79,205,929	217,854,220	242,497,529
Arbitral proceedings interest	30,408,033	-	-
Other interest	19,560	-	-
Total finance income	348,527,733	440,541,774	336,295,165
Finance expenses
Commercial interest (1)	(194,538,860)	(460,787,579)	(337,086,792)
Fiscal interest	(74,605,776)	(51,036,110)	(40,861,761)
Financial interest	(937,001,529)	(508,127,128)	(415,828,810)
Other interest	(1,923,174)	(17,622,416)	(266,289)
Taxes and bank commissions	(33,124,914)	(30,042,093)	(15,846,973)
Penalties for early repayment of loans	-	(40,391,657)	-
Other financial expenses	(16,120,541)	(5,221,923)	(3,985,095)
Total financial expenses	(1,257,314,794)	(1,113,228,906)	(813,875,720)
Other financial results
Foreign currency exchange difference	(566,172,708)	(761,254,771)	(744,150,070)
Result from repurchase of Corporate Bonds	9,904,686	47,122,571	88,879,485
Changes in the fair value of financial instruments	2,252,941,696	907,867,357	295,854,837
Discounted value measurement	23,228,386	223,304,132	(155,869,735)
Asset retirement obligation	(18,899,410)	(47,953)	-
Other financial results	(31,636)	3,063,685	(3,975,734)
Total other financial results	1,700,971,014	420,055,021	(519,261,217)
Total financial results, net	792,183,953	(252,632,111)	(996,841,772)

⁽¹⁾ Net of the profit recorded due to the agreement between CAMMESA and Edenor described in Note 2.3.1.9).

NOTE 32: INCOME TAX

The breakdown of income tax charge is:

	Note	12.31.2015	12.31.2014	12.31.2013
Current tax		370,067,119	40,319,531	29,485,263
Deferred tax	14	162,789,052	34,668,716	(177,697,799)
Tax returns amendment adjustment		-	-	12,415,095
Difference in the estimate of previous fiscal year income tax and the income return		(17,177)	(1,731,266)	2,846,486
Minimum notional tax		53,937,955	27,155,297	15,238,198
Discontinued operations		-	-	105,533,766
Total income tax		586,776,949	100,412,278	(12,178,991)

F - 159

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 32: (Continuation)

Below is a reconciliation between income tax expense and the amount resulting from application of the tax rate on the income before taxes:

	12.31.2015	12.31.2014	12.31.2013
Profit before tax	4,435,600,963	629,952,564	729464657
Current tax rate	35%	35%	35%
Result at the tax rate	1,552,460,337	220,483,397	255,312,630
Share of profit of Joint Ventures and associates	229,072	(11,411,154)	899,798
Reserve for directors’ options	-	2,348,155	3,130,873
Non-taxable results	(1,045,231,477)	(419,313,741)	(246,305,179)
Non-deductible cost	12,512,541	4,706,151	23,993,259
Non-deductible provisions	423,216	3,071,264	-
Other	(2,463,555)	(205,979)	1,995,728
Subtotal	517,930,134	(200,321,907)	39,027,109
Expiration of tax loss-carryforwards	-	145,346	23,260,952
Minimun notional income tax credit	53,937,955	27,155,297	15,238,198
Difference in the estimate of previous fiscal year income tax and the income tax statement	45,081,553	(12,252,732)	1,952,401
Discontinued operations	-	-	105,533,766
Tax loss-carryforwards not previously recognized	(282,398,102)	(51,584,956)	(385,844,096)
Deferred tax assets not recognized	252,225,409	337,271,230	188,652,679
Total income tax expense	586,776,949	100,412,278	(12,178,991)

As of December 31, 2015 and 2014 consolidated accumulated tax losses amount to $ 1,749.9 million and $ 2,023.8 million, respectively, which may be offset, pursuant to the applicable tax laws, with tax profits corresponding to future fiscal years based on the following breakdown:

F - 160

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 32: (Continuation)

		Amount to 35%
Fiscal year generation	Fiscal year prescription	12.31.2015	12.31.2014
2009	2014	-	4,230,639
2010	2015	-	85,431,384
2011	2016	23,653,642	77,855,098
2012	2017	37,298,554	96,415,882
2013	2018	120,710,479	121,111,925
2014	2019	153,247,281	323,291,847
2015	2020	277,560,297	-
		612,470,253	708,336,775
Unrecognized deferred assets		(580,866,040)	(592,961,150)
Recognized Tax loss-carryforwards		31,604,213	115,375,625

Due to the uncertainty on whether future tax income may or may not absorb all deferred tax assets, as of December 31, 2015 and 2014 the Company and some subsidiaries have not recorded deferred assets resulting from tax-loss carry-forwards accrued for a total amount of $ 580.9 million and $ 593 million, respectively.

NOTE 33: EARNING (LOSS) PER SHARE

a)Basic

Basic earnings (loss) per share are calculated by dividing the result attributable to the Company’s equity interest holders by the weighted average of outstanding common shares during the year.

b)Diluted

Diluted earnings (loss) per share are calculated by adjusting the weighted average of outstanding common shares to reflect the conversion of all dilutive potential common shares. According as mentioned in Note 41 as of December 31, 2014, the Company had a kind of dilutive potential common shares, which corresponding to share purchase options. As of December 31, 2015 were converted into shares, for which there are no potential dilutive ordinary shares.

Potential common shares will be deemed dilutive only when their conversion into common shares may reduce the earnings per share or increase losses per share of the continuing business. Potential common shares will be deemed anti-dilutive when their conversion into common shares may result in an increase in the earnings per share or a decrease in the losses per share of the continuing operations.

F - 161

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 33: (Continuation)

The calculation of diluted earnings (loss) per share does not entail a conversion, the exercise or another issuance of shares which may have an anti-dilutive effect on the losses per share, or where the option exercise price is higher than the average price of ordinary shares during the period, no dilutive effect is recorded, being the diluted earning (loss) per share equal to the basic. As of December 31, 2015, the diluted earnings per share is equal to basic. Therefore, the basic and diluted results per share are the same for continuing operations during 2013, and for discontinued operations during 2013.

	12.31.2015	12.31.2014	12.31.2013
Earnings attributable to the equity holders of the Company	3,065,089,423	743,159,355	371,782,245
Weighted average amount of outstanding shares	1,346,716,389	1,314,310,895	1,314,310,895
Basic earnings per share	2.2760	0.5654	0.2829
Earnings attributable to the equity holders of the Company	3,065,089,423	743,159,355
Charge for reserve for directors’ options	-	6,709,014
Earnings attributable to the equity holders of the Company	3,065,089,423	749,868,369
Weighted average amount of outstanding shares	1,346,716,389	1,314,310,895
Adjustments for stock options	-	161,151,512
Weighted average amount of outstanding shares for diluted profit per share	1,346,716,389	1,475,462,407
Diluted earnings per share	2.2760	0.5082
			12.31.2013
(Loss) Earings attributable to the equity holders of the Company for discontinued operations			(85,698,444)
Weighted average amount of outstanding shares			1,314,310,895
Basic and diluted loss per share from discontinued operations			(0.0652)

NOTE 34: SEGMENT INFORMATION

The Company is engaged in the electricity sector, with a participation in the electricity generation, transmission and distribution segments through different legal entities. As of December 31, 2015, in view of the growth of PEPASA operations, the Company has identified Oil and Gas as a new segment. Therefore, the comparative information by segment has been restated. Accordingly, the following business segments have been identified by means of its subsidiaries and based on the nature, customers and risks involved:

Generation, consisting in direct and indirect equity interest in CPB, CTG, CTLL, HINISA, HIDISA, PACOSA and investments in shares in other companies related to the electricity generation sector.

Transmission, consisting in indirect equity interest through Citelec in Transener and its subsidiaries. For the purposes of presenting segment information the indirect equity interest has been consolidated proportionally.

Distribution, consisting in indirect equity interest in EASA and Edenor. As of December 31, 2013 the Company has deconsolidated AESEBA, classifying their results as discontinued operations.

Oil and gas, consisting in direct participation in PEPASA dedicated to exploration and exploitation of oil and gas.

Holding and others, consisting in financial investment operations, holding, and other businesses.

The Company manages its segments based on the net income level of reporting.

F - 162

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 34: (Continuation)

Consolidated profit and loss information at December 31, 2015	Generation	Transmission	Distribution(1)	Oil and gas	Holding and others	Eliminations	Consolidated
Revenue	2,473,222,714	968,597,265	3,802,161,917	847,514,299	22,727,233	-	8,114,223,428
Intersegment sales	-	4,824,400	-	95,976,534	30,833,245	(111,654,509)	19,979,670
Cost of sales	(1,337,465,646)	(666,014,234)	(5,189,018,337)	(660,007,210)	(2,275,876)	95,976,534	(7,758,804,769)
Gross profit (loss)	1,135,757,068	307,407,431	(1,386,856,420)	283,483,623	51,284,602	(15,677,975)	375,398,329
Selling expenses	(23,489,931)	-	(833,445,076)	(115,743,829)	(3,197)	-	(972,682,033)
Administrative expenses	(262,677,837)	(125,593,749)	(711,866,475)	(149,667,556)	(130,743,384)	15,677,975	(1,364,871,026)
Other operating income	91,149,862	1,134,357	80,068,901	551,436,292	218,022,982	-	941,812,394
Other operating expenses	(79,179,456)	(13,520,651)	(584,329,027)	(84,663,177)	(6,206,344)	-	(767,898,655)
Reversal of impairment of property, plant and equipment	25,259,957	-	-	-	-	-	25,259,957
Profit from share in joint ventures	-	-	813	-	-	-	813
Loss from share in associates	-	-	-	-	(9,932,259)	-	(9,932,259)
Operating profit (loss) before higher costs recognition and SE Resolution No. 32/15	886,819,663	169,427,388	(3,436,427,284)	484,845,353	122,422,400	-	(1,772,912,480)
Income recognition on account of the RTI - SE Resolution 32/15	-	-	5,025,113,729	-	-	-	5,025,113,729
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes	-	-	551,498,435	-	-	-	551,498,435
Operating profit	886,819,663	169,427,388	2,140,184,880	484,845,353	122,422,400	-	3,803,699,684
Financial income	301,521,342	193,761,722	96,225,288	11,871,259	25,524,990	(86,615,146)	542,289,455
Financial expenses	(357,519,192)	(62,019,100)	(576,974,728)	(389,374,954)	(20,052,832)	86,615,146	(1,319,325,660)
Other financial results	(88,601,258)	(254,679,447)	(870,332,509)	407,959,095	2,251,945,686	-	1,446,291,567
Financial results, net	(144,599,108)	(122,936,825)	(1,351,081,949)	30,455,400	2,257,417,844	-	669,255,362
Profit before income tax	742,220,555	46,490,563	789,102,931	515,300,753	2,379,840,244	-	4,472,955,046
Income tax and minimun notional income tax	(192,388,769)	(18,843,250)	(176,287,828)	(163,563,328)	(54,537,024)	-	(605,620,199)
Profit for the year	549,831,786	27,647,313	612,815,103	351,737,425	2,325,303,220	-	3,867,334,847
Adjustment non-controlling interest in joint ventures	-	(18,510,833)	-	-	-	-	(18,510,833)
Total profit of the year	549,831,786	9,136,480	612,815,103	351,737,425	2,325,303,220	-	3,848,824,014
Depreciation and amortization (2)	149,007,354	45,428,820	294,780,551	275,623,108	1,273,245	-	766,113,078

F - 163

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 34: (Continuation)

Consolidated profit and loss information at December 31, 2015	Generation	Transmission	Distribution(1)	Oil and gas	Holding and others	Eliminations	Consolidated
Total profit attributable to:
Owners of the Company	496,882,307	9,136,480	59,131,776	174,635,640	2,325,303,220	-	3,065,089,423
Non - controlling interest	52,949,479	-	553,683,327	177,101,785	-	-	783,734,591
Consolidated statement of financial position as of December 31,2015
Assets	8,050,979,733	1,490,947,675	11,736,631,427	3,969,844,749	6,372,205,648	(1,170,875,949)	30,449,733,283
Liabilities	5,955,974,665	1,116,402,542	11,672,823,823	3,360,682,807	949,774,248	(1,170,875,949)	21,884,782,136
Additional consolidated information as of December 31, 2015
Increases in property, plant and equipment	1,515,591,572	142,608,646	2,518,227,142	2,213,604,140	468,641	-	6,390,500,141
(1) Includes financial results generated by Corporated Bonds issued by EASA for $ 672.2 million and other consolidation adjustments.
(2) Includes amortization and depreciation of property, plant and equipment, intangible assets and biological assets (recognized in cost of sales, administrative expenses and selling expenses).

F - 164

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 34: (Continuation)

Consolidated profit and loss information at December 31, 2014 (restated)	Generation	Transmission	Distribution(1)	Oil and gas	Holding and others	Eliminations	Consolidated
Revenue	2,275,455,230	736,960,163	3,598,376,178	289,520,897	29,753,110	-	6,930,065,578
Intersegment sales	-	1,484,071	-	67,274,788	37,494,429	(93,229,121)	13,024,167
Cost of sales	(1,176,661,033)	(539,700,648)	(4,716,523,920)	(201,174,719)	(1,994,824)	67,274,788	(6,568,780,356)
Gross profit (loss)	1,098,794,197	198,743,586	(1,118,147,742)	155,620,966	65,252,715	(25,954,333)	374,309,389
Selling expenses	(17,933,800)	-	(658,946,487)	(36,474,776)	(5,284)	-	(713,360,347)
Administrative expenses	(200,037,863)	(91,840,829)	(510,281,735)	(71,109,801)	(81,467,335)	25,510,965	(929,226,598)
Other operating income	113,410,323	3,866,382	53,172,550	138,863,463	6,529,523	-	315,842,241
Other operating expenses	(73,504,738)	(11,449,555)	(319,224,611)	(51,989,531)	(2,339,617)	-	(458,508,052)
Reversal of impairment of property, plant and equipment	88,406,704	-	-	-	-	-	88,406,704
Profit from share in joint ventures	-	-	4,928	-	-	-	4,928
Loss from share in associates	-	-	-	-	(1,605,070)	-	(1,605,070)
Operating profit (loss)	1,009,134,823	99,319,584	(2,553,423,097)	134,910,321	(13,635,068)	(443,368)	(1,324,136,805)
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes	-	-	2,271,926,952	-	-	-	2,271,926,952
Operating profit (loss)	1,009,134,823	99,319,584	(281,496,145)	134,910,321	(13,635,068)	(443,368)	947,790,147
Financial income	240,948,678	226,124,624	238,973,376	12,933,722	13,102,465	(65,416,467)	666,666,398
Financial expenses	(310,774,890)	(59,393,142)	(692,484,612)	(176,669,084)	849,632	65,859,835	(1,172,612,261)
Other financial results	(82,259,803)	(142,011,652)	(528,135,412)	122,981,107	907,469,129	-	278,043,369
Financial results, net	(152,086,015)	24,719,830	(981,646,648)	(40,754,255)	921,421,226	443,368	(227,902,494)
Profit (Loss) before income tax	857,048,808	124,039,414	(1,263,142,793)	94,156,066	907,786,158	-	719,887,653
Income tax and minimun notional income tax	(224,090,358)	(51,421,728)	161,758,063	(10,236,836)	(27,843,149)	-	(151,834,008)
Profit (Loss) for the year	632,958,450	72,617,686	(1,101,384,730)	83,919,230	879,943,009	-	568,053,645
Adjustment non-controlling interest in joint ventures	-	(38,513,359)	-	-	-	-	(38,513,359)
Total profit (loss) of the year	632,958,450	34,104,327	(1,101,384,730)	83,919,230	879,943,009	-	529,540,286
Depreciation and amortization (2)	134,205,042	43,187,056	251,012,741	80,908,481	1,033,884	-	510,347,204

F - 165

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 34: (Continuation)

Consolidated profit and loss information at December 31, 2014 (restated)	Generation	Transmission	Distribution(1)	Oil and gas	Holding and others	Eliminations	Consolidated
Total profit (loss) attributable to:
Owners of the Company	529,325,836	34,104,327	(742,146,551)	41,932,734	879,943,009	-	743,159,355
Non - controlling interest	103,632,614	-	(359,238,179)	41,986,496	-	-	(213,619,069)
Consolidated statement of financial position as of December 31, 2014 (restated)
Assets	5,152,601,934	1,244,965,218	8,066,880,278	1,489,301,207	2,887,803,792	(910,030,330)	17,931,522,099
Liabilities	3,547,364,693	900,141,394	8,616,187,612	1,231,876,690	827,710,323	(910,030,330)	14,213,250,382
Additional consolidated information as of December 31, 2014 (restated)
Increases of property, plant and equipment	387,045,008	196,277,070	1,701,773,299	618,844,913	1,514,837	-	2,905,455,127
(1) Includes financial results generated by Corporated Bonds issued by EASA for $ 312,2 million and other consolidation adjustments.
(2) Includes amortization and depreciation of property, plant and equipment, intangible assets and biological assets (recognized in cost of sales, administrative expenses and selling expenses).

