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Empresa Distribuidora y Comercial Norte (EDN)

Filed: 6 Feb 13, 7:00pm


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

Form 20-F/A

AMENDMENT NO. 2 TO

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2011

Commission File number: 001-33422

Empresa Distribuidora y Comercializadora Norte S.A.
(Exact name of registrant as specified in its charter)
 
Distribution and Marketing Company of the North S.A.Argentine Republic
(Translation of registrant’s name into English)(Jurisdiction of incorporation or organization)
 
Avenida Del Libertador 6363
Ciudad de Buenos Aires, C1428ARG
Buenos Aires, Argentina
(Address of principal executive offices)
Leandro Montero
Tel.: +54 11 4346 5127 / Fax: +54 11 4346 5325
Avenida Del Libertador 6363 (C1428ARG)
Buenos Aires, Argentina
Investor Relations Officer
 
Securities registered or to be registered pursuant to Section 12(b) of the Act:
 
Title of each class:Name of each exchange on which registered
Class B Common SharesNew York Stock Exchange, Inc.*
American Depositary Shares, or ADSs, evidenced by American Depositary Receipts, each representing 20 Class B Common SharesNew York Stock Exchange, Inc.
*Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.
 

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

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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o No þ

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

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

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

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 o Accelerated filer þ Non-accelerated filer o

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

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 o Item 18 þ

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


 

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Index to Financial Statements F-1
 
 
 

 
 

This Amendment No.#2 to the Annual Report on Form 20-F of Empresa Distribuidora y Comercializadora Norte S.A. (“Edenor”) for the fiscal year ended December 31, 2011, as filed on April 26, 2012 (the “Original 20-F”) is being filed solely for the reason set forth below:
 
1.
 
 
To amend Item 5 (“Operating and financial review and Prospects”) to explain in further detail the basis behind Edenor’s assumption that increased electric tariff rates would be approved during 2013 in Edenor’s assessment of long-lived assets for impairment.
2.
To amend item 3 (“Key Information”) to revise the Selected Financial Data on page 5.  Figures have been revised to include the correct amounts where necessary and to break down the “Net loss per ADS – basic and diluted” item into “Net loss per ADS from continuing operations attributable to Edenor´s shareholders– basic and diluted” and “Net loss per ADS from discontinued operations attributable to Edenor´s shareholders– basic and diluted” to facilitate recalculation of related amounts.
3.
To file a complete amended Original 20-F with all of the items as required by Form 20-F, along with a currently dated and signed signature page and required certifications of the CEO and CFO filed as exhibits 12.1, 12.2 and 13.1 to this Amendment No. 2
We note that the Amended Original 20-F being filed as part of this Amendment No. 2 includes the revisions made pursuant the the Amendment No. 1 to the Original 20-F, which was filed on December 16, 2012.
 
Other than as set forth above, this Amendment No. 2 does not, and does not purport to, amend, update or restate the information in any other item, or exhibits to, the Original 20-F and should not be understood to mean that any other statements contained therein are true or complete as of any date subsequent to April 26, 2012.
 
 
1

 
 
PART I

Item 1.                Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2.                Offer Statistics and Expected Timetable

Not applicable.

Item 3.                Key Information

In this annual report, except as otherwise specified, references to “we”, “us”, “our” and “the Company” are references to (i) Empresa Distribuidora y Comercializadora Norte S.A., or “Edenor”, on a standalone basis prior to March 1, 2011, (ii) Edenor, Empresa Distribuidora Eléctrica Regional S.A. (“Emdersa”) and Aeseba S.A. (“Aeseba”) when references are made to information as of any date within the period between March 1, 2011 and December 31, 2011 and (iii) Edenor and Aeseba as of each date after December 31, 2011.  References to Edenor, Emdersa and/or Aeseba on a standalone basis are made by naming each company as the case may be.  Our financial statements as of December 31, 2011, include the financial data of Emdersa, Aeseba and Empresa Distribuidora Eléctrica Regional Holding S.A. (“Emdersa Holding”).  For more information, see “Item 4—Information on the Company—History and Development of the Company.”

FORWARD-LOOKING STATEMENTS

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

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

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

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

 ·electricity shortages;

 ·potential disruption or interruption of our service;

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

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

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

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

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

 ·the successful integration of Aeseba;

 ·our ability to access to financing under reasonable terms;
 
 
2

 
 
 ·the successful sale of Edelar and Edesa;  and

 ·additional matters identified in “Risk factors”.

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

SELECTED FINANCIAL DATA

The following table presents selected financial and operating data.  This information should be read in conjunction with our audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report.

The financial data as of December 31, 2011 and 2010 and for each of the three years in the period ended December 31, 2011 are derived from our audited consolidated financial statements, which were audited by Price Waterhouse & Co. S.R.L. (“PWC”), member firm of PricewaterhouseCoopers network, whose report dated April 26, 2012 is included elsewhere herein.  See Item 18 – “Financial Statements.”  We have prepared our annual financial statements for the fiscal year ended December 31, 2011 included herein, assuming that we will continue as a going concern. Our independent auditors, PWC, issued a report dated April 26, 2012 on our financial statements as of and for the years ended December 31, 2011 and 2010, which contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern.  As discussed in Notes 2 and 8.C to the financial statements, the delays in obtaining tariff increases, recognition of cost adjustments requested by the Company in accordance with the terms of the Adjustment Agreement  and the continuous increase in operating expenses have affected significantly the economic and financial position of the Company and have raised substantial doubt with respect to our ability to continue as a going concern.  Management's plans in response to these matters are also described in Note 2. However, our financial statements as of and for the year ended December 31, 2011 and 2010 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty.  See Item 3: “Key Information-Risk Factors - Risks Relating to Our Business - Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our tariff adjusted to reflect increases in our distribution costs in a timely manner, could have a material adverse effect on our capacity to perform our financial and commercial obligations. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern.” See Item 18: “Financial Statements.”

Our audited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in Argentina, which we refer to as Argentine GAAP and the regulations of the Comisión Nacional de Valores (National Securities Commission or CNV), which differ in certain significant respects from United States Generally Accepted Accounting Principles (U.S.GAAP).  Note 32 to our audited consolidated financial statements included elsewhere in this annual report provides a description of the significant differences between Argentine GAAP and U.S. GAAP, as they relate to us, and a reconciliation to United States GAAP of net (loss) income for the years then ended December 31, 2011, 2010 and 2009 and shareholders’ equity as of December 31, 2011 and 2010. In addition, note 29 to our audited consolidated financial statements included elsewhere in this annual report provides a reconciliation between Argentine GAAP and IFRS of shareholders’s equity as of January 1, 2011(transition date) and December 31, 2011 and of net (loss) for the year ended December 31, 2011.

Our financial statements as of December 31, 2011, include the financial data of Emdersa, Aeseba and Emdersa Holding.  The incorporation of Aeseba, including its subsidiary, Empresa Distribuidora de Energía Norte S.A., an electricity distribution company with the concession area in the northern part of the Province of Buenos Aires (“Eden”), was made on the basis of the general method of line item consolidation, which is established in Technical Resolution No. 21 issued by the Argentine Federation of Professional Councils in Economic Sciences (the “FACPCE”).  Furthermore, as of December 31, 2011, in accordance with the decision of the Board of Directors to divest and sell the subsidiaries of Emdersa and Emdersa Holding, including Empresa Distribuidora de San Luis S.A. (“Edesal”), Empresa Distribuidora de La Rioja S.A. (“Edelar”), Empresa Distribuidora de Salta S.A. (“Edesa”) and Emdersa Generación Salta S.A. (“Egssa”), we have classified these assets in the consolidated financial statements as of December 31, 2011 as “Other assets available for sale”.  The corresponding charges to results have been included line by line in our consolidated statements of operations for the year ended December 31, 2011.

 
3

 
 
In this annual report, except as otherwise specified, references to “$”, “U.S. $” and “Dollars” are to U.S. Dollars, and references to “Ps. ” and “Pesos” are to Argentine Pesos.  Solely for the convenience of the reader, Peso amounts as of and for the year ended December 31, 2011 have been translated into U.S. Dollars at the buying rate for U.S. Dollars quoted by Banco de la Nación Argentina (Banco Nación) on December 31, 2011 of Ps. 4.304 to U.S. $1.00.  The U.S. Dollar equivalent information should not be construed to imply that the Peso amounts represent, or could have been or could be converted into, U.S. Dollars at such rates or any other rate.  See “Item 3. Key Information—Exchange Rates.”

Under Argentine GAAP, we generally are not required to record the effects of inflation in our financial statements.  However, because Argentina experienced a high rate of inflation in 2002, with the wholesale price index increasing by approximately 118%, we were required by Decree No. 1269/2002 and CNV Resolution No. 415/2002 to restate our financial statements in constant Pesos in accordance with Argentine GAAP.  On March 25, 2003, Decree No. 664/2003 rescinded the requirement that financial statements be prepared in constant currency, effective for financial periods on or after March 1, 2003.  As a result, we are not required to restate and have not restated our financial statements for inflation after February 28, 2003.  See note 2 to our audited consolidated financial statements included in this annual report. In connection with the adoption of IFRS and in accordance with General Resolution No 562/09 of the CNV, we have elected to recognize a deferred tax liability related to the effect of inflation on the value of other fixed assets.  This adjustment has been recorded with impact in our accumulated deficit. At the 2012 shareholders’ meeting, we expect that our shareholders will resolve to reclassify this adjustment within equity, as required by the resolution of the CNV.
 
 
4

 
 
Certain figures included in this annual report have been subject to rounding adjustments.  Accordingly, figures shown as totals may not sum due to rounding.
 
                   
   2011(*)   2011(*)   2010  2009  2008   2007 
Statement of operations data (in millions, except for per share and per ADS data) 
Argentine GAAP                        
Net sales
 U.S.$828.3  Ps.  3,565.0  Ps.  2,173.6  Ps. 2,077.9  Ps. 2,000.2  Ps.
1,981.9
 
Electric power purchases
  (370.3)  (1,593.9)  (1,069.7)  (1,003.4)  (934.7)  (889.9)
Gross margin
  458.0   1,971.1   1,103.9   1,074.5   1,065.5   1,092.0 
Transmission and distribution expenses  (276.2)  (1,188.7)  (636.3)  (548.6)  (497.9)  (417.6)
Selling expenses
  (99.9)  (429.9)  (194.2)  (159.0)  (126.0)  (120.6)
Administrative expenses
  (75.1)  (323.4)  (178.9)  (144.0)  (138.7)  (124.7)
Subtotal
  6.7   29.0   94.5   222.9   302.9   429.2 
Gain (loss) in permanent investments                  
Negative Goodwill amortization (2)
  2.9   12.3             
Result from valuation of other assets available for sale at NRV (8)
  (17.4)  (75.0)    —          
Subtotal
  (7.8)  (33.7)  94.5   222.9   302.9   429.2 
Other (expenses) income , net
  (5.9)  (25.3)  (9.8)  23.3   (29.8)  1.0 
Financial income (expenses) and holding gains (losses):                        
Generated by assets:                        
Exchange difference
  4.2   18.0   7.4   21.4   8.1   (0.9)
Interest
  5.7   24.4   28.4   16.2   9.8   13.4 
Holding results
  (0.3)  (1.2)  (14.7)  37.6   (7.3)  0.1 
Taxes and sundry expenses(2)
  (7.0)  (30.1)  (16.0)  (13.4)      
Others  (0.6)  (2.4)            
Generated by liabilities:                        
Financial expenses
  (6.0)  (25.7)  (12.5)  (11.7)  (10.0)  (21.0)
Exchange difference
  (25.1)  (108.1)  (40.3)  (99.1)  (92.7)  (29.9)
Interest
  (44.1)  (189.7)  (91.3)  (87.7)  (95.3)  (74.5)
Taxes and sundry expenses(2)
  (5.7)  (24.7)  (21.1)  (19.2)      
Loss for debt restructuring
  (0.6)  (2.7)            
Others
  (0.5)  (2.2)            
Adjustment to present value of the retroactive tariff increase arising from the application of the new electricity rate schedule and other receivables(3)
    0.3   1.2   11.6   3.4   13.5   (29.6)
Adjustment to present value of notes(4)
        (4.2)  (5.2)  (8.5)  (21.5)
Gain (Loss) from the purchase of notes(5)
  1.5   6.5   (7.1)  81.5   93.5   (10.2)
Adjustment to present value of purchased notes(4)
    —        —         (8.6)
Results holdings in related companies  0.2   0.9             
(Loss) Income before taxes and minority interest  (91.7)  (394.7)  (75.2)  170.0   184.3   247.4 
Income tax
  (5.2)  (22.4)  26.1   (79.3)  (61.2)  (125.0)
Minority interest
  (4.2)  (18.2)            
Net (loss) income
 U.S.$(101.2)  Ps.(435.4)  Ps.(49.1)  Ps.  90.6  Ps. 123.1  Ps.
122.5
 
Net (loss) income per ordinary share – basic and diluted  (0.113)  (0.485)  (0.055)  0.101   0.137   0.135 
Dividends declared per ordinary share(6)
    —                
Net (loss) income per ADS(7) — basic and diluted
  (2.256)  (9.707)  (1.095)  2.020   2.745   2.702 
Number of shares outstanding  897,042,600   897,042,600   897,042,600   897,042,600   897,042,600   906,455,100 
                         
U.S. GAAP                        
Net sales/service revenues
 U.S.$662.9  Ps.2,853.2  Ps. 2,253.7  Ps. 2,163.3  Ps. 2,059.0  Ps.
1,937.0
 
Electric power purchases
  (311.7)  (1,341.6)  (1,069.7)  (1,003.4)  (934.7)  (889.9)
Transmission and distribution expenses  (259.7)  (1,117.8)  (731.8)  (624.0)  (577.0)  (477.5)
Gross margin
  91.5   393.9   452.1   535.9   547.3   569.6 
Operating expenses, net
  (31.7)  (136.5)  (372.4)  (294.7)  (296.6)  (207.5)
Net operating income (loss)
  59.8   257.3   79.7   241.3   250.7   362.1 
Financial (expense), net and holding gains  (54.9)  (236.4)  (134.7)  (75.0)  82.0   (46.5)
Net income (loss) before income taxes  4.9   20.9   (54.9)  166.3   332.7   315.7 
Income tax
  (37.3)  (160.6)  19.2   (93.2)  (68.2)  (99.9)
Less: Net gain from continued operations attributable to non-controlling interest  1.4   5.8             
Net (loss) income for the year
  (33.8)  (145.5)  (35.7)  73.1   264.5   215.8 
                         
Loss from discontinued operations before income tax and non-controlling interest  (37.3)  (160.4)            
                         
Income tax from discontinued operations  5.3   23.0             
Loss on discontinued operations attributable to Edenor shareholders’  (33.5)  (144.3)            
Less: Net gain on discontinued operations attributable to non-controlling interest  1.6   6.9             
Net (loss) income under US GAAP attributable to EDENOR shareholders’  (67.3)  (289.8)            
Net gain under US GAAP attributable to non-controlling interest  2.9   12.7             
Net (loss) Earning per ordinary share attributable to Edenor's shareholders from continued operations – basic and diluted
  (0.038)  (0.162)  (0.040)  0.081   0.295   0.238 
Loss per ordinary share attributable to Edenor's shareholders from discontinued operations – basic and diluted
  (0.037)  (0.161 )            
Net (loss) income per ADS attributable to Edenor's shareholders (7) from continued operations  — basic and diluted
  (0.754)  (3.245)  (0.796)  1.630   5.897   4.761 
                         
Net loss per ADS attributable to Edenor's shareholders (7) from discontinued operations — basic and diluted
  (0.747)  (3.217)            
 
 
 
5

 
 

(*)Consolidated financial data.
(1)Represents the amortization of the negative goodwill recognized as a result of the excess of the fair value of the assets acquired and liabilities assumed at the moment of the acquisition of Aeseba and Emdersa over the purchase price.
(2)For the years ended December 31, 2008 and 2007, taxes on financial transactions were included in administrative expenses.  For the years ended December 31, 2009, 2010 and 2011, taxes on financial transactions were included as a separate line item, as taxes and sundry expenses under financial income (expenses) and holding gains (losses) generated by assets and liabilities.
(3)
Reflects the adjustment to present value, as of December 31, 2011, of the retroactive portion of the tariff increase that was invoiced in 55 consecutive monthly installments, beginning in February 2007.  As of December 31, 2011, no amounts were due under this transaction. Also reflects, as of December 31, 2010,  the adjustment to present value of the retroactive portion of the tariff increase that was invoiced in 55 consecutive monthly installments, beginning in February 2007, and the adjustment to present value of Ps. 38.4 million due under the payment plan agreement with the Province of Buenos Aires that was invoiced in 18 installments, starting in January 2007.  As of December 31, 2010, no amounts were due under the payment plan agreement with the Province of Buenos Aires. As of December 31, 2009 and 2008, Ps. 2.3 million was due under the payment plan agreement with the Province of Buenos Aires and Ps. 21.4 million, Ps. 69.2 million and Ps. 118.8 million of the retroactive tariff increase had been invoiced in 2010, 2009 and 2008, respectively.  In accordance with Argentine GAAP, we account for these long term receivables at their net present value, which we calculate at a discount rate that reasonably reflects the market evaluation of the time value of money and specific risks, net of issuance expenses, for the retroactive tariff increase, recording the resulting non-cash charge as an adjustment to present value of this receivable.  See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—)Tariffs.”
(4)We record our financial debt in our balance sheet at fair value reflecting our management’s best estimate of the amounts expected to be paid at each year end, calculated at a discount rate that reasonably reflects the market evaluation of the time value of money and specific risks, net of issuance expenses, for the years ended December 31, 2011, 2010, 2009, 2008 and 2007.
(5)In 2007, we repurchased U.S. $43.7 million principal amount of our outstanding Fixed Rate Par Notes due 2016 and redeemed and repurchased U.S. $240 million principal amount of our outstanding Discount Notes due 2014. In the years ended December 31, 2008, 2009 and 2010, we repurchased U.S. $32.5 million, U.S. $32.2 million and U.S. $15.3 million principal amount of our outstanding Fixed Rate Par Notes due 2016, respectively, and U.S. $17.5 million, U.S. $53.8 million and U.S. $123.9 million principal amount of our outstanding Senior Notes due 2017, respectively. In addition, in the year ended December 31, 2011, we repurchased U.S. $12.7 million and U.S. $41.5 million principal amount of our outstanding Senior Notes due 2019 and Senior Notes due 2022, respectively. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Debt.”
(6)Edenor have not declared or paid any dividends since August 14, 2001.
(7)Each ADS represents 20 Class B common shares.
(8)As of December 31, 2011, corresponds to investments in EMDERSA and EMDERSA HOLDING that have been valued at their estimated realizable value, which is lower than their equity value.