F - 166

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 34: (Continuation)

Consolidated profit and loss information at December 31, 2013 (restated)	Generation	Transmission	Distribution(1)	Oil and gas	Holding and others	Eliminations	Consolidated
Revenue	1,729,333,146	435,300,074	3,440,690,501	135,072,632	22,200,309	-	5,762,596,662
Intersegment sales	2,002,563	1,580,605	-	35,052,611	21,686,380	(51,044,592)	9,277,567
Cost of sales	(1,426,829,452)	(393,694,193)	(4,122,453,202)	(88,199,812)	(844,391)	35,052,611	(5,996,968,439)
Gross profit (loss)	304,506,257	43,186,486	(681,762,701)	81,925,431	43,042,298	(15,991,981)	(225,094,210)
Selling expenses	(78,522,087)	-	(549,142,696)	(8,464,649)	-	-	(636,129,432)
Administrative expenses	(139,046,394)	(67,703,269)	(332,572,593)	(26,065,746)	(78,118,032)	13,989,418	(629,516,616)
Other operating income	363,356,067	9,677,530	62,289,569	32,822,400	7,750,190	-	475,895,756
Other operating expenses	(47,465,615)	(7,057,780)	(143,441,679)	(6,755,323)	(6,433,872)	-	(211,154,269)
Profit from share in joint ventures	-	-	4,682	-	-	-	4,682
Loss from share in associates	-	-	-	-	2,228,499	-	2,228,499
Operating profit (loss)	402,828,228	(21,897,033)	(1,644,625,418)	73,462,113	(31,530,917)	(2,002,563)	(1,223,765,590)
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes	-	-	2,933,051,544	-	-	-	2,933,051,544
Operating profit (loss)	402,828,228	(21,897,033)	1,288,426,126	73,462,113	(31,530,917)	(2,002,563)	1,709,285,954
Financial income	63,949,836	172,978,880	287,067,095	2,095,270	4,503,972	(21,321,008)	509,274,045
Financial expenses	(216,444,762)	(41,928,248)	(565,770,281)	(60,073,397)	7,130,820	21,293,461	(855,792,407)
Other financial results	(437,463,117)	(114,902,206)	(425,491,481)	25,943,514	317,749,867	-	(634,163,423)
Financial results, net	(589,958,043)	16,148,426	(704,194,667)	(32,034,613)	329,384,659	(27,547)	(980,681,785)
(Loss) Profit before income tax	(187,129,815)	(5,748,607)	584,231,459	41,427,500	297,853,742	(2,030,110)	728,604,169
Income tax and minimun notional income tax	(20,682,593)	832,623	52,724,268	(4,178,328)	(15,684,356)	-	13,011,614
(Loss) Profit for the year	(207,812,408)	(4,915,984)	636,955,727	37,249,172	282,169,386	(2,030,110)	741,615,783
Discontinued operations	-	-	(128,888,438)	-	-	2,030,110	(126,858,328)
Adjustment non-controlling interest in joint ventures	-	27,865	-	-	-	-	27,865
Total (loss) profit of the year	(207,812,408)	(4,888,119)	508,067,289	37,249,172	282,169,386	-	614,785,320
Depreciation and amortization (2)	107,730,568	41,944,731	230,060,227	35,886,233	1,114,203	-	416,735,962

F - 167

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 34: (Continuation)

Consolidated profit and loss information at December 31, 2013 (restated)	Generation	Transmission	Distribution(1)	Oil and gas	Holding and others	Eliminations	Consolidated
Total (loss) profit attributable to:
Owners of the Company	(191,916,592)	(4,888,119)	163,469,954	37,249,172	282,169,386	-	286,083,801
Non - controlling interest	(15,895,816)	-	344,597,335	-	-	-	328,701,519
Consolidated statement of financial position as of December 31, 2013 (restated)
Assets	3,714,900,214	963,993,871	6,971,553,493	560,698,328	1,623,089,057	(455,870,761)	13,378,364,202
Liabilities	2,713,844,869	687,818,246	6,434,706,032	486,540,541	508,493,445	(455,870,761)	10,375,532,372
Additional consolidated information as of December 31, 2013 (restated)
Increases of property, plant and equipment	50,790,025	108,370,673	1,092,342,662	129,759,923	10,631,860	-	1,391,895,143
(1) Includes financial results generated by financial debt issued by EASA for Ps. 130.3 million and other consolidation adjustments.
(2) Includes amortizations and depreciation of fixed assets and intangible assets (recognized in cost of sales, administrative expenses and selling expenses).

F - 168

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 34: (Continuation)

Accounting criteria used by the subsidiaries to measure of results, assets and liabilities of the segments is consistent with that used in the financial statements. Transactions between different segments are conducted under market conditions. Assets and liabilities are allocated based on the segment’s activity.

The segment called “Electricity transmission”, which corresponds to the Company’s indirect interest in Citelec and its subsidiaries, has been included as a reportable segment since it is considered as such in the reports received by the Executive Director. Since the stake in such companies constitutes an interest in a joint venture, it is not consolidated and it is valued according to the equity method of accounting in the consolidated Statement of Income and Financial position. 

The reconciliation between the segment information and the statement of comprehensive income (loss) is presented below:

Consolidated profit and loss information at December 31, 2015	Segment information	Results from interest in joint ventures	Consolidated comprehensive total income
Revenue	8,114,223,428	(968,597,265)	7,145,626,163
Intersegment sales	19,979,670	(4,824,400)	15,155,270
Cost of sales	(7,758,804,769)	666,014,234	(7,092,790,535)
Gross profit (loss)	375,398,329	(307,407,431)	67,990,898
Selling expenses	(972,682,033)	-	(972,682,033)
Administrative expenses	(1,364,871,026)	125,484,951	(1,239,386,075)
Other operating income	941,812,394	(1,134,358)	940,678,036
Other operating expenses	(767,898,655)	13,497,209	(754,401,446)
Reversal of impairment of property, plant and equipment	25,259,957	-	25,259,957
Profit from share in joint ventures	813	9,276,955	9,277,768
Loss from share in associates	(9,932,259)	-	(9,932,259)
Operating loss before higher costs recognition and SE Resolution No. 32/15	(1,772,912,480)	(160,282,674)	(1,933,195,154)
Income recognition on account of the RTI - SE Resolution 32/15	5,025,113,729	-	5,025,113,729
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes	551,498,435	-	551,498,435
Operating profit (loss)	3,803,699,684	(160,282,674)	3,643,417,010
Financial income	542,289,455	(193,761,722)	348,527,733
Financial expenses	(1,319,325,660)	62,010,866	(1,257,314,794)
Other financial results	1,446,291,567	254,679,447	1,700,971,014
Financial results, net	669,255,362	122,928,591	792,183,953
Profit (Loss) before income tax	4,472,955,046	(37,354,083)	4,435,600,963
Income tax and minimun notional income tax	(605,620,199)	18,843,250	(586,776,949)
Profit (Loss) for the year	3,867,334,847	(18,510,833)	3,848,824,014
Adjustment non-controlling interest in Joint Ventures	(18,510,833)	18,510,833	-
Profit for the year	3,848,824,014	-	3,848,824,014
Depreciation and amortization	766,113,078	(45,428,820)	720,684,258

F - 169

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 34: (Continuation)

Consolidated statement of financial position as of December 31,2015	Segment information	Assets and liabilities from interest in joint ventures	Consolidated Statements of financial position
Assets	30,449,733,283	(1,300,124,175)	29,149,609,108
Liabilities	21,884,782,136	(1,116,371,280)	20,768,410,856
Additional consolidated information as of December 31, 2015	Segment information	Increases in property, plant and equipment from interest in joint ventures	Note 10
Increases in property, plant and equipment	6,390,500,141	(142,608,646)	6,247,891,495

Consolidated statement of financial position as of December 31, 2014 (restated)	Segment information	Results from interest in joint ventures	Consolidated comprehensive total income
Revenue	6,930,065,578	(736,960,163)	6,193,105,415
Intersegment sales	13,024,167	(1,484,071)	11,540,096
Cost of sales	(6,568,780,356)	539,700,648	(6,029,079,708)
Gross profit (loss)	374,309,389	(198,743,586)	175,565,803
Selling expenses	(713,360,347)	-	(713,360,347)
Administrative expenses	(929,226,598)	91,767,882	(837,458,716)
Other operating income	315,842,241	(3,866,384)	311,975,857
Other operating expenses	(458,508,052)	11,433,176	(447,074,876)
Reversal of impairment of property, plant and equipment	88,406,704	-	88,406,704
Profit from share in joint ventures	4,928	34,203,440	34,208,368
Loss from share in associates	(1,605,070)	-	(1,605,070)
Operating profit (loss) before higher costs recognition and SE Resolution No. 32/15	(1,324,136,805)	(65,205,472)	(1,389,342,277)
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes SE No. 6852/13 and 4012/14	2,271,926,952	-	2,271,926,952
Operating profit (loss)	947,790,147	(65,205,472)	882,584,675
Financial income	666,666,398	(226,124,624)	440,541,774
Financial expenses	(1,172,612,261)	59,383,355	(1,113,228,906)
Other financial results	278,043,369	142,011,652	420,055,021
Financial results, net	(227,902,494)	(24,729,617)	(252,632,111)
Profit before income tax	719,887,653	(89,935,089)	629,952,564
Income tax and minimun notional income tax	(151,834,008)	51,421,730	(100,412,278)
Profit for the year	568,053,645	(38,513,359)	529,540,286
Adjustment non-controlling interest in joint ventures	(38,513,359)	38,513,359	-
Total profit of the year	529,540,286	-	529,540,286
Depreciation and amortization (2)	510,347,204	(43,187,056)	467,160,148

Consolidated profit and loss information at December 31, 2014 (restated)	Segment information	Assets and liabilities from interest in joint ventures	Consolidated Statements of financial position
Assets	17,931,522,099	(1,064,548,738)	16,866,973,361
Liabilities	14,213,250,382	(900,116,036)	13,313,134,346
Additional consolidated information as of December 31, 2014 (restated)	Segment information	Increases in property, plant and equipment from interest in joint ventures	Note 10
Increases in property, plant and equipment	2,905,455,127	(196,277,070)	2,709,178,057

F - 170

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 34: (Continuation)

Consolidated statement of financial position as of December 31, 2013 (restated)	Segment information	Results from interest in joint ventures	Consolidated comprehensive total income
Revenue	5.762.596.662	(435.300.074)	5.327.296.588
Intersegment sales	9.277.567	(1.580.605)	7.696.962
Cost of sales	(5.996.968.439)	393.694.193	(5.603.274.246)
Gross profit (loss)	(225.094.210)	(43.186.486)	(268.280.696)
Selling expenses	(636.129.432)	-	(636.129.432)
Administrative expenses	(629.516.616)	67.643.523	(561.873.093)
Other operating income	475.895.756	(9.675.726)	466.220.030
Other operating expenses	(211.154.269)	7.043.195	(204.111.074)
Profit from share in joint ventures	4.682	(4.804.031)	(4.799.349)
Loss from share in associates	2.228.499	-	2.228.499
Operating (loss) profit before higher costs recognition and SE Resolution No. 32/15	(1.223.765.590)	17.020.475	(1.206.745.115)
Higher Costs Recognition - SE Resolution No. 250/13 and subsequent Notes SE No. 6852/13 and 4012/14	2.933.051.544	-	2.933.051.544
Operating profit	1.709.285.954	17.020.475	1.726.306.429
Financial income	509.274.045	(172.978.880)	336.295.165
Financial expenses	(855.792.407)	41.916.687	(813.875.720)
Other financial results	(634.163.423)	114.902.206	(519.261.217)
Financial results, net	(980.681.785)	(16.159.987)	(996.841.772)
Profit before income tax	728.604.169	860.488	729.464.657
Income tax and minimun notional income tax	13.011.614	(832.623)	12.178.991
Profit for the year	741.615.783	27.865	741.643.648
Discontinued operations	(126.858.328)	-	(126.858.328)
Adjustment non-controlling interest in joint ventures	27.865	(27.865)	-
Total profit of the year	614.785.320	-	614.785.320
Depreciation and amortization (2)	416.735.962	(41.944.731)	374.791.231
Consolidated profit and loss information at December 31, 2013 (restated)	Segment information	Assets and liabilities from interest in joint ventures	Consolidated Statements of financial position
Assets	13.378.364.202	(815.809.970)	12.562.554.232
Liabilities	10.375.532.372	(687.800.243)	9.687.732.129
Additional consolidates information as of December 31, 2013 (restated)	Segment information	Increases in property, plant and equipment from interest in joint ventures	Note 10
Increases in property, plant and equipment	1.391.895.143	(108.370.673)	1.283.524.470

F - 171

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 35: RELATED PARTIES´ TRANSACTIONS

a)Sales of goods and services  

	12.31.2015	12.31.2014	12.31.2013
Joint ventures
Transener	15,155,270	11,540,096	7,696,962
	-	-
Other related parties
TGS	40,479,980	30,259,816	-
CYCSA	1,560,000	1,195,488	1,095,864
Grupo Dolphin	-	41,382	-
	57,195,250	43,036,782	8,792,826

Corresponds to gas sale, advisory services in technical assistance for the operation, maintenance and management of the transport system of high-voltage electricity.

b)Purchases of goods and services

	12.31.2015	12.31.2014	12.31.2013
Joint ventures
Transener	(4,824,400)	(1,484,071)	(1,580,605)
Other related parties
SACME	(27,331,368)	(19,605,316)	(14,744,698)
TGS	(3,147,821)	(3,754,792)	-
	(35,303,589)	(24,844,179)	(16,325,303)

Corresponds to maintenance, operation and monitoring of the system for transmitting electricity.

c)Fees for services

	12.31.2015	12.31.2014	12.31.2013
Other related parties
Salaverri, Dellatorre, Burgio & Wetzler	(802,748)	(1,262,984)	(1,596,860)
	(802,748)	(1,262,984)	(1,596,860)

Corresponds to fees for legal advice.

F - 172

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 35: (Continuation)

d)Other operating income

	12.31.2015	12.31.2014	12.31.2013
Other related parties
TGS	215,413,769	-	-
CYCSA	6,187,905	5,018,436	3,857,297
PYSSA	-	2,100	-
	221,601,674	5,020,536	3,857,297

Corresponds to offsetting of rights over arbitration proceedings against loans and royalties for the use of the distribution network.

e)Other operating expenses

	12.31.2015	12.31.2014	12.31.2013
Other related parties
Fundación	(3,490,000)	(3,370,000)	(2,600,000)
	(3,490,000)	(3,370,000)	(2,600,000)

Corresponds to donations.

f)Financial expenses

	12.31.2015	12.31.2014	12.31.2013
Other related parties
PYSSA	(89,071)	(89,819)	(94,822)
TGS	(11,789,035)	(14,309,650)	(9,654,462)
Orígenes Retiro	(44,971,678)	(45,032,366)	-
	(56,849,784)	(59,431,835)	(9,749,284)

Corresponds mainly to interest on loans received.

g)Capital Subscription

	12.31.2015	12.31.2014	12.31.2013
Joint ventures
Citelec	475,000	-	1,198,435
	475,000	-	1,198,435

h)Reserve for directors’ options

	12.31.2015	12.31.2014	12.31.2013
Other related parties
Directores	-	6,709,014	8,945,352
	-	6,709,014	8,945,352

F - 173

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 35: (Continuation)

i)Corporate Bonds transactions

	12.31.2015	12.31.2014	12.31.2013
Other related parties
Orígenes Retiro	3,121,084	6,460,000	-
	3,121,084	6,460,000	-

j)Other financial results

	12.31.2015	12.31.2014	12.31.2013
Other related parties
CYCSA	12,025,000	-	-
	12,025,000	-	-

Corresponds to the valuation of derivative financial instruments.

k)Key management personnel remuneration

The total remuneration to executive directors accrued during the year ended December 31, 2015,2014 and 2013 amounts to $ 267.3 million ($ 43.7 million in Directors' and Sindycs' fees and $ 223.6 in the accrual of the Company-Value Compensation and EBDA), $ 88.8 million ($ 20.6 million in Directors' and Sindycs' fees $ 6.7 in the accrual of reserves of share based payments and $ 61.5 in the accrual of the Company-Value Compensation and EBDA) and $ 36.6 million ($ 18.8 million in Directors' and Sindycs' fees $ 8.9 in the accrual of reserves of share based payments and $ 8.9 in the accrual of the Company-Value Compensation and EBDA) respectively.

F - 174

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 35: (Continuation)

l)Balances with related parties:

As of December 31, 2015	Trade receivables	Other receivables
	Current	Non Current	Current
Joint ventures:
Transener	5,832,549	-	-
Other related parties:
CYCSA	471,900	-	6,406,202
PYSSA	-	-	7,510
Fundación	-	-	300,000
SACME	-	7,064,978	661,802
Grupo Dolphin	-	-	8,757
Ultracore	-	-	2,071,475
TGS	426,410	-	5,270,322
	6,730,859	7,064,978	14,726,068

As of December 31, 2015	Trade payables	Others payables	Borrowings
	Current	Current	Current	Non Current
Joint ventures:
Transener	1,513,486	-	-	-
Other related parties:
CYCSA	-	116,595,124	-	-
PYSSA	-	-	-	-
SACME	-	3,446,742	-	-
Grupo Dolphin	-	16,767	-	-
Orígenes Retiro	-	-	179,600,083	21,092,258
TGS	343,439	-	-	-
UTE Apache	-	4,622,080	-	-
	1,856,925	124,680,713	179,600,083	21,092,258

As of December 31, 2014	Trade receivables	Other receivables
	Current	Non Current	Current
Joint ventures:
Citelec	-	-	250,000
Transener	3,539,690	-	-
Other related parties:
CYCSA	241,090	-	170,051
Ultracore	-	-	942,506
SACME	-	7,366,313	666,344
Directors	-	-	4,344,050
TGS	5,846,235	-	3,449,039
	9,627,015	7,366,313	9,821,990

F - 175

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 35: (Continuation)

As of December 31, 2014	Trade payables	Others payables	Borrowings
	Current	Current	Current	Non Current
Joint ventures:
Transener	163,093	-	-	-
Other related parties:
SACME	-	2,705,669	-	-
Orígenes Retiro	-	-	-	193,403,000
TGS	221,441	-	269,697,740	-
	384,534	2,705,669	269,697,740	193,403,000

NOTE 36: FINANCIAL INSTRUMENTS

The following chart presents financial instruments by category:

As of December 31, 2015	Financial assets/liabilities at amortized cost	Financial assets/liabilities at fair value through profit and losss	Subtotal financial assets/liabilities	Non financial assets/liabilities	Total
Assets
Trade receivables and other receivables	5,017,249,072	290,662,529	5,307,911,601	796,131,220	6,104,042,821
Financial assets at fair value through profit and loss
Government securities	-	1,590,353,006	1,590,353,006	-	1,590,353,006
Corporate securities	-	13,428,727	13,428,727	-	13,428,727
Trusts	-	2,554,544,826	2,554,544,826	-	2,554,544,826
Shares	-	70,805	70,805	-	70,805
Investment funds	-	2,500,804,849	2,500,804,849	-	2,500,804,849
Derivative financial instruments	-	197,150	197,150	-	197,150
Cash and cash equivalents	423,110,047	93,487,871	516,597,918	-	516,597,918
Total	5,440,359,119	7,043,549,763	12,483,908,882	796,131,220	13,280,040,102
Liabilities
Trade and other liabilities	7,120,712,793	-	7,120,712,793	2,230,542,573	9,351,255,366
Borrowings	7,992,409,113	-	7,992,409,113	-	7,992,409,113
Derivative financial instruments	-	18,081,410	18,081,410	-	18,081,410
Total	15,113,121,906	18,081,410	15,131,203,316	2,230,542,573	17,361,745,889

F - 176

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 36: (Continuation)

As of December 31, 2014	Financial assets/liabilities at amortized cost	Financial assets/liabilities at fair value through profit and losss	Subtotal financial assets/liabilities	Non financial assets/liabilities	Total
Assets
Trade receivables and other receivables	3,294,835,322	53,238,417	3,348,073,739	510,181,149	3,858,254,888
Financial assets at fair value through profit and loss
Government securities	-	237,068,910	237,068,910	-	237,068,910
Corporate securities	-	505,553	505,553	-	505,553
Trusts	-	962,942,332	962,942,332	-	962,942,332
Shares	-	61,700,114	61,700,114	-	61,700,114
Investment funds	-	729,373,180	729,373,180	-	729,373,180
Cash and cash equivalents	199,697,527	135,536,579	335,234,106	-	335,234,106
Total	3,494,532,849	2,180,365,085	5,674,897,934	510,181,149	6,185,079,083
Liabilities
Trade and other liabilities	4,805,459,080	-	4,805,459,080	1,640,446,064	6,445,905,144
Borrowings	4,570,571,693	-	4,570,571,693	-	4,570,571,693
Derivative financial instruments	-	47,880,462	47,880,462		47,880,462
Total	9,376,030,773	47,880,462	9,423,911,235	1,640,446,064	11,064,357,299

The categories of financial instruments have been determined according to IFRS 9.