 
6

 
 
  2011(*) 2011(*)  2010  2009  2008  2007 
  (in millions) 
Balance sheet data                        
Argentine GAAP                        
Current assets:                        
Cash and banks
 U.S.$ 5.4  Ps.  23.4  Ps.8.6  Ps. 8.7  Ps. 6.1  Ps. 3.5 
Investments
  25.5   109.5   668.2   219.7   121.0   97.7 
Trade receivables
  124.2   534.7   421.2   389.2   400.5   346.0 
Other receivables
  56.9   244.9   43.4   61.1   42.8   26.0 
Supplies
  5.3   22.9   12.4   14.9   16.7   23.2 
Other assets available for sale  50.3   216.5             
Total current assets
 U.S.$ 267.7  Ps. 
1,152.0
  Ps. 
1,153.8
  Ps. 
693.6
  Ps. 
587.1
  Ps. 
496.3
 
Non-current assets:                        
Trade receivables
  10.6   45.7   45.5   87.0   111.4   100.3 
Other receivables
  16.4   70.7   14.8   88.8   99.5   144.1 
Investments in other companies  0.1   0.4   0.4   0.4   0.4   0.4 
Investments
              67.2    
Supplies
  6.2   26.9   23.2   18.6   12.8   13.8 
Property, plant and equipment  1,100.9   4,738.3   3,689.5   3,482.4   3,256.3   3,092.7 
Goodwill
  (67.3)  (289.6)            
Total non-current assets U.S.$ 1,067.0  Ps. 
4,592.4
  Ps. 
3,773.5
  Ps. 
3,677.2
  Ps. 
3,547.6
  Ps. 
3,351.3
 
Total assets
 U.S.$ 1,334.7  Ps. 
5,744.4
  Ps. 
4,927.3
  Ps. 
 4,370.7
  Ps. 
4,134.6
  Ps. 
3,847.6
 
Current liabilities:                        
Trade accounts payable
  153.0   658.3   378.5   347.8   339.3   316.2 
Loans
  13.7   59.0   54.1   83.0   27.2   29.3 
Salaries and social
security taxes
  66.7   287.1   180.4   118.4   94.8   59.9 
Taxes
  39.3   169.0   111.1   140.3   111.0   84.6 
Other liabilities
  33.6   144.8   4.5   8.0   10.5   9.7 
Accrued litigation
  2.4   10.3   57.8   62.8   52.8   39.9 
Total current liabilities
 U.S.$ 308.7  Ps. 
1,328.6
  Ps. 
786.5
  Ps. 
 760.3
  Ps. 
635.6
  Ps. 
539.6
 
Non-current liabilities:                        
Trade accounts payable
  12.6   54.3   51.0   46.9   40.2   35.5 
Loans
  276.5   1,189.9   1,035.1   707.5   913.1   949.1 
Salaries and social security taxes  16.2   69.5   50.6   43.7   40.1   24.7 
Taxes
  67.6   290.9   262.8   9.4   0   0 
Other liabilities(1) 
  319.2   1,373.7   984.5   610.8   369.0   281.4 
Accrued litigation
  15.4   66.1   6.8   10.1   45.1   42.8 
Total non-current liabilities  707.4   3,044.5   2,390.9   1,428.3   1,407.5   1,333.5 
Total liabilities
 U.S.$ 1,016.0  Ps. 
4,373.0
  Ps. 
3,177.4
  Ps. 
 2,188.5
  Ps. 
2,043.1
  Ps. 
1,873.0
 
Minority interest
  13.2   56.9             
Shareholders’ equity
  305.4   1,314.5   1,749.9   2,182.2   2,091.6   1,974.6 
Total liabilities and shareholders’ equity U.S.$ 1,334.7  Ps. 
5,744.4
  Ps.
4,927.3
  Ps. 
 4,370.7
  Ps. 
4,134.6
  Ps. 
3,847.6
 
                         
U.S. GAAP                        
Current assets
 U.S.$ 217.4  Ps.  935.5  Ps. 1,155.4  Ps. 703.3  Ps. 666.7  Ps. 536.7 
Property, plant and equipment, net  1,114.9   4,798.4   3,754.6   3,552.4   3,331.2   3,175.7 
Other non-current assets  52.0   223.7   274.6   260.4   258.4   346.6 
Assets of disposal groups classified as held for sale  264.6   1,138.8             
Total assets
 U.S.$1,648.8  Ps. 
7,096.4
  Ps. 
5,184.6
  Ps. 
4,516.1
  Ps. 
4,256.3
  Ps. 
4,059.0
 
Current liabilities
 $U.S. 308.7  Ps.  1,328.6  Ps. 818.1  Ps. 790.9  Ps. 707.5  Ps. 573.7 
Non-current liabilities
  772.5   3,324.7   2,598.5   1,923.8   1,821.6   2,018.2 
Liabilities of disposal groups classified as held for sale  214.3   922.2             
Total liabilities
  1,295.4   5,575.5   3,416.6   2,714.7   2,529.1   2,591.9 
Shareholders’ equity
  353.4   1,520.9   1,768.0   1,801.4   1,727.2   1,467.1 
Total liabilities and shareholders’ equity $U.S. 1,648.8  Ps. 
 7,096.4
  Ps. 
5,184.6
  Ps. 
4,516.1
  Ps. 
4,256.3
  Ps. 
4,059.0
 
 

(*)Consolidated financial data.
(1)Includes the amounts collected through the Program for the Rational Use of Electricity Power (PUREE), which as of December 31, 2011, 2010, 2009 and 2008 amounted to Ps. 928.7 million, Ps. 529.1 million, Ps. 233.3 million and Ps. 33.5 million, respectively.  For the year ended December 31, 2011, Ps. 61.6 million correspond to PUREE funds collected by Aeseba, included under current liabilities, and Ps. 867.1 million correspond to PUREE funds collected by Edenor, included under non-current liabilities. Edenor is permitted to retain funds from the PUREE that it would otherwise be required to transfer to CAMMESA according to Resolution SS.EE. 1037/07.
 
 
7

 
 
  2011  2011  2010  2009  2008  2007 
  (in millions)
Cash flow data                        
Argentine GAAP                        
Operating activities:                        
Net (loss) income
 U.S.$(101.2)  Ps. (435.4)  Ps. (49.1)  Ps. 90.6  Ps. 123.1  Ps.122.5 
Adjustment to reconcile net (loss) income to net cash flows provided by (used in) operating activities:                   
Depreciation of property, plant and equipment  58.6   252.2   178.4   175.4   170.3   174.4 
Retirement of property, plant and equipment  5.1   22.0   1.1   2.8   1.9   1.1 
Gain from the sale of real property        (5.3)         
Gain from investments in affiliated parties  (0.2)  (0.9)  0         (0.1)
Negative Goodwill amortization
  (2.9)  (12.3)            
                         
(Gain) Loss from investments
  (10.4)  (44.8)  (55.7)  26.4   (4.3)  (8.5)
Adjustment to present value of notes        4.2   5.2   8.5   21.5 
Loss (Gain) from the purchase and redemption of notes  (1.5)  (6.5)  7.1   (81.5)  (93.5)  10.2 
Loss for debt restructuring
  0.6   2.7             
Adjustment to present value of the repurchased and redeemed notes                 8.6 
Results from valuation of other assets available for sale at NRV  17.4   75.0             
Exchange differences, interest and penalties on loans  71.3   306.8   49.5   178.6   232.7   69.5 
Increase in trade receivables due to the unbilled portion of the retroactive tariff increase                 (171.3)
Recovery of the accrual for tax contingencies           (35.6)      
Income tax
  (5.2)  22.4   (26.1)  79.3   61.2   125.0 
Allowance for doubtful accounts  8.8   37.9   16.3   13.5   17.1    
Reversal of the allowance for doubtful accounts           (27.0)  (24.0)   
Allowance for other doubtful accounts  0.3   1.5   4.9   3.3   1.7    
Results holdings in related companies  4.2   18.2             
Adjustment to net present value of the retroactive tariff increase arising from the application of the new electricity rate schedule and of the Payment Plan Agreement with the Province of Buenos Aires  (0.3)  (1.2)  (11.6)  (3.4)  (13.5)  29.6 
Changes in operating assets and liabilities:                        
(Increase) decrease  in trade receivables (net of the unbilled portion of the retroactive tariff increase)  (36.5)  (157.2)  0.2   48.1   (49.5)  (36.9)
Net (increase) decrease in other receivables  (60.2)  (258.9)  (0.3)  5.3   (33.4)  (8.4)
(Increase) decrease in supplies
  (3.5)  (15.2)  (2.2)  (3.9)  7.4   (18.4)
Increase in other available for sale assets  (67.7)  (291.6)            
Increase in trade accounts payable
  65.8   283.2   34.9   15.2   27.8   52.7 
Increase in salaries and social security taxes  29.2   125.6   69.0   27.2   50.3   12.9 
Increase (decrease) in taxes
  14.8   63.5   (45.8)  (56.9)  26.4   22.5 
Increase in other liabilities
  39.0   167.8   74.5   39.3   78.1   17.7 
Increase in funds obtained from the Program for the Rational Use of Electric Power (PUREE)(1)
  92.8   399.6   295.8   199.8       
Net increase (decrease) in accrued litigation  2.8   11.8   (8.2)  10.6   15.1   16.2 
Financial interest paid, net of interest capitalized  (24.7)  (106.2)  (64.9)  (76.8)  (62.7)  (25.5)
Financial and commercial interest collected  12.0   51.5   60.2   32.2   6.9   11.6 
Net cash flow provided by operating
activities
  118.9   511.8   526.9   668.0   547.5   427.2 
Investing activities:                        
Additions of property, plant and equipment  (151.8)  (653.4)  (388.8)  (404.2)  (325.4)  (336.9)
Acquisition of permanent investments  (131.9)  (567.6)            
Cash increase due to the acquisition of permanent investments  27.7   119.0             
Collection of other investments sold  29.4   126.7              
Collection of PPE sold        7.4          
Net cash flow used in investing activities  (226.6)  (975.2)  (381.3)  (404.2)  (325.4)  (336.9)
Financing activities:                        
Decrease (increase) in current and non-current investments           13.6   (67.9)   
Net (decrease) increase  in loans
  (18.8)  (81.1)  302.9   (175.5)  (122.9)  (203.6)
Capital increase
                 181.8 
Increase in minority interest  9.0   38.6             
Treasury shares purchased
              (6.1)   
Payment of dividends (2) 
  (8.8)  (38.0)            
Net cash flows (used in) provided by  financing
activities
  (18.7)  (80.4)  302.9   (161.8)  (197.0)  (21.8)
Cash variations:                        
Cash and cash equivalents at beginning of year U.S.$ 157.3  Ps. 676.8  Ps. 228.4  Ps. 126.4  Ps. 101.2  Ps. 32.7 
Cash and cash equivalents at end of the year  30.9   133.0   676.8   228.4   126.4   101.2 
Net (decrease) increase  in cash and cash equivalents  (126.4)  (543.9)  448.5   102.0   25.2   68.5 
 

(1)For the year ended December 31, 2008, funds obtained from the PUREE were included under “Increase in other liabilities”.
(2)Corresponds to dividend payments declared by Aeseba before it was acquired by Edenor.
 
 
8

 
 
  Year ended December 31, 
    
   2011 2010  2009   2008   2007 
  Edenor  
Aeseba (1)
  Emdersa (1)             
Operating data                     
Energy sales (in GWh):                     
Residential
  8,139   619   1,390   7,796   7,344   7,545   7,148 
Small commercial
  1,601   227      1,543   1,470   1,530   1,485 
Medium commercial
  1,700   104   1,191   1,634   1,565   1,597   1,552 
Industrial
  3,442   807   385   3,378   3,204   3,277   3,628 
Wheeling system(2) 
  4,156   291   699   3,891   3,622   3,700   3,111 
Others:                            
Public lighting
  656   80   189   654   644   644   643 
Shantytowns
  384   657      377   351   304   301 
Others(3) 
  20   6      20   20   19   18 
Customers (in thousands)(4) 
  2,699   340   550   2,662   2,605   2,537   2,490 
Energy losses (%)
  12.6%  10.4%  11.2%  12.5%  11.9%  10.8%  11.6%
MWh sold per employee
  7,188.1   3,771.2   9,421.5   7,123.9   6,936.1   7,392.8   7,230.6 
Customers per employee
  965   460   1,345   971   978   997   998 
 

(1)           Financial data and other operating information for the year ended December 31, 2011 may not be representative of the results recorded  in our Consolidated financial statements for the year ended December 31, 2011, which includes financial information of Emdersa and Aeseba for the period commencing March 1, 2011 and ended December 31, 2011.
(2)           Wheeling system charges represent our tariffs for large users, which consist of a fixed charge for recognized technical losses and a charge for our distribution margins but exclude charges for electric power purchases, which are undertaken directly between generators and large users.
(3)           Represents energy consumed internally by us and our facilities.
(4)           We define a customer as one meter.  We may supply more than one consumer through a single meter.  In particular, because we measure our energy sales to each shantytown collectively using a single meter, each shantytown is counted as a single customer.
 
 
9

 
 
EXCHANGE RATES

From April 1, 1991 until the end of 2001, the Convertibility Law established a fixed exchange rate under which the Central Bank was obliged to sell U.S. Dollars at a fixed rate of one Peso per U.S. Dollar (the “Convertibility Regime”).  On January 6, 2002, the Argentine Congress enacted the Public Emergency Law, formally putting an end to the regime of the Convertibility Regime and abandoning over ten years of U.S. Dollar-Peso parity.  The Public Emergency Law grants the executive branch of the Argentine government the power to set the exchange rate between the Peso and foreign currencies and to issue regulations related to the foreign exchange market.  The Public Emergency law has been extended until December 31, 2013.  For a brief period following the end of the Convertibility Regime, the Public Emergency Law established a temporary dual exchange rate system.  Since February 2002, the Peso has been allowed to float freely against other currencies.

The following table sets forth the annual high, low, average and period-end exchange rates for U.S. Dollars for the periods indicated, expressed in Pesos per U.S. Dollar at the purchasing exchange rate and not adjusted for inflation.  When preparing our financial statements, we utilize the selling exchange rates for U.S. Dollars quoted by Banco Nación to translate our U.S. Dollar denominated assets and liabilities into Pesos.  The Federal Reserve Bank of New York does not report a noon buying rate for Pesos.
 
  
Low
 
High
 
Average
 
Period End
  (Pesos per U.S. Dollar) 
Year ended December 31,            
2007
  3.06   3.18   3.12(1)  3.15 
2008
  3.01   3.47   3.16(1)  3.45 
2009
  3.45   3.88   3.73(1)  3.80 
2010  3.79   3.99   3.91(1)  3.98 
2011  3.97   4.30   4.13(1)  4.30 
                 
Month                
January 2012
  4.30   4.34   4.321(2)  4.34 
February 2012
  4.33   4.36   4.35(2)  4.36 
March 2012
  4.34   4.38   4.36(2)  4.38 
April 2012(3) 
  4.38   4.41   4.40(4)  4.41 
 

Source : Banco Nación
(1)           Represents the average of the exchange rates on the last day of each month during the period.
(2)           Average of the lowest and highest daily rates in the month.
(3)           Represents the corresponding exchange rates from April 1 through April 24, 2012.
(4)           Represents the average of the lowest and highest daily rates from April 1 through April 24, 2012.
 
 
10

 
 
RISK FACTORS

Risks Related to Argentina

Overview

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

The global financial crisis and unfavorable credit and market conditions that commenced in 2007 may negatively affect our liquidity, customers, business, and results of operations

The ongoing effects of the global credit crisis and related turmoil in the global financial system may have a negative impact on our business, financial condition and results of operations, an impact that is likely to be more severe on an emerging market economy, such as Argentina.  The effect of this economic crisis on our customers and on us cannot be predicted.  Weak economic conditions could lead to reduced demand for energy, which could have a negative effect on our revenues.  Economic factors such as unemployment, inflation levels and the availability of credit could also have a material adverse effect on demand for energy and therefore on our financial condition and operating results. In addition, our ability to access the credit or capital markets may be restricted at a time when we would need financing, which could have an impact on our flexibility to react to changing economic and business conditions.  For these reasons, any of the foregoing factors or a combination of these factors could have an adverse effect on our results of operations and financial condition and cause the market value of our ADSs and Class B common shares to decline.

Argentina’s economic recovery since the 2001 economic crisis may not be sustainable in light of current economic conditions, and any significant decline could adversely affect our financial condition

During 2001 and 2002, Argentina went through a period of severe political, economic and social crisis.  Although the economy has recovered significantly since the 2001 crisis, uncertainty remains as to the sustainability of economic growth and stability.  After the significant slowdown in the Argentine economy in 2009, which started in the last quarter of 2008 and continued into much of 2009 (impacted by the largest global crisis in decades and negative domestic factors), the Argentine economy experienced a growth of about 0.9% and during 2009 and 2010, respectively, according to preliminary official public estimates.  Similarly, during 2011, the Argentine economy registered a growth of 8.9%.  However, uncertainty remains about the sustainability of this growth.  Sustainable economic growth is dependent on a variety of factors, including international demand for Argentine exports, the stability and competitiveness of the Peso against foreign currencies, confidence among consumers and foreign and domestic investors and a stable rate of inflation.

The Argentine economy remains fragile, as reflected by the following economic conditions:
 
 
11

 
 
 ·the availability of long-term credit is scarce;

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

 ·fiscal surplus shows a steady decline, with risk of becoming a fiscal deficit in the near term;

 ·public debt remains high, as payments have increased (in line with post-default payment terms), while international financing remains limited;

 ·inflation has accelerated recently and threatens to continue at levels that risk economic stability;

 ·the regulatory environment continues to be uncertain;

 ·controls to exchange Pesos into foreign currencies or to transfer funds abroad continue to increase;

 ·the recovery 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; and

 ·the trade balance surplus (and the fiscal surplus, to a lesser extent) is largely dependent on the production of grains and soybeans, such that risk to economic stability is magnified by the possibility of a new major drought affecting these crops (as was the case in 2008 and 2009).

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 maintain price stability, generate growth and enhance consumer and investor confidence. This, in turn, could lead to decreased demand for our services as well as a decrease in collection rates from customers and increased energy losses due to illegal use of our services, which could materially adversely affect our financial condition and results of operations, or cause the market value of our ADSs and Class B common shares to decline.  Furthermore, the Argentine government could respond to a lack of economic growth or stability by adopting measures that affect private sector enterprises, as it has done in the past, including the tariff restrictions imposed on public utility companies such as several of our subsidiaries.

We cannot assure you that a decline in economic growth or increased economic instability, developments over which we have no control, would not have an adverse effect on our business, financial condition or results of operations or would not have a negative impact on the market value of our ADSs and Class B common shares.

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

Inflation has, in the past, materially undermined the Argentine economy and the Argentine government’s ability to create conditions that permit growth. According to data published by the Instituto Nacional de Estadística y Censos (National Statistics and Census Institute or INDEC), the rate of inflation reached 9.5% in 2011, 10.9% in 2010 and 7.7% in 2009. Inflation rates reported by several Argentine provinces on average refer to annual rates of inflation significantly in excess of those published by INDEC.  Average inflation in the 11 provinces that publish independent inflation data was 14.2%, 23.8% and 20% for 2009, 2010 and 2011, respectively. The Argentine government has implemented programs to control inflation and monitor prices for essential goods and services, including price support arrangements agreed between the Argentine government and private sector companies in several industries and markets.

A return to a high inflation environment would undermine Argentina’s foreign competitiveness by diluting the effects of the Peso devaluation, negatively impact the level of economic activity and employment and undermine confidence in Argentina’s banking system, which could further limit the availability of domestic and international credit to businesses.  In turn, a portion of the Argentine debt is adjusted by the Coeficiente de Estabilización de Referencia (Stabilization Coefficient or CER), a currency index, that is strongly related to inflation.  Therefore, any significant increase in inflation would cause an increase in the Argentine external debt and consequently in Argentina’s financial obligations, which could exacerbate the stress on the Argentine economy.  A high inflation environment could also temporarily undermine our results of operations if we are temporarily unable, or if we are not able at all, to adjust our tariffs accordingly and could adversely affect our ability to finance the working capital needs of our businesses on favorable terms, and adversely affect our results of operations and cause the market value of our ADSs and Class B common shares to decline.

 
12

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

In January 2007, INDEC modified its methodology used to calculate the consumer price index (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.  Further, at the time that INDEC adopted this change in methodology, the Argentine government also replaced certain key personnel at INDEC.  The alleged governmental interference prompted complaints from the technical staff at INDEC, which, in turn, has led to the initiation of several judicial investigations involving members of the Argentine government aimed at determining whether there was a breach of classified statistical information relating to the collection of data used in the calculation of the CPI.  These events have affected the credibility of the CPI index published by INDEC, as well as other indexes published by INDEC the calculation of which are based on the CPI, including poverty rates, the unemployment rate and the calculation of the GDP, among others.  As a result, the inflation rate of Argentina and the other rates calculated by INDEC could be higher than as indicated in official reports. The International Monetary Fund is currently providing technical assistance to the Argentine government to improve the calculation and collection of inflation data. If these investigations result in a finding that the methodologies used to calculate the CPI or other INDEC indexes derived from the CPI were manipulated by the Argentine government, or if it is determined that it is necessary to correct the CPI and the other INDEC indexes derived from the CPI as a result of the methodology used by INDEC, there could be a significant decrease in confidence in the Argentine economy.  Given the limited credit available to emerging market nations as a result of the global economic crisis, our ability to access credit in the capital markets could be limited by the uncertainty relating to the inaccuracy of the economic indexes and rates in question which could adversely affect our results of operations and financial conditions and cause the market value of our ADSs and Class B common shares to decline.

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

In 2005, Argentina restructured part of its sovereign debt that had been in default since the end of 2001.  The Argentine government announced that as a result of this restructuring, it had approximately U.S. $129.2 billion in total gross public debt as of December 31, 2005.  Certain bondholders that did not participate in that restructuring, mainly from the United States, Italy and Germany, have filed legal actions against Argentina to collect on the defaulted bonds.  Many of these proceedings are still pending as of this date and holdout creditors may initiate new suits in the future.

On January 3, 2006, Argentina repaid in full its debt of approximately U.S. $9.8 billion with the International Monetary Fund.

In September 2008, Argentina announced its intention to cancel its external public debt to Paris Club creditor nations using reserves of the Central Bank in an amount equal to approximately U.S. $6.5 billion.  However, as of the date of this annual report, the Argentine government has not yet cancelled such debt.  Indeed, negotiations in this respect remain stagnant.  If no agreement with the Paris Club creditor nations is reached, financing from multilateral financial institutions may be limited or not available, which could adversely affect economic growth in Argentina and Argentina’s public finances.

Certain groups of holders that did not participate in the 2005 restructuring have filed claims against Argentina and it is possible that new claims will be filed in the future.  In addition, foreign shareholders of several Argentine companies have filed claims before the ICSID (International Centre for Settlement of Investment Disputes) alleging that certain government measures adopted during the country’s 2001 crisis were inconsistent with the fair and equitable treatment standards set forth in various bilateral investment treaties to which Argentina is a party.  Since May 2005, the ICSID tribunals have issued several awards against Argentina.  Only the cases “CMS v. Argentina”, “Azurix v. Argentina” and “Vivendi v. Argentina” are currently final and unappealable, which decisions required that the Argentine government pay U.S. $133.2 million, U.S. $165.2 million and U.S. $105 million, respectively.  As of the date of this annual report, Argentina has not yet paid the amounts referred to above.
 
 
13

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

Argentina’s past default and its failure to restructure completely its remaining sovereign debt and fully negotiate with the holdout creditors may limit Argentina’s ability to reenter the international capital markets.  Litigation initiated by holdout creditors as well as ICSID claims have resulted and may continue to result in judgments and awards against the Argentine government which, if not paid, could prevent Argentina from obtaining credit from multilateral organizations.  Judgment creditors have sought and may continue to seek to attach or enjoin assets of Argentina.  In addition, various creditors have organized themselves into associations to engage in lobbying and public relations concerning Argentina’s default on its public indebtedness.  Such groups have over the years unsuccessfully urged passage of federal and New York state legislation directed at Argentina’s defaulted debt and aimed at limiting Argentina’s access to the U.S. capital markets.  Although neither the United States Congress nor the New York state legislature has adopted such legislation, we can make no assurance that legislation or other political actions designed to limit Argentina’s access to capital markets will not take effect.

In April 2010, a Court of New York granted an attachment over reserves of the Argentine Central Bank in the United States requested by creditors of Argentina on the theory that the Central Bank was its alter ego.  In July 2011, an appeals court reversed that ruling, stating that the assets of the Central Bank were protected by law.  Plaintiffs have petitioned the United States Supreme Court to review the appeals court decision and, as of the date of this annual report, the United States Supreme Court has not ruled if it will hear the case.

As a result of Argentina’s default and the events that have followed it, the Argentine government may not have the financial resources necessary to implement reforms and foster economic growth, which, in turn, could have a material adverse effect on the country’s economy and, consequently, our businesses and results of operations.  Furthermore, Argentina’s inability to obtain credit in international markets could have a direct impact on our own ability to access international credit markets to finance our operations and growth, which could adversely affect our results of operations and financial condition and cause the market value of our ADSs and Class B common shares to decline.

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

The devaluation of the Peso in 2002 (a 238% decline against the U.S. Dollar) had a far-reaching negative impact on the financial condition of many businesses and individuals.  The devaluation of the Peso had a negative impact on the ability of Argentine businesses to honor their foreign currency-denominated debt, led to very high inflation initially, significantly reduced real wages, had a negative impact on businesses whose success is dependent on domestic market demand, including public utilities and the financial industry, and adversely affected the Argentine government’s ability to honor its foreign debt obligations.  If the Peso devalues significantly, the negative effects on the Argentine economy could have adverse consequences to our businesses, our results of operations and the market value of our ADSs.

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

 
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Measures taken by the Argentine government to address social unrest may adversely affect the Argentine economy and our business and results of operations

During the economic crisis in 2001 and 2002, Argentina experienced social and political turmoil, including civil unrest, riots, looting, nationwide protests, strikes and street demonstrations.  Despite the economic recovery and relative stability since 2002, social and political tensions and high levels of poverty and unemployment continue.  Future government policies to preempt, or respond to, social unrest may include expropriation, nationalization, forced renegotiation or modification of existing contracts, suspension of the enforcement of creditors’ rights and shareholders’ rights, new taxation policies, including royalty and tax increases and retroactive tax claims, and changes in laws, regulations and policies affecting foreign trade and investment.  These policies or significant protests resulting therefrom could destabilize the country and adversely and materially affect the Argentine economy.

In March 2008, the Argentine Ministry of Economy and Production announced the adoption of new taxes on exports of a number of agricultural products.  The taxes were to be calculated at incremental rates as the price for the exported products increased, and represented a significant increase in taxes on exports by the agricultural sector in Argentina.  The adoption of these taxes met significant opposition from various political and economic groups with ties to the Argentine agricultural sector, including strikes by agricultural producers around the country, roadblocks to prevent the circulation of agricultural goods within Argentina and massive demonstrations in the City of Buenos Aires and other major Argentine cities.  Although the Argentine congress did not pass these measures, we cannot assure you that the Argentine government will not reintroduce new export taxes or adopt other similar measures.  In addition, further social unrest caused by such measures that could adversely affect the Argentine economy, increased damages to our networks as a result of protesters or illicit activity, which could have a material adverse effect on our financial condition, results of operations and the market value of our ADSs.

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

In 2001 and 2002, Argentina experienced a massive withdrawal of deposits from the Argentine financial system in a short period of time, which precipitated a liquidity crisis within the Argentine financial system and prompted the Argentine government to impose exchange controls and restrictions on the ability of depositors to withdraw their deposits and send funds abroad in an attempt to prevent capital flight and further depreciation of the Argentine Peso. Although some of these restrictions have been suspended, terminated or substantially relaxed, in June 2005 the Argentine government adopted various rules and regulations that established new restrictive controls on capital inflows into the country, including a requirement that for certain funds remitted into Argentina an amount equal to 30% of the funds must be deposited into an account with a local financial institution as a U.S. Dollar deposit for a one-year period without any accrual of interest, benefit or other use as collateral for any transaction. Since October 2011, the Argentine government has strengthened certain restrictions on the sale of foreign currency to non residents in connection with the repatriation of direct investments, and on the creation of foreign assets belonging to residents. See “Exchange Rates” and “Item 10. Exchange Controls.” The Argentine government could impose new exchange controls or restrictions on the movement of capital and take other measures that could limit our ability to access the international capital markets and impair our ability to make interest or principal payments abroad or payments.  Argentina may re-impose exchange controls, transfer restrictions or other measures in the future in response to capital flight or a significant depreciation of the Peso.

In the event of a future shock, such as the failure of one or more banks or a crisis in depositor confidence, the Argentine government could impose further exchange controls or transfer restrictions and take other measures that could lead to renewed political and social tensions and undermine the Argentine government’s public finances, which could adversely affect Argentina’s economy and prospects for economic growth, which, in turn, could adversely affect our business and results of operations and the market value of our ADSs.  In addition, the Argentine government or the Central Bank may reenact certain restrictions on the transfers of funds abroad, impairing our ability to make dividend payments to holders of the ADSs, which may adversely affect the market value of our ADSs.  As of the date of this annual report, however, the transfer of funds abroad to pay dividends is permitted to the extent such dividend payments are made in connection with audited financial statements approved by a shareholders’ meeting.

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

In recent years a significant portion of the local demand for securities of Argentine companies came from the Argentine private pension funds. In response to the global economic crisis, in December 2008, by means of Argentine Law No. 26,425, the Argentine Congress unified the Argentine pension and retirement system into a system publicly administered by the Administración Nacional de la Seguridad Social (National Social Security Agency or ANSES), eliminating the pension and retirement system previously administered by private managers. In accordance with the new law, private pension managers transferred all of the assets administered by them under the pension and retirement system to the ANSES. With the nationalization of Argentina’s private pension funds, the local capital markets decreased in size and became substantially concentrated. In addition, the Argentine government became a significant shareholder in many of the country’s public companies. In April 2011, the Argentine government lifted certain restrictions pursuant to which ANSES was prevented from exercising more than 5% of its voting rights in any stock exchange listed company (regardless of the equity interest held by ANSES in such companies). ANSES has publicly stated that it intends to exercise its voting rights in excess of such 5% limit in order to appoint directors in different stock exchange listed companies in which it holds an interest exceeding 5%. ANSES’ interests may differ from those of other investors, and consequently, if ANSES acquires a more prevailing role in any Argentine listed companies in which it owns shares, ANSES’ actions might have an adverse effect on such companies and, to a certain extent, on domestic capital markets. As of the date of this annual report ANSES owns shares representing 20.96% of the capital stock of our subsidiary Emdersa and 25.3% of the capital stock of Edenor.

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

The Argentine economy could be adversely affected by economic developments in other global markets

Argentine financial and securities markets are influenced, to varying degrees, by economic and financial conditions in other markets.  Although economic conditions can vary from country to country, investors’ perception of the events occurring in one country may 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, Argentina may be affected by events in the economies of its major regional trading partners, including, for example, currency devaluations caused by the global economic crisis that continue to affect it.

Also, the Argentine economy might be affected by occurring events in developed countries that are its commercial partners or which may have an impact on the global economy.  In addition, the global financial crisis that commenced in the last quarter of 2008 has affected and may continue to negatively affect the economies of several countries around the world including Argentina and certain of its trading partners. Developed economies like the United States have sustained some of the most severe effects while some emerging economies like that of China and Brazil have suffered comparatively milder effects. More recently, several European countries, such as Ireland, Greece, Portugal, Spain, the United Kingdom and Italy, have revealed significant macroeconomic imbalances. In addition, on August 5, 2011, Standard & Poor’s Financial Services LLC downgraded the debt instruments issued by the United States and on January 13, 2012, Standard & Poor’s Rating Services downgraded the instruments of nine European countries including France and Italy. Financial markets have reacted adversely curtailing the ability of certain of these countries to refinance their outstanding debt. The impact of this crisis on Argentina could include a reduction in exports and foreign direct investment, a decline in national tax revenues and an inability to access international capital markets, which could adversely affect our business, results of operations and the market value of our ADSs. The realization of any or all of these risk factors, as well as events that may arise in the main regional partners, including members of Mercosur, could have a material adverse effect on the Argentine economy and, indirectly, on our business, financial condition and results of operations and the market value of our ADSs.

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

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

Risks Relating to the Electricity Distribution Sector

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

To address the Argentine economic crisis 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 distribution companies and included the freezing of distribution margins, the revocation of adjustment and inflation indexation mechanisms for tariffs and a limitation on charging our customers the increases of certain regulatory charges.  In addition, a new price-setting mechanism was introduced in the wholesale electricity market, which had a significant impact on electricity generators and has led to significant price mismatches between participants in our market.  The Argentine government continues to intervene in this sector, including granting temporary margin increases, proposing a new social tariff regime for residents of poverty-stricken areas, creating specific charges to raise funds that are transferred to government-managed trust funds that finance investments in distribution infrastructure and mandating investments for the construction of new generation plants and the expansion of existing transmission and distribution networks.

Furthermore, on November 15, 2011, the Secretary of Energy issued Note No.8752/11 (“Note 8752”), which provided that any approval by the provincial governments of increases to the electricity tariffs applicable to end-users as of November 1, 2011 will trigger a proportionate decrease in the federal subsidy available to that end-user in connection with the purchase of electricity. Since the issuance of Note 8752, certain provincial governments have initiated legal proceedings to challenge the jurisdiction of the Secretary of Energy to issue Note 8752, particularly because of the potential chilling effect that this regulation may have on the ability of the provincial governments to increase electricity tariffs. These proceedings have not been resolved as of the date of this annual report.

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

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

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

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

During the 2001 and 2002 economic crisis, electricity demand in Argentina decreased due to the decline in the overall level of economic activity and the deterioration in the ability of many consumers to pay their electricity bills.  In the years following the 2001 and 2002 economic crisis electricity demand experienced significant growth, increasing at an estimated average of approximately 5.0% per annum from 2003 through 2011.  This increase in demand reflects the relative low cost, in real terms, of electricity to consumers due to the freeze of distribution margins and the elimination of the inflation adjustment provisions in distribution concessions coupled with the devaluation of the Peso and inflation.  The executive branch of the Argentine government granted temporary increases in distribution margins, and we are currently negotiating further increases and adjustments to our tariff schemes with the Argentine government. Although the recent increases in 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 for electricity granted to certain customers that are presumably in a position to face its real cost. These measures are currently in an early stage of implementation and we cannot ascertain as of the date of this report what the effect on our revenues could be. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting our Results of Operations—Recognition of Cost of Electric Power Purchases.” However, we cannot assure you that these measures or any future measures (including increases on tariffs for residential users) will not lead distribution companies, such as 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 we experience continued energy shortages in the face of growing demand for electricity, our ability to deliver electricity to our customers could be adversely affected, which could result in customer claims, material penalties and decreased results of operations

In recent years, the condition of the Argentine electricity market has provided little incentive to generators to further invest in increasing their generation capacity, which would require material long-term financial commitments.  As a result, Argentine electricity generators are currently operating at near full capacity and may not be able to guarantee the supply of electricity to distribution companies, such as us, which, in turn, could limit the ability of these companies, including us, to provide electricity to customers, and could lead to a decline in growth of such companies.  Under Argentine law, distribution companies, such as us, are responsible to their customers for any disruption in the supply of electricity.  To date, the Argentine authorities have not been called upon to decide under which conditions energy shortages may constitute force majeure.  In the past, however, the Argentine authorities have taken a restrictive view of force majeure and have recognized the existence of force majeure only in limited circumstances, such as internal malfunctions at the customer’s facilities, extraordinary meteorological events (such as major storms) and third-party work in public thoroughfares.  As a result, we could face customer claims and fines and penalties for service disruptions caused by energy shortages unless the relevant Argentine authorities determine that energy shortages constitute force majeure, which claims, fines and penalties could have a materially adverse effect on our financial condition and results of operations, and cause the market value of our ADSs and Class B common shares to decline.

 
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Risks Relating to Our Business

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

We are currently engaged in RTI with the ENRE, as required by the agreement entered into with the Argentine government in February 2006 relating to the adjustment and renegotiation of the terms of our concession (the “Adjustment Agreement”) but the timeline for completing this process and the favorability to us of the final resolution are both uncertain.

The Adjustment Agreement currently contemplates a cost adjustment mechanism for the transition period during which the RTI is being conducted.  This mechanism, known as the Cost Monitoring Mechanism (CMM), requires the ENRE to review our actual distribution costs every six months (in May and November of each year) and adjust our distribution margins to reflect variations of 5% or more in our distribution cost base.  We may also request that the ENRE apply the CMM at any time that the variation in our distribution cost base is at least 10% or more.  Any adjustments, however, are subject to the ENRE’s assessment of variations in our costs, and we cannot guarantee that the ENRE will approve adjustments that are sufficient to cover our actual incremental costs.  In the past, even when the ENRE has approved adjustments to our tariffs, there has been a lag between when we actually experience increases in our distribution costs and when we receive increased revenues following the corresponding adjustments to our distribution margins pursuant to the CMM.  Despite the adjustment we were granted under the CMM in October 2007 and July 2008, we cannot assure you that we will receive similar adjustments in the future. As of the date of this annual report we have requested eight increases under the CMM beginning in May 2008, which increases are still being reviewed by the ENRE. Under the terms of the Adjustment Agreement, these eight increases should have been approved in May 2008, November 2008, May 2009, November 2009, May 2010, November 2010, May 2011 and November 2011.

During the year ended December 31, 2011, we recorded a significant decrease in net income and operating income, and our working capital and liquidity levels were negatively affected, primarily as a result of the delay in obtaining a tariff increase and in having our tariff adjusted to reflect increases in our distribution costs, coupled with a constant increase in operating costs to maintain adequate service levels.

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

We have prepared our annual financial statements for the fiscal year ended December 31, 2011 included herein, assuming that we will continue as a going concern. Our independent auditors, PWC, issued a report dated April 26, 2012 on our financial statements as of and for the years ended December 31, 2011 and 2010, which contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern.  As discussed in Notes 2 and 8.c to the financial statements, the delays in obtaining tariff increases, recognition of cost adjustments requested by the Company in accordance with the terms of the Adjustment Agreement  and the continuous increase in operating expenses have affected significantly the economic and financial position of the Company and have raised substantial doubt with respect to our ability to continue as a going concern.  Management's plans in response to these matters are also described in Note 2. However, our financial statements as of and for the year ended December 31, 2011 and 2010 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty.  See Item 18: “Financial Statements.”

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

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

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

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

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

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

Our concession does not allow us to pass through to our customers the cost of additional energy purchased to cover any energy losses that exceed the loss factor contemplated by our concession, which is, on average, 10%.  As a result, if we experience energy losses in excess of those contemplated by our concession, we may record lower operating profits than we anticipate.  Prior to the 2001 and 2002 economic crisis, we had been able to reduce the high level of energy losses experienced at the time of the privatization to the levels contemplated (and reimbursed) under our concession.  However, during the 2001 and 2002 economic crisis and during the years ended December 31, 2009 and 2010, our level of energy losses, particularly our non-technical losses, started to grow again, in part as a result of the increase in poverty levels and, with it, the number of delinquent accounts and fraud. Although we have been able to reduce energy losses in recent periods, these losses continue to exceed the 10% average loss factor in the concession, and based on the current economic turmoil, we do not expect these losses to decrease in the near term.  Our energy losses amounted to 12.6% in 2011, 12.5% in 2010, 11.9% in 2009 and 10.8% in 2008.  We cannot assure you that our energy losses will not increase again in future periods, which may lead us to have lower margins and could adversely affect our financial condition, our results of operations and the market value of our ADSs.

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

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

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

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

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

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

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

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

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

In 2011, the fines and penalties imposed on us by the ENRE amounted to Ps. 81.1 million, which represented 3.6% of our energy sales.  See “Item 4. Information on the Company —Our Concession—Fines and Penalties.”

If the Argentine government were to foreclose on the pledge of our Class A common shares, pending the sale of those shares, the Argentine government would also have the right to exercise the voting rights associated with such shares.  In addition, the foreclosure by the Argentine government on the pledge of our Class A common shares may be deemed to constitute a change of control under the terms of our Senior Notes issued in October 2007, October 2010 and April 2011, which would require us to offer to repurchase all such debt at its face value.  We cannot assure you that we will have sufficient funds or access to financing to effect such repurchases.  If the Argentine government forecloses on the pledge of our Class A common shares, our results of operations and financial condition could be significantly affected and the market value of our ADSs could be affected too.

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

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

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

As of December 31, 2011, approximately 82% of our employees were union members.  Although our relations with unions are currently stable and we have had an agreement in place with the two unions representing our employees since 1995, we cannot assure you that we will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and revenues, especially in light of the social tensions generated in Argentina by the economic crisis.  We cannot assure you that we will be able to negotiate salary agreements on the same terms as those currently in effect, or that we will not be subject to strikes or work stoppages before or during the negotiation process.  If we are unable to negotiate salary agreements or if we are subject to strikes or work stoppages, our results of operations, financial condition and the market value of our ADSs could be materially adversely affected.

As of December 31, 2011, approximately 84% of Eden employees were union members.

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

We outsource a number of activities related to our business to third party contractors in order to maintain a flexible cost base.  As of December 31, 2011, we had approximately 2,796 third-party employees under contract.  Although we have very strict policies regarding compliance with labor and social security obligations by our contractors, we are not in a position to ensure that contractors’ employees will not initiate legal actions to seek indemnification from us based upon a number of judicial rulings issued by labor courts in Argentina recognizing joint and several liability between 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 our outsourcing, such liability could have an adverse effect on our financial condition, our results of operations and the market value of our ADSs.

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

Our revenues are collected in Pesos pursuant to tariffs that are not indexed to the U.S. Dollar, while a significant portion of our existing financial indebtedness is denominated in U.S. Dollars, which exposes us to the risk of loss from devaluation of the Peso.  We currently seek to hedge this risk in part by converting a portion of our excess cash denominated in Pesos into U.S. Dollars and investing those funds outside Argentina, as permitted by applicable Argentine Central Bank regulations and entering in currency forward contracts, but we continue to have substantial exposure to the U.S. Dollar.  We cannot assure you that the Argentine government will continue to allow us to access the market to acquire U.S. Dollars in the manner we have done so to date.  Although we may also seek to enter into further hedging transactions to cover all or a part of our remaining exposure, we have not been able to hedge all of our exposure to the U.S. Dollar on terms we consider viable for our company.  If we continue to be unable to effectively hedge all or a significant portion of our currency risk exposure, a devaluation of the Peso may significantly increase our debt service burden, which, in turn, may have a material adverse effect on our financial condition and results of operations.

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

As of December 31, 2011, our physical assets were insured for up to U.S. $734.4 million.  However, we do not carry insurance coverage for losses caused by our network or business interruption, including loss of our concession. See “Item 4.  Information on the Company—Our Business—Insurance.”  Although we believe our insurance coverage is commensurate with standards for the distribution industry, no assurance can be given of the existence or sufficiency of risk coverage for any particular risk or loss. If an accident or other event occurs that is not covered by our current insurance policies, we may experience material losses or have to disburse significant amounts from our own funds, which may have a material adverse effect on our net profits and our overall financial condition and on the market value of our ADSs.

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

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

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

In July 2006, EASA completed a comprehensive restructuring of all of its outstanding financial indebtedness, which had been in default since 2002.  In connection with this restructuring, EASA issued approximately U.S. $85.3 million in U.S. Dollar-denominated notes in exchange for the cancellation of approximately 99.94% of its outstanding financial debt.  Since EASA’s ability to meet its debt service obligations under these notes depends largely on our ability to pay dividends or make distributions or payments to EASA, our failure to do so could result in EASA becoming subject to actions by its creditors, including the attachment of EASA’s assets and petitions for involuntary bankruptcy proceedings.  If EASA’s creditors were to attach our Class A common shares held by EASA, the Argentine government would have the right under our concession to foreclose on the pledge of our Class A common shares held by the Argentine government, which would trigger a repurchase obligation under the terms of our restructured debt and our Senior Notes issued in October 2007, October 2010 and April 2011, and have a material adverse effect on our results of operations and financial condition.