The income, expenses, gains and losses derived from each of the financial instrument categories are indicated below:

As of December 31, 2015	Financial assets/liabilities at amortized cost	Financial assets/liabilities at fair value through profit and losss	Subtotal financial assets/liabilities	Non Financial assets/ liabilities	Total
Interest income	326,131,437	22,396,296	348,527,733	-	348,527,733
Interest expense	(1,137,115,526)	-	(1,137,115,526)	(70,953,813)	(1,208,069,339)
Foreign exchange, net	(1,026,680,876)	460,508,168	(566,172,708)	-	(566,172,708)
Results from financial instruments at fair value	-	2,252,941,696	2,252,941,696	-	2,252,941,696
Other financial results	(17,547,111)	1,403,092	(16,144,019)	(18,899,410)	(35,043,429)
Total	(1,855,212,076)	2,737,249,252	882,037,176	(89,853,223)	792,183,953
As of December 31, 2014	Financial assets/liabilities at amortized cost	Financial assets/liabilities at fair value with changes in profit and losss	Subtotal financial assets/liabilities at amortized cost	Non Financial assets/ liabilities at amortized cost	Total
Interest income	421,578,000	18,963,774	440,541,774	-	440,541,774
Interest expense	(969,307,212)	-	(969,307,212)	(68,266,021)	(1,037,573,233)
Foreign exchange, net	(955,452,688)	194,197,917	(761,254,771)	-	(761,254,771)
Results from financial instruments at fair value,	-	907,867,357	907,867,357	-	907,867,357
Other financial results	195,910,702	-	195,910,702	1,876,060	197,786,762
Total	(1,307,271,198)	1,121,029,048	(186,242,150)	(66,389,961)	(252,632,111)
As of December 31, 2013	Financial assets/liabilities at amortized cost	Financial assets/liabilities at fair value through profit and losss	Subtotal financial assets/liabilities at amortized cost	Non Financial assets/ liabilities at amortized cost	Total
Interest income	297.026.738	39.268.427	336.295.165	-	336.295.165
Interest expense	(753.181.891)	-	(753.181.891)	(40.861.761)	(794.043.652)
Foreign exchange, net	(856.896.878)	116.878.477	(740.018.401)	(4.131.669)	(744.150.070)
Results from financial instruments at fair value	2.277.047	293.577.790	295.854.837	-	295.854.837
Other financial results	(88.986.917)	58.220	(88.928.697)	(1.869.355)	(90.798.052)
Total	(1.399.761.901)	449.782.914	(949.978.987)	(46.862.785)	(996.841.772)

F - 177

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: CONTINGENCIES

37.1 CTG

Legal proceeding with DESA

DESA filed a complaint against CTG seeking to enforce performance of a contract entered into between the parties and to collect differences in the settlement of fees paid to the plaintiff pursuant to this contract.

After a long judicial proceeding with wholly contradictory Court judgments, on April 15, 2014 and in view of the course of the litigation during the year 2014, CTG’s management decided to put an end to the dispute with DESA by executing a settlement agreement whereby it paid the amount of $ 15 million plus VAT to DESA and the amount of $ 3.8 million plus VAT to the intervening Law Office.

Termination of the reorganization proceeding

On September 24, 2014, CTG was served notice of a judicial order passed on June 30, 2014 and its explanatory order passed in September declaring the termination of the reorganization proceeding pursuant to Section 59 of Bankruptcy Act No. 24,522 and its amending provisions. Within this context, the judge ordered the lifting of the general restraint overgoods, the termination of the statutory auditors’ duties and the fixing of their professional fees in the amount of $ 1.6 million plus VAT. Statutory auditors have expressed their consent to this order, which is thus deemed final and conclusive. CTG has appealed the high statutory auditors’ fees having, the last one, answered the transfer of the corresponding grievances. It is pending of resolution.

F - 178

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

37.2 CTLL

Legal action for breach of the joint venture formed by Isolux Corsan Argentina SA and Tecna Estudios y Proyectos de Ingeniería S.A.  and Engineering Projects (collectively "the Contractor")

As a result of the serious delays in the delivery of the expansion work, the lower power produced by the installed steam turbine (165 MW as compared with the originally expected 176 MW) and other breaches by the Contractor, CTLL is currently under an arbitration proceeding brought before an Arbitration Court constituted pursuant to the arbitration rules of the International Chamber of Commerce.

The arbitration complaint was brought by the Contractor in 2011, which claims as follows:

(i)The granting of the provisional reception certificate under the Construction Agreement;

(ii)The return of the amounts collected by CTLL through the execution of bank guarantees issued by BBVA and Commerzbank AG for a total amount of US$ 20 million;

(iii)The payment of the last contractual milestone, which had received a discount (compensation for breaches) by the Contractor, valued in US$ 18 million;

(iv)The payment of the damages which would result from CTLL’s actions regarding items (i) and (ii) above.

CTLL filed a counterclaim against the Contractor seeking a compensation for the serious injuries sustained as a result of the above mentioned breaches.

The Contractor assessed its claims in the amount of US$ 97.5 million, including US$ 71.5 million for reputational damages. Likewise, the Company assessed its claims in the total amount of US$ 148.3 million, and later restated this amount to US$ 228.2 million.

On June 19, 2015, CTLL was served notice of the award issued by the Arbitration Court constituted to such effect, which would put an end to all existing controversies (the “Award”).

The Award: (i) disallows practically all claims filed by the Contractor in the Arbitration Proceeding; (ii) declares that the Contractor has incurred several breaches of contract; (iii) provides for a penalty payable by the Contractor to CTLL in the amount of US$ 49.3 million as compensation for damages, cost reimbursements and penalties stipulated under the Contract in case of delays by the Contractor; (iv) declares the legitimacy of the execution of sureties by CTLL; and finally, (v) sentences the Contractor to pay the amount of US$ 1.6 million corresponding to 60% of the costs and expenses incurred by CTLL in the Arbitration Proceeding.

F - 179

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

On November 17, 2015 the Addendum to the Award was notified, whereby the Arbitration Court dismissed all petitions filed by the parties, with the exception of the correction of certain misspellings and minor adjustments in the principal and interest amounts pursuant to the execution of the sureties.

Thus, after offsetting certain reciprocal receivables and payables between the parties, the balance owed by the Contractor in favor of CTLL by virtue of the Award and its addendum, amounted to US$ 14.5 million, which is made up as follows: (i) U$S 10.3 million as principal (which will accrue interest at an 8% annual rate until the full repayment of the debt); (ii) US$ 2.6 million as interest calculated until March 2015; and (iii) US$ 1.6 million as legal and arbitration costs.

On December 3, 2015, the parties executed a “Debt Acknowledgment, Payment Undertaking and Settlement Agreement” (the “Agreement”) establishing the form, terms and conditions for the cancellation of the balance owed by the Contractor to CTLL.

Consequently, as of November 27, 2015, the Contractor acknowledges that it owes US$ 15.3 million to CTLL, which is broken down as follows:

(i)Award's main penalty: US$ 10.3 million.

(ii)Interest on the Award's main penalty: US$ 3.2 million.

(iii)Legal and arbitration costs: US$ 1.8 million.

Furthermore, the parties have agreed a repayment installment plan, the first three installments in the amount of US$ 4 million and the fourth and last in the amount of US$ 3.3, maturing on December 30, 2015, January 30, January 27 and March 30, 2016, respectively. Provided the Contractor has duly paid the first three installments as and when required, the Company will grant a US$ 547,000 discount on the fourth installment.

The execution of the Agreement has entailed a waiver and dismissal by the Contractor of all its rights to bring or continue with any judicial proceeding aiming to annul or challenge the Award in any way whatsoever. Likewise, both the Contractor and CTLL have waived their rights to continue with the legal proceedings instituted in Spain and in Argentina.

As at the date hereof, the Contractor has only paid the amount of US$ 7.9 million and, therefore, it has breached its main obligation to pay  in whole the first two installments stipulated in the Agreement as and when required.

F - 180

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

Therefore, CTLL has demanded the forced execution of the Agreement, which is a lawfully enforceable title conferring the right of execution in Spain.

With the execution of the Agreement on December 3, 2015, which entailed the waiver by the Contractor of all its rights to bring or continue any action aimed to annul or challenge the Award in any way whatsoever, CTLL recognized the accounting impact of the award on that date, to such effect using the provisions of IAS 37 – “Provisions, Contingent Liabilities and Contingent Assets”, since CTLL considers that now there is reasonable degree of certainty dees virtually certain for the collection of the amounts owed by the Contractor.

Items of the judgment directly related to activities the Contractor should conduct so that the acquired asset may properly operate according to the stipulated contractual conditions have been recognized as a decrease in net asset cost for an amount of US$ 24.3 million (of the US$ 18 million compensation received pursuant to the March 2011 Agreement), to such end using the exchange rate effective upon the execution of the settlement agreement with the Contractor.

The remaining compensatory items not directly related to the cost of the asset for an amount of U$S 10.9 million, which constitute a reimbursement of certain sums paid by CTLL to third parties or which are accessories to the asset recognized as from the Award (compensatory interest), have been disclosed as income under Other operating income and Financial Results in the statement of Comprehensive Income, respectively.

Sales Tax

CTLL submitted a note to the Province of Neuquén’s Revenue Department in order to inform it that CTLL considers that the electric power generation activity conducted in that province should be covered by Section 12 of Law No. 15,336, which provides that electricity generation, transformation and transmission works and works and facilities within the national jurisdiction and the energy generated or transported by them should not be levied with taxes or contributions, nor be subject to domestic provisions restricting or hindering energy’s free production and circulation. Pursuant to this article, income derived from the generation of electric power is exempt from the provincial sales tax.

CTLL’s position was finally upheld by a final and conclusive decision by the State Attorney’s Office of the Province of Neuquén on April 9, 2014, where the State Attorney, in answer to Docket No. 5823-007042/14, “S/Central Térmica Loma de la Lata S/ISIB s/Generación de Energía Eléctrica y solicitud de certificado de exención”, held as follows: “[…] that pursuant to the provisions enacted by the National Government in this area as a proper means to attain the sought federal objectives, the Company should not pay the Provincial sales tax.”

In line with the decision of the State Attorney’s Office of the Province of Neuquén, in the month of May 2014 the Revenue Department of that province issued a Non-Tax Withholding and/or Collection Certificate to CTLL effective until December 31 of that year, which has been renewed twice so far, effective until December 31, 2015.

F - 181

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

As at December 31, 2014, and based on the decisions adopted by such entities, CTLL has decided to reverse the provision recorded as of December 31, 2013 in the amount of $ 41.1 million, with an offsetting entry under “Other operating income” in the statement of comprehensive income for $ 37.9 million as sales tax and under “Other financial results” in the amount of $ 3.2 million as compensatory interest.

37.3 HIDISA e HINISA

Income tax

HIDISA and HINISA have assessed their income taxes for fiscal years 2012, 2013 and 2014, which resulted in a $ 1.5, $ 0.9 and $ 45.3 million for HIDISA and $ 1.2, $ 9.3 and $ 58.2 million tax-loss carry forward, respectively, for HINISA, taking into consideration the application of the inflation adjustment mechanisms set forth in Title VI of the Income Tax Act, the update of Property, plant and equipment amortizations (Sections 83, 84 and 89), a cost restatement on account of the disposal of shares and mutual funds quotas (Sections 58, 61 and 89), and the update of intangible assets amortizations (Sections 81.c, 84 and 89, and Section 128 of its regulatory decree), to such effect using the domestic wholesale price index (IPIM) published by the National Institute of Statistics and Censuses based on the similarity with the parameters put forward in the matter of “Candy S.A.” heard by the National Supreme Court of Justice, which on July 3, 2009 ruled for the application of the inflation adjustment mechanism. If the inflation adjustment mechanisms had not been applied, the taxes assessed for fiscal years 2012, 2013 and 2014 would have amounted to $ 9.6 $ 12.3 and $ 4.4 million and $ 14.1 million, respectively, for HIDISA and  $13.3 million, 14.1 million and $ 14.1 million, respectively, for HINISA

As of December 31, 2015 and until this issue is finally and conclusively resolved, HIDISA and HINISA will hold a provision for the additional income tax liabilities assessable for fiscal years 2012, 2013 and 2014 in case the inflation adjustment had not been deducted. This provision amounts to $ 39.5 million and $ 63.4 million respectively, including compensatory interest.

Sales tax

HIDISA and HINISA have filed a note to the Province of Neuquén’s Revenue Department informing that they consider that the electric power generation activity conducted in that province should be covered by the provisions of Section 12 of Act No. 15,336. Pursuant to this Section, revenues resulting from the generation of electric power are exempted from the provincial gross income tax.

As at December 31, 2015, a provision is held for gross receipts tax liabilities which would have been assessed for the January 2014 – December 2015 period if the electric power-derived income had been taxed.

F - 182

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

37. 4 CPB

Income tax

Tax refund claim

On December 30, 2008, CPB filed a tax refund claim before the AFIP regarding the income tax payable for fiscal year 2002. This claim seeks the refund of $ 4.3 million. The refund was based on the substantial and unreasonable differences resulting from the failure to apply the inflation adjustment to tax returns submitted before such fiscal period.

As AFIP didn’t answer the claim, on March 18, 2011 CPB brought the tax refund claim before a National First Instance Administrative Litigation Court.

On March 10, 2015 CPB was notified of a judgment sustaining the tax refund claim filed by CPB. In turn, on August 3, 2015 a second-instance decision was passed disallowing the appeal filed by the National Treasury, which lodged an Extraordinary Appeal on August 18, 2015. The extraordinary appeal was dismissed, and such decision was not challenged by the Treasury; therefore, the decision is deemed a final and conclusive judgment.

37. 5 PESA and subsidiaries

Mminimum notional income tax

Tax refund claim

The Company and CTLL have filed different petitions for refund against AFIP – DGI for the application of the IGMP corresponding to the fiscal years 2008 and 2009.  This claim seeks the refund of $ 24.9 million, including the recovery of payments recorded and the reversal of the payment made on account of the offsetting of several fiscal credits.

As AFIP didn’t answer the claim, the Company and CTLL brought the tax refund claim before a National First Instance Administrative Litigation Court Federal and at the same time requested the granting of interim injunctive relief so that AFIP may refrain from demanding payment and/or instituting tax execution proceedings and/or lock action against the companies.

Regarding the interim relief filed, on May 10, 2011 and March 3, 2011, were notified of the judgment of First Instance which the precautionary measures requested by PESA and CTLL respectively were rejected.

F - 183

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

Declaratory relief

The Company and its subsidiaries filed a petition for declaratory relief pursuant to Section 322 of the Federal Code of Civil and Commercial Procedure against AFIP in order to obtain assurance as to the application of the minimum notional income tax for the fiscal years 2010, 2011, 2012, 2013 and 2014, based on the decision by the CSJN in “Hermitage” dated on September 15, 2010.

In this established precedent, the Court had declared this tax unconstitutional since it may be considered unreasonable under certain circumstances and since it breaches the tax capacity principle.

Furthermore, the Company and certain subsidiaries have requested the granting of interim injunctive relief so that AFIP may refrain from demanding payment or instituting tax execution proceedings on the tax and for the fiscal year mentioned. The Court seized of in the proceedings decided to reject the precautionary measures.

As regards the Company's fiscal year 2010 claim, on November 25, 2015 a first-instance judicial decision was rendered sustaining the filed declaratory relief.

As regards EGSSA's fiscal year 2010 and 2012 claims, on August 11 and March 31, respectively, first-instance judicial decisions were rendered sustaining the filed declaratory relief. In turn, on April 8 and September 14, 2015, the appeals filed by the National Treasury were sustained and the proceedings were elevated to the Court of Appeals.

As at the issuance hereof, the intervening Courts have not rendered a decision on the substance of the other pending actions.

As of December 31, 2015 and 2014, the Company held a provision for the IGMP for the fiscal years mentioned and for the proportional tax estimated for this year for a total amount of $ 256.6 million and $ 207.2 million, respectively, including compensatory interest.

F - 184

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

37.6  Edenor

Edenor has contingent liabilities and is a party to lawsuits that arise from the ordinary course of business. Based on the opinion of its legal advisors, Edenor Management estimates that the outcome of the current contingencies and lawsuits will not exceed the amounts of the recorded provisions nor will be significant with respect to the Company’s financial position or the results of its operations.

Furthermore, it is worth mentioning that there exist contingent obligations and labor, civil and commercial complaints filed against Edenor related to legal actions for individual non-significant amounts for which a provision, which as of December 31, 2015  amounts to $ 330.1 million, has been recorded.

The most significant legal actions in which Edenor is a party involved are detailed below:

37.6.1    Legal action brought by Consumidores Libres Coop. Ltda. de provisión de servicios de acción comunitaria

Purpose:

a) That all the last resolutions concerning electricity rates issued by the ENRE and the SE be declared null and unconstitutional, and, in consequence whereof, that the amounts billed by virtue of these resolutions be refunded.

b) That all the defendants be under the obligation to carry out the RTI.

c) That the resolutions issued by the SE that extend the transition period of the Adjustment Agreement be declared null and unconstitutional.

d) That the defendants be ordered to carry out the sale process, through an international public bidding, of the class "A" shares, due to the fact that the Management Period of the Concession Agreement is considered over.

e) That the resolutions as well as any act performed by a governmental authority that modify contractual renegotiations be declared null and unconstitutional.

f) That the resolutions that extend the management periods stipulated in the Concession Agreement be declared null and unconstitutional.

g) Subsidiarity, should the main claim be rejected, that the defendants be ordered to bill all customers on a bimonthly basis.

Amount: undetermined

F - 185

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

Procedural stage of the proceedings: Edenor answered the complaint rejecting all its terms and requesting that a summons be served upon CAMMESA as a third-party defendant. The Court hearing the case sustained the request and CAMMESA answered the service of notice in due time and proper manner. The Federal Government has answered the complaint filed against it within the term granted for such purpose, filing a motion to dismiss for lack of standing to be sued. At present no resolution has been issued modifying the procedural stage of the proceedings; however, the records have been made available to the Prosecutor, and after they were returned the defendant submitted the report required by section 4, sub-section 1 of Law No. 26,854

Conclusion: no provision has been recorded for these claims in these financial statements as Edenor believes, based on both that which has been previously mentioned and the opinion of its legal advisors, that there exist solid arguments for them to be considered unfounded. It is estimated that this legal action will not be terminated in 2016.