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

Although our concession grants us the exclusive right to distribute electric energy within our service area, this exclusivity may be revoked in whole or in part if technological developments 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, which could have a material adverse effect on our financial condition, our results of operations and the market value of our ADSs.

 
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Our acquisition of Emdersa and Aeseba and the subsequent divestiture of the subsidiaries of Emdersa are subject to perfunctory approval by the Argentine Antitrust Commission and, in some cases, by the ENRE and Edenor may fail to realize the anticipated benefits of the acquisitions and divestitures, and the integration of these companies with our distribution operations may present significant challenges.

In March 2011, we acquired Emdersa and Aeseba and several related companies, which are now our subsidiaries.  Since then, we have decided to divest the subsidiaries of Emdersa.  These acquisitions and divestitures are subject to perfunctory approval by the Argentine Antitrust Commission and, in some cases, by the ENRE.  Although we have submitted all required documentation to the Argentine Antitrust Commission and to the ENRE, we cannot assure you that the Argentine Antitrust Commission or ENRE, as applicable, will authorize such acquisitions and, therefore, the acquisitions may be revoked or the divestitures may never be perfected if the relevant approvals are not granted.

In addition, we may face significant challenges in integrating Aeseba’s operations and streamlining procedures in a timely and efficient manner while retaining key personnel from the acquired company. The integration of the assets of Aeseba will be costly, complex and time-consuming, and will require substantial management attention.  These costs could be greater than we currently anticipate, which could reduce our profitability.  The integration of this business could also disrupt the operation of our current business and Aeseba’s existing business, or result in additional administrative procedures or regulatory oversight. It could also adversely affect our and Aeseba’s ability to maintain relationships with customers, suppliers, employees and others with whom we may have business dealings.  If we were to incur significant integration cost overruns or if the proposed integration would materially disrupt our existing business, this could have an adverse effect on our financial condition, our results of operations and the market value of our ADSs.

Because our financial statements are prepared under Argentine GAAP, which differs from US GAAP and IFRS with respect to corporate disclosure and accounting rules, information about us may not be as detailed or comprehensive as that of companies reporting under US GAAP or IFRS, including that of companies in the United States

Our financial statements are prepared in Pesos and in accordance with Argentine GAAP. Our financial statements under Argentine GAAP may not provide you with the information you would have received if our financial statements were prepared under U.S. GAAP or under IFRS.  Publicly available information about public companies in Argentina is generally less detailed and not as frequently updated as the information that is regularly published by or about listed companies in the United States or European markets.  Furthermore, there is a less extensive regulation of the Argentine securities markets and of the activities of the investors in these markets as compared to the securities markets in the United States, European markets and certain other international financial markets.  Argentine GAAP differs in certain significant respects from U.S. GAAP, SEC rules and regulations, and IFRS.

The Company is obligated to adopt IFRS as from the fiscal year beginning on January 1, 2012.  See “Item 5. Operating and Financial Review and Prospects—Critical Accounting Policies—Adoption of IFRS.”  On April 27, 2010, the Company’s Board of Directors approved a specific implementation plan pursuant to the CNV’s General Resolution No. 562/09.  The first annual and quarterly financial statements prepared by the Company pursuant to IFRS will be those corresponding to the year ended December 31, 2012 and the quarterly period ended March 31, 2012, respectively. As of the date of this annual report, the Company has reached certain preliminary conclusions regarding the principal impacts of the implementation of IFRS by the Company. The effects of the adoption of IFRS and the reconciliations between the Argentine GAAP and IFRS are included in note 22 to the audited consolidated financial statements.

 
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Risks relating to ADSs and our Class B common shares

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

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

Our ability to pay dividends is limited

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

Our shareholders’ ability to receive cash dividends may be limited

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

 
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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 corporations law to protect their interests relative to actions by our board of directors may be fewer and less well-defined than under the laws of those other jurisdictions.  Although insider trading and price manipulation are illegal under Argentine law, the Argentine securities markets are not as highly regulated or supervised as the U.S. securities markets or markets in some other jurisdictions.  In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well-defined and enforced in Argentina that in the United States, putting holders of our common shares and ADSs at a potential disadvantage.

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

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

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.

Item 4.                Information on the Company

HISTORY AND DEVELOPMENT OF THE COMPANY

Empresa Distribuidora y Comercializadora Norte S.A., or Edenor, is a public service company incorporated as a sociedad anónima (limited liability corporation) under the laws of Argentina.  Our principal executive offices are located at Avenida del Libertador 6363, Ciudad de Buenos Aires, C1428ARG, Argentina, and our general telephone number at this location is +54 11 4346 5000.
 
 
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We were incorporated on July 21, 1992, under the name Empresa Distribuidora Norte Sociedad Anónima,  as part of the privatization of the Argentine state-owned electricity utility, Servicios Eléctricos del Gran Buenos Aires S.A. (SEGBA).  In anticipation of its privatization, SEGBA was divided into three electricity distribution companies, including our company, and four electricity generation companies, and on May 14, 1992, the Argentine Ministry of Economy and Public Works and Utilities (currently the Ministry of Economy and Public Finance) approved the public sale of all of our company’s Class A common shares, representing 51% of the capital stock of our company.

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

In June 1996, our shareholders approved the change of our name to Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR S.A.) to more accurately reflect the description of our core business.  The amendment to our by–laws related to our name change was approved by the ENRE and registered with the Public Registry of Commerce in 1997.

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

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

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

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

 
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On November 20, 2008, the Argentine congress passed a law unifying the Argentine pension and retirement system into a system publicly administered by the ANSES and eliminating the retirement savings system previously administered by private pension funds under the supervision of a governmental agency. In accordance with the new law, private pension funds transferred all of the assets administered by them under the retirement savings system to the ANSES.  As of the date of this annual report, ANSES held 229,125,205 of our Class B common shares, representing 25.3% of our capital stock.

Acquisition of Emdersa and Aeseba

On January 19, 2011, our indirect controlling shareholder, Pampa Energía, agreed to acquire, directly or through one or more designees, from certain subsidiaries of AEI, the following assets:

 (i)77.19% of the outstanding capital stock of Emdersa, a company engaged in the distribution of electricity in the Argentine provinces of San Luis, La Rioja and Salta through its subsidiaries Edesal, Edesa, and in the generation of electricity through its subsidiary Egssa; and

 (ii)99.99% of the outstanding capital stock of Aeseba, an electric utility company, which owns 90% of the outstanding capital stock of Eden.

In addition, Pampa Energía agreed to acquire from AEI 0.01% of the outstanding capital stock of Edesal, 0.02% of the outstanding capital stock of Egssa and 0.01% of the outstanding capital stock of Edelar, which were each held directly by AEI and its subsidiaries (other than Emdersa).

Pursuant to the terms of the sale of the shares described above, on February 25, 2011, Pampa Energía made us an offer, which we accepted on March 4, 2011, to purchase the shares described above, and on March 4, 2011, we purchased the shares (other than shares representing approximately 0.01% of the outstanding capital stock of Aeseba, which Pampa Energía purchased) for a total purchase price of U.S. $140.0 million. The transaction also involved the assignment to certain affiliates of Pampa Energía of certain rights that AEI had over Aeseba, Eden and Emdersa and its subsidiaries.

In addition, if within three years from March 4, 2011 (the purchase date), we sell all or part of such shares, Pampa Energía will have the right to receive from us a payment equal to 50% of the value we receive from the sale of any such shares in excess of the price paid to AEI for any such shares.

As of the date of this annual report, we have taken action to divest some of the assets described above.  In order to effect the purported divestiture, on August 23, 2011, Emdersa’s Board of Directors decided to convene an extraordinary general shareholders’ meeting, which was held on December 16, 2011, to consider (subject to approval by the relevant administrative authorities) the spin-off of certain assets and liabilities of Emdersa and the incorporation of three new companies, whose main assets will be the shares owned by Emdersa in Edesal, Edesa and Eggsa, respectively. Emdersa’s shareholders’ meeting held on December 16, 2011 recessed until January 13, 2012, when the shareholders approved the special spin-off financial statements for the period ended September 30, 2011, the spin-off of the assets and the incorporation of the companies referred to above, the share exchange relationship, the amount of shares of the three holding companies to be incorporated, which shall be delivered to Emdersa’s shareholders in exchange for the tendering of their shares in Emdersa, and the spin-off prospectus. Further, Emdersa’s shareholders approved the by-laws of the abovementioned new holding companies and the corresponding capital reduction of Emdersa from Ps.236,066,302 to Ps.60,975,926.

On September 16, 2011, our Board of Directors accepted an offer from Rovella Carranza S.A. (“Rovella”) to purchase from us shares representing 78.44% of the shares and votes of a company with an investment purpose, which shall own 99.99% of the shares and votes in Edesal.  The offer additionally included an offer to purchase 0.01% of the shares of Edesal owned by us.  In order to implement this transaction, we committed to cause Emdersa to partially spin-off certain assets related to Emdersa’s equity interests in Edesal, and pursuant to which three new holding companies will be incorporated, one of which (“Edesal Holding”) will be the holder of 99.99% of the share capital and votes of Edesal.  On October 25, 2011, we transferred to Rovella shares representing 24.8% of the capital stock and votes of Emdersa and shares representing 0.01% of the capital stock and votes of Edesal.
 
 
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Rovella, in turn, transferred such shares of Emdersa and Edesal to a collateral trust created by the parties and Deutsche Bank S.A., as trustee.  Once the spin-off process is finalized, Edesal Holding will issue 78.44% of its shares to the trustee of the collateral trust, who, in turn, will transfer those shares to Rovella, along with the 0.01% shares of Edesal, and will simultaneously transfer the shares of Emdersa back to us.  If within two years from the acceptance of the offer, Emdersa’s spin off has not been completed and Edesal Holding has not been incorporated, the trustee of the collateral trust will transfer to Rovella, as an alternative consideration, 24.80% of the capital stock and voting rights of Emdersa, and we will maintain a 53.77% ownership of Emdersa’s capital stock and voting rights. The agreement between the parties also contemplates matters related to the corporate governance and conduct of the business of Edesal pending completion of the transaction.

Furthermore, on September 16, 2011, our Board of Directors accepted an offer from Andes Energía Argentina S.A. to acquire from us an option to: (a) if the spin-off of Emdersa is completed within two years, acquire 78.44% of the share capital that we hold indirectly in Edelar, and (b) if the spin-off of Emdersa is not completed within two years, acquire 20.27% of the capital stock and voting rights that we will hold indirectly in Emdersa.  In order to implement this transaction, we will contribute 53.77% of the share capital and votes of Emdersa to a new company to be incorporated (“Emdersa Holding”), through which the transfer of shares of Emdersa in favor of Andes Energía Argentina S.A. will take place.  On the call option exercise date and upon completion of the transaction described in this paragraph, the capital stock subject to this transaction will be transferred to a collateral trust to be created in order to secure compliance of the parties’ obligations, while maintaining our control in Emdersa. On December 15, 2011, our Board of Directors approved an amendment to the terms and conditions of the offer letter from Andes Energía Argentina S.A., modifying certain matters relating to payments owed by Andes Energía Argentina S.A. Further, on December 29, 2011 the call option exercise date and payment due date were extended until June 30, 2012. The agreement between the parties also contemplates matters related to the corporate governance and conduct of the business of Edelar pending completion of the transaction.

On October 11, 2011, our Board of Directors accepted a further offer letter from Pampa Energía to acquire, by means of a stock purchase subject to a condition precedent, shares representing 78.44% of the capital stock and votes of an investment company to be incorporated as a result of the spin-off of  Emdersa (“Egssa Holding”), which company will be the owner of (a) 99.99% of the capital stock and votes of Egssa, and (b) 0.01% of the capital stock of Egssa owned by us. Such stock purchase is subject to the condition precedent that the spin-off resolved by the Board of Directors of Emdersa on August 23, 2011 be consummated within 24 months as of the date of acceptance of the offer made by Pampa Energía. Within 5 days as of the consummation of such spin-off, we will transfer the shares to Pampa Energía in legal form and free from liens, and Pampa Energía will, in turn, pledge such shares for our benefit as security for the full payment of the outstanding purchase price. Beginning on the date of initial payment of the purchase price and until its full payment by Pampa Energía, the members of the board of directors of EGSSA shall be appointed both by us and Pampa Energía.  In case the above condition precedent is not satisfied, the amount corresponding to the initial price payment shall be reimbursed to Pampa Energía within 5 days therefrom, plus an annual 6% interest that will be calculated as of the date of such initial payment until the date of effective payment thereof.

Edesa Sale Agreement

On April 19, 2012, Edenor accepted an Offer Letter from Salta Inversiones Eléctricas S.A. (“SIESA”), pursuant to which the latter submitted to Edenor and Emdersa HOLDING a proposal to acquire, by means of a stock purchase, shares representing 78.44% of the capital stock and votes of an investment company to be incorporated as a result of the spin-off of EMDERSA under the name of “EDESA HOLDING”, which company will be the owner of (i) 90% of the capital stock and votes of EDESA, which in turn owns 99.99% of Empresa de Sistemas Eléctricos Dispersos S.A. (“Esed”) and (ii) 0.01% of the capital stock of Esed.  Such stock purchase is subject to certain condition precedent, including but not limited to, the consummation of the spin-off resolved by the Board of Directors of EMDERSA on August 23, 2011.  In order to implement this transaction, Emdersa HOLDING will transfer to SIESA shares of EMDERSA and as of May 5, 2012, EMDERSA and SIESA will transfer their shares in Emdersa HOLDING to a collateral trust to be created in order to secure compliance of the parties’ obligations under the Offer Letter.  The shares to be transferred to the collateral trust will be returned to Emdersa HOLDING once the spin-off is completed and the EDESA Holding shares transferred to SIESA.  Additionally, as of May 5, 2012, SIESA offers to (i) cause EDESA to cancel certain loan agreements granted by Edenor for an amount of Ps. 131,319,500 plus accrued interest, (ii) release EMDERSA of the guarantee granted to EDESA for an amount of Ps. 55,250,000 in respect of a loan agreement granted by certain banks to EDESA and other subsidiaries of EMDERSA; and (iii) cause EDESA to cancel, when due, certain notes issued on November 2010 for an outstanding amount of Ps. 3,8 million.  The price to be paid for the EDESA HOLDING shares is U.S.$ 18 million to be paid as follows: (i) U.S.$ 15 million as of May 5, 2012; (ii) the remaining U.S.$ 3 million in five equal and consecutive annual installments at an interest rate of LIBOR plus 2% with the first one due on May 5, 2013.

 
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Emdersa and its Subsidiaries

Emdersa, through Edesal, Edelar and Edesa, supplies electricity to a service area with a population of approximately 2.0 million that encompasses approximately 124,000 square miles in the Provinces of San Luis, La Rioja and Salta, respectively.  As of December 31, 2011, Emdersa had approximately 550,193 customers and sold approximately 3,155 GWh of electricity in 2011.  Edesa also owns 99.99% of Empresa de Sistemas Eléctricos Dispersos (“Esed”), an electricity generation and distribution company that supplies energy to customers in remote areas of the Province of Salta through the utilization of photovoltaic solar panels.  In addition, Emdersa’s subsidiary EGSSA obtained in 2008 the approval from the Argentine Secretary of Energy to act as agent of the Wholesale Electricity Market.  Egssa is located in the northeastern part of the Province of Salta, and commenced its operations in the second half of 2010.  Emdersa is a public company, whose shares are traded on the Buenos Aires Stock Exchange under the symbol “Emdehr”. Emdersa owns 99.9% of the capital stock of each of Edesal, Edelar and Egssa, and 90.0% of the capital stock of Edesa.  The remaining 10.0% of Edesa was retained by the government of the Province of Salta for use in an Employee Stock Participation Program, though the provincial government owns all of such share as of the date of this annual report.  Our acquisition of Emdersa is still pending antitrust approval.

Edesal, Edelar and Edesa hold an exclusive long-term renewable concession granted by the relevant regulators of the Provinces of San Luis, La Rioja and Salta, respectively.  Edesal’s concession agreement is divided into several administrative periods, the first of which lasted 15 years and expired in 2008, followed by eight successive ten-year periods, the next of which will expire in 2018.  At the end of each such period a competitive bid process for the sale of a minimum of 51% of the share capital of Edesal will take place.  We can participate in the bidding and will only be required to sell and transfer control of our interest in Edesal if there is a higher bid, in which case we will receive the amount bid by such bidder.  Following such auction, a new ten-year concession will be granted to Edesal at the end of which the auction process would be held again.  Edelar’s concession is divided similarly with an initial period of 15 years (which expired in 2010) followed by eight successive ten-year periods with a competitive bidding process at the end of each period which follows the same process described for Edesal.  As of the date of this annual report, the competitive bidding process with respect to Edelar has not yet taken place.  Edesa’s concession has an initial period of 20 years (which will expire in 2016) followed by two successive 15-year periods with a competitive bidding process at the end of each period which follows the same process described for Edesal and Edelar.

Tariffs for Argentine electricity distribution companies are periodically reviewed by the regulators within the service area in which the concession is located.   Edesal, Edelar and Edesa generally have RTIs every five years.  Edesal’s and Edesa’s tariffs are currently under an RTI process, and Edelar’s tariffs were last reviewed in an RTI in 2008.  Under their current tariff schemes, the tariffs are designed to provide for a pass-through to customers of the main variable cost items (mainly power purchase costs and transmission charges), recovery of reasonable operating and administrative costs, incentives to reduce costs and make required capital investments and a regulated rate of return on their regulated asset base.  Tariffs are also adjusted every 6 or 12 months for inflation of fixed costs and to pass-through adjustments to variable costs.  Edesal, Edelar and Edesa have been granted adjustments to their tariffs periodically to reflect increases in costs.

 
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The tables below summarize energy sales information regarding Edesal, Edelar and Edesa, solely on the basis of public information filed by Emdersa in Argentina.

Edesal’s Energy Sales
 
  Year ended December 31, 
    
  2011  2010  2009 
  (in MWh, except percentages) 
Residential
  352,000   26.3%  340,247   26.9%  311,543   26.8%
Commercial
  120,000   9.0%  109,978   8.7%  104,680   9.0%
Public lighting
  63,000   4.7%  61,300   4.8%  60,964   5.2%
Large users
  402,000   30.0%  394,681   31.2%  361,799   31.1%
Industrial (Grandes Usuarios del MEM)
  401,470   30.0%  358,772   28.4%  325,218   27.9%
Total
  1,338,470   100.0%  1,264,978   100.0%  1,164,204   100.0%
 
 
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EDELAR’s Energy Sales
 
  Year ended December 31,  
    
  2011  2010  2009 
  (in MWh, except percentages) 
Residential
  363,278   34.7%  353,009   33.9%  315,057   33.3%
Commercial
  90,577   8.6%  88,646   8.5%  83,911   8.9%
Public lighting
  37,926   3.6%  36,758   3.5%  37,586   4.0%
Large users
  359,627   34.3%  350,723   33.7%  316,184   33.5%
Industrial (Grandes Usuarios del MEM)
  196,841   18.8%  219,994   20.4%  192,215   20.3%
Total
  1,048,249   100.0%  1,042,130   100.0%  944,953   100.0%
 
EDESA’s Energy Sales Year ended December 31,  
    
  2011  2010  2009 
  (in MWh, except percentages) 
Residential
  682,165��  46.0%  645,717   45.6%  593,074   44.9%
Commercial
  176,054   11.9%  172,839   12.2%  157,502   11.9%
Public lighting
  89,116   6.0%  88,187   6.2%  90,443   6.8%
Large users
  435,608   29.4%  413,962   29.2%  381,289   28.9%
Industrial (Grandes Usuarios del MEM)
  100,430   6.8%  95,720   6.8%  99,010   7.5%
Total
  1,483,373   100.0%  1,416,425   100.0%  1.321.318   100.0%
 
The tables below summarize certain key financial information regarding Emdersa and its subsidiaries, solely on the basis of Emdersa’s public securities filings in Argentina.
 
Consolidated Income Statement: Year ended December 31, 
  
2011(1)
  
2010(1)
  2009 
  (in millions) 
             
Net sales U.S.$ 202.5  Ps.  871.4  Ps.  740.1  Ps.  648.8 
Cost of sales  (119.7)  (515.4)  (441.0)  (387.2)
Gross profit  82.7   356.0   299.1   261.6 
Administrative, selling and other expenses  (53.1)  (228.3)  (177.2)  (140.1)
Other operating income (or costs)  5.8   25.1   20.4   17.4 
Operating income  35.5   152.7   142.5   138.8 
Financial and holding results  (20.8)  (89.6)  (67.4)  (79.0)
Goodwill           (0.3)
Other income or costs  (0.3)  (1.3)  3.7   3.5 
Gain from investments in related companies  0.2   0.9       
Income before income taxes and minority interest  14.6   62.8   78.8   63.1 
Minority interest  (0.3)  (1.2)  (1.6)  (0.5)
Income tax expenses  (4.5)  (19.3)  (27.6)  (24.1)
Income for the year U.S.$ 9.8  Ps.  42.2  Ps.  49.6  Ps.  38.5 
 

(1)  As of December 31, 2011 and December 31, 2010, Emdersa elected to recognize as a temporary difference (deferred tax liability) the difference between the accounting and tax values resulting from the adjustment for inflation included in non-monetary assets.
 