37.6.2 Legal action brought by Consumidores Financieros Asociación civil para su defensa

Purpose:

1) Reimbursement of the VAT percentage paid on the illegally “widened” taxable basis due to the incorporation of a concept (National Fund of Electricity - FNEE) on which no VAT had been paid by the defendants when CAMMESA (the company in charge of the regulation and operation of the wholesale electricity market) invoiced them the electricity purchased for distribution purposes.

2) Reimbursement of part of the administrative surcharge on “second due date”, in those cases in which payment was made within the time period authorized for such second deadline (14 days) but without distinguishing the effective day of payment.

3) Application of the “borrowing rate” in case of customer delay in complying with payment obligation, in accordance with the provisions of Law No. 26,361.

Amount: undetermined

Procedural stage of the proceedings: On April 22, 2010, Edenor answered the complaint and filed a motion to dismiss for lack of standing, requesting, at such opportunity, that a summons be served upon the Federal Government, the AFIP and the ENRE as third-party defendants. Notice of this was served upon the plaintiff. Although the plaintiff’s opposition to the requested summons had not yet been resolved, the proceedings were brought to trial, in response to which Edenor filed a motion for reversal with a supplementary appeal. The Court hearing the case granted the motion filed by Edenor and ordered that the Federal Government, the AFIP and the ENRE be summoned as third-party defendants, which is currently taking place.

Conclusion: no provision has been recorded for these claims in these financial statements as Edenor, based on both that which has been previously mentioned and the opinion of its legal advisors, that there exist solid arguments for them to be considered unfounded. It is estimated that the proceedings will not be terminated in 2016

F - 186

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

37.6.3 Legal action brought by the Company (“EDENOR S.A. VS ENRE RESOLUTION No. 32/11”)

Purpose: The judicial annulment of ENRE Resolution that established the following:

- That Edenor be fined in the amount of $ 750,000 due to its failure to comply with the obligations arising from Section 25, sub-sections a, f and g, of the Concession Agreement and Section 27 of Law No. 24,065.

- That Edenor be fined in the amount of $ 375,000 due to its failure to comply with the obligations arising from Section 25 of the Concession Agreement and ENRE Resolution No. 905/1999.

- That Edenor customers be paid as compensation for the power cuts suffered the following amounts: $ 180 to each small-demand residential customer (T1R) who suffered power cuts that lasted more than 12 continuous hours, $ 350 to those who suffered power cuts that lasted more than 24 continuous hours, and $ 450 to those who suffered power cuts that lasted more than 48 continuous hours. The resolution stated that such compensation did not include damages to customer facilities and/or appliances, which were to be dealt with in accordance with a specific procedure.

Amount:  $ 22.4 million.

Procedural stage of the proceedings: On July 8, 2011, Edenor requested that notice of the substance of the case be served upon the ENRE, which has effectively taken place. The proceedings are “awaiting resolution” since the date on which the ENRE answered the notice served. Furthermore, on October 28, 2011, Edenor filed an appeal to the Supreme Court concerning the provisional relief sought and not granted. On April 24, 2013, the Company was notified of Division I’s decision dated March 21, 2013, pursuant to which the appeal filed by Edenor was declared formally inadmissible. On May 3, 2013, Edenor filed an ordinary appeal to the Supreme Court. Additionally, on May 13, 2013, an extraordinary appeal was also filed to the same Court. On November 7, 2014, it was notified to Edenor that Division I had rejected the ordinary appeal but partially granted the extraordinary appeal, considering for the granting thereof the federal nature of the regulations being challenged and rejecting it in relation to the arbitrariness raised by Edenor. Therefore, and within the procedural term granted for such purpose, Edenor filed an appeal requesting that the extraordinary appeal dismissed be sustained. As of the date of this report, no decision has yet been issued on this regard.

Conclusion: As of the closing date of the year ended December 31, 2015, the provision recorded by the Company for principal and interest accrued amounts to $ 34.9 million. It is estimated that this legal action may be terminated in 2016.

37.6.4 Legal action brought by ASOCIACIÓN DE DEFENSA DE DERECHOS DE USUARIOS Y CONSUMIDORES – ADDUC

Purpose: that Edenor be ordered to reduce or mitigate the default or late payment interest rates charged to customers who pay their bills after the first due date, inasmuch as they violate section 31 of Law No. 24,240, ordering both the non application of pacts or accords that stipulate the interest rates that are being applied to the users of electricity –their unconstitutional nature– as well as the reimbursement of interest amounts illegally collected from users of the service from August 15, 2008 through the date on which the defendant complies with the order to reduce interest. It is also requested that the value added tax (VAT) and any other taxes charged on the portion of the surcharge illegally collected be reimbursed.

F - 187

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

Amount: undetermined

Procedural stage of the proceedings: On November 11, 2011, Edenor answered the complaint and filed a motion to dismiss for both lack of standing to sue and the fact that the claims at issue were being litigated in another lawsuit, currently in process, requesting as well that a summons be served upon the ENRE as a third-party defendant. Notice of these pleadings was served upon the plaintiff. Prior to rendering a decision on the motion to dismiss, the Court ordered that the Court in Contentious and Administrative Federal Matters No. 2 – Clerk’s Office No. 3 provide it with the proceedings “Consumidores Financieros Asociación Civil vs EDESUR and Other defendants, for breach of contract”. At the date of issuance of these financial statements, the Court has received the requested file. On April 8, 2014, the Court in Civil and Commercial Federal Matters No. 9 – Clerk’s Office No. 17 admitted the motion to dismiss due to the fact that the claims at issue were being litigated in another lawsuit, and ordered that the proceedings be sent to Federal Court No. 2 – Clerk’s Office No. 3 to be dealt with thereat, thus joining them to the case entitled “consumidores financieros vs Edesur and other defendants, for breach of contract”. Apart from the fact that the proceedings have been received in the court that currently hears the case, which continues in process, no significant events have occurred.

Conclusion: It is estimated that this action will not be terminated in 2016.

37.6.5 Legal action brought by the Company (“EDENOR S.A. VS FEDERAL GOVERNMENT – MINISTRY OF FEDERAL PLANNING / PROCEEDING FOR THE DETERMINATION OF A CLAIM AND MOTION TO LITIGATE WITHOUT LIABILITY FOR COURT FEES OR COSTS ”)

On June 28, 2013, Edenor instituted these proceedings for the recognizance of a claim and the related leave to proceed without liability for court fees or costs, both pending in the Federal Court of Original Jurisdiction in Contentious and Administrative Federal Matters No. 11 – Clerk’s Office No. 22.

Purpose of the main proceedings: To sue for breach of contract due to the Federal Government’s failure to perform in accordance with the terms of the “Memorandum of Understanding concerning the Renegotiation of the Concession Agreement” entered into with Edenor in 2006, and for damages caused as a result of such breach.

Procedural stage of the proceedings: On November 22, 2013, Edenor amended the complaint so as to extend it and claim more damages as a consequence of the Federal Government’s omission to perform the obligations under the aforementioned “Adjustment Agreement”. On February 3, 2015, the court hearing the case ordered that notice of the complaint be served to be answered within the time limit prescribed by law, which was answered by the Federal Government in due time and in proper manner.  Subsequently, Edenor reported as new event, under the terms of Section 365 of the Federal Code of Civil and Commercial Procedure (CPCCN), the issuance by the Energy Secretariat of Resolution 32/15. After notice was served, the court rejected the treatment thereof as an “event”, holding the Company liable for costs. Edenor filed an appeal, which was admitted “with a postponed effect” (i.e. the Appellate Court will grant or reject the appeal when deciding on the granting or rejection of the appeal against final judgment). On October 16, 2015, the Attorney General’s Office requested to borrow the records for a term of 20 days, which were returned on December 1, 2015, in order to control the work done by the state’s attorneys. On December 4, 2015, Edenor requested the suspension of the procedural time-limits under the terms of section 157 of the CPCCN, in accordance with the provisions of SE Resolution 32/15, notice of which has been served upon the defendant. On February 16, 2016, Edenor reiterated the request due to the revocation of SE Resolution 32/15.

F - 188

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

The motion to litigate without liability for court fees or costs , which was filed on July 2, 2013, is at present at the discovery period.

Additionally, and in the same action, in February 2014, Edenor applied for the immediate granting of a provisional remedy in order to maintain an efficient and safe service, requesting that until judgment is passed on the merits of the case, the Federal Government be compelled to provide Edenor with economic assistance, whether by means of a temporary rate adjustment or through government grants. After notice was served upon and answered by the Federal Government – Ministry of Federal Planning, on May 27, 2014, the court hearing the case rejected the provisional remedy sought by the Company, decision which was confirmed by Division V of the Appellate Court and notified to Edenor on December 19, 2014.

Conclusion: It is estimated that this action will not be terminated in 2016.

37.6.6    Administrative proceedings DJ/36/14 initiated by the AFIP.

Purpose: To accuse the Company of and have it fined for the filing of an inaccurate Minimum Presumed Income Tax return for fiscal period 2011.

Amount: $ 5.5 million.

Status: In May, 2012, Edenor filed the original minimum presumed income tax return for fiscal period 2011 with no assessed tax amount in the understanding that the payment of the tax for fiscal period 2011 when Edenor’s cumulative income tax losses carry forward amounted to $ 258 million, violated recognized constitutional guarantees and reflected its lack of payment capacity in relation to the taxes levied on income, such as the Minimum Presumed Income Tax (IGMP). This situation was duly informed to the AFIP.

At the same time, in accordance with the terms of Section 322 of the Federal Code of Civil and Commercial Procedure, Edenor filed a declaratory judgment action with the Federal Court against the Federal Government – Federal Administration of Public Revenue (AFIP) - General Tax Bureau, with the aim of obtaining a declaratory judgment as to whether or not the minimum presumed income tax related to fiscal period 2011 applied in the sense resolved by the Supreme Court in the “Hermitage” case on June 15, 2010. In this case, the Supreme Court had declared that this tax was unconstitutional as it was deemed confiscatory.

Subsequently, the Court of Original Jurisdiction in Contentious and Administrative Federal Matters No. 7 rejected the action requested by the Company, decision which was ratified by the Court of Appeals.

Faced with this situation, and in order to avoid possible attachments or prohibitions to dispose of property that could affect the normal development of its activities for the provision of the public service, the Company decided to rectify the Minimum Presumed Income Tax Return for fiscal period 2011 and adhere to the easy payment plan implemented by AFIP General Resolution 3451.

On November 19, 2015, by means of administrative proceedings DJ/36/14 initiated by the AFIP, Edenor is accused of and fined for the filing of an inaccurate Minimum Presumed Income Tax Return for fiscal period 2011.

On December 30, 2015, Edenor filed a post-judgement motion for reversal with the tax authority, requesting that the administrative proceedings be revoked, the fine imposed be annulled and the respective records be filed.

F - 189

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 37: (Continuation)

As is evident from the preceding paragraphs, it was not Edenor’s intention to cause any harm whatsoever to the national treasury, particularly considering that a rectifying tax return has been filed.

Conclusion: no provision has been recorded for this claim in these financial statements as Edenor believes, based on that which has been previously mentioned, that there exist solid arguments for it to be considered unfounded.

37.6.7 Legal action brought by the Company (Study, Review and Inspection of Works in Public Spaces Fees “TERI”)

In December 2015, Edenor filed with the City of Buenos Aires Court in Contentious and Tax-Related Matters, a petition for declaratory judgment, together with a petition for the granting of a precautionary measure, in order to obtain a favorable judgment that would put an end to the controversy, declaring the unlawfulness of the Government of the City of Buenos Aires’s claim concerning compliance by Edenor with the payment of the TERI. The precautionary measure requested, if granted, would stop the executory proceedings in process and eliminate the possibility that an attachment be levied on Edenor’s assets. It must be pointed out that as of the date of the filing of the petition, Edenor has received assessment and demand for payment notices from the Government of the City of Buenos Aires for a total amount of $ 28.8 million for such concept.

In Edenor’s opinion, these fees are not applicable in accordance with federal regulations, the case law and the procedural status of judicial decisions. Therefore, the Management of Edenor as well as its external legal advisors believe that there exist good reasons to support Edenor’s position and have this tax claim rejected by a court of law. Therefore, the probability of an outflow of resources on account of such contingency has been regarded as low.

NOTE 38: PAYMENT PLAN

As regards the AFIP’s income tax inspection for fiscal years 2008 through 2011, the  moment of the deduction of certain income by CPB has been challenged. On July 31, 2013, CPB resolved to allow the tax claim and adhered to the Payment Plan regulated by General Resolution No. 3451/13 to regularize periods not barred by the statue of limitations for a total amount of $ 15.2 million, which will be paid up in 120 monthly installments.

NOTE 39: EDENOR’S ASSIGMENT OF USE

a.As assignee

The features that these assignments of use have in common are that payments (installments) are established as fixed amounts; there are neither purchase option clauses nor renewal term clauses (except for the assignment of use contract of the Energy Handling and Transformer Center that has an automatic renewal clause for the term thereof); and there are prohibitions such as: transferring or sub-leasing the building, changing its use and/or making any kind of modifications thereto. All operating assignment of use contracts have cancelable terms and assignment periods of 2 to 13 years.

Among them the following can be mentioned: commercial offices, two warehouses, the headquarters building (comprised of administration, commercial and technical offices), the Energy Handling and Transformer Center (two buildings and a plot of land located within the perimeter of Central Nuevo Puerto and Puerto Nuevo) and Las Heras Substation.

F - 190

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 39: (Continuation)

As of December 31, 2015 and 2014, future minimum payments with respect to operating assignments of use are as follow:

	12.31.2015	12.31.2014	12.31.2013
2014	-	-	21,046,000
2015	-	26,123,000	10,998,000
2016	47,897,037	19,864,000	4,943,000
2017	19,464,103	15,740,000	4,752,000
2018	6,320,594	5,698,282	147,000
2019	4,310,446	4,310,446	147,000
2020	146,938	146,938	-
2021	147,000	-	-
Total future minimum payments	78,286,119	71,882,667	42,033,000

Total expenses for operating assignments of use for the years ended December 31, 2015 and 2014 are $ 38.6 million and $31 million, respectively:

b.As assignor

Edenor has entered into operating assignment of use contracts with certain cable television companies granting them the right to use the poles of Edenor’s network. Most of these contracts include automatic renewal clauses.

As of December 31, 2015 and 2014, future minimum collections with respect to operating assignments of use are as follow:

	12.31.2015	12.31.2014	12.31.2013
2014	-	-	51,620,297
2015	90,521,780	72,921,528	48,022,824
2016	84,949,198	5,481,316	27,846
2017	251,308	200,222	-
2018	-	157,344	-
Total future minimum collections	175,722,287	78,760,411	99,670,967

Total income from operating assignments of use for the years ended December 31, 2015 and 2014 is $74.6 million and $ 57.5 million, respectively.

F - 191

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 40: profit distributions

Dividends

In accordance with Law No. 25,063, passed in December 1998, dividends distributed in cash or in kind, in excess of accumulated tax profits at the end of the year immediately before the date of payment or distribution, will be subject to a 35% income tax withholding in a single and final payment. To such effect, income to be considered in each fiscal year will be that resulting from adding to the specific income determined pursuant to the general provisions of the Income Tax Act the dividends or earnings from other companies not computed within the determination of such income during the same fiscal periods.

NOTE 41: SHARE BASED PAYMENTS

On September 27, 2006, the Company entered into an Opportunities Assignment Agreement whereby certain officers undertook to offer the Company, on a priority basis, all investment opportunities above US$ 5 million they detect within the Company’s investment guidelines. In consideration of this commitment, the Company has granted these officers Warrants for up to 20% of its capital stock (the “Warrants Issuance Agreements”).

On April 16, 2009, the parties agreed on the following modifications to the Opportunities Assignment Agreement and the Warrants Issuance Agreements:

i) the term of the agreement was extended for five years, until September 27, 2014;

ii) one-fifth of the Warrants will accrue annually, as from September 28, 2010 and until September 28, 2014, and Warrants will remain in effect for fifteen years as from the date of issuance.

iii) their exercise price was set at US$ 0.27 per warrant.

On September 28, 2014, the Opportunities Allocation Agreement terminated, having been complied of all stipulated obligations. Furthermore, as from the stated date all Company shares’ purchase options granted to the Officers may be actually exercised, according to the following expiration dates and exercise prices:

Expiration	Price of the year (U$S)	Stock Options
26.04.2024	0.27	111,500,000
26.04.2024	0.27	150,000,000
26.04.2024	0.27	120,048,564

The fair value of these Warrants has been measured according to the Black-Scholes valuation model. The main variables considered in such model are the following: (i) a 27% volatility, based on the historical volatility of the Company; (ii) 3% dividends; and (iii) a 4.63% risk-free U.S. dollars interest rate.

F - 192

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 41: (Continuation)

Regarding these Warrants, the Company has recognized a total $ 266.1 million in profit and loss, with an offsetting entry in an equity reserve during the life of the Opportunities Assignment Agreement.

On November 23, 2015, the Company received a notification from Merrill Lynch, Pierce, Fenner & Smith Incorporated, which, acting as attorneys in fact for the holders of all warrants, formally communicated the decision to exercise, conditional upon the meeting of certain conditions, all warrants against the payment of the set exercise price.

In furtherance of the obligations under the Warrants Issuance Agreements, on December 1, 2015, against the payment of US$ 103,018,112, that is US$ 0.27 per common share or its equivalent in pesos, the Company issued 381,548,564 new common shares in the form of American Depositary Shares (“ADS”).

After the issuance, these new common shares represent 22.5% of the company's capital stock and voting rights. Thus, the Company's capital stock now consists of 1,695,859,459 common shares in book-entry form with a face value of $ 1 each and each granting the right to one vote. Both the capital increase and the public offering and quotation of the issued shares are duly authorized by the CNV and Mercado de Valores.

Therefore, the Company recognized in its Statement of Changes in Shareholders’ Equity additional paid-in capital in the amount of $ 883.3 million and a $ 266.1 million decrease in reserves.

The movements in the number of Warrants and their respective average exercise prices are detailed below:

	12.31.2015		12.31.2014		12.31.2013
	Stock Options	Average price of the year in USD	Stock Options	Average price of the year in USD	Stock Options	Average price of the year in USD
At the beginning	381,548,564	0.27	381,548,564	0.27	381,548,564	0.27
Granted	-	-	-	-	-	-
Excercised	(381,548,564)	0.27	-	-	-	-
At the end	-	-	381,548,564	0.27	381,548,564	0.27

 

F - 193

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 42: ECONOMIC AND FINANCIAL SITUATION OF GENERATION, TRANSMISSION AND DISTRIBUTION SEGMENTS

42.1 Generation

HIDISA and HINISA

During the fiscal year ended December 31, 2014, HIDISA and HINISA have disclosed negative gross and operating results. During the year ended December 31, 2015, their economic and financial situation has continued deteriorate, as evidenced by gross and operating losses and the shortfall in operating funds. This situation is mainly attributable to the negative impact that ES Resolution No. 95/13 (as amended by ES Resolutions No. 529/14 and No. 482/15) has had on these subsidiaries' remuneration as from the commercial transaction corresponding to the month of November 2013.

Despite the increases granted by ES Resolution No. 482/15 in fixed (64%), variable (23%) and additional (10%) remunerations and the incorporation of a new remunerative item (the Maintenance Remuneration), repeated claims filed by HIDISA and HINISA through different presentations to CAMMESA and the ES requesting a tariff adjustment more aligned with their technical and operating structures have been neglected.

The new remuneration scheme implemented through ES Res. No. 95/13, later modified by ES Resolutions No. 529/14 and No. 482/15, would not allow HIDISA and HINISA to generate the minimum operating cash flows necessary to cover for their operating costs. Furthermore, the scope of the new Maintenance Remuneration is insufficient to finance the cost of the maintenance works necessary to guarantee normal and efficient operating conditions.

Besides this, according to hydrological forecasts by the National Undersecretariat of Hydric Resources, the expected water input to the reservoir for the hydrological period October-September 2016 will be between 49%-82% in HIDISA and 69%-91% in HINISA of an average year, this year being classified as dry. This situation, which has persisted for six consecutive years, further impairs HIDISA and HINISA's revenues, since the established remuneration scheme has a strong variable component, and expected values cannot be reached under the current conditions.

Despite the economic and financial situation described, HIDISA and HINISA have prepared their projections on the understanding that they will get tariff improvements in line with the new guidelines on energy policy that could involve a review of the current regulatory framework of generation.

CPB

As of December 31, 2015, CPB recorded negative working capital for a total amount of $ 191.2 million. Under the Borrowings, CPB registered related funding by $ 203.1 million to be refinanced through financing disbursements of Major Maintenance to receive from CAMMESA. Furthermore, it is expected that the economic and financial situation of CPB significantly improved as of the plant again reach its full production capacity and start generating revenue again TV29 unit, after the work of technological update that is mentioned in Note 20 .

Also, while the cancellation is subject to the ability to generate excess cash, the financial burden could exceed operating results, and consequently affect the financial balance of CPB.

F - 194

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 42: (Continuation)

42.2 Distribution

In fiscal year 2015, Edenor recorded positive operating and net results, thus reversing its negative economic and financial situation of the last years. This improvement has been achieved as a consequence of the issuance by the ES on March 13, 2015 of Res. No. 32/15, which addresses the need for the adjustment of the economic and financial situation of distribution companies and considers it necessary that urgent and temporary measures should be adopted in order to maintain the normal provision of the public service, object of the concession.

In spite of the deterioration of the economic and financial equation over the last years as a consequence of the delay in the compliance with certain obligations under the Adjustment Agreement, especially with regard to the  recognition of the semiannual rate adjustments resulting from the MMC, and the carrying out of the RTI, thanks to the adoption of certain measures aimed at mitigating the impact thereof, Edenor has been able to not only maintain the quality of the electricity distribution service but also satisfy the constant year-on-year increase in the demand for electricity that has accompanied the economic growth and the standard of living of the last years. In this regard, Edenor absorbed the higher costs associated with the provision of the service and complied with the execution of the investment plan and the carrying out of the essential operation and maintenance works that are necessary to maintain the provision of the public service in a satisfactory manner in terms of quality and safety.

In spite of that which has been mentioned in the first paragraph of this Note, as of December 31, 2015 Edenor’s negative working capital amounts to $ 1.8 billion, which includes the amount owed to CAMMESA for $ 1.8 billion plus interest accrued as of December 31, 2015, as described in Note 2.3.1.7.e, in respect of which Edenor submitted a payment proposal based on its available and projected cash flows. Until the date of issuance of these financial statements, no answer from CAMMESA has been received.

Furthermore, on December 16, 2015, the Federal Government issued Executive Order No. 134, which declared the state of emergency in the country’s electricity sector and authorized the MEyM to implement a plan of action for the generation, transmission and distribution of electricity at national level and guarantee the provision of the electricity public service under adequate economic and technical conditions.

F - 195

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 42: (Continuation)

After the closing date of the fiscal year being reported, in January 2016, the Energy and Mining Ministry issued, as part of the measures aimed at the restructuring of the electricity sector, Resolutions Nos. 6 and 7 which implemented a new electricity rate system aimed at improving the distribution companies’ revenue in order for them to be able to make investments and carry out network maintenance and expansion works. Additionally, the ENRE was instructed to adjust, on account of the RTI, VAD in electricity rate schedules and to take all the necessary steps to carry out the RTI before December 31, 2016. This new electricity rate system will protect those sectors that cannot afford the full cost of the service through the creation of a “Social Tariff”, will be accompanied by a program aimed at reducing the consumption of electricity and will provide for the billing of electricity consumption on a monthly basis in order to soften the impact of the increases on customers.

In view of this scenario, Edenor Board of Directors is currently assessing the sufficiency of the financial resources granted to cover the costs of the operation, the investment plans and debt service payments, as well as the impact of the different variables that affect Edenor’s business, such as behavior of demand, losses, delinquency, service quality and penalties, etc.

Additionally, Edenor Board of Directors will continue to take steps to resolve with the Grantor of the Concession and the regulatory agency the issue related to the RTI, which is expected will be concluded in accordance with the provisions of MEyM Resolution 7/16 (Note 2.3.1.2) in a satisfactory manner with regard to its timing and final form.

42.3 Transmission                

Even though it is still difficult to forecast the evolution of issues described in Note 2 and their possible impact on Transener’s business and cash flows, the execution of the Renewal Agreement constitutes a remarkable milestone towards the consolidation of Transener’s economic and financial equation.Transener has prepared its consolidated financial statements using the accounting principles applicable to an on-going business. Consequently, these statements do not include the effects of any applicable adjustment or reclassification in case these situations are not resolved favorably to the continuity of Transener’s operations and, thus, this company would be forced to realize its assets and cancel its liabilities, including contingent ones, under conditions that are not in its ordinary course of business.

The interest in the joint venture represents about 1% of the Group’s assets and approximately 0.2% of the Group’s income. Additionally, the Company’s management considers that the uncertainty regarding Citelec’s joint venture does not affect its capacity to continue operating on an ordinary basis, mainly due to the following reasons: (i) There is no financial dependence on Citelec, as this joint venture has not paid it any dividends since its acquisition date in 2006; (ii) Even though there is an enforceable and binding technical assistance agreement with Transener, the Company does not depend on this flow of funds to normally develop its activities; (iii) The Company is not contractually obliged to provide financial assistance to Citelec.

F - 196

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 43: TRANSACTIONS WITH NON-CONTROLLING INTERESTS

Sale of a non-controlling interest in EDENOR

During the year 2014, PISA has sold, through different market transactions, all its Edenor’s ADRs share (973.190 ADRs equivalent to 19.5 million of shares), which represented about 2% of the Company’s equity interest. For these operations, the Company has recorded $ 61.7 million as additional paid-in capital.

NOTE 44: DOCUMENTATION KEEPING

On August 14, 2014, the National Securities Commission issued General Resolution No. 629, which introduced modifications to the provisions applicable to the keeping and conservation of corporate and accounting books and commercial documentation. To such effect, the Company and its subsidiaries Edenor, CTG, CTLL, EASA and PEPASA have sent non-sensitive work papers and information corresponding to the periods not covered by the statute of limitations for their keeping in the Iron Mountain Argentina S.A.’s data warehouses located at the following addresses:

-Azara 1245 –C.A.B.A.

-Don Pedro de Mendoza 2163 –C.A.B.A.

-Amancio Alcorta 2482 C.A.B.A.

-San Miguel de Tucumán 601, Carlos Spegazzini, Municipality of Ezeiza, Province of Buenos Aires.

On February 5, 2014, Iron Mountain S.A.’s warehouse located at Azara 1245 suffered a publicly known accident.

However, according to an internal study conducted by the Company and timely reported to the National Securities Commission on February 12, 2014, approximately 15% of the documentation which the Company, CTG, CTLL, EASA and PEPASA had deposited with Iron Mountain S.A. may be located at the warehouse where the incident took place.

On February 18, 2014, Edenor informed the National Securities Commission that the accident may have affected between 20% and 30% of all the documentation sent to Iron Mountain S.A. for its custody.

At the date of issuance of these financial statements, the Company has been informed that according to Iron Mountain’s records, the boxes are probably located in the areas where the incident took place, although they cannot provide more detailed information until they are granted access to the facilities.

A list of the documentation delivered for storage, as well as the documentation provided for in Article 5.a.3) Section I, Chapter V, Title II of the PROVISIONS (2013 regulatory provisions and amending rules), is available at the Company headquarters.

F - 197

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 45: HYDROCARBON DEVELOPMENT AND EXPLOITATION PROJECTS

As of December 31, 2015, PEPASA is part of the following investment projects:

Investment agreement with YSUR by Anticlinal Campamento and Estación Fernández Oro

On December 1, 2010, PEPASA executed an investment agreement with YSUR for the joint development and exploitation of unconventional gas reservoirs in the Anticlinal Campamento and Estación Fernández Oro areas, located in the Provinces of Neuquén and Río Negro respectively.

This venture with YSUR has a 700,000 m3/day production target for unconventional natural gas during a term of three years between January 2011 and December 2013. The participation of PEPASA is 15% of that production.

To maintain the target volume production, it was estimated that the total drilling plan shall be thirty wells, which involved a total investment for PEPASA U$S 20 million.

As of December 31, 2015, the deadline for investment under this agreement has concluded, so PEPASA will receive the proceeds of the 22 drilled wells till the end of the useful life of them and will contribute to the costs associated with the exploitation. The cumulative investment amounts to US$ 17.5 million.

PEPASA's current production reaches 70,000 m3/day, which is being sold by YSUR under the Gas Plus Program.

Investment Agreements with Petrobras for “El Mangrullo” Area

Petrobras I

On December 7, 2010, PEPASA executed an investment agreement with Petrobras for the joint development and exploitation of unconventional gas reservoirs in El Mangrullo Area.

This partnership with Petrobras has an unconventional natural gas 400,000 m3/day production target during a term of four years since August 2011. PEPASA has a 43% interest in this production.

During the year ended December 31, 2015, the investment term stipulated in this agreement has terminated and, therefore, PEPASA will receive the proceeds from the 5 drilled wells until the end of their life cycles. The accumulated investments amounted to U$S 20.6 million.

The produced hydrocarbons are separately commercialized by each of the partners. PEPASA has entered into a Gas Supply Agreement with CAMMESA which is under the Gas Plus Program, and all its production is commercialized for a price of US$ 5.20/MMBTU.

Petrobras II

On February 7, 2013, PEPASA entered into a new investment agreement with Petrobras for El Mangrullo Area pursuant to conditions similar to that of the previous agreement.

F - 198

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 45: (Continuation)

This new partnership with Petrobras seeks to reach an unconventional natural gas production of 400,000 m3/day during a term of four years. PEPASA has an interest in 43% of the production.

In order to maintain a target production it has been estimated that the total drilling plan will consist of nine wells, which would entail a total investment of approximately US$ 33 million for PEPASA. Taking into consideration the higher costs of the wells drilled under this agreement, the final investment by PEPASA will exceed its initial estimates.

During the year ended December 31, 2015, two new wells have been drilled, one of which is already in production, whereas the remaining is under analysis. In this way, six wells were drilled under this agreement, which allowed achieve target volume production since July 2013. The cumulative investments totaling U$S 29.3 million.

The produced hydrocarbons are commercialized by each of the partners. PEPASA has entered a Gas Supply Agreement with CAMMESA under the Gas Plus Program, and all its production is commercialized for a price of US$ 5.20/MMBTU.

Lastly, during 2016, with the purpose of keeping the target production committed under the Agreement, low-pressure capture activities are expected to become operative, which will allow for an increase in the hydrocarbon recovery factor and in the production of wells; besides, three new wells are expected to be drilled with an estimated investment of US$ 9.4 million for PEPASA.

Investment Agreement Senillosa Area

On September 14, 2010, PEPASA accepted an offering to assign from Rovella Carranza SA for the provision of the service jointly for the exploration, development and production of hydrocarbons in the exploration area "Senillosa". The agreement will allow PEPASA get 50% share of hydrocarbon production. PEPASA committed investments amounting to U$S 3.3 million.

PEPASA performed investments accumulated for U$S 12.5 million, including:

(i)Analysis of the area through the study of 3D seismic and geochemistry.

(ii)Nine drilling exploratory wells, of which two were discoverers of gas, four had manifestations of hydrocarbons and three were found to be sterile.

After meeting all investment commitments and pursuant to Executive Order No. 2541/15, the Senillosa joint venture obtained a 25-year exploitation concession called “Rio Limay Este”, as well as a prospecting lot called “Aguada Pavón” for a term of two years. Furthermore, G&P, in its capacity as concessionaire, is currently conducting proceedings to return rights over 368 km to the National Government.

During 2014, according to changes in the concession, PEPASA recognized a decrease in property, plant and equipment of $ 12.6, in Other operating expenses of the statement of comprehensive income.

F - 199

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 45: (Continuation)

Furthermore, in June 2015, PEPASA finished the work on the construction and assembly of a gas conditioning plant and a pipeline to its link with the transport system with the aim of putting into production of productive wells, allowing the start of production area. As at December 31, 2015, PEPASA's production under this agreement amounted to 10,000 m3 a day marketed to industrial clients at an average price of US$ 4.2/MMBTU.

Investment Agreement El Caracol North Area

On May 19, 2011, PEPASA entered into another agreement with GyP and Rovella Energía S.A. for the joint performance of the hydrocarbon exploitation, development and production service of the “El Caracol Norte” exploitation area. This agreement will allow PEPASA to obtain a 60% interest in the area’s hydrocarbon production. Investments committed by PEPASA amount to US$ 3.7 million.

As for December 31, 2014, PEPASA analyzed 3D seismic and two hydraulic fractures were made in the PA x – 3 well. As a result of these works, the well showed hydrocarbon manifestations, but, according to estimates made by the Management of PEPASA, such Company recognized a decrease in property, plant and equipment of $ 9.2 million in Other operating expenses of the statement of comprehensive Income.

On June 4, 2015, PEPASA assigned its rights and obligations under this Agreement to Petróleos Sudamericanos S.A., HOMAQ S.A. and JCR S.A. in consideration of US$ 200,000, out of which US$ 133,000 correspond to the Company.

This assignment agreement is subject to approval by the Environmental Authority and the Provincial Executive Branch within a term of twelve months as from the first business day following the execution of the Agreement.   

As at the issuance of these financial statements, PEPASA is waiting for the fulfillment of these conditions for its recognition.

Investment Agreement with YPF for the “Rincón del Mangrullo” Area

On November 6, 2013, PEPASA entered into an investment agreement with YPF S.A. in the amount of US$ 151.5 million in consideration of a 50% interest in the production of hydrocarbons in the Rincón del Mangrullo area.

The Assigned Interest represents the total undivided rights and obligations associated with the production of hydrocarbons in the Area, with the exception of certain pre-existing wells that had been drilled by YPF and certain new YPF’s wells which will be drilled and funded exclusively by YPF.

The Investment Agreement consists of two investment phases:

F - 200

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 45: (Continuation)

a) First Phase

PEPASA undertook to invest:

·US$ 80 million in the drilling, completion and entry into production of 17 wells to be made in the Area’s Western zone, with the exception of 2 wells which will be drilled in the Area’s South West,

·U$S 1.5 million for the performance of approximately 40 km2 of 3D seismic.

Furthermore, YPF undertook to invest:

·in the drilling, conclusion and entry into production of 17 additional wells exclusive of YPF; and

·in the construction of a gas treatment and conditioning plant, as well as in a gas pipeline with an approximate length of 55 km, which will allow connecting the Area to the gas trunkline system.

b) Second Phase

After the conclusion of the first phase, PEPASA may opt to continue investing up to US$ 70 million in the drilling of 15 wells in any zone within the Area.

After the conclusion of both investment phases, all subsequent investments will be made according their respective interests.

Addendum

On May 26, 2015, PEPASA and YPF executed an agreement to modify certain terms and conditions of the Investment Agreement dated November 6, 2013.

On July 14, 2015, the Parties deemed that certain conditions precedent regarding to the validity of the Addendum have been duly met; therefore, all the terms and conditions stipulated therein will become retroactively in force as from January 1, 2015.

The main modifications to the Agreement stipulated in the Addendum are the following:

(i)other formations previously excluded are incorporated, only excluding the Vaca Muerta and Quintuco formations;

(ii)PEPASA will be entitled to the production of all the existing wells in the Area, with the obligation to make all investments in surface facilities -estimated at US$ 65 million for PEPASA during the years 2015 and 2016- and to take on all costs and expenses incurred in the operation of the Area according to its percentage share (50%);

(iii)PEPASA will invest US$ 22.5 million in wells in the Mulichinco formation and/or make additional surface investments for the 2016-2017 period;

(iv)PEPASA will make investments in exploratory wells in the Lajas formation, which will amount to US$ 34 million during the first stage for the 2016-2017 period;

(v)in turn, PEPASA has jointly decided with YPF to expand the drilling plan for the year 2015 by approximately US$ 70 million in the Mulichinco formation.

F - 201

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 45: (Continuation)

In this way, after detailed addendum, the total investment committed by PEPASA for the period 2014-2017 in the area, would exceed U$S 350 million. As of December 31, 2015, the disbursed investment amounted to U$S 218 million.

As of December 31, 2015, production under this agreement reaches approximately 3.1 million m3/day (50% of which correspond to PEPASA, plus a 300,000 m3/day compensation pursuant to the provisions of the Agreement), which is marketed through gas supply agreements with different clients at an average price of US$ 4.7/MMBTU. It should be pointed out that the evacuation facilities have reached their maximum capacity, and they are expected to be increased to 5 million m3/day approximately during March 2016.

Furthermore, the liquids and natural gas volumes retroactively recognized to PEPASA for the period comprised between January 1 and the Addendum's effective date amount to 63.7 million m3 and 1,820 m3, respectively, which will be wholly compensated to the Company by April 30, 2016. As of December 31, 2015, 41 million m3 gas volumes have been compensated, which represented an approximate income of $ 64,5 million for PEPASA.

NOTE 46: COMPENSATION AGREEMENTS

Annual Variable Compensation (the “EBDA Compensation”):

PEPASA has granted its Corporate Directors an Annual Variable Compensation (the "EBDA Compensation") for the performance of technical and administrative duties amounting to 7% of the EBDA (EBITDA less paid income tax, less total net financial costs, less interest on its own capital, considering an annual 10% dollar-denominated rate) accrued for each fiscal year as disclosed in the corresponding financial statements approved by the applicable PEPASA’s General Ordinary Shareholders Meeting.