 
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  Year ended December 31, 
Balance Sheet: 
2011(1)
  
2010(1)
  2009 
  (in millions) 
Current assets U.S.$ 56.4  Ps.  242.8  Ps.  203.3  Ps. 187.6 
Non-current assets  284.4   1,224.2   1,100.9   971.1 
Goodwill  0.1   0.5   0.6   0.8 
Total assets  341.0   1,467.5   1,304.8   1,159.4 
Current liabilities  120.1   516.7   284.0   400.9 
Non-current liabilities  43.2   185.9   299.0   12.1 
Total liabilities  163.3   702.7   583.0   413.0 
Minority interest  5.1   22.1   20.9   23.1 
Total shareholders’ equity  172.6   742.7   700.9   723.3 
Total liabilities and shareholders’ equity U.S.$ 341.0  Ps.
 1,467.5
  Ps. 
1,304.8
  Ps. 
1,159.4
 
 

(1)  As of December 31, 2011 and December 31, 2010, Emdersa elected to recognize as a temporary difference (deferred tax liability) the difference between the accounting and tax values resulting from the adjustment for inflation included in non-monetary assets.

Aeseba and its Subsidiaries

Aeseba is a holding company that owns 90% of the outstanding capital stock of Eden, an electricity distribution company that supplies electricity to a service area with a population of approximately 1.0 million that encompasses approximately 42,000 square miles in the northern part of the Province of Buenos Aires.  As of December 31, 2011, Eden had approximately 340,121 customers and sold approximately 2,784 GWh of electricity in 2011.  The remaining ownership interest in Eden is owned by its employees. Our acquisition of Eden is still pending antitrust approval.

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

Tariffs for Argentine electricity distribution companies are reviewed periodically by the regulators within the service area in which the concession is located (in the case of Eden this is the Buenos Aires Province).  Eden periodically has RTIs, and as of the date of this annual report, Eden’s tariffs are currently under an RTI process.  Under its current tariff scheme, the tariffs are designed to provide for a pass-through to customers of the main variable cost items (mainly power purchase costs and transmission charges), recovery of reasonable operating and administrative costs, incentives to reduce costs and make required capital investments and a regulated rate of return on its regulated asset base.  Tariffs are also adjusted for inflation of fixed costs and to pass-through adjustments to variable costs.  Eden has been granted adjustments to its tariff periodically to reflect increases in costs. See “Item 3. Key Information—Risk factors—Risks Relating to the Electricity Distribution Sector— The Argentine government has intervened in the electricity sector in the past, and is likely to continue intervening.”

The table below summarizes energy sales information regarding Eden.
 
EDEN’s Energy Sales  Year ended December 31,     
         
         
  2011   2010   2009 
   (in MWh, except percentages) 
Residential
  619,224   22.2%  598,619   22.6%  570,638   23.0%
Commercial
  331,086   11.9%  308,304   11.7%  291,900   11.7%
Public lighting
  79,716   2.9%  77,319   2.9%  74,310   3.0%
Large users
  1,462,983   52.5%  1,359,219   51.4%  1,266,465   51.0%
Industrial (Grandes usuarios del MEM)  291,400   10.5%  299,936   11.3%  281,714   11.3%
Total
  2,784,409   100.0%  2,643,397   100.0%  2,485,026   100.0%
 
 
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The tables below summarize certain key financial information regarding Eden, solely on the basis of Eden’s statutory financial statements.
 
Income Statement: Year ended December 31, 
   2011  2010  2009 
          
  (in millions ) 
Net sales U.S.  137.7  Ps.  592.6  Ps.  467.2  Ps.  401.3 
Cost of sales  (91.2)  (392.7)  (329.1)  (302.8)
Gross profit  46.4   199.9   138.1   98.4 
Administrative and selling expenses  (20.6)  (88.5)  (80.0)  (67.7)
Other operating income  5.7   24.4   20.0   15.3 
Operating income  31.6   135.9   78.1   46.0 
Financial results  (6.2)  (26.5)  (20.7)  (20.0)
Other income or costs, net  0.5   2.3   (6.4)  34.9 
Income before income taxes  25.9   111.7   51.1   60.9 
Income tax expenses  (9.2)  (39.5)  (17.8)  (19.5)
Income for the year U.S.$ 16.8  Ps. 72.2  Ps.  33.3  Ps.  41.4 


  Year ended December 31, 
Balance Sheet: 2011  2010    2009 
           
  (in millions) 
Current assets U.S.$  41.6  Ps.  179.2  Ps. 170.8  Ps.  172.1 
Non-Current assets  187.0   804.9   783.0   768.9 
Total assets  228.7   984.1   953.8   941.0 
Current liabilities  80.9   348.0   282.0   232.5 
Non-Current liabilities  15.8   67.8   144.1   174.8 
Total liabilities *  96.6   415.9   426.1   407.3 
Total shareholders’ equity  132.0   568.3   527.7   533.8 
Total liabilities and shareholders’ equity U.S.$ 228.7  Ps.984.1  Ps. 
953.8
  Ps.941.0
 
 

* On March 4, 2011, as a result of the change of control in Eden triggered by our acquisition of Aeseba, Eden prepaid the loan it had with Standard Bank Argentina S.A. and HSBC Argentina S.A.  Such repayment was made with Eden’s funds and with the proceeds from a loan that we granted to Eden in an aggregate amount equal to Ps. 80.0 million.  See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Debt.”
 
BUSINESS OVERVIEW

We believe we are the largest electricity distribution company in Argentina and one of the largest in Latin America in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2011.  We hold a concession to distribute electricity on an exclusive basis to the northwestern part of the greater Buenos Aires metropolitan area and in the northern part of the City of Buenos Aires.  As of December 31, 2011, Edenor and Eden served 2,698,548 customers and 340,121 customers, respectively.  The following table shows the percentage of the electricity produced and sold by generating companies that was purchased by us in the periods indicated:
 
  
Demand (GWh)
 
  
Wholesale Electricity
Market(1)
  
Edenor
Demand(2)
  
Edenor Demand as a
% of Wholesale
Electricity Market
 
2011  116,418   26,120(3)  22.5%(3)
2010  110,767   22,053   19.9%
2009  104,592   20,676   19.8%
 

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

(1)Demand  in the Mercado Eléctrico Mayorista Sistema Patagónico (Patagonia wholesale electricity market, or MEMSP).
(2)Calculated as electricity purchased by us and our wheeling system customers.
(3)Includes Edenor and Aeseba information.

 
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Our Strengths

We believe our main strengths are the following:

 ·
We believe we are the largest electricity distributor in Argentina in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2011.  We serve the largest number of electricity customers in Argentina, which at December 31, 2011 amounted to 3,038,669 customers.  Our electricity purchases, used to meet customer demand in our service area, accounted for approximately 22.5% of total electricity demand in the country in 2011. As a result of being the largest electricity distributor in Argentina in terms of volume and customers, we have strong bargaining power with respect to many of our operating expenses, including salaries, and benefit from economies of scale.  We also actively participate in industry decision making bodies and are working closely with the Argentine government to address Argentina’s current energy challenges.

 ·
We distribute electricity to an attractive and diversified client base in a highly developed area of Argentina.  We operate on an exclusive basis in the northwestern part of the greater Buenos Aires metropolitan area and in the northern part of the City of Buenos Aires, which are two of Argentina’s largest industrial and commercial centers and in the northern part of the province of Buenos Aires. We have a highly concentrated, urban client base characterized by high purchasing power and low delinquency in payments of electricity bills.  Our geographically concentrated and urban client base also allows us to operate more efficiently with relatively lower distribution costs.  Finally, we have a balanced distribution of clients (residential, commercial, industrial) and operate in other provinces of Argentine through its subsidiaries.

 ·
We have substantial experience in the operation of electricity distribution systems with strong operating performance and efficiency for the characteristics of our concession area.  We have substantial experience in the operation of electricity distribution systems and have received multiple ISO certifications on our commercial, technical and administrative processes, including on the quality of our services and safety and environmental standards.  We were declared by the ENRE as a self-operating business in 1997, which means that we are not required to have a strategic operator conduct our business and are allowed to act as an operator in other electricity businesses.  We believe that our energy losses are low compared to other electricity distribution companies in Latin America.  In addition, we have maintained what we believe are optimal levels of operating efficiency, with 859 customers per employee and 6,473.0  MWh sold per employee in 2011.

 ·
We have a well-balanced debt profile.  As of December 31, 2011, our financial debt amounted to U.S. $290.2 million, including U.S. $272.1 million principal amount of Dollar-denominated notes and Ps. 35.0 million Peso-denominated notes.  We have continued to strengthen our capital structure during 2011 by repurchasing and cancelling U.S. $12.7 million principal amount of our Senior Notes due 2019 and U.S. $41.5 million principal amount of our Senior Notes due 2022, which repurchased notes were held by the Company as of December 31, 2011.

Our Strategy

Our goal is to continue to serve the strong demand in our concession area, while maximizing profitability and shareholder value.  We are seeking to realize this goal through the following key business strategies:

 ·
Complete our tariff renegotiation process.  On November 12, 2009, we submitted our tariff proposal to ENRE’s Board of Directors in response to the ENRE’s request as part of the RTI process.  Our integral tariff proposal includes, among other factors, a recalculation of the compensation we receive for our distribution services based on a revision of our asset base and rate of return. Furthermore, our proposal presented the ENRE with three options for the revised tariff scheme based on three different scenarios and each of which implementation of the tariff increase in three equal semiannual installments.  During 2010, Edenor, upon ENRE’s request, submitted additional information in relation to the tariff scheme presented in 2009. During 2011, the parties have not made any progress in respect of this issue. See “Risks Relating to Our Business—Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our tariff adjusted to reflect increases in our distribution costs in a timely manner, could have a material adverse effect on our capacity to perform our financial and commercial obligations. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern”.
 
 
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 ·
Continue to serve our concession area with a high quality of service.  We aim to continue serving our clients in accordance with the terms of our concession, distributing electricity within our area and meeting or exceeding the required quality standards.  We intend to continue to dedicate a significant portion of our capital expenditures to the maintenance, enhancement and expansion of our network in order to achieve this goal.

 ·
Undertake a reclassification of our smaller customers by economic activity rather than level of demand to optimize our tariff base.  We intend to reclassify our client base based on type of economic activity and purchasing power rather than only on levels of electricity demand.  We believe this will allow us to shift clients who currently fall within our lowest tariff categories, to other, more appropriate categories, including professionals and small businesses which, due to their low demand, are currently classified as residential customers, and to charge them accordingly.

 ·
Focus on increasing our operating efficiency and optimizing our level of energy losses.  We are committing significant resources to improving the quality of our technical services and the safety of our public infrastructure, which allows us to reduce the amount of fines imposed by Argentine regulatory authorities in the ordinary course of our operations.  We intend to build new entry points for our network in Tigre (previously called Escobar), Province of Buenos Aires, and Malaver, City of Buenos Aires, which will significantly improve the quality and reliability of our network.  Currently, our objective is to maintain energy losses at an optimum level, taking into account the marginal cost of reducing such losses and the level at which, pursuant to the terms of our concession, we are reimbursed for the cost of such losses.

Edenor Concession

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

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

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

 
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Pursuant to the Adjustment Agreement, the Argentine government granted us an increase of 28% in our distribution margin, which is effective retroactively as from November 1, 2005.  The Adjustment Agreement is intended to apply transitionally until we complete the RTI with the ENRE in accordance with the terms of the Adjustment Agreement.  See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Tariffs.” In addition, because the Adjustment Agreement is effective retroactively as of November 1, 2005, the ENRE applied the CMM retroactively in each of May and November 2006, the dates in each year on which the ENRE is required to apply the CMM.  In the May 2006 CMM, the ENRE determined that our distribution cost base increased by 8.032% (compared to the distribution cost base recognized in the Adjustment Agreement), and, accordingly, approved an equivalent increase in our distribution margin effective May 1, 2006.  This increase, when compounded with the 28% VAD increase granted under the Adjustment Agreement, results in an overall 38.3% increase in our distribution margins charged to our non-residential customers.  Also on February 13, 2007, the ENRE authorized us to bill our clients (excluding residential clients) the retroactive portion of the 38.3% increase (corresponding to the period from November 2005 to January 2007), which amounted to Ps. 218.6 million and which we have continued to invoice in 55 monthly installments since February 2007.  As of December 31, 2011, we had invoiced the total amount.

In October 2007, the Argentine Secretary of Energy issued Resolution No 1037/2007, which granted us an increase of 9.63% in our distribution margins to reflect an increase in our distribution cost base for the period from May 1, 2006 to April 30, 2007, compared to the recognized distribution cost base as adjusted by the May 2006 CMM. However, this increase was not incorporated into our tariff structure, and, instead, we were allowed to retain the funds that we are required to collect and transfer to the fund established by 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, we obtained an increase of approximately 17.9% in our distribution margin, which we incorporated into our tariff structure. This increase represented the 9.63% CMM increase corresponding to the period from May 2006 to April 2007 and the 7.56% CMM increase corresponding to the period from May 2007 to October 2007. These CMM adjustments were included in our tariff structure as of July 1, 2008 and resulted in an average increase of 10% for customers in the small commercial, medium commercial, industrial and wheeling system categories and in an average increase of 21% for residential customers with bimonthly consumption levels over 650 kWh.  In addition, the ENRE authorized us to be reimbursed for the retroactive portion of the 7.56% CMM increase amounting to 45.5 million for the period between November 2007 and June 2008, from the PUREE funds.

Furthermore, we requested an additional increase in our distribution margins under the CMM to account for fluctuations in the distribution cost base for the period from November 2007 to April 2008, in comparison to the distribution cost base recognized by the CMM in November 2007.  In 2008, the ENRE adopted Note No 81,399, which authorized a 5.791% increase under the CMM.  As of the date of this annual report, the ENRE has not approved a new tariff scheme including this tariff increase.

As of April 25, 2012, we had submitted to the ENRE eight requests for CMM adjustments as described in the table below, since May 2008:
Assessment Period
 
Application Date
 
CMM Adjustment Requested
November 2007 – April 2008 May 2008 5.791%
May 2008 – October 2008 November 2008 5.684%
November 2008 – April 2009 May 2009 5.068%
May 2009 – October 2009 November 2009 5.041%
November 2009 – April 2010 May 2010 7.103%
May 2010 – October 2010 November 2010 7.240%
November 2010 – April 2011 May 2011 6.104%
May 2011 – October 2011 November 2011 7.721 %
Cumulative:   61.986%
 
 
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As of the date of this annual report, the ENRE has not yet responded to these requests (other than the request submitted in May 2008, as explained above), for which reason we are unable to reasonably estimate the amount receivable by us pursuant to the submitted requests in our consolidated financial statements until approval is granted by ENRE.

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

These increases, and any further increases granted under the CMM, will remain in force until the approval of a new tariff structure under the RTI.

As of December 31, 2011 and 2010 the amounts collected by Edenor through the PUREE, amounted to Ps. 867.1million and Ps. 529.1 million, respectively, and have been disclosed under other non-current liabilities. Edenor is permitted to retain funds from the PUREE that it would otherwise be required to transfer to CAMMESA (Res. SE N° 1037/2007) in order to reimburse Edenor for the amounts it is owed for CMM increases not yet reflected in Edenor distribution margin.

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

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

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

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

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

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

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

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

Currently, the RTI has not yet been completed and although we are currently in discussions with the Argentine government regarding the RTI, we cannot predict when or how the RTI will be implemented.

Eden Concession

EDEN is a company created by the Government of the Province of Buenos Aires who privatized 100% of its capital stock under the Decree No. 106/97 of the Provincial Executive. The Banco de la Provincia de Buenos Aires ("BAPRO") was established as the Trust of 10% of the social capital until the Programa de Participación Accionaria del Personal (the "PPAP") is implemented. The privatization was carried out through the adjudication of the exclusive right to provide distribution services of electricity for a period of ninety-five years from the date of taking possession (the "Eden Concession"). The concession period is divided into management periods, the first of fifteen years and the remaining ten years each. The grantor may extend the concession for a maximum period of ten years. The capital stock of Eseba Distribución was transferred on June 2, 1997 to three private companies in which it was divided: Empresa Distribuidora de Energía Norte S.A. (EDEN S.A.), Empresa Distribuidora de Energía Sur S.A. (EDES S.A.) y Empresa Distribuidora de Energía Atlántica S.A. (EDEA S.A.).

 
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Pursuant to the Public Emergency Law enacted to address the crisis, 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.

On September 2, 2004, the Ministerio de Infraestructura, Vivienda y Servicios Públicos de la Provincia  (Ministry of Infrastructure, Housing and Utilities of the Province, or MIVySP) issued the Res. No. 489/04, which required to the  power distribution dealers of provincial jurisdiction, the presentation of an economic model to represent the operating and maintenance costs associated with the provision of electric service, as well as the valuation of the assets available to the service.

Subsequently, by Res. No. 59/05 and 632/05, the MIVySP approved the valuation of assets associated with the distribution and selling of electricity, which has been used as a basis for determining the revenue in the period 2004-2007. This mechanism allowed Eden to reach a balance objective through partial adjustment of rates based on increases in operating costs incurred. It was also decided that 2007 would be the year in which they conduct the Revisión Tarifaria Integral (Integral Tariff Revision, or RTI).

On October 25, 2005, Eden and the MIVySP signed the Protocolo de Entendimiento (Protocol of Understanding) by which established  guidelines for the end of the Public Emergency Law, In particular, it defined a plan to recover the revenue of the concession and the need to conduct an RTI, planned for October 2007. The Protocolo de Entendimiento was approved by Decree N ° 2862/05 and ratified by the budget law of 2006.

The Protocolo de Entendimiento contemplated a delay between the subscription and execution of the Eden RTI and it was necessary to establish an adjustment mechanism that would reflect costs changes that Eden could not control, to ensure the continuity and stability of the technical relations of Eden Concession.

As of the date of this Annual Report, EDEN RTI has not yet been completed and although we are currently in discussions regarding the Eden RTI, we cannot predict when or how the EDEN RTI will be implemented.

According to the application of the mechanism for updating the expected revenue in the Protocol of Understanding, it granted rate increases to Eden since 2005 as detailed below:

 a.By Resolution No. 508/2005 dated September 12, 2005 issued by the Ministry of Infrastructure, Housing and Utilities of the Province, or MIVySP, they authorized an adjustment to Eden’s average rate of sale of8.48%.

 b.By Resolution No. 17/2007 dated January 17, 2007, they authorized an adjustment in EDEN’s average rate of sales of 3.10%.

 c.On August 8, 2008, the Governor of the Province of Buenos Aires issued Decree No. 1578/08 whereby, in response to the request to update the costs of electric distribution service presented by Eden, he authorized an adjustment in the average selling rate of 21.56% of Eden, distributable among end users thereof, applicable to consumption after the publication of those regulations mentioned in the Official Gazette of the Province of Buenos Aires, which occurred August 25, 2008.

 d.On March 22, 2010, the MIVySP issued Resolution No. 141/2010 whereby, in response to the request to update the costs of electric distribution service presented by Eden, they authorized an adjustment in the average rate of sale of 24% of Eden applicable in the form of three staggered stages from April to May, June to October and November.

 e.On June 1, 2011, the MIVySP issued Resolution No. 415/2011 whereby, in response to the request for updated service cost of electrical distribution presented by Eden, they authorized an adjustment in the average rate of sale of 9% of Eden, distributable among end users as of June 1, 2011.
 
 
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On November 9, 2011, Eden presented a new filing with the MIVySP requesting a rate adjustment based on increases in operating costs as well as the change in the valuation of assets made available by the provision of service in June 2011.

Secretary of Energy – Note 8752

The ability of each Edenor and Eden to increase their tariffs may also be affected by Note 8752 of the Secretary of Energy, which is currently subject to legal proceedings in various provinces of Argentina.   See “Item 3. Key Information—Risk factors—Risks Relating to the Electricity Distribution Sector—The Argentine government has intervened in the electricity sector in the past, and is likely to continue intervening.”