As of December 31, 2015, PEPASA disclosed $ 46.6 million results for the EBDA Compensation cost against other liabilities

Company Value Sharing (the “Company-Value Compensation”)

On November 6, 2013, PEPASA’s Extraordinary General Meeting of Shareholders resolved to approve a variable and contingent compensation to certain officers equivalent to 7% of the capital stock after the Company’s capital stock increase, valued based on the difference between the share’s market value at the time of exercising the right and a given value of US$ 0.1735 per share determined at the exact moment of the capital stock increase.

F - 202

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 46: (Continuation)

On January 13, 2014, the capital stock increase was carried out and the rights granted to Officers to receive the Company-Value Compensation became effective.

The variable remuneration may be required by officers as follows:

1)25% as from June 2015

2)7.14% as from December 2015

3)32.15% as from June 2016

4)35.71% as from June 2017

The given right may be monetized at any time from the date of effective enforcement until November 15, 2020 (by 5%) and 11 January 2021 (for the remaining 2%) over 7% of the share capital calculated according to what was detailed in the first paragraph of the note.

The fair value of the Option has been measured according to the Black-Scholes valuation model. The main variables considered in such model are the following:

1)54.3% volatility based on the volatility of the shares of other comparable companies;

2)1,6886% risk-free U.S. dollars interest rate;

As of September 30, 2014, PEPASA has recognized this compensation’s in profit or loss (with a credit under “Other Liabilities”) on amount of $ 50.5 million, considering a share market value of $ 15.25.

Since its organization, the Company's growth and performance has far exceeded all initially defined metrics, parameters, and development and business plans.  Therefore, and in view of its officers' significant contribution to meeting such goals, on December 28, 2015, PEPASA entered into an amendment to the compensation agreement providing for the full and irrevocable accrual of the variable remuneration to be collected by officers regarding the percentages which are not yet due effective as from that date, without this affecting the previously described enforceability.

As of December 31, 2015, PEPASA recognized $ 227.4 million in results as the above mentioned compensation cost (with an offsetting entry in Other Debts), out of which $ 176.9 million were accrued in results during this fiscal year. The market value of the share amounted to $ 28.86.

F - 203

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTA 47: WORKS OF DISTRIBUTION

a.FOTAE

Due to the constant increase recorded in the demand for electricity as a result of the economic recovery, the SE, through Resolution 1875 dated December 5, 2005, established that the interconnection works through an underground power cable at two hundred and twenty kilovolts (220 kV) between Costanera and Puerto Nuevo Transformer Stations with Malaver Transformer Station were necessary. These works require not only the execution of expansion works but also new layout-designs of the high-voltage subsystems of Edenor and Edesur’s networks.  In addition, it established that a fraction of the electricity rate increase granted to distribution companies by ENRE Resolution 51/07 (as mentioned in Note 2.c.I), would be used to finance up to 30% of the total execution cost of these works, with the remaining 70% of the total cost of the works being absorbed by the MEM’s demand. Fund inflows and outflows related to the aforementioned expansion works are managed by the Works Trust Fund SE Resolution 1/03, which will act as the link among CAMMESA, the Contracting Distribution Companies and the companies that would have been awarded the contracts for the provision of engineering services, supplies and main pieces of equipment as well as those for the execution of the works and provision of minor supplies.

The amount transferred to CAMMESA by Edenor as from the commencement date of the project, through contributions in cash, supplies and services totaled $ 45.8 million. 

In accordance with the agreements entered into on August 16, 2007 by and between Edenor and the National Energy Secretariat and on December 18, 2008 by and between the Company and Banco de Inversión y Comercio Exterior, in its capacity as Trustee of the FOTAE, Edenor is responsible for the development of all the stages of the project, regardless of the oversight tasks to be performed by the Works Commission SE Resolution 1/03. The agreement stipulates that Edenor will be in charge of the operation and the planned and reactive maintenance of the facilities comprising the expansion works, being entitled to receive as remuneration for the tasks and obligations undertaken 2% of the cost of major equipment and 3% of all the costs necessary for the carrying out of civil engineering and electromechanical assembly works related to the Malaver-Colegiales and Malaver-Costanera electrical transmission lines, the expansion of Malaver Substation and the remaining expansion works of Puerto Nuevo Substation.

The works were developed in different stages, and Edenor complied with its responsibility with regard to the development of each of them, as well as with the operation and the planned and reactive maintenance of the facilities comprising the expansion works. The final conclusion of the works occurred in fiscal year 2014.

Furthermore, on January 15, 2015, CAMMESA not only informed Edenor of the amounts disbursed by the BICE and CAMMESA for the execution of the aforementioned works, but also requested that Edenor carry out the pertinent actions to comply with the provisions of Resolution 1875/05. Consequently, Edenor has begun to carry out actions aimed at coordinating and reaching agreement, with the different parties involved, on the steps to be followed to have this process finalized. This will make it possible to subsequently define Edenor’s real situation in relation to the obligations that have been imposed to it by said resolution.

As of December 31, 2015, Edenor recognized as facilities in service in the Property, plant and equipment account its participation in the works for an estimated value of $ 141.8 million, including financial charges, $ 155.8 million of which have not yet been contributed, a debt which is disclosed in the Other payables account of non-current liabilities.

F - 204

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 47: (Continuation)

b.Construction works - San Miguel and San Martín Transformer Centers

The Company carried out construction works of a 7.3 km-long electrical transmission line consisting of four 13.2 kV lines in trefoil formation to link Rotonda Substation with San Miguel Transformer Center, owned by ENARSA, necessary for the provision of electric power generation services; and a 6.2 km-long electrical transmission line consisting of a 13.2 kV line in trefoil formation to link Rotonda Substation with San Martín Transformer Center, owned by ENARSA.

The works, whose ownership was assigned to Edenor, were carried out by Edenor with the contributions made by ENARSA. As of December 31, 2015, Edenor continues to recognize liabilities for this concept in the Deferred revenue account. The recognized amount is $ 32.1 million.

c.Electric works arrangement - Agreement for the supply of electric power to Mitre and Sarmiento railway lines

In September 2013, Edenor and the Interior and Transport Ministry entered into a supply and financial contribution arrangement pursuant to which the Federal Government will finance the necessary electric works aimed at adequately meeting the greater power requirements of the Mitre and Sarmiento railway lines.

The total cost of the works amounts to $ 114.3 million. The Federal Government will bear the costs of the so called “exclusive facilities”, which amount to $ 59.9 million, whereas the costs of the remaining works will be financed by the Federal Government and reimbursed by Edenor.

The financed amount of $ 54.4 million will be reimbursed by Edenor in seventy-two monthly and consecutive installments, as from the first month immediately following the date on which the Works are authorized and brought into service.

During the fiscal year being reported, Edenor received disbursements for $ 9.9 million, related to installment 5. As of December 31, 2015, the Company recorded $ 57.2 million as Non-current deferred revenue and $ 51.9 million as Non-current trade payables – Customer contributions.

d.Contrato de realización de obra Municipalidad de la Matanza

In April 2015, the Company and La Matanza District entered into an agreement for the execution of works aimed at improving the electricity service. The amount of the agreement totals $ 103.75 million, including applicable taxes and charges.

It was agreed that after the completion of each work and upon the presentation of the respective invoices, the new facilities will be assigned free of charge in order for Edenor to proceed with the start-up of the facilities and the subsequent operation and maintenance thereof

F - 205

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 47: (Continuation)

The Public Works Secretariat of the Ministry of Federal Planning, Public Investments and Services agrees to provide financial assistance to La Matanza District, on the basis of an arrangement signed between the parties, for the total amount of the agreement.

As of December 31, 2015, Edenor recorded $ 16.9 million as non-current deferred revenue.

NOTE 48: NEW CONTRACT FOR THE MAINTENANCE OF LMS TG-100

During the month of August 2014, CTG entered into a new maintenance agreement with GE for its LMS 100 unit.

As distinguished from the previous contract, which was based on pre-stablished maintenance and exchange of  components (for example, at 25,000 and 50,000 hours of operation for certain components), this new agreement consists of periodical inspections and pieces repairs or exchanges, which will be programmed and executed based on their condition in order to guarantee the proper functioning and availability of the unit and to decrease the risk associated with long outages. The new agreement will be effective until the unit reaches 100,000 accumulated hours of operation.

Therefore, CTG, during 2014, recorded a loss in the amount of $ 11.4 million resulting from the write-off of the receivables associated with these contracts, which were disclosed under “Other operating expenses” in the statement of comprehensive income.

NOTE 49:  SALE OF MAN ENGINES

On April 30, 2015, CTG'S Board of Directors approved CTLL's proposal for the purchase of the MAN engines for a price of US$ 5 million (as approved by CAMMESA) so that the latter may expand its capacity under the “Agreement for the Increase of Thermal Generation Availability between the ES and Generators” and the “Specific Conditions to the Generation Availability Increase Agreement entered into between the ES and Generator’s subsidiaries”.

On September 15, 2015, CTG accepted the offer for the purchase of the MAN engines and supplementary equipment by CTLL, and the transfer of ownership was thus perfected. This operation entailed the recognition of profits in the amount of $ 25.3 million under Reversal of impairment of property, plant and equipment to let it to its original cost.

F - 206

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 50: DISCONTINUED OPERATIONS

Sale of AESEBA/EDEN’s assets

In February 2013 Edenor received offers from two investment groups for the acquisition of the total number of shares of AESEBA, the parent company of EDEN. On February 27, 2013, Edenor Board of Directors unanimously approved the acceptance of the Offer Letter sent by Servicios Eléctricos Norte BA S.L. (the “Buyer”) for the acquisition of the shares representing 100% of AESEBA’s capital stock and voting rights. The price offered by the buyer is payable through the delivery of Edenor debt securities for an amount equivalent, considering their quoted price at the date of the acceptance, to approximately U$S 85 million of nominal value. Such price was fixed in Bonar 2013 sovereign debt bonds or similar bonds (“the Debt Securities”) for a value equivalent to $ 334.3 million at the closing of the transaction, considering the market value of such government bonds at that time.

In this regard, a Trust was set up in March 2013 by the Settlor (the Buyer), the Trustee (Equity Trust Company from Uruguay) and Edenor.

At the closing date of the transaction, which took place on April 5, 2013, the buyer deposited in the Trust cash and Debt Securities for the equivalent of $ 262 million, considering the market value of those government bonds at the closing date, and, prior to December 31, 2013, the buyer will be required to deposit in the Trust Debt Securities for the equivalent of 8.5 million of nominal value divided by the average price of purchase thereof.  At the closing of the transaction, Edenor received the rights as beneficiary under the Trust. With the proceeds of the liquidation of the bonds received the Trust will purchase Edenor Class 9 and Class 7 Corporate Bons due in 2022 and 2017, respectively.

In this manner, as of December 31, 2013, Edenor divested the AESEBA segment, which resulted in a loss of $ 96.5 million, included within the loss from discontinued operations, after tax-related effects and without considering the results of the repurchase of Corporate Bonds, which were recognized by Edenor when such transaction took place. At December 31, 2013, and due to the repurchases of Edenor’s own debt made by the Trust, Edenor recorded a gain of $ 71.7 million included in the “Other financial expense” line item of the Statement of Comprehensive Income (Loss).

F - 207

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 50: (Continuation)

The Trust has purchased the totality of Edenor Corporate Notes due in 2017 and 2022 indicated in the respective trust agreement for U$S 10 million and USD 68 million of nominal value, respectively. On March 27, 2014, these Corporate Notes were written off.

Due to the repurchases of Edenor’s own debt made by the Trust, as of December 31, 2014, Edenor recorded a gain of $ 44.4 million, which has been included in the “Other financial expense” line item of the Statement of Comprehensive Income (Loss).

Additionally, on April 5, 2014, the Trust was terminated and liquidated.

Sale of EMDERSA/EDELAR

On September 17, 2013, Edenor Board of Directors approved the sending to Energía Riojana S.A. (ERSA) and the Government of the Province of La Rioja of an irrevocable offer for (i) the sale of the indirect stake held by Edenor in EMDERSA, the parent company of EDELAR, and (ii) the assignment for valuable consideration of certain receivables which Edenor has with EMDERSA and EDELAR. On October 4, 2013, Edenor received the acceptance of the Offer by ERSA and the Government of the Province of La Rioja in its capacity as controlling shareholder of the buyer. The transaction was closed and effectively carried out on October 30, 2013. The price agreed upon in the aforementioned agreement amounts to $ 75.2 million and is payable in 120 monthly and consecutive installments, with a grace period of 24 months, to commence from the closing date of the transaction, for the payment of the first installment.

Furthermore, on August 5, 2013 Edenor was notified of ENRE Resolution No. 216/2013, whereby the Regulatory agency declared that the procedure required by Section 32 of Law No. No. 24,065 with respect to the purchase of EMDERSA, AESEBA and their respective subsidiaries made by Edenor in March 2011 had been complied with, formally authorizing the acquisition thereof.

The transaction was closed on October 30, 2013 together with the holding of the Ordinary Shareholders’ Meeting that appointed new authorities and approved the actions taken by the outgoing Directors and Supervisory Committee members.

F - 208

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 50: (Continuation)

The financial statements related to discontinued operations included in this financial statement are disclosed below:

	12.31.2015	12.31.2014	12.31.2013
Sales	-	-	408,647,206
Cost of sales	-	-	(275,630,741)
Gross profit	-	-	133,016,465
Selling expenses	-	-	(56,439,207)
Administrative expenses	-	-	(36,856,088)
Other operating income	-	-	1,864,823
Other operating expenses	-	-	(36,379,564)
Operating profit	-	-	5,206,429
Financial income	-	-	14,802,397
Financial cost	-	-	(28,576,161)
Other finance results	-	-	(7,472,520)
Financial results, net	-	-	(21,246,284)
(Loss) Income before income tax	-	-	(16,039,855)
Income tax	-	-	171,707,861
Income after income tax	-	-	155,668,006
Impairment of assets classified as held for sale	-	-	(7,144,579)
Loss on sale of assets classified as held for sale	-	-	(185,960,015)
Income tax	-	-	(89,421,740)
Total (loss) income of the year	-	-	(126,858,328)
Total (loss) income of the year attributable to:
Owners of the company	-	-	(85,698,444)
Non - controlling interest	-	-	(41,159,884)
	-	-	(126,858,328)

F - 209

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 51: SUBSEQUENT EVENTS

PEPASA

Corporate Bonds Program

On January 14, 2016, PEPASA modified the Simple Corporate Bonds Program (non-convertible into shares) for up to US$ 500 million or its equivalent in other currencies.

On February 3, 2016, PEPASA issued Series 7 Corporate Bonds for a face value of $ 309 million, accruing interest at the Badlar rate plus a 3.95% spread and maturing on August 3, 2017. Interest will be payable on a quarterly basis.

VCPs Global Program

On January 14, 2016, PEPASA modified the VCP Global Program by increasing its amount for up to US$ 100 million or its equivalent in other currencies.

Shareholders' Meeting

On January 14, 2016, PEPASA Extraordinary General Shareholders’ Meeting resolved as follows: i) to increase the capital stock for up to 400 million new common shares in book-entry form with a face value of $ 1 each, to be publicly offered in Argentina, and ii) to approve a first issuance for up to 20 million. As of the date hereof, the Company is taking the necessary steps to seek authorization of the first issuance by the CNV, which has not yet been granted.

Edenor

Extraordinary bonus granted to employees

On January 18, 2016, Edenor entered into two agreements, one with the Sindicato de Luz y Fuerza de Capital Federal and another one with the Asociación del Personal Superior de Empresas de Energía, pursuant to which Edenor agreed to grant, on a voluntary and one-time basis, to all the employees who are subject to the collective bargaining agreements of the aforementioned union/association an extraordinary bonus of $ 5,000 to be paid in two installments of $ 2,000 and $ 3,000 on January 21 and March 21, 2016, respectively.

The payment of the aforementioned bonus was extended to all Company employees.

PESA

Corporate Bonds Program

On January 22, 2016, the Company Ordinary and Extraordinary General Shareholders’ Meeting approved the creation of a global Simple Corporate Bond Program, not convertible into shares, for up to U$S 500 million or its equivalent in other currencies, and the issue under the same program to its maximum amount at any time, to be issued in one or more classes and / or series

F - 210

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 51: (Continuation)

Acquisition of the shares of Petrobras Argentina S.A.

Petroleo Brasileiro S.A. and the Company have agreed an exclusivity period of 30 days and can be extended for 30 additional days, to continue advanced negotiations for the acquisition of the shares of Petrobras Argentina S.A. in possession of its subsidiary Petrobras Participaciones S.L., equivalent to 67.2% of capital and votes of Petrobras Argentina S.A.

Holding the previously referred transaction is subject to the successful negotiation of the terms applicable and relevant documentation and approval of such terms and documentation by the competent corporate bodies of Petroleo Brasileiro S.A. and the Company.

Launching of Negotiations for the Sale of Assets

On March 9, 2016, pursuant to the continuous assessment of Pampa Group’s corporate strategy and in view of the possible incorporation of new assets, the Company’s Board of Directors has decided to start negotiations regarding the possible sale of its indirect interest in TGS, which it holds through a trust classified as Financial assets at fair value through profit and loss (Note 6) as well as its interests in affiliates (Note 9), both included in the Holding and Others segment.

F - 211

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 52: SUPLEMENTAL INFORMATION ON OIL AND GAS ACTIVITIES (UNAUDITED)

The following information is presented in accordance with ASC No. 932 "Extractive Activities - Oil and Gas", as amended by ASU 2010 - 03 “Oil and Gas Reserves, Estimation and Disclosures”, issued by FASB in January 2010 in order to align the current estimation and disclosure requirements with the requirements set in the SEC final rules and interpretations, published on December 31, 2008. This information includes the PEPASA's oil and gas production activities.

Table 1 – Cost incurred in exploration, property acquisitions and development

The following table presents those costs capitalized as well as expensed that were incurred during each of the year ended as of December 31, 2015, 2014 and 2013. The acquisition of properties includes the cost of acquisition of proved or unproved oil and gas properties. Exploration costs include geological and geophysical costs, costs necessary for retaining undeveloped properties, drilling costs and exploratory well equipment. Development costs include drilling costs and equipment for developmental wells, the construction of facilities for extraction, treatment and storage of hydrocarbons and all necessary costs to maintain facilities for the existing developed reserves.

	12.31.2015	12.31.2014	12.31.2013
Acquisition of properties
Proved	-	-	-
Unproved	-	-	-
Total property acquisition	-	-	-
Exploration	-	-	-
Development	2,213,339,740	617,475,979	129,414,231
Total costs incurred	2,213,339,740	617,475,979	129,414,231

F - 212

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 52: (Continuation)

Table 2 – Capitalized cost related to oil and gas producing activities

The following table presents the capitalized costs as of December 31, 2015, 2014 and 2013, for proved and unproved oil and gas properties, and the related accumulated depreciation as of those a dates.

	12.31.2015	12.31.2014	12.31.2013
Proved properties
Equipment, camps and other facilities	193,778,409	4,156,943	1,386,447
Mineral interests and wells	1,928,419,773	796,159,838	247,047,524
Other uncompleted projects	978,039,855	92,975,692	49,165,635
Unproved properties	-	-	-
Gross capitalised costs	3,100,238,037	893,292,473	297,599,606
Accumulated depreciation	(439,877,173)	(164,891,552)	(84,321,270)
Total net capitalised costs	2,660,360,864	728,400,921	213,278,336

Table 3 – Results of operations for oil and gas producing activities

The breakdown of results of the operations shown below summarizes revenues and expenses directly associated with oil and gas producing activities for the years ended December 31, 2015, 2014 and 2013. Income tax for the years presented was calculated utilizing the statutory tax rates.

	12.31.2015	12.31.2014	12.31.2013
Revenue	943,490,833	356,795,685	160,996,690
Surplus Gas Injection Compensation Res. No. 1/13	546,774,869	127,147,619	22,572,407
Production costs, excluding depreciation
Operating costs	(265,503,146)	(71,169,816)	(28,087,068)
Royalties	(119,518,449)	(49,429,788)	(22,487,022)
Total production costs	(385,021,595)	(120,599,604)	(50,574,090)
Exploration expenses
Accretion expense	(18,899,410)	(47,953)	(33,426)
Impairment loss for non-financial assets	(3,045,986)	(21,783,112)	(3,638,475)
Depreciation, depletion and amortization	(274,985,621)	(80,575,115)	(34,948,339)
Results of operations before income tax	808,313,090	260,937,520	94,374,767
Income tax	(282,909,582)	(91,328,132)	(33,031,168)
Results of oil and gas operations	525,403,509	169,609,388	61,343,599

F - 213

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 52: (Continuation)

Table 4- Reserve quantity information

Estimated oil and gas reserves

Proved reserves estimated quantities of oil (including crude oil and condensate) and natural gas, which available geological and engineering data demonstrates with reasonable certainly to be recoverable in the future from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that can reasonably be expected to be recovered through wells with existing equipment and operating methods. The choice of method or combination of methods employed in the analysis of each reservoir was determined by the stage of development, quality and reliability of basic data, and production history.

PEPASA believes that its estimates of remaining proved recoverable oil and gas reserve volumes are reasonable and such estimates have been prepared in accordance with the SEC Modernization of Oil and Gas Reporting rules, which were issued by the SEC al the end of 2008.

PEPASA estimated its reserves at least once a year. PEPASA's reserves estimation as of December 31, 2015 was based on the Netherland, Sewell & Associates Inc. Reserves Report. Netherland, Sewell & Associates Inc. prepared its proved oil and natural gas reserve estimates in accordance with Rule 4-10 of Regulation S-X, promulgated by the SEC, and in accordance with the oil and gas reserves disclosure provisions of ASC 932 of the FASB Accounting Standards Codification (ASC) relating to Extractive Activities--Oil and Gas (formerly SFAS no. 69 Disclosures about Oil and Gas Producing Activities).

Reserves engineering is a subjective process of estimation of hydrocarbon accumulation, which cannot be accurately measured, and the reserve estimation depends on the quality of available information and the interpretation and judgment of the engineers and geologists. Therefore, the reserves estimations, as well as future production profiles, are often different than the quantities of hydrocarbons which are finally recovered. The accuracy of such estimations depends, in general, on the assumptions on which they are based.

Prior to 2015, PEPASA did not have any third-party reserves certification reports because such reports were not required under any reporting requirements to which PEPASA is subject.  Accordingly, the information underlying such third-party reports and certain of the information specified under the requirements for disclosure by registrants engaged in oil and gas producing activities under Subpart 1200 of Regulation S-K were not prepared for periods prior to December 31, 2015.  As a result, PEPASA is unable to provide comparisons between information on the values of reserves in 2015 with values from years prior to 2015.

F - 214

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 52: (Continuation)

The following table sets forth PEPASA’s oil and natural gas net proved reserves as of December 31, 2015, which are based on the Independent Reserves Engineers’ Reserves Report.

	12.31.2015
	Gas	Oil
	(in millions of cubic feet)	(in thousands of barrels)
Net proved developed
YSUR	4,087.5	60.8
Petrobras	19,345.5	43.2
YPF	58,441.0	253.6
Senillosa	20.6	-
Net proved undeveloped
YSUR	-	-
Petrobras	1,948.2	4.0
YPF	20,360.9	21.0
Senillosa	-	-
Total proved reserves	104,203.7	382.6

Table 5- Standardized measure of discounted future net cash flow related to prove oil and gas reserves

The following table discloses estimated future cash flows from future production of proved developed and undeveloped reserves of crude oil, condensate and natural gas. As prescribed by SEC Modernization of Oil and Gas Reporting rules and ASC 932 of the FASB Accounting Standards Codification (ASC) relating to Extractive Activities - Oil and Gas (formerly SFAS no. 69 Disclosures about Oil and Gas Producing Activities), such future net cash flows were estimated using the average first day of the month price during the 12- month period for 2015 and using a 10% annual discount factor. Future development and abandonment costs include estimated drilling costs, development and exploitation installations and abandonment costs. These future development costs were estimated based on evaluations made by the Company. The future income tax was calculated by applying the statutory tax rates in affect in effect in the respective countries in which we have interests, as of the date this supplementary information was filed.

This standardized measure is not intended to be and should not be interpreted as an estimate of the market value of the Company’s reserves. The purpose of this information is to give standardized data to help the users of the financial statements to compare different companies and make certain projections. It is important to point out that this information does not include, among other items, the effect of future changes in prices costs and tax rates, which past experience indicates that are likely to occur, as well as the effect of future cash flows from reserves which have not yet been classified as proved reserves, of a discount factor more representative of the value of money over the lapse of time and of the risks inherent to the production of oil and gas. These future changes may have a significant impact on the future net cash flows disclosed bellow. For all these reasons, this information does not necessarily indicate the perception the Company has on the discounted future net cash flows from the reserve of hydrocarbons.

F - 215

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

(in Argentine Pesos (“$”) – unless otherwise stated)

NOTE 52: (Continuation)

	12.31.2015
Future cash inflows	720,632
Future production costs	(226,347)
Future development costs	(72,675)
Undiscounted future net cash flows	421,610
Future income tax	(147,563)
10% annual discount	(73,562)
Standarized measure of discounted future net cash flows(1)	348,048

⁽¹⁾ Future net revenue is after deductions of Pampa`s share of production taxes, capital costs, and operating expenses but before consideration of any income taxes.

F - 216

EX-8.1

Exhibits 8.1.

List of significant subsidiaries of Pampa Energía S.A.

1) Generation Business

Inversora Nihuiles S.A.

Inversora Diamante S.A.

Inversora Piedra Buena S.A.

Central Térmica Loma de la Lata S.A.

Hidroeléctrica Los Nihuiles S.A.

Hidroeléctrica Diamante S.A.

Central Piedra Buena S.A.

Central Térmica Güemes S.A.

Pampa Comercializadora S.A.

Greenwind S.A.

2) Transmission Business

Transelec Argentina S.A.

Citelec S.A.

Transener S.A.

Transba S.A.

3) Distribution Business

IEASA S.A.

EASA S.A.

Empresa Distribuidora y Comercializadora Norte S.A.

4) Oil Business

Petrolera Pampa S.A.

5) Gas Business

PEPCA S.A.

Compañía de Inversiones de Energía S.A.

TGS S.A.

6) Other Business

Bodega Loma de la Lata S.A.

All of the subsidiaries mentioned above have their jurisdiction of incorporation in the Republic of Argentina.

EX-12.1

 

Exhibit 12.1

Co-Chief Executive Officer and Chief Financial Officer Certification

I, Ricardo Alejandro Torres, certify that:

1.I have reviewed this annual report on Form 20-F of Pampa Energía S.A.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: April 29, 2016

/s/ Ricardo Alejandro Torres

Ricardo Alejandro Torres

Co-Chief Executive Officer and Chief Financial Officer

EX-12.2

 

Exhibit 12.2

Co-Chief Executive Officer Certification

I, Gustavo Mariani, certify that:

1.I have reviewed this annual report on Form 20-F of Pampa Energía S.A.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;

4.The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5.The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

(b)   Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.

Date: April 29, 2016

/s/ Gustavo Mariani

Gustavo Mariani

Co-Chief Executive Officer

EX-13.1

 

Exhibit 13.1

Officer Certifications Pursuant to Section 906

of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Pampa Energía S.A., a sociedad anónima organized under the laws of Argentina (the “Company”), does hereby certify to such officer’s knowledge that:

The annual report on Form 20-F for the fiscal year ended December 31, 2015 (the “Form 20-F”) of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 20-F fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: April 29, 2016

	/s/ Ricardo Alejandro Torres
	Name: Ricardo Alejandro Torres
	Title: Co-Chief Executive Officer and Chief Financial Officer
Date: April 29, 2016
	/s/ Gustavo Mariani
	Name: Gustavo Mariani
	Title: Co-Chief Executive Officer

A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

EX-13.2

Mr. Tomás Magliano
Petrolera Pampa S.A.
Ortiz de Ocampo 3302 – Edificio 4
C1425DSR Buenos Aires
Argentina

Dear Mr. Magliano:

In accordance with your request, we have estimated the proved reserves and future revenue, as of December 31, 2015, to the Petrolera Pampa S.A. (Pampa) interest in certain gas properties located in Neuquen and Rio Negro Provinces in Argentina. We completed our evaluation on or about the date of this letter. It is our understanding that the proved reserves estimated in this report constitute all of the proved reserves owned by Pampa. The estimates in this report have been prepared in accordance with the definitions and regulations of the U.S. Securities and Exchange Commission (SEC) and, with the exception of the exclusion of future income taxes, conform to the FASB Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas. Definitions are presented immediately following this letter.

As presented in the accompanying summary projections, Tables I through IV, we estimate the net reserves and future net revenue to the Pampa interest in these properties, as of December 31, 2015, to be:

	Net Reserves		Future Net Revenue (M$)
	Gas	Condensate		Present Worth
Category	(MMCF)	(MBBL)	Total	at 10%
Proved Developed Producing	069,099.4	322.4	310,533.8	262,476.0
Proved Developed Non-Producing	012,795.1	035.2	064,228.4	054,347.5
Proved Undeveloped	022,309.2	025.0	046,847.7	031,224.2
Total Proved	104,203.6	382.6	421,609.8	348,047.7
Totals may not add because of rounding.

Gas volumes are expressed in millions of cubic feet (MMCF) at standard temperature and pressure bases. Condensate volumes are expressed in thousands of barrels (MBBL); a barrel is equivalent to 42 United States gallons. Monetary values shown in this report are expressed in United States dollars ($) or thousands of United States dollars (M$).

The estimates shown in this report are for proved reserves. As requested, probable and possible reserves that exist for these properties have not been included. For El Mangrullo Field, estimates of proved undeveloped reserves have been included for certain locations that generate negative future net revenue based on the constant prices and costs discussed in subsequent paragraphs of this letter. These locations have been included based on drilling and gas volume commitments as provided by Pampa. This report does not include any value that could be attributed to interests in undeveloped acreage beyond those tracts for which undeveloped reserves have been estimated. Reserves categorization conveys the relative degree of certainty; reserves subcategorization is based on development and production status. The estimates of reserves and future revenue included herein have not been adjusted for risk.

This report includes summary projections of reserves and revenue by reserves category. Also included are summary projections of reserves and revenue by reserves category for each field.

Gross revenue shown in this report is Pampa's share of the gross (100 percent) revenue from the properties prior to any deductions. Future net revenue is after deductions for Pampa's share of production taxes, capital costs, abandonment costs, and operating expenses but before consideration of any income taxes. The future net revenue has been discounted at an annual rate of 10 percent to determine its present worth, which is shown to indicate the effect of time on the value of money. Future net revenue presented in this report, whether discounted or undiscounted, should not be construed as being the fair market value of the properties.

Prices used in this report have been represented by Pampa to be based on the 12-month unweighted arithmetic average of the first-day-of-the-month price for each month in the period January through December 2015. For gas volumes, the average price of $4.970 per MMBTU is adjusted for a premium to realize a gas price of $7.500 per MMBTU under the Argentine PlanGas program until January 1, 2018. After program expiration, the average price of $4.970 per MMBTU is used. Gas prices are adjusted by field for market differentials and by lease for energy content. For condensate volumes, average prices are determined by field. Prices are not escalated for inflation. The average adjusted product prices weighted by production over the remaining lives of the properties are $6.654 per MCF of gas and $71.19 per barrel of condensate.

Operating costs used in this report are based on operating expense records of the operators of the properties, as provided by Pampa. These costs include the per-well overhead expenses allowed under joint operating agreements along with estimates of costs to be incurred at and below the district and field levels. Operating costs have been divided into field-level costs, per-well costs, and per-unit-of-production costs. Since all properties are nonoperated, headquarters general and administrative overhead expenses of Pampa are not included. Operating costs are not escalated for inflation.

Capital costs used in this report were provided by Pampa and are based on authorizations for expenditure and actual costs from recent activity. Capital costs are included as required for new development wells and production equipment. Based on our understanding of future development plans, a review of the records provided to us, and our knowledge of similar properties, we regard these estimated capital costs to be reasonable. Abandonment costs used in this report are Pampa's estimates of the costs to abandon the wells; these estimates do not include any salvage value for the lease and well equipment. Capital costs and abandonment costs are not escalated for inflation.

For the purposes of this report, we did not perform any field inspection of the properties, nor did we examine the mechanical operation or condition of the wells and facilities. We have not investigated possible environmental liability related to the properties; therefore, our estimates do not include any costs due to such possible liability.

We understand from Pampa that the Pampa interest is underproduced at Rincon Del Mangrullo Field. This report includes gas projections to show the effect of bringing these properties into balance by April 1, 2016. The gas imbalance information has been provided by Pampa and has not been independently verified. All other projections are based on Pampa receiving its net revenue interest share of estimated future gross gas production after field usage and shrinkage.

The reserves shown in this report are estimates only and should not be construed as exact quantities. Proved reserves are those quantities of oil and gas which, by analysis of engineering and geoscience data, can be estimated with reasonable certainty to be economically producible; probable and possible reserves are those additional reserves which are sequentially less certain to be recovered than proved reserves. Estimates of reserves may increase or decrease as a result of market conditions, future operations, changes in regulations, or actual reservoir performance. In addition to the primary economic assumptions discussed herein, our estimates are based on certain assumptions including, but not limited to, that the properties will be developed consistent with current development plans as provided to us by Pampa, that the properties will be operated in a prudent manner, that no governmental regulations or controls will be put in place that would impact the ability of the interest owner to recover the reserves, and that our projections of future production will prove consistent with actual performance. If the reserves are recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts. Because of governmental policies and uncertainties of supply and demand, the sales rates,

 

prices received for the reserves, and costs incurred in recovering such reserves may vary from assumptions made while preparing this report.

For the purposes of this report, we used technical and economic data including, but not limited to, well logs, geologic maps, seismic data, well test data, production data, historical price and cost information, and property ownership interests. The reserves in this report have been estimated using deterministic methods; these estimates have been prepared in accordance with the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserves Information promulgated by the Society of Petroleum Engineers (SPE Standards). We used standard engineering and geoscience methods, or a combination of methods, including performance analysis, volumetric analysis, and analogy, that we considered to be appropriate and necessary to categorize and estimate reserves in accordance with SEC definitions and regulations. As in all aspects of oil and gas evaluation, there are uncertainties inherent in the interpretation of engineering and geoscience data; therefore, our conclusions necessarily represent only informed professional judgment.

The data used in our estimates were obtained from Pampa, public data sources, and the nonconfidential files of Netherland, Sewell & Associates, Inc. and were accepted as accurate. Supporting work data are on file in our office. We have not examined the contractual rights to the properties or independently confirmed the actual degree or type of interest owned. The technical persons primarily responsible for preparing the estimates presented herein meet the requirements regarding qualifications, independence, objectivity, and confidentiality set forth in the SPE Standards. We are independent petroleum engineers, geologists, geophysicists, and petrophysicists; we do not own an interest in these properties nor are we employed on a contingent basis.

 

DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

The following definitions are set forth in U.S. Securities and Exchange Commission (SEC) Regulation S-X Section 210.4-10(a). Also included is supplemental information from (1) the 2007 Petroleum Resources Management System approved by the Society of Petroleum Engineers, (2) the FASB Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas, and (3) the SEC's Compliance and Disclosure Interpretations.

(1) Acquisition of properties. Costs incurred to purchase, lease or otherwise acquire a property, including costs of lease bonuses and options to purchase or lease properties, the portion of costs applicable to minerals when land including mineral rights is purchased in fee, brokers' fees, recording fees, legal costs, and other costs incurred in acquiring properties.

(2) Analogous reservoir. Analogous reservoirs, as used in resources assessments, have similar rock and fluid properties, reservoir conditions (depth, temperature, and pressure) and drive mechanisms, but are typically at a more advanced stage of development than the reservoir of interest and thus may provide concepts to assist in the interpretation of more limited data and estimation of recovery. When used to support proved reserves, an "analogous reservoir" refers to a reservoir that shares the following characteristics with the reservoir of interest: (i) Same geological formation (but not necessarily in pressure communication with the reservoir of interest); (ii) Same environment of deposition; (iii) Similar geological structure; and (iv) Same drive mechanism.

Instruction to paragraph (a)(2): Reservoir properties must, in the aggregate, be no more favorable in the analog than in the reservoir of interest.

(3) Bitumen. Bitumen, sometimes referred to as natural bitumen, is petroleum in a solid or semi-solid state in natural deposits with a viscosity greater than 10,000 centipoise measured at original temperature in the deposit and atmospheric pressure, on a gas free basis. In its natural state it usually contains sulfur, metals, and other non-hydrocarbons.

(4) Condensate. Condensate is a mixture of hydrocarbons that exists in the gaseous phase at original reservoir temperature and pressure, but that, when produced, is in the liquid phase at surface pressure and temperature.

(5) Deterministic estimate. The method of estimating reserves or resources is called deterministic when a single value for each parameter (from the geoscience, engineering, or economic data) in the reserves calculation is used in the reserves estimation procedure.

(6) Developed oil and gas reserves. Developed oil and gas reserves are reserves of any category that can be expected to be recovered: (i) Through existing wells with existing equipment and operating methods or in which the cost of the required equipment is relatively minor compared to the cost of a new well; and (ii) Through installed extraction equipment and infrastructure operational at the time of the reserves estimate if the extraction is by means not involving a well.