Geographic Exclusivity

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

Edenor’s concession area is divided into the following operating territories:
 
Operating territory
 
Districts
Morón
Morón, Ituzaingó, Hurlingham, Merlo, Marcos Paz, Las Heras and La Matanza
Norte
Ciudad de Buenos Aires, San Martín and Tres de Febrero
Olivos
Vicente López, San Isidro, San Fernando, Tigre and Escobar
Pilar
Moreno, Gral, Rodríguez, Pilar, Malvinas Argentinas, J.C.  Paz and San Miguel
 
Eden’s concession area is divided into the following operating territories:
 
Operating territory
 
Districts
Arrecifes                                                  Arrecifes, Capitán Sarmiento, Pérez Millán, Ramallo
Campana                                                  Campana, Baradero, Capilla del Señor, Los Cardales
Carlos Casares                                                  Carlos Casares, Daireaux, Henderson, Pellegrini, Salliqueló, Tres Lomas
Chivilcoy                                                  Chivilcoy, 25 de Mayo, Alberti, Bragado
Junín                                                  Junín, Alberdi, Arribeños, Ascensión, General Arenales, L.N. Alem, Vedia
Lincoln                                                  Lincoln, Blaquier, General Pinto, General Villegas
Mercedes                                                  Mercedes, Lobos, Roque Pérez, San Andrés de Giles, Suipacha
San Nicolás                                                  San Nicolás, Conesa

 
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The table below sets forth certain information relating to operating territories of Edenor as of and for the year ended December 31, 2011:
 
Operating territory
 
Area
(km2)
  
Customers
(in thousands)
  
% of Sales
 
Morón
  1,761   865.6   32.0%  26.8%
Norte
  164   838.7   31.1%  27.6%
Olivos
  1,624   498.5   18.5%  23.1%
Pilar
  1,088   495.8   18.4%  22.5%
Total
  4,637   2,698.5   100%  100%


According to INDEC, the Pilar operating territory experienced the highest population growth rate of the Buenos Aires metropolitan region between 1991 and 2001, growing by 56.6% from approximately 149,070 people in 1991 to approximately 233,508 people in 2001.  Today, some of the most affluent neighborhoods and upscale commercial centers and businesses are located in the Pilar operating territory.

The table below sets forth certain information relating to operating territories of Eden as of and for the year ended December 31, 2011:
 
Operating Territory 
Lines (km) (1)
  Customers (in thousands)  % of Sales 
          
Arrecifes  1,201   23.1   6.8%  9.2%
Campana  2,067   51.6   15.1%  20.4%
Carlos Casares  2,275   28.9   8.5%  8.9%
Chivilcoy  2,036   58.8   17.2%  14.3%
Junín  2,080   51.5   15.1%  11.3%
Lincoln  1,535   24.9   7.3%  7.8%
Mercedes  2,273   52.7   15.5%  16.3%
San Nicolás  1,363   49.4   14.5%  11.9%
Total  14,830   340.9   100.0%  100.0%
                 
(1) This figure does not include 3,162 km belonging to Transmission Lines between Operating Territories. Therefore, total length of lines is 17,992 km.
 
Our Obligations

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

 ·the time required to connect new users;

 ·voltage fluctuations;

 ·interruptions or reductions in service; and

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

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

 
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Under our concession, we may also be required to continue rendering services after the termination of the concession term upon the request of the Argentine government, but for a period not to exceed 12 months.
 
We are obligated to allow certain third parties (namely, other agents and large users) to access any available transportation capacity within our distribution system upon payment of a wheeling fee.  Consequently, we must render the distribution service on an uninterrupted basis to satisfy any reasonable demand.  We are prohibited from engaging in practices that limit competition or result in monopolistic abuses.

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

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

In the case of Eden, and in accordance with the obligations of Eden under the terms of its concession, Eden Class A shares are pledged to the Provincial Government until the end of Eden’s concession.

Quality Standards – Edenor´s Concession

Pursuant to Edenor’s concession, we are required to meet specified quality standards with respect to the quality of the product (electricity) and the delivery of the product.  The quality standards relating to the product quality refer to the electricity’s voltage levels.  A disturbance occurs when there is a change in the voltage level.  Edenor’s concession requires that the voltage level that we deliver must be 3x380/220 V; 13.2 kV; 33kV; 132 kV; 220 kV.  Edenor’s concession provides that disturbances in the voltage level may not exceed the following (in accordance with international standards):
 
High voltage
-5.0% to   +5.0%
Overhead network (medium or low voltage)
-8.0% to   +8.0%
Buried network (medium or low voltage)
-5.0% to   +5.0%
Rural
-10.0% to +10.0%
 
A fine is imposed under Edenor’s concession for disturbances that exceed the above-mentioned limits for 3.0% or more of the total amount of time that electricity is provided.  The amount of the fine depends on the magnitude of the disturbance.  As the disturbance’s percentage increases (or decreases) from the contracted tension level, the rate of the fine per kWh increases.  These fines are credited to the affected user’s next bill.

The standards for delivery of the product set forth in Edenor’s concession refer to the frequency and duration of the interruptions.  The following table sets forth the standards set forth in our concession with respect to the frequency and duration of interruptions per customer during the current management period:
 
 
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Category of user
 
Frequency of
interruptions
(maximum number of
interruptions per
semester)
 
Duration of interruption
(maximum amount of time
per interruption)(1)
High voltage
3 2 hours
Medium voltage
4 3 hours
Low voltage: (small and medium demand)
6 10 hours
Large demand
6 6 hours
 

(1)Interruptions of less than three minutes are not recorded.

These standards may be subject to change during subsequent management periods and/or pursuant to the outcome of the RTI.

In addition, pursuant to the Adjustment Agreement, we have agreed to comply with a medium delivery standard that reflects our actual average delivery standards during the period from 2001 through 2003.  This medium delivery standard requires us to comply with a maximum number of interruptions per semester, on average, of 2.761 and a maximum duration of interruption, on average, of 5.386 hours.  If we do not meet the delivery standards required by our concession, as set forth in the table above, but are otherwise in compliance with the medium delivery standard under the Adjustment Agreement, we may withhold payment of any fines that may be imposed under our concession for this failure and use this amount of unpaid fines for our capital expenditures.  If we fail to comply with this measure, we will be required to pay the fines.

Pursuant to our concession, the ENRE may fine us if one of our customers suffers more than the maximum number of interruptions specified for its category (excluding interruptions of less than 3 minutes) or suffers interruptions for a longer period than as specified for its category.  We pay these fines by granting credits to the affected customers in their electricity bills.  Fines are calculated at a rate per kWh that varies depending on the particular tariff or price schedule that is applicable to the customer.  Following our privatization in 1992, we have been able to improve our quality of service from an average of 22 hours of interruptions per customer and 13 interruptions per customer in 1992 to an average of 7.33 hours of interruptions per customer and 4.98 interruptions per customer in 2000, the last full year prior to the Argentine crisis.

The following table sets forth the frequency and duration of interruptions of our service in the periods indicated:
 
  
Year ended December 31,
 
  
2011
  
2010
  
2009
 
Average frequency of interruptions
  4.50   5.13   4.42 
Average duration of interruption (in hours)
  11.00   10.62   8.79 
 
In January 2011, continued adverse climatic effects of the heat wave of December 2010 had a significant impact on our grid. During that period, sustained high temperatures exceeded the historical records of the past 50 years. Moreover, in the winter months of 2010 there were severe storms and winds blowing above 140 km / h. In only one day there were more than 100 breaks in MV and HV networks attributable to this climatic anomaly. The values ​​of the indicators in the table above reflect the impact.

Additionally, in order to satisfy quality standards, we must meet certain operating requirements relating to commercial service, including maintenance of the distribution network so as to minimize failures and to maximize the useful life of fixed assets and billings on actual meter readings to generate customer bills.  We may bill customers using estimates in cases of force majeure, but we may not send a customer more than two successive estimated bills, if billed bimonthly, or, in other cases, more than three successive estimated bills.  Furthermore, estimated bills cannot exceed 8% of total billings in each category of customers.

 
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Quality Standards – Eden´s Concession

Pursuant to Eden’s concession, we are required to meet specified quality standards with respect to the quality of the product (electricity) and the delivery of the product.  The quality standards relating to the product quality refer to the electricity’s voltage levels.  A disturbance occurs when there is a change in the voltage level.  Eden’s concession requires that the voltage level that we deliver must be 3x380/220 V; 13.2 kV; 33kV; 132 kV; 220 kV.  Eden’s concession provides that disturbances in the voltage level may not exceed the following (in accordance with international standards):
 
High voltage-7.0% to   +7.0%
Medium or low voltage
-8.0% to   +8.0%
Rural
-12.0% to +12.0%
 
A fine is imposed under Eden’s concession for disturbances that exceed the above-mentioned limits for 3.0% or more of the total amount of time that electricity is provided.  The amount of the fine depends on the magnitude of the disturbance.  As the disturbance’s percentage increases (or decreases) from the contracted tension level, the rate of the fine per kWh increases. Fines for quality will go into a fund for works, being the regulator who determines the work to be done.

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

 A)User supplied from Provincial Carrier
 
Category of user
 
Frequency of
interruptions
(maximum number of
interruptions per
semester)
 
Duration of interruption
(maximum amount of time
per interruption)(1)
High voltage
3 1 hours
Medium voltage
4 2 hours
Low voltage: (small and medium demand)
5 3 hours
 

(1)Interruptions of less than three minutes are not recorded.

 B)User supplied from suburban distribution systems and substations Distributor
 
Category of user
 
Frequency of
interruptions
(maximum number of
interruptions per
semester)
 
Duration of interruption
(maximum amount of time
per interruption)(1)
High voltage
 - hours
Medium voltage
5 2 hours
Low voltage: (small and medium demand)
6 3 hours
 

(2)Interruptions of less than three minutes are not recorded.
 
 
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The following tables show the frequency and duration of interruptions of service distributor in the periods indicated:
 
  2008   2009   2010   2011 
SAIFI number of interruptionsFirst Half4.62  4.00    4.72    4.00 
Second Half
4.28  4.64     4.43   2.00
 Full Year8.90  8.64   9.15   6.00 

  2008  2009  2010  2011
SAIDI Hours / ClientFirst Half 8.24   6.77    10.07    7.09 
Second Half 
7.54  9.55   8.08   3.60
 Full Year15.78  16.32   18.15   10.69 
 
Note:
  
(1)Not recorded interruptions of less than three minutes.
 
Fines and Penalties

Pursuant to our concession, the ENRE may impose various fines and penalties on us if we fail to comply with our obligations under our concession.

Fines relating to our failure to meet any of the quality and delivery standards described above are payable by granting credits or bonuses to our customers to offset a portion of their electricity charges. Since 1996 we have operated a central information system that allows us to directly credit customers who are affected by these quality or delivery deficiencies in the amount of the applicable fines.

Fines and penalties that are not directly related to our customers are paid directly to the ENRE. These include fines imposed on us by the ENRE for any network installations that it determines to pose a safety or security hazard in a public space, including streets and sidewalks. In addition, the ENRE may fine us for inconsistency in technical information that we are required to furnish to the ENRE. Fines paid to the ENRE are deposited in the Reserva de Fondos de Terceros del ENRE (Third Party Reserve Fund of the ENRE) in an account at Banco Nación.  Payments accrue in that account until the account reaches Ps. 3 million and then, with the ENRE’s authorization, the amount is proportionally distributed among our customers.

When we entered into the Adjustment Agreement in September 2005, the ENRE granted us a payment plan in respect of approximately Ps. 116 million of our accrued fines and penalties and agreed, subject to the condition that we meet the quality standards and capital expenditure requirements specified in the Adjustment Agreement, to forgive approximately Ps. 58 million of our accrued fines and penalties. According to the terms of the payment plan, we will repay our fines and penalties in fourteen semiannual installments, with the first installment due upon the termination of a 180-day grace period beginning on the date the RTI comes into effect.

Because the Adjustment Agreement was not ratified until January 2007, we have recalculated the amounts of accrued fines and penalties subject to the payment plan under the terms of the Adjustment Agreement as well as the amounts subject to forgiveness. In addition, we are required to make adjustments to our accrued fines and penalties under the payment plan in order to reflect increases in our distribution margins, including the CMM adjustments. For the year ended on December 31, 2008, we recorded adjustments of Ps. 17.2 million, to reflect CMM adjustments. We did not record any adjustments in 2009, 2010 and 2011. In 2011, the fines and penalties imposed on us by the ENRE amounted to Ps. 81.1 million, which represented 3.6% of our energy sales. As of December 31, 2011 our aggregate fines and penalties imposed by the ENRE amounted to Ps. 542.2 million as compared to Ps. 455.4 million as of December 31, 2010. We estimate that the ENRE will forgive approximately Ps. 71.4 million of our accrued fines and penalties upon the completion of the RTI, and that we will be required to pay approximately Ps. 361.6 million in accordance with the payment plan provided for in the Adjustment Agreement, although we cannot be certain of the amount, if any, that will ultimately be forgiven.
 
 
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The following table shows the adjustments to Edenor’s accruals for potential ENRE fines and penalties, including current fines and penalties and adjustments to past fines due to increases in our tariffs pursuant to the Adjustment Agreement, for the periods specified:
 
  
Year ended December 31,
 
  
(in millions of Pesos)
 
  
2011
  
2010
  
2009
  
2008
  
2007
  
2006
  
2005
  
2004
  
2003
  
2002
  
2001
 
Accruals at beginning of year  455.4   377.5   331.6   281.4   241.1   169.7   99.3   63.4   49.0   19.0   13.6 
ENRE Fines and Penalties  81.1   80.0   58.5   34.8   23.9   25.2   72.7   36.0   14.6   31.7   16.4 
Quality of Technical Service  47.0   46.0   15.0   15.2   7.0   10.4   4.9   4.7   3.2   5.6   5.2 
Quality of Technical Product  3.2   3.4   3.1   3.0   0.9   0.6   1.1   6.9   6.5   5.5   2.9 
Quality of Commercial Service  5.1   3.0   2.4   1.6   1.1   1.2      1.2   0.5   1.5   1.7 
Public Safety  19.8   19.4   34.0   11.6   10.3   6.7   25.4   10.9   2.0   4.9   4.2 
Transport Technical Function  0.6   0.4   0.3   0.3   0.2   0.4      0.2   0.2   0.2    
Reporting Violations  4.2   6.6   3.7   2.9   4.4   5.6   33.7   12.2   1.7   4.9   1.9 
Others  1.3   1.3            0.2   7.5      0.4   9.0   0.5 
Less: Paid during period:                                            
Quality of Technical Service                    1.6         0.9   3.3 
Quality of Technical Product                                2.3 
Quality of Commercial Service  4.5   1.9   3.7      1.5   0.4   0.1   0.1   0.1   0.3   1.4 
Public Safety     0.1   8.9   1.5                     2.1 
Transport Technical Function              0.1   0.3         0.1   0.3   0.2 
Others                    0.6            1.8 
Total paid during period  4.6   2.0   12.7   1.7   1.7   0.7   2.4   0.1   0.2   1.6   11.1 
Plus: Adjustment to fines and penalties pursuant to the ratification of the Adjustment Agreement           17.2   18.1   47.0                
Accruals at year-end  531.9   455.4   377.5   331.6   281.4   241.1   169.7   99.2   63.4   49.0   19.0 
 

Note: The facts or events that generated the amounts charged in each period may have occurred in prior periods and not necessarily in the period in which the charge is made.

On February 8, 2011, ENRE passed Resolution 32/2011, imposing two fines on us and obligating us to compensate customers for any disruption in service resulting from a power outage during a heat-wave that occurred from December 20 to December 31, 2010 in alleged violation of our concession.  The two fines against us are in the amounts of Ps. 0.8 million and Ps. 0.4 million.  Pursuant to the ENRE resolution, we are required to credit the accounts of affected customers in an amount equal to each customer’s portion of the aggregate fine.

In addition, the ENRE resolution requires that we compensate our customers (in amounts ranging from Ps. 180 to Ps. 450 per customer, depending on the duration of the power outage) by directly crediting customer accounts and, if necessary, making cash payments for the balance of the amount due to the customer as compensation.

The approximate amount of such compensation is Ps. 22.4 million, which is recorded under Other Non-Current Liabilities in our financial statements for the year ended December 31, 2010.

We have commenced administrative and legal proceedings challenging the validity of ENRE Resolution No. 32/2011 and its implementation.  On March 28, 2011, Edenor challenged the resolution in the Court of Federal Administrative Litigation (Cámara en lo Contencioso Administrativo Federal).  In response to this challenge, on July 8, 2011, the court requested that the ENRE assert its defense on the record.  As of the date of this annual report, Edenor is waiting to review the ENRE’s response, which as of this date, has not been published in the record.  In parallel, on March 9, 2011, Edenor sought an injunction from the Appellate Court against the implementation of the fines levied against Edenor pursuant to Resolution No. 32/2011, which request was denied on April 28, 2011.  Following this denial of relief, we filed an extraordinary federal appeal (Recurso Extraordinario Federal) with the same court, which was denied on September 19, 2011.  On October 28, 2011, Edenor filed a second appeal, known as a Recurso de Queja, directly with the Supreme Court of Justice, and resolution of this appeal is pending as of the date of this annual report.  As of December 31, 2011, Edenor estimated a potential obligation of Ps. 25.3 million as a result of ENRE Resolution No. 32/2011 and registered an accrual for this amount in its financial statements for the year ended December 31, 2011.
 
 
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Foreclosure on the Pledge of Our Class A common shares or Revocation of Our Concession

Pursuant to the terms of the Adjustment Agreement, the Argentine government may foreclose on the pledge of Edenor Class A common shares and sell them in an public bidding process if any of the following occur:

 ·Edenor incur penalties in excess of 20% of our 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 our Class A common shares;

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

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

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

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

 ·our shareholders or former shareholders fail to desist from any ICSID claims against the Argentine government following completion of the RTI and the approval of a new tariff regime.

Upon the occurrence of any of these events, the Argentine government will have the right to foreclose on the pledge of our Class A common shares and exercise the voting rights of the Class A common shares until the transfer of such shares to a new purchaser occurs, at which time EASA will receive the proceeds of such transfer, net of a specified penalty payable to the Argentine government.

In addition, under our concession, the Argentine government has the right to revoke our concession if we enter into bankruptcy and the Argentine government decides that we shall not continue rendering services, in which case all of our 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 our creditors, net of any debt owed by us to the Argentine government.  Any residual proceeds will be distributed among our shareholders.

 Pursuant to the Eden Concession, the Provincial Government of Buenos Aires has the right to foreclose on the pledge of our Class A shares and sell them in the following situations:

 ·a breach of Articles 16 or 17 of the concession agreement;

 ·
upon notice from the Organismo de Control de Energia Electria de la Provincia de Buenos Aires (“OCEBA”) of a continuing breach and Eden’s failure to cure such breach within the period of time specified in the concession agreement;

 ·when the accumulated fines applied to Eden in the previous year are greater than 20% of its annual earnings before taxes;

 ·if the guarantors are taxed, or become permitted to be taxed, in any way in respect of the pledged Class A common shares;

 ·if Eden or the guarantors hamper in any way the national and international public tender of the Class A common shares under the Eden Concession; or
 
 
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 ·if an Eden assembly aproves, without the intervention of the enforcement authority, a reform of the Company’s by-laws or a share issuance that results in, or could result in, a change of control of the Class A common shares or their voting rights.

Upon the occurrence of any of these events, the Provincial Government of Buenos Aires will have the right to foreclose its pledge over the Eden Class A common shares and exercise the voting rights of these shares until such shares are transfered to a new purchaser occurs, at which time, the previous owner of those shares will receive the proceeds of such transfer, net of a specified penalty payable to the Provincial Government of Buenos Aires. The previous owner of the Class A common shares is not entitled to participle, directly or indirectly, in the public bidding process, nor will it be otherwise permitted to make an offer to buy such shares.

Periodic bidding for control of Edenor

Before the end of each management period under our concession, the ENRE will arrange for an international public bidding procedure to be conducted for the sale of 51% of our capital stock and voting rights in similar conditions to those under which EASA acquired its stake.  EASA will be entitled to participate in the bid.  The person or group offering the highest price will acquire the stock and will pay the offered price to EASA.  If EASA is the highest bidder or if EASA’s bid equals the highest bid, it will retain 51% of our stock, but no funds will 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.  In the event EASA fails to submit a bid or its bid is lower than the highest bid, the Class A common shares will be transferred to the highest bidder and the price paid by the purchaser (except for any amounts owed to the Argentine government) will be delivered to EASA.

The first management period was set to expire on August 31, 2007.  We presented a request for a five-year extension of the initial management period in May 2007 and on July 5, 2007, the ENRE, pursuant to the ENRE resolution No. 467/2007, agreed to extend the initial management period for an additional five years from the date that the new tariff structure is adopted under the RTI.  The remaining 10-year periods will run from the expiration of the extension of the initial management period.

Default of the Argentine government

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

Edenor Network

As of December 31, 2011, the system through which we supply electricity was composed of 71 Sub-Stations of high/high voltage, high/high/medium voltage and high/medium voltage, representing 14,343 MVA of transformer capacity and 1,382 kilometers of high-voltage power lines 220 kV, 132 kV and 27.7 kV.  The distribution system of medium/low voltage was comprised of 15,374 transformers of medium/low voltage, representing 5,838 MVA of transformer capacity, 9,446 kilometers of medium-voltage power lines 33 and 13.2 kV and 25,328 kilometers of low-voltage power lines 380 V.
 
 
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The following table provides certain information concerning our transmission and distribution system as of the dates presented:
 
  
At December 31,
 
  
2011
  
2010
  
2009
 
Kilometers of transmission lines         
High voltage
  1,382   1,368   1,365 
Medium voltage
  9,446   9,364   9,191 
Low voltage
  25,328   25,123   24,761 
Total
  36,156   35,855   35,317 
             
Transformer capacity (MVA)            
High voltage/high voltage
  7,648   7,048   7,048 
High voltage/medium voltage
  6,695   6,571   6,356 
Medium voltage/low voltage and medium voltage/medium voltage  6,025   5,849   5,643 
Total
  20,368   19,468   19,047 
 
Demand is provided from points of interconnection with the Argentine Interconnection System (Sistema Argentina de Interconexión, or SADI) (500 kV-220 kV Rodríguez Substation, 220 kV Ezeiza Substation) and from the local Puerto and Costanera power plants.  In turn, the transmission network links these nodes with head sub-stations of 220V: Casanova, Malaver, Matheu, Morón, Talar and Zappalorto, and 132 kV Matanza, Ramos Mejía, Agronomía, Puerto Nuevo, Nuevo Puerto Colegiales and Edison.

This transmission and subtransmisson system (the “HV System”), together with the Edesur S.A. (“Edesur”) and Edelap S.A. (“Edelap”) systems, forms the Greater Buenos Aires (GBA) system.  The GBA system is operated by the Sociedad Anónima Centro de Movimiento de Energía (SACME), 50% of whose share are owned by us and Edesur.  SACME is responsible for the management of regional high-voltage distribution in the greater Buenos Aires metropolitan area, coordinating, controlling and supervising the operation of the generation, transmission and sub-transmission network in the City of Buenos Aires and the greater Buenos Aires metropolitan areas, including coordination with the SADI in our and Edesur’s concession areas.  SACME also represents its shareholders in the control of distribution for those concession areas.

We distribute energy from the sub-stations of high/medium voltage through the primary 13.2kV and 33kV system to a secondary 380/220 V low-voltage system.  Our distribution network, consisting of several transformers, power lines and substations, distributes the electricity to final users with varied voltages depending on the requirements of end users.  Certain customers, however, are supplied with power at significantly higher voltages.

By mid-2012 is estimated the 220 kV linking of the local generation Central Puerto and Costanera with Edenor network, through Colegiales and Malaver substations. This extension was defined by the Secretary of Energy Resolution 1875/05 and it allows the increase in supply capacity by 600 MW. Puerto Nuevo - Colegiales, estimating by mid-year 2012 the completion of the 220 kV bars in Malaver Substation.

We are currently working with the Argentine government and Edesur to construct two new entry points for our network, named “Oscar Smith” (previously called “Norte”) and “Puerto Nuevo-Malaver-Costanera”.  These new entry points will significantly improve the quality and reliability of our network.  On April 4, 2008, we entered into an agreement with the Minsterio de Planificación Federal, Inversión Pública y Servicios (the Ministry of Federal Planning, Public Investment and Services) to build the new 500/220 kV “Oscar Smith” transformer station in the Partido de Tigre.  This new transformer station will serve to connect our network with the SADI.  We believe that this new entry point will allow us to meet the increasing energy demands in the medium and long term throughout our concession area.  See “Item 5.  Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Demand—Capacity Demand.”

Eden Network

Demand for electricity is provided from points of interconnection with the Sistema Argentino de Interconexión, or SADI (Argentine Interconnection System).  Eden responds to this demand by distributing electricity from the sub-stations of high/medium voltage through the primary 13.2kV and 33kV system to a secondary 380/220 V low-voltage system.  Eden’s distribution network, consisting of several transformers, power lines and substations, distributes the electricity to final users with varied voltages depending on the requirements of end users.
 
 
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Systems

During 2011 we continued with the consolidation of the Systems Plan and Medium-Term Plan for Telecommunications.  The major projects implemented were the following:

 ·In September 2011 we finalized the first phase of implementation of CC & B (Customer Care & Billing), a software for the complete renewal of our commercial systems and manages solution for our large customers. The second phase of the project began, the main objective of which is to incorporate other customers (small and medium demands) to our new commercial management system.   Finalization of the second phase is planned for mid-2012.

 ·To support the new operation of our commercial management system, that will involve more than 2.6 million customers, we acquired a next-generation hardware (HP Superdome) and we expanded our storage system (SAN).

 ·Significant improvements were implemented into our NEXUS system to optimize our operational management. Among the most important are the grouping of claims (re-inference), the division of documents and optimizing the treatment of anomalies.

 ·In April 2011 we implemented our new corporate website, improving substantially its appearance and functionality. We also replace our Intranet using Microsoft Sharepoint and made available IT collaborative spaces for our different departments. Completion is scheduled for the first quarter of 2012.

 ·Within the framework of our technological renovation process, we replaced much of the structure of our perimeter security (Firewall, IPS, Load Balancers, Proxy and Proxy Manager), also upgraded the authentication tokens for remote access and purchased and installed blade servers as part of our virtualization efforts to accommodate non-production environments.  Additionally, we replaced our Uninterrupted Power System (“UPS”) and electrical panels to support our new equipment.

 ·In October 2011 Eden initiated implementation of SAP to install a system model with features similar to ours and full functionality.  Completion is expected in June 2012.

 ·Since December 2011, we implemented the first stage of Resolution 1301/11, which instructs the removal of the state subsidies from national industrial and commercial customers of all tariffs framed in certain activities.

 ·With respect to our various administrative systems, there have been numerous initiatives, including:

 oImplementation of the Sugar CRM system to optimize customer service by managing queues;

 oImplementation of a new product version of Meta 4 for personnel management; and,

 oOptimization of the SAP SRM to improve the management of Purchasing.

 ·As part of the Sarbanes-Oxley requirements, we have undertaken projects to improve various management aspects:

 oWe completed the implementation of the Altiris tool that makes the inventory of physical computer assets more efficient (pc, server, switch, etc..).

 oWe began with the Asset Classification project in conjunction with Control Management, which will comprise our core systems and will more accurately analyze our risk map availability, including integrity and confidentiality.
 
 
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 ·Within the project of implementing a new security plan:
 
 oWe incorporated a user provisioning trading system (CC & B) within the system of identity management (IDM).

 oWe defined a risk matrix for the trading system (CC & B) integrating its administration on SAP-GRC.

 oWe implemented Microsoft NAP in our Libertador Building to provide a more secure access via WiFi.

 oWe implemented new security rules to support the Security Policy.

Telecomunications:

 
We conducted the deployment of 1000 km of optical fiber on Low Voltage between us and CYCSA in the districts of Vicente López, 3 de Febrero, Moron, Matanza and Hurlingham. Through these lines we began the process of providing fiber optic connectivity to 16 substations (Luzuriaga Ss., San Justo Ss., Matanza Ss., Ramos Mejia Ss., Moron Ss., Malaver Ss., Migueletes Ss., Caseros Ss., Hurlingham Ss., Suarez Ss., Villa Adelina Ss., Munro Ss., Sevel Ss., Casanova Ss., Laferrere Ss., Catan Ss.), 3 commercial offices (Laferre Of., Catan Of. and Tapiales Of.) and the Morón Area (San Justo Building).  This allows us to improve our availability of telecommunication networks and expand our capacity of transportation, and affords us greater capillarity to provide secure communications to the transformer centers.

 ·We carried out the implementation of call centers with IP technology. We implemented a new IP calls recording system, which enables us to centralize our recordings of the 3 sites of customer care (Buenos Aires, Tucuman and Guzman Building).  Additionally, we installed a new IVR platform with more features and capabilities for customer service. This platform became operational in March 2012.
 
 ·We conducted remodeling and moving to the new site Operations and Maintenance of Telecommunications located contiguously to the Austria substation. This new unit has the Telecommunication Network Control and all maintenance personnel.
 
 ·To adapt the facilities of the substations we acquired switches compatible with the standard 61,850.  As of the date of this annual report, these new switches have been installed in our Malaver Substation, Matheu and Pilar. The remaining equipment will be installed during the first half of 2012.

 ·We conducted the migration of reprogramming frequencies and Trunking system reduced by application of the CNC (National Communications Commission). These were prepared to respond to emergencies in case of failure of the Nextel system.

 ·As of the date of this annual report, the following works were performed in substations:

 oLaying fiber optic cable for the Costanera Ss. and Malaver Ss. and fiber SACME connectivity;

 oInstallation and starting up of Air Conditioning in Rooms Communications from Matanza, Pilar, Hurlingham and Tigre Substations;

 oProvision, installation, reception and starting up of Access Control System of the Paso del Rey, Austria (Telecommunications area) and finished works in Luzuriaga and Pantanosa Substations; and

 oProvision and commissioning of a multiplexer equipment to include the Paso del Rey substation to Edenor Network Communications.

 ·With regard to improvement initiatives, in the field of Telecommunications:

 oIn September 2011 we installed a Digital Signage System in 10 floors of our Libertador building, allowing the Human Resources department to disseminate information dynamically.
 
 
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 oWe migrated the communications platform of Alpha energy meters at 18 of our substations to an IP solution supported by the Corporate Network.

 oWe set up a pilot communications technology (PLC communications over electrical wires) to provide communications systems on the Remote Transformer (CT). 2 CT were successfully connected to the Güemes substation to communicate to a remote Telecontrol.

 ·In order to secure, update and expand the OF wire telesupervision system we designed and purchased materials for installation and modification of the solution Telemetry oil pressure of OF Wires. The scope of this stage is the upgrade of 20 remotes and installation of 5 new ones. It expects to complete these tasks by the first quarter of 2012.

Customers

The following graph shows the evolution of our customer base through December 31, 2011:
 

As of December 31, 2011, we served 3,038,669 customers (considering both Edenor and Eden).  We define a “customer” as one meter.

Edenor Tariff Categories

Edenor classifies its customers pursuant to the following tariff categories:

 ·Residential (T1-R1 to R9): residential customers whose peak capacity demand is less than 10kW.  In 2011, this category accounted for approximately 41% of our electricity sales.

 ·Small commercial (T1-G1 and T1-G2): commercial customers whose peak capacity demand is less than 10kW.  In 2011, this category accounted for approximately 8% of our electricity sales.
 
 
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 ·Medium commercial (T2): customers whose peak capacity demand is equal to or greater than 10kW but less than 50kW.  In 2011, this category accounted for approximately 9% of our electricity sales.

 ·Industrial (T3): industrial customers whose peak capacity demand is equal to or greater than 50kW.  This category is applied to high-demand customers according to the voltage at which each customer is connected.  The voltage ranges included in this category are the following: (i) Low Voltage (LV): voltage less than or equal to 1 kV; (ii) Medium Voltage (MV): voltage greater than 1kV but less than 66 kV; and (iii) High Voltage (HV): voltage equal to or greater than 66kV.  In 2011, this category accounted for approximately 17% of our electricity sales.  This category does not include customers who purchase their electricity directly through the wholesale electricity market under the wheeling system.

 ·Wheeling System: large users who purchase their electricity directly from generation or broker companies through the wholesale electricity market.  These tariffs follow the same structure as those applied under the Industrial category described above.  As of December 31, 2011, the total number of such large users was 682, and in 2011 this category represented approximately 21% of our electricity sales.

 ·Others: public lighting (T1-PL) and shantytown customers whose peak capacity demand is less than 10kW.  In 2011, this category accounted for approximately 5% of our electricity sales.  See “—Framework Agreement (Shantytowns).”

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

Edenor relies on the following measures to detect incorrectly categorized customers:

 ·reporting by its employees tasked with reading meters to identify observed commercial activities which are being performed by residential customers,

 ·conducting internet surveys to identify advertisements for commercial services (such as medical or other professional services) that are linked to a residential customer’s address, and

 ·analyzing customer demand to determine whether Edenor should further evaluate the peak capacity demand of a given customer whose use might exceed 10kW.

Reading, Billing and Collecting

Edenor bills its customers based on their category of service.  Residential and small commercial customers are billed a fixed charge payable bimonthly and a variable charge based on each unit of energy consumed.  The price of these charges, in turn, is determined based on the bimonthly consumption registered by each customer, which is divided into subcategories for each of our residential and small commercial customers as follows:

Residential (Tariff 1-R):

 ·Tariff 1-R1: bimonthly energy demand less than or equal to 300 kWh

 ·Tariff 1-R2: bimonthly energy demand greater than 301 kWh

 ·Tariff 1-R3: bimonthly energy demand greater than 651 kWh and less than 800 kWh

 ·Tariff 1-R4: bimonthly energy demand greater than 801 kWh and less than 900 kWh

 ·Tariff 1-R5: bimonthly energy demand greater than 901 kWh and less than 1000 kWh

 ·Tariff 1-R6: bimonthly energy demand greater than 1001 kWh and less than 1200 kWh

 ·Tariff 1-R7: bimonthly energy demand greater than 1201 kWh and less than 1400 kWh
 
 
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 ·Tariff 1-R8: bimonthly energy demand greater than 1401 kWh and less than 2800 kWh

 ·Tariff 1-R9: bimonthly energy demand greater than 2800 kWh

Small commercial (Tariff 1-G):

 ·Tariff 1-G1: bimonthly energy demand less than or equal to 1600 kWh

 ·Tariff 1-G2: bimonthly energy demand greater than 1600 kWh but less than or equal to 4000 kWh

 ·Tariff 1-G3: bimonthly energy demand greater than 4000 kWh

Medium commercial customers (Tariff T2) are billed a fixed charge based on a fixed amount of capacity that is payable monthly and a variable charge based on each unit of energy consumed.

Industrial customers (Tariff T3) are billed two monthly fixed charges based on capacity during peak hours and non-peak hours and three variable charges for each unit of energy consumed, which charges vary based on whether the unit was consumed during peak hours (from 6 p.m.  to 11 p.m.), horas de valle (valley hours, from 11 p.m.  to 5 a.m.) or during the remaining hours of the day (from 5 a.m.  to 6 p.m.).

Public lighting customers are billed a monthly variable energy charge based on each unit of energy consumed.

The table below shows the number of Edenor customers per category at the dates indicated.
 
  
At December 31,
 
  
2011
  
2010
  
2009
 
Residential
  2,354,242   2,325,574   2,271,960 
Small commercial
  306,541   299,822   297,070 
Medium commercial
  30,678   29,820   28,923 
Industrial
  6,006   5,816   5,628 
Wheeling system
  682   643   636 
Other*
  399   393   395 
Total
  2,698,548   2,662,068   2,604,612 
 

*  Represents public lighting and shantytown customers.

Since 1995, Edenor has maintained two billing systems: one for small- and medium-demand customers and another for large users.  Both systems permit the integration of the reading, billing, collection processes and the tracing of the delinquent balances of customers included in those demand categories.

All of the meters are read with portable meter-reading terminals, either with manual access or optical reading (in the case of electronic meters for medium commercial and industrial customers).  The systems validate the readings, and any inconsistent reading is checked in the field.  Estimates of customer usage are no longer used as a result of this new billing system.  Once the invoices are printed, independent contractors in each operating area, subject to strict controls, distribute them.

Eden Tariff Categories

 ·Residential (T1-R1 to R7, T1RE and T4): residential and rural customers whose peak capacity demand is less than 10kW.  In 2011, this category accounted for approximately 22% of our electricity sales.

 ·Small commercial (T1-G1, T1-G2 and T1GE): commercial customers whose peak capacity demand is less than 10kW.  In 2011, this category accounted for approximately 8% of our electricity sales.

 ·Medium commercial (T2): customers whose peak capacity demand is equal to or greater than 10kW but less than 50kW.  In 2011, this category accounted for approximately 4% of our electricity sales.
 
 
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 ·Industrial (T3BT, T3MT, T8BT, T8MT and T8AT): industrial customers whose peak capacity demand is equal to or greater than 50kW.  This category is applied to high-demand customers according to the voltage at which each customer is connected.  The voltage ranges included in this category are the following: (i) Low Voltage (LV): voltage less than or equal to 1 kV; (ii) Medium Voltage (MV): voltage greater than 1kV but less than 66 kV; and (iii) High Voltage (HV): voltage equal to or greater than 66kV.  In 2011, this category accounted for approximately 29% of our electricity sales.  This category does not include customers who purchase their electricity directly through the wholesale electricity market under the wheeling system.

 ·Wheeling System: large users who purchase their electricity directly from generation or broker companies through the wholesale electricity market.  These tariffs follow the same structure as those applied under the Industrial category described above.  As of December 31, 2011, the total number of such large users was 81, and in 2011 this category represented approximately 10% of our electricity sales.

 ·Others: Public Lighting (T1-PL) whose peak capacity demand is less than 10kW and Cooperatives, which are energy distributors in many Municipalities in the Province.  In 2011, these categories accounted for approximately 3% and 24% of our electricity sales respectively. Also, other two categories of energy can be included: Self Consumption, belonging to energy consumed in Eden facilities, and Recovered Energy, which is energy consumed in previous periods and billed in the current one. These two concepts represented 0.2% of energy sales.

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

Eden relies on the following measures to detect incorrectly categorized customers:

 ·reporting by its employees tasked with reading meters to identify observed commercial activities which are being performed by residential customers.

 ·conducting internet surveys to identify advertisements for commercial services (such as medical or other professional services) that are linked to a residential customer’s address, and

 ·analyzing customer demand to determine whether Eden should further evaluate the peak capacity demand of a given customer whose use might exceed 10kW.

Reading, Billing and Collecting

Eden bills its customers based on their category of service.  Residential and small commercial customers are billed a fixed charge payable bimonthly and a variable charge based on each unit of energy consumed.  The price of these charges, in turn, is determined based on the bimonthly consumption registered by each customer, which is divided into subcategories for each of our residential and small commercial customers as follows:

Residential (Tariff 1-R):

 ·Tariff 1-R1: bimonthly energy demand less than or equal to 200 kWh

 ·Tariff 1-R2: bimonthly energy demand greater than 200 kWh and less than 400 kWh

 ·Tariff 1-R3: bimonthly energy demand greater than 400 kWh and less than 800 kWh

 ·Tariff 1-R4: bimonthly energy demand greater than 800 kWh and less than 1000 kWh

 ·Tariff 1-R5: bimonthly energy demand greater than 1000 kWh and less than 1400 kWh

 ·Tariff 1-R6: bimonthly energy demand greater than 1400 kWh and less than 2800 kWh

 ·Tariff 1-R7: bimonthly energy demand greater than 2800 kWh
 
 
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 ·Tariff 1-RE1 (seasonal residential): bimonthly energy demand less than or equal to 1000 kWh

 ·Tariff 1-RE2 (seasonal residential): bimonthly energy demand greater than 1000 kWh and less than 1400 kWh

 ·Tariff 1-RE3 (seasonal residential): bimonthly energy demand greater than 1400 kWh and less than 2800 kWh

 ·Tariff 1-RE4 (seasonal residential): bimonthly energy demand greater than 2800 kWh

 ·Tariff 4 (Rural): Rural customers with less than 10 kW peak capacity demand

Small commercial (Tariff 1-G):

 ·Tariff 1-G1: bimonthly energy demand less than or equal to 2000 kWh

 ·Tariff 1-G2: bimonthly energy demand greater than 2000 kWh but less than or equal to 4000 kWh

 ·Tariff 1-G3: bimonthly energy demand greater than 4000 kWh

 ·Tariff 1-GE1 (seasonal commercial): bimonthly energy demand less than or equal to 4000 kWh

 ·Tariff 1-GE2 (seasonal commercial): bimonthly energy demand greater than 4000 kWh

Medium commercial customers (Tariff T2) are billed a fixed charge based on a fixed amount of capacity that is payable monthly and a variable charge based on each unit of energy consumed.

Industrial customers (Tariff T3) are billed two monthly fixed charges based on capacity during peak hours and non-peak hours and three variable charges for each unit of energy consumed, which charges vary based on whether the unit was consumed during peak hours (from 6 p.m.  to 11 p.m.), horas de valle (valley hours, from 11 p.m.  to 5 a.m.) or during the remaining hours of the day (from 5 a.m.  to 6 p.m.).

Public lighting customers are billed a monthly variable energy charge based on each unit of energy consumed.

The table below shows the number of Eden customers per category at the dates indicated.
 
  
At December 31,
 
  
2011
  
2010
  
2009
 
Residential  293,320   288,931   283,662 
Small Commercial  42,657   41,130   39,785 
Medium Commercial  1,446   1,372   1,287 
Industrial  812   748   721 
Wheeling System  81   83   81 
Others:            
     Public Lighting  1,672   1,617   1,576 
     Cooperatives  133   131   131 
Total  340,121   334,012   327,243 
 
All of the meters are read with portable meter-reading terminals, either with manual access or optical reading (in the case of electronic meters for medium commercial and industrial customers).  The systems validate the readings, and any inconsistent reading is checked in the field. Estimates of customer usage are no longer used as a result of this new billing system.  Once the invoices are printed, independent contractors subject to strict controls, distribute them.
 
 
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Slow-Paying Accounts and Past Due Receivables

When we assumed the operation of the distribution system from SEGBA in September 1992, many residential electricity meters had not been read for months, individual customer account information was unreliable or nonexistent, and billing and collection systems and procedures required substantial improvement.  The state of these customer records made it difficult to determine how much electricity individual customers had used and whether they were delinquent in paying for the service.  As a result, one of our primary objectives since 1992 has been to address and minimize slow-paying accounts and past due receivables.

Since 1992, many procedures have been established to reduce delinquency and make collection possible.  Our Commercial Department oversees the strict observance of such procedures.

Municipalities’ accounts form a significant number of our arrears accounts.  The methods of collection on such arrears vary for each municipality.  One method of collection is to withhold from the municipalities certain taxes collected by us from the public on behalf of the municipalities and using such taxes to offset any past due amounts owed to us by such municipalities.  Another method of collection is entering into refinancing agreements with the municipalities.  These procedures allowed us to reduce significantly the number of arrears accounts.

Our past due receivables increased from Ps. 106.3 million as of December 31, 2010 to Ps. 124.0 million as of December 31, 2011.   Past due receivables as of December 31, 2011 and 2010 included Ps. 37.5 million and Ps. 34.3 million, respectively, as a result of our acquisition of Aeseba.  This increase in past due receivables was mainly the result of the preliminary injunction awarded pursuant to the request of the Ombudsman challenging the October 2008 adjustment of our tariffs.  The preliminary injunction prohibits us from cutting the supply of energy to customers challenging the October 2008 tariff increase until a decision is reached with respect to the Ombudsman’s claim.  See “Item 8. Financial Information—Legal and Administrative Proceedings—Legal Proceedings—Preliminary Injunction of the Public Ombudsman.”   Our collections experienced the greatest adverse impact in response to the injunction during February and March 2009; however, they continue to be adversely impacted.

The following graph shows Edenor delinquent balances as of December 31 of each year:
 
 
 
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We also supply energy to low-income areas pursuant to the framework agreement with the Argentine government and the Province of Buenos Aires, for which certain payments are still owed to us.  See “—Framework Agreement (Shantytowns).”

Energy Losses

Energy losses are equivalent to the difference between energy purchased and energy sold and may be classified as technical and non-technical losses.  Technical losses represent the energy that is lost during transmission and distribution within the network as a consequence of natural heating of the transformers and conductors that transmit the electricity from the generating plants to the customers.  These losses typically increase in proportion to the amount of energy volume distributed (as has been the case for us in recent years).  Technical losses are normal for any energy distributor and cannot be completely eliminated but can be reduced by improvements in the network.  We believe that the level of technical losses is approximately 7% in countries with distribution networks similar to ours.  Non-technical losses represent the remainder of our energy losses and are primarily due to illegal use of our services and administrative and technical errors.

Energy losses require us to purchase additional energy to satisfy apparent demand, thereby increasing costs.  Furthermore, illegally tied-in customers typically consume more electricity than the average level of consumption for their category.  We are unable to recover from customers the cost of electricity purchased beyond the loss factor established as 10% (on average) pursuant to our concession.  The reduction of energy losses therefore reduces the amount of energy that we have to purchase to satisfy apparent demand but cannot invoice, and increases the amount of electricity actually sold.

At the time of privatization of the electricity sector in 1992, our total energy losses were approximately 30%.  At that time, our non-technical losses were estimated at 21%, with over half of that amount due to fraud and illegal use of our service.  In response to the high level of losses, we implemented a loss reduction plan in 1992 which emphasized accurate measurement of energy consumption through periodic inspections, reduction of administrative errors, regularization of shanty towns, reduction of illegal direct connections, provision of services to shantytowns and reduction of technical losses.

In the year 2000, our losses were close to the 10% target rate established in our concession and recognized in tariffs.  However, as a result of the economic, political and social crisis that erupted in 2001, our level of energy losses began to escalate again due to increased poverty levels and payment delinquency.  Fraud control by our workers was often impeded due to the increased aggression from customers during monitoring visits.  Such incidents have decreased since 2004, however, due to improved socioeconomic conditions and the efforts of our management.  Due to the inefficiencies associated with reducing our energy losses below the level at which we are reimbursed pursuant to our concession, we currently do not intend to significantly lower our level of losses.

At present, our goal is to maintain our energy losses at an optimal level, taking into account the cost of reducing such losses and the level at which we are reimbursed for the cost of these losses under our concession.  Our procedures for maintaining an optimal level of losses are focused on improving collections to ensure that customers pay for all the energy that they consume and making investments in our network to control technical losses.  To reduce the theft of electricity we have implemented vigilance and special technologies, such as much higher networks that cannot be reached using normal ladders, shields close to the electricity posts, concentric cables, shielded meters and suspension of electricity service, among other remedies.  We are experimenting with other programs including teaching low-income customers how to ration their consumption, providing low-income customers with the option of paying in installments and the installation of 4,800 prepaid meters.  We also plan to encourage, through subsidies, the installation of special low-energy lamps.  A final decision with respect to the implementation of these energy sales measures on a large scale is currently under evaluation by the ENRE.  In addition, the Argentine government has implemented a program through PRONUREE (Programa Nacional de Uso Racional y Eficiente de la Energía) to distribute low energy consumption lamps to our customers through agreements with local municipalities.  In 2008, 2009, 2010 and 2011, over 3,000,000 of such lamps were distributed to our customers through this program.

The following table illustrates Edenor’s estimation of the approximate breakdown between technical and non-technical energy losses experienced in Edenor’s concession area since 2000.
 
 
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Year ended December 31,
  
2011
  
2010
  
2009
  
2008
  
2007
  
2006
  
2005
  
2004
  
2003
  
2002
  
2001
  
2000
Technical losses  9.8%  9.8%  9.8%  9.8%  9.6%  8.6%  8.3%  8.1%  8.0%  7.8%  7.5%  7.3%
Non-technical losses  2.8%  2.7%  2.1%  1.0%  2.0%  2.5%  2.7%  3.4%  4.7%  4.5%  3.6%  2.7%
Total losses  12.6%  12.5%  11.9%  10.8%  11.6%  11.1%  11.0%  11.5%  12.7%  12.3%  11.1%  10.0%
 
As of December 31, 2011, total energy losses recorded by Eden were 10.4%, of which technical losses represented 8.1% and non-technical losses represented 2.3%.

Framework Agreement (Shantytowns)

In January 1994, we and Edesur entered into a framework agreement (the “Initial Framework Agreement”) with the Argentine government and the Province of Buenos Aires to regulate our supply to low-income areas and shantytowns.  Pursuant to Initial Framework Agreement, we agreed to supply electricity and, if feasible, install individual meters within each shantytown.  However, given the lack of adequate space or streets between shantytown homes, in many instances we were only able to install a single meter at the boundary of each shantytown to measure its collective consumption.  Under the terms of the Initial Framework Agreement, we were entitled to receive compensation from (a) the municipality in which the shantytowns were located, (b) a federal fund, first, for any non-payment in respect of the electricity supplied to the shantytowns and, second, for losses of up to Ps. 20 million incurred prior to the signing of the Initial Framework Agreement, and (c) a provincial fund for capital expenditures made to regularize the shantytown energy supply.

In October 2003, we, together with Edesur and Edelap, entered into a new framework agreement (the “2003 Framework Agreement”) with the Argentine government and the Province of Buenos Aires, which was applicable retroactively as from September 2002 and was scheduled to expire on the earlier of December 31, 2006 or upon full regularization of electricity supply to the shantytowns.  The 2003 Framework Agreement contains terms similar to the Initial Framework Agreement.  Under the 2003 Framework Agreement, we are compensated for the service we provide to shantytowns by a commission formed in each shantytown that collects funds from residents of the shantytown.  In addition, we are compensated separately by the municipality in which each shantytown is located, and, if there is any payment shortfall, by a special fund supported by the Argentine government and the Province of Buenos Aires.  Specifically, the Argentine government contributes an amount equal to 21% and the Province of Buenos Aires contributes an amount equal to 15.5% of the compensation, net of taxes, paid by those customers with payment problems and meter irregularities who have been regularized under the 2003 Framework Agreement. Under the 2003 Framework Agreement, we may also suspend service to regularized customers for lack of payment.

On June 23, 2008, we entered into an amendment to the 2003 Framework Agreement (the “Amended 2003 Framework Agreement”) with the Argentine government, the Province of Buenos Aires and the other national electric distributors agreeing to extend retroactively the terms of the agreement for four years beginning as of January 1, 2007.  The Argentine government ratified the amendment on September 22, 2008 and on June 18, 2009 the Province of Buenos Aires published the ratification of the Amended 2003 Framework Agreement in the Official Bulletin of the Province of Buenos Aires.

Pursuant to the Amended 2003 Framework Agreement, we received from the Argentine government Ps. 20.0 million, Ps. 19.3 million and Ps. 7.14 million between November and December 2009, between March and December 2010 and between January and December 2011, respectively, and during 2012, we have received Ps. 21.0 million.

The Amended 2003 Framework Agreement expired on December 31, 2010.
 
On July 22, 2011, the Company, together with Edesur and Edelap, entered into an Addendum with the Federal Government and the Government of the Province of Buenos Aires, for the renewal for a term of four years of the framework agreement.  The renewal is yet to be approved by the Ministry of Federal Planning, Public Investment and Services. Nevertheless, the Company has continued supplying electricity to low-income areas and shantytowns and has submitted the information related to this consumption to control authorities, under the assumption that these amounts will be covered by a new framework agreement that will apply retroactively to the current period and will continue in full force and effect for future periods.
 
 
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As of December 31, 2011, we charged Ps. 28.6 million to the allowance for doubtful accounts in respect of receivables for electricity provided to shantytowns during 2011, the recovery of which amount is pending the renewal of the Amended 2003 Framework Agreement.

Our receivables for amounts accrued with the Province of Buenos Aires but not yet paid for the supply of energy to shantytowns amounted to Ps. 54.3 million as of December 31, 2011, Ps. 33.0 million as of December 31, 2010, Ps. 54.8 million as of December 31, 2009 and Ps. 49.4 million as of December 31, 2008.

In March 2010, we signed a payment plan agreement with the Province of Buenos Aires with respect to the amount owed to us by the Province of Buenos Aires under the Amended 2003 Framework Agreement. The Government of the Province of Buenos Aires agreed to pay the amount due with cancellation bonds (Bonos de Cancelación de Deuda), which are bonds issued by the Province of Buenos Aires for the purpose of paying its outstanding obligations.  The agreement was signed subject to the approval of the Provincial Executive Branch and our board of directors.  Our board approved the execution of the agreement in the meeting held on April 27, 2010.  In May 2010, we received payments from the Province of Buenos Aires for Ps. 1.6 million in cash and Ps. 30.1 million in aggregate principal amount of cancellation bonds.  These cancellation bonds were issued by the Province of Buenos Aires on December 15, 2009, with a maturity of March 15, 2011.  As of December 31, 2011, we had charged total payments of cancellation bonds and all payments on these cancellation bonds have been made according to schedule.

Insurance

As of December 31, 2011, we had insurance for loss and damage to property, including damage due to floods, fires and earthquakes covering up to U.S. $773.5 million, with the following deductibles:

 ·transformers, between U.S. $175,000 and U.S. $850,000 (depending on their power level);

 ·equipment of sub-stations (not including transformers), U.S. $75,000.

 ·commercial offices, U.S. $1,500 for each office;

 ·deposits and other properties, U.S. $25,000; and

 ·acts of terrorism, U.S.$50,000, being the maximum insured amount for this purpose, U.S.$ 10,000,000.

We are also insured against theft of cash and securities for a maximum amount of U.S. $100,000 and U.S. $5,000, respectively.

In addition, we maintain the following insurance, subject to customary deductibles and limitations:

 ·Directors’ and Officers’ Liability insurance;

 ·Civil Liability insurance;

 ·Automobile insurance;
 
 ·Mandatory life insurance for all our officers and employees which is maintained in accordance with Argentine law; and

 ·Optionals life insurances for all our officers and employees
 
 
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Although we do not have business interruption insurance, we consider our insurance coverage to be adequate and in accordance with the prevailing standards for the industry.  See “Item 3. Key Information. Risk Factors—Risks Relating to Our Business—Our insurance may not be sufficient to cover certain losses.”

Environmental Management

In Argentina, the Argentine government, the provincial governments and the government of the City of Buenos Aires are entitled to legislate on natural resources and environmental protection issues.  The 1994 Constitution reaffirms this principle, assigning to the Argentine government the establishment of broad environmental guidelines and to the provincial governments and to the government of the City of Buenos Aires the duty to implement the necessary legislation to attain national environmental goals.  The environmental policy for the electricity market is formulated by the Secretary of Energy and implemented by the ENRE.  Areas regulated by the ENRE include the tolerance level for electromagnetic fields, radio interference, voltage of contact and pass, liquid spills, disposal and handling of solid wastes, noise and vibration admissible levels and use, and the transport and storage of hazardous waste, including polychlorinated biphenyl (PCB), a viscous substance which was historically used to lubricate electrical transformers.  The Argentine Environmental Law requires that we eliminate the PCB in our transformers before the end of 2010.

Over the course of 2009, we completed the removal of PCBs from all our transformers with contaminated cooling oils exceeding 50 ppm (parts per million), the limit established by Federal law.

As part of our investment plan, we made important improvements to our network and implemented technological innovations to evaluate the impact of these improvements on the environment and the surrounding areas.  We are currently engaged, together with environmental governmental entities, in the application of procedures to decontaminate mineral oils.  We are required to apply for licenses from the ENRE for all our business activities, including those related to the environment.  We believe that we are in compliance in all material respects with all applicable environmental standards, rules and regulations established by the ENRE, the Secretary of Energy and federal, provincial and municipal authorities.  We have implemented environmental variables testing programs to evaluate environmental variances and to take corrective actions when necessary.  In addition, we have in place an environmental emergency plan to reduce potential adverse consequences if an environment accident should occur.  Finally, as part of our environmental actions, we improved and deepened the program of rational uses of energy in our buildings and in our customer equipment.

On October 19, 1999, the Instituto Argentino de Normalización (the Argentine Institute of Normalization) certified that we have an Environmental Management System that is in accordance with the requirements of the standards set by the International Standardization Organization (ISO) as specified in its release, ISO 14001, which relates specifically to environmental management systems.  This certification is reaffirmed on an annual basis, most recently as of November 2011.

Argentine law requires all persons whose activities risk environmental damage, such as us, to obtain environmental insurance up to a certain minimum coverage or set aside funds in an environmental restoration fund to pay for environmental liabilities that may arise.

Since the enactment of Resolution No. 481/11 of the Secretaria de Ambiente y Desarrollo Sustentable de la Nacion (Argentine Environment Secretary), our business is not considered an activity with significant environmental damage, and is exempt from the environmental insurance requirement set forth by Law 25,675 Section 22. We also have an environmental emergency plan that details the steps that would be taken in the event that our operations resulted in any environmental damage.
 
Seasonality

Demand for our services fluctuates on a seasonal basis.  For a discussion of this seasonality of demand, see “Item 5. Operating and Financial Review and Prospects—Demand—Seasonality of Demand.”
 
 
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THE ARGENTINE ELECTRICITY INDUSTRY

Historical Background

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 the 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), our predecessor, 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 January 1992, the Argentine federal congress adopted the Regulatory Framework Law (Law No. 24,065), which established guidelines for the restructuring and privatization of the electricity sector.  The Regulatory Framework 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 and subjected each to appropriate regulation.

The ultimate objective of the privatization process was to achieve a reduction in rates paid by users and improve quality of service through competition.  The privatization process commenced in February 1992 with the sale of several large thermal generation facilities formerly operated by SEGBA, and continued with the sale of transmission and distribution facilities (including those currently operated by our company) and additional thermoelectric and hydroelectric generation facilities.
 
Regulatory and Legal Framework

Role of the Government

The Argentine government has 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 international hydropower projects and nuclear power plants. Provincial authorities followed the Argentine government by divesting themselves of commercial interests and creating separate policy-making and regulatory entities for the provincial electricity sector.
 
 
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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. 1398/1992, since a distribution company cannot own generation units, a holder of generation units cannot own distribution concessions. However, the shareholders of the electricity generator may own an entity that holds distribution units, either as shareholders of the generator 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, any company controlled by a transmission company nor any company controlling a transmission company can own or be the majority shareholder or the controlling company of a distribution company; and

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

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. 1398/1992, a distribution company cannot own generation units. However, the shareholders of the electricity distributor may own generation units, either directly 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.
 
 
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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 the 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 the 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

 ·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.

2001 Economic Crisis

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.” The crisis and the Argentine government’s policies during this period severely affected the electricity sector.  Pursuant to the Public Emergency Law enacted to address the crisis, 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 energy concessions); and
 
 ·empowered the Argentine executive branch to conduct a renegotiation of public utility contracts (including energy concessions), including the tariffs for public utility services.

These measures, combined with the devaluation of the Peso and high rates of inflation, had a severe effect on public utilities in Argentina, including on us.  Because public utilities were no longer able to increase tariffs to cover their cost increases, the impact of inflation on costs led to decreases in their revenues in real terms and a deterioration of their operating performance and financial condition.  Most public utilities had also incurred large amounts of foreign currency indebtedness under the fixed one-to-one Peso per Dollar exchange rate of the Convertibility Regime and, following the elimination of the Convertibility Regime and the resulting devaluation of the Peso, the debt service burden of these utilities increased sharply, which led many of these utilities to suspend payments on their foreign currency debt in 2002.  This situation caused many Argentine electricity generators, transmission companies and distributors to defer making 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.
 
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The Argentine government has repeatedly intervened in and modified the rules of the wholesale electricity market since 2002 in an effort to address the electricity crisis generated by the economic crisis.  These modifications include the establishment of caps on the prices paid by distributors for electricity power purchases and the requirement that all prices charged by generators be calculated based on the price of natural gas (also regulated by the Argentine government) regardless of the fuel actually used in generation activities.  These modifications have created a huge structural deficit in the operation of the wholesale electricity market.  The Argentine government has made some attempts at correcting these problems, including proposing new rules to structure the wholesale electricity market in December 2004 and creating a special fund to finance infrastructure improvements in the energy sector in April 2006, but little progress has been made in advancing a system-wide solution to the problems confronting Argentina’s electricity sector.

In 2009, the Argentine government completed construction and began operation of two new 800 MW combined cycle generators constructed as part of its effort to increase energy supply.    The costs of construction were financed with net revenues of generators derived from energy sales in the spot market and through specific charges from CAMMESA to large users.  These funds had been deposited in the Fondo de Inversiones Necesarias que Permitan Incrementar la Oferta de Energía Eléctrica en el Mercado Eléctrico Mayorista (Fund for Investments Required to Increase Electricity Supply in the Wholesale Electricity Market, or FONINVEMEM).

In September 2006 the Secretary of Energy issued Resolution No. 1281/06 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 those industrial and commercial users whose energy demand is at or below 300 kilowatts (kW) and who lack 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 kW), such as us, will be authorized to secure energy supply up to their “base demand” (equal to their demand in 2005) by entering into term contracts; and

 ·
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 (Energy Plus) system at unregulated market prices.  The Energy Plus system consists of the supply of additional energy generation from new generation and/or generating agents, co-generators or auto-generators who are not agents of the electricity market or who as of the date of the resolution were not part of the wholesale electricity market.  Large users in the wholesale electricity market and large customers of distribution companies can also enter into contracts directly with these new generators or purchase energy at unregulated market prices through CAMMESA.
 
This resolution helped us to mitigate the risk of energy shortages due to a lack of electricity generation.  See “Business—Our concession—Our obligations.”
 
 
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Regulatory Authorities

The principal regulatory authorities responsible for the Argentine electricity industry are:

(1)           the Secretary of Energy;

(2)           the ENRE, the regulator for Edenor and

(3)           The OCEBA, the regulator for Eden.

The Secretary of Energy advises the Argentine government on matters related to the electricity sector and is responsible for the application of the policies concerning the Argentine electricity industry. See “Risks Relating to Our Business - Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our tariff adjusted to reflect increases in our distribution costs in a timely manner, could have a material adverse effect on our capacity to perform our financial and commercial obligations. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern”

The ENRE is an autonomous agency created by the Regulatory Framework Law.  The ENRE has a variety of regulatory and jurisdictional powers, including, among others:

 ·enforcement of compliance with the Regulatory Framework Law and related regulations;

 ·control of the delivery of electric services and enforcement of compliance with the terms of concessions;

 ·adoption of rules applicable to generators, transmitters, distributors, electricity users and other related parties concerning safety, technical procedures, measurement and billing of electricity consumption, interruption and reconnection of supplies, third-party access to real estate used in the electricity industry and quality of services offered;

 ·prevention of anticompetitive, monopolistic and discriminatory conduct between participants in the electricity industry;

 ·imposition of penalties for violations of concessions or other related regulations; and

 ·arbitration of conflicts between electricity sector participants.

The ENRE is managed by a five-member board of directors appointed by the executive branch of the Argentine government.  Two of these five members are nominated by the Consejo Federal de la Energía Eléctrica (Federal Council on Electricity, or CFEE).  The CFEE is funded with a percentage of revenues collected by CAMMESA for each MWh sold in the market.  Sixty percent of the funds received by the CFEE are reserved for the Fondo Subsidiario para Compensaciones Regionales de Tarifas a Usuarios Finales (Regional Tariff Subsidy Fund for End Users), from which the CFEE makes distributions to provinces that have met certain specified tariff provisions.  The remaining forty percent is used for investments related to the development of electrical services in the Argentine provinces.

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.
 
 
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The Wholesale Electricity Market

Overview

The Secretary of Energy established the wholesale electricity market in August 1991 to allow electricity generators, distributors and other agents to buy and sell electricity in spot transactions or under long-term supply contracts at prices determined by the forces of supply and demand.

The wholesale electricity market consists of:

 ·a term market in which generators, distributors and large users enter into long-term agreements on quantities