Supplemental definitions from the 2007 Petroleum Resources Management System:

Developed Producing Reserves – Developed Producing Reserves are expected to be recovered from completion intervals that are open and producing at the time of the estimate. Improved recovery reserves are considered producing only after the improved recovery project is in operation.

Developed Non-Producing Reserves – Developed Non-Producing Reserves include shut-in and behind-pipe Reserves. Shut-in Reserves are expected to be recovered from (1) completion intervals which are open at the time of the estimate but which have not yet started producing, (2) wells which were shut-in for market conditions or pipeline connections, or (3) wells not capable of production for mechanical reasons. Behind-pipe Reserves are expected to be recovered from zones in existing wells which will require additional completion work or future recompletion prior to start of production. In all cases, production can be initiated or restored with relatively low expenditure compared to the cost of drilling a new well.

(7) Development costs. Costs incurred to obtain access to proved reserves and to provide facilities for extracting, treating, gathering and storing the oil and gas. More specifically, development costs, including depreciation and applicable operating costs of support equipment and facilities and other costs of development activities, are costs incurred to: (i) Gain access to and prepare well locations for drilling, including surveying well locations for the purpose of determining specific development drilling sites, clearing ground, draining, road building, and relocating public roads, gas lines, and power lines, to the extent necessary in developing the proved reserves.

(ii) Drill and equip development wells, development-type stratigraphic test wells, and service wells, including the costs of platforms and of well equipment such as casing, tubing, pumping equipment, and the wellhead assembly.

Definitions - Page 1 of 6

 

DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

(iii) Acquire, construct, and install production facilities such as lease flow lines, separators, treaters, heaters, manifolds, measuring devices, and production storage tanks, natural gas cycling and processing plants, and central utility and waste disposal systems.

(iv) Provide improved recovery systems.

(8) Development project. A development project is the means by which petroleum resources are brought to the status of economically producible. As examples, the development of a single reservoir or field, an incremental development in a producing field, or the integrated development of a group of several fields and associated facilities with a common ownership may constitute a development project.

(9) Development well. A well drilled within the proved area of an oil or gas reservoir to the depth of a stratigraphic horizon known to be productive.

(10) Economically producible. The term economically producible, as it relates to a resource, means a resource which generates revenue that exceeds, or is reasonably expected to exceed, the costs of the operation. The value of the products that generate revenue shall be determined at the terminal point of oil and gas producing activities as defined in paragraph (a)(16) of this section.

(11) Estimated ultimate recovery (EUR). Estimated ultimate recovery is the sum of reserves remaining as of a given date and cumulative production as of that date.

(12) Exploration costs. Costs incurred in identifying areas that may warrant examination and in examining specific areas that are considered to have prospects of containing oil and gas reserves, including costs of drilling exploratory wells and exploratory-type stratigraphic test wells. Exploration costs may be incurred both before acquiring the related property (sometimes referred to in part as prospecting costs) and after acquiring the property. Principal types of exploration costs, which include depreciation and applicable operating costs of support equipment and facilities and other costs of exploration activities, are:

(i) Costs of topographical, geographical and geophysical studies, rights of access to properties to conduct those studies, and salaries and other expenses of geologists, geophysical crews, and others conducting those studies.Collectively, these are sometimes referred to as geological and geophysical or "G&G" costs.

(ii) Costs of carrying and retaining undeveloped properties, such as delay rentals, ad valorem taxes on properties, legal costs for title defense, and the maintenance of land and lease records.

(iii) Dry hole contributions and bottom hole contributions. (iv) Costs of drilling and equipping exploratory wells.

(v) Costs of drilling exploratory-type stratigraphic test wells.

(13) Exploratory well. An exploratory well is a well drilled to find a new field or to find a new reservoir in a field previously found to be productive of oil or gas in another reservoir. Generally, an exploratory well is any well that is not a development well, an extension well, a service well, or a stratigraphic test well as those items are defined in this section.

(14) Extension well. An extension well is a well drilled to extend the limits of a known reservoir.

(15) Field. An area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same individual geological structural feature and/or stratigraphic condition. There may be two or more reservoirs in a field which are separated vertically by intervening impervious strata, or laterally by local geologic barriers, or by both. Reservoirs that are associated by being in overlapping or adjacent fields may be treated as a single or common operational field. The geological terms "structural feature" and "stratigraphic condition" are intended to identify localized geological features as opposed to the broader terms of basins, trends, provinces, plays, areas-of-interest, etc.

(16) Oil and gas producing activities.

(i) Oil and gas producing activities include:

(A) The search for crude oil, including condensate and natural gas liquids, or natural gas ("oil and gas") in their natural states and original locations; (B) The acquisition of property rights or properties for the purpose of further exploration or for the purpose of removing the oil or gas from such properties; (C) The construction, drilling, and production activities necessary to retrieve oil and gas from their natural reservoirs, including the acquisition, construction, installation, and maintenance of field gathering and storage systems, such as: (1) Lifting the oil and gas to the surface; and (2) Gathering, treating, and field processing (as in the case of processing gas to extract liquid hydrocarbons); and

Definitions - Page 2 of 6

 

DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

(D) Extraction of saleable hydrocarbons, in the solid, liquid, or gaseous state, from oil sands, shale, coalbeds, or other nonrenewable natural resources which are intended to be upgraded into synthetic oil or gas, and activities undertaken with a view to such extraction.

Instruction 1 to paragraph (a)(16)(i): The oil and gas production function shall be regarded as ending at a "terminal point", which is the outlet valve on the lease or field storage tank. If unusual physical or operational circumstances exist, it may be appropriate to regard the terminal point for the production function as: a. The first point at which oil, gas, or gas liquids, natural or synthetic, are delivered to a main pipeline, a common carrier, a refinery, or a marine terminal; and b. In the case of natural resources that are intended to be upgraded into synthetic oil or gas, if those natural resources are delivered to a purchaser prior to upgrading, the first point at which the natural resources are delivered to a main pipeline, a common carrier, a refinery, a marine terminal, or a facility which upgrades such natural resources into synthetic oil or gas.

Instruction 2 to paragraph (a)(16)(i): For purposes of this paragraph (a)(16), the term saleable hydrocarbons means hydrocarbons that are saleable in the state in which the hydrocarbons are delivered.

(ii) Oil and gas producing activities do not include: (A) Transporting, refining, or marketing oil and gas;

(B) Processing of produced oil, gas, or natural resources that can be upgraded into synthetic oil or gas by a registrant that does not have the legal right to produce or a revenue interest in such production; (C) Activities relating to the production of natural resources other than oil, gas, or natural resources from which synthetic oil and gas can be extracted; or (D) Production of geothermal steam.

(17) Possible reserves. Possible reserves are those additional reserves that are less certain to be recovered than probable reserves.

(i) When deterministic methods are used, the total quantities ultimately recovered from a project have a low probability of exceeding proved plus probable plus possible reserves. When probabilistic methods are used, there should be at least a 10% probability that the total quantities ultimately recovered will equal or exceed the proved plus probable plus possible reserves estimates.

(ii) Possible reserves may be assigned to areas of a reservoir adjacent to probable reserves where data control and interpretations of available data are progressively less certain. Frequently, this will be in areas where geoscience and engineering data are unable to define clearly the area and vertical limits of commercial production from the reservoir by a defined project.

(iii) Possible reserves also include incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than the recovery quantities assumed for probable reserves.

(iv) The proved plus probable and proved plus probable plus possible reserves estimates must be based on reasonable alternative technical and commercial interpretations within the reservoir or subject project that are clearly documented, including comparisons to results in successful similar projects.

(v) Possible reserves may be assigned where geoscience and engineering data identify directly adjacent portions of a reservoir within the same accumulation that may be separated from proved areas by faults with displacement less than formation thickness or other geological discontinuities and that have not been penetrated by a wellbore, and the registrant believes that such adjacent portions are in communication with the known (proved) reservoir.

Possible reserves may be assigned to areas that are structurally higher or lower than the proved area if these areas are in communication with the proved reservoir.

(vi) Pursuant to paragraph (a)(22)(iii) of this section, where direct observation has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves should be assigned in the structurally higher portions of the reservoir above the HKO only if the higher contact can be established with reasonable certainty through reliable technology. Portions of the reservoir that do not meet this reasonable certainty criterion may be assigned as probable and possible oil or gas based on reservoir fluid properties and pressure gradient interpretations.

(18) Probable reserves. Probable reserves are those additional reserves that are less certain to be recovered than proved reserves but which, together with proved reserves, are as likely as not to be recovered.

(i) When deterministic methods are used, it is as likely as not that actual remaining quantities recovered will exceed the sum of estimated proved plus probable reserves. When probabilistic methods are used, there should be at least a 50% probability that the actual quantities recovered will equal or exceed the proved plus probable reserves estimates.

Definitions - Page 3 of 6

 

DEFINITIONS OF OIL AND GAS RESERVES
Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

(ii) Probable reserves may be assigned to areas of a reservoir adjacent to proved reserves where data control or interpretations of available data are less certain, even if the interpreted reservoir continuity of structure or productivity does not meet the reasonable certainty criterion. Probable reserves may be assigned to areas that are structurally higher than the proved area if these areas are in communication with the proved reservoir.

(iii) Probable reserves estimates also include potential incremental quantities associated with a greater percentage recovery of the hydrocarbons in place than assumed for proved reserves.

(iv) See also guidelines in paragraphs (a)(17)(iv) and (a)(17)(vi) of this section.

(19) Probabilistic estimate. The method of estimation of reserves or resources is called probabilistic when the full range of values that could reasonably occur for each unknown parameter (from the geoscience and engineering data) is used to generate a full range of possible outcomes and their associated probabilities of occurrence.

(20) Production costs.

(i) Costs incurred to operate and maintain wells and related equipment and facilities, including depreciation and applicable operating costs of support equipment and facilities and other costs of operating and maintaining those wells and related equipment and facilities. They become part of the cost of oil and gas produced. Examples of production costs (sometimes called lifting costs) are:

(A) Costs of labor to operate the wells and related equipment and facilities.

(B) Repairs and maintenance.

(C) Materials, supplies, and fuel consumed and supplies utilized in operating the wells and related equipment and facilities.

(D) Property taxes and insurance applicable to proved properties and wells and related equipment and facilities.

(E) Severance taxes.

(ii) Some support equipment or facilities may serve two or more oil and gas producing activities and may also serve transportation, refining, and marketing activities. To the extent that the support equipment and facilities are used in oil and gas producing activities, their depreciation and applicable operating costs become exploration, development or production costs, as appropriate. Depreciation, depletion, and amortization of capitalized acquisition, exploration, and development costs are not production costs but also become part of the cost of oil and gas produced along with production (lifting) costs identified above.

(21) Proved area. The part of a property to which proved reserves have been specifically attributed.

(22) Proved oil and gas reserves. Proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the right to operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time.

(i) The area of the reservoir considered as proved includes:

(A) The area identified by drilling and limited by fluid contacts, if any, and

(B) Adjacent undrilled portions of the reservoir that can, with reasonable certainty, be judged to be continuous with it and to contain economically producible oil or gas on the basis of available geoscience and engineering data.

(ii) In the absence of data on fluid contacts, proved quantities in a reservoir are limited by the lowest known hydrocarbons (LKH) as seen in a well penetration unless geoscience, engineering, or performance data and reliable technology establishes a lower contact with reasonable certainty.

(iii) Where direct observation from well penetrations has defined a highest known oil (HKO) elevation and the potential exists for an associated gas cap, proved oil reserves may be assigned in the structurally higher portions of the reservoir only if geoscience, engineering, or performance data and reliable technology establish the higher contact with reasonable certainty.

(iv) Reserves which can be produced economically through application of improved recovery techniques (including, but not limited to, fluid injection) are included in the proved classification when: (A) Successful testing by a pilot project in an area of the reservoir with properties no more favorable than in the reservoir as a whole, the operation of an installed program in the reservoir or an analogous

Definitions - Page 4 of 6

 

DEFINITIONS OF OIL AND GAS RESERVES

Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

     reservoir, or other evidence using reliable technology establishes the reasonable certainty of the engineering analysis on which the project or program was based; and (B) The project has been approved for development by all necessary parties and entities, including governmental entities.

(v) Existing economic conditions include prices and costs at which economic producibility from a reservoir is to be determined. The price shall be the average price during the 12-month period prior to the ending date of the period covered by the report, determined as an unweighted arithmetic average of the first-day-of-the-month price for each month within such period, unless prices are defined by contractual arrangements, excluding escalations based upon future conditions.

(23) Proved properties. Properties with proved reserves.

(24) Reasonable certainty. If deterministic methods are used, reasonable certainty means a high degree of confidence that the quantities will be recovered. If probabilistic methods are used, there should be at least a 90% probability that the quantities actually recovered will equal or exceed the estimate. A high degree of confidence exists if the quantity is much more likely to be achieved than not, and, as changes due to increased availability of geoscience (geological, geophysical, and geochemical), engineering, and economic data are made to estimated ultimate recovery (EUR) with time, reasonably certain EUR is much more likely to increase or remain constant than to decrease.

(25) Reliable technology. Reliable technology is a grouping of one or more technologies (including computational methods) that has been field tested and has been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

(26) Reserves. Reserves are estimated remaining quantities of oil and gas and related substances anticipated to be economically producible, as of a given date, by application of development projects to known accumulations. In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production, installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.

Note to paragraph (a)(26): Reserves should not be assigned to adjacent reservoirs isolated by major, potentially sealing, faults until those reservoirs are penetrated and evaluated as economically producible. Reserves should not be assigned to areas that are clearly separated from a known accumulation by a non-productive reservoir (i.e., absence of reservoir, structurally low reservoir, or negative test results). Such areas may contain prospective resources (i.e., potentially recoverable resources from undiscovered accumulations).

Excerpted from the FASB Accounting Standards Codification Topic 932, Extractive Activities—Oil and Gas:

932-235-50-30 A standardized measure of discounted future net cash flows relating to an entity's interests in both of the following shall be disclosed as of the end of the year:

a. Proved oil and gas reserves (see paragraphs 932-235-50-3 through 50-11B)

b. Oil and gas subject to purchase under long-term supply, purchase, or similar agreements and contracts in which the entity participates in the operation of the properties on which the oil or gas is located or otherwise serves as the producer of those reserves (see paragraph 932-235-50-7).

The standardized measure of discounted future net cash flows relating to those two types of interests in reserves may be combined for reporting purposes.

932-235-50-31 All of the following information shall be disclosed in the aggregate and for each geographic area for which reserve quantities are disclosed in accordance with paragraphs 932-235-50-3 through 50-11B:

a. Future cash inflows. These shall be computed by applying prices used in estimating the entity's proved oil and gas reserves to the year-end quantities of those reserves. Future price changes shall be considered only to the extent provided by contractual arrangements in existence at year-end.

b. Future development and production costs. These costs shall be computed by estimating the expenditures to be incurred in developing and producing the proved oil and gas reserves at the end of the year, based on year-end costs and assuming continuation of existing economic conditions. If estimated development expenditures are significant, they shall be presented separately from estimated production costs.

c. Future income tax expenses. These expenses shall be computed by applying the appropriate year-end statutory tax rates, with consideration of future tax rates already legislated, to the future pretax net cash flows relating to the entity's proved oil and gas reserves, less the tax basis of the properties involved. The future income tax expenses shall give effect to tax deductions and tax credits and allowances relating to the entity's proved oil and gas reserves.

d. Future net cash flows. These amounts are the result of subtracting future development and production costs and future income tax expenses from future cash inflows.

Definitions - Page 5 of 6

 

DEFINITIONS OF OIL AND GAS RESERVES

Adapted from U.S. Securities and Exchange Commission Regulation S-X Section 210.4-10(a)

e. Discount. This amount shall be derived from using a discount rate of 10 percent a year to reflect the timing of the future net cash flows relating to proved oil and gas reserves.

f. Standardized measure of discounted future net cash flows. This amount is the future net cash flows less the computed discount.

(27) Reservoir. A porous and permeable underground formation containing a natural accumulation of producible oil and/or gas that is confined by impermeable rock or water barriers and is individual and separate from other reservoirs.

(28) Resources. Resources are quantities of oil and gas estimated to exist in naturally occurring accumulations. A portion of the resources may be estimated to be recoverable, and another portion may be considered to be unrecoverable. Resources include both discovered and undiscovered accumulations.

(29) Service well. A well drilled or completed for the purpose of supporting production in an existing field. Specific purposes of service wells include gas injection, water injection, steam injection, air injection, salt-water disposal, water supply for injection, observation, or injection for in-situ combustion.

(30) Stratigraphic test well. A stratigraphic test well is a drilling effort, geologically directed, to obtain information pertaining to a specific geologic condition. Such wells customarily are drilled without the intent of being completed for hydrocarbon production. The classification also includes tests identified as core tests and all types of expendable holes related to hydrocarbon exploration. Stratigraphic tests are classified as "exploratory type" if not drilled in a known area or "development type" if drilled in a known area.

(31) Undeveloped oil and gas reserves. Undeveloped oil and gas reserves are reserves of any category that are expected to be recovered from new wells on undrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.

(i) Reserves on undrilled acreage shall be limited to those directly offsetting development spacing areas that are reasonably certain of production when drilled, unless evidence using reliable technology exists that establishes reasonable certainty of economic producibility at greater distances.

(ii) Undrilled locations can be classified as having undeveloped reserves only if a development plan has been adopted indicating that they are scheduled to be drilled within five years, unless the specific circumstances, justify a longer time.

From the SEC's Compliance and Disclosure Interpretations (October 26, 2009):

Although several types of projects — such as constructing offshore platforms and development in urban areas, remote locations or environmentally sensitive locations — by their nature customarily take a longer time to develop and therefore often do justify longer time periods, this determination must always take into consideration all of the facts and circumstances. No particular type of project per se justifies a longer time period, and any extension beyond five years should be the exception, and not the rule.

Factors that a company should consider in determining whether or not circumstances justify recognizing reserves even though development may extend past five years include, but are not limited to, the following:

y The company's level of ongoing significant development activities in the area to be developed (for example, drilling only the minimum number of wells necessary to maintain the lease generally would not constitute significant development activities);

y The company's historical record at completing development of comparable long-term projects;

y The amount of time in which the company has maintained the leases, or booked the reserves, without significant development activities;

y The extent to which the company has followed a previously adopted development plan (for example, if a company has changed its development plan several times without taking significant steps to implement any of those plans, recognizing proved undeveloped reserves typically would not be appropriate); and

y The extent to which delays in development are caused by external factors related to the physical operating environment (for example, restrictions on development on Federal lands, but not obtaining government permits), rather than by internal factors (for example, shifting resources to develop properties with higher priority).

(iii) Under no circumstances shall estimates for undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual projects in the same reservoir or an analogous reservoir, as defined in paragraph (a)(2) of this section, or by other evidence using reliable technology establishing reasonable certainty.

(32) Unproved properties. Properties with no proved reserves.

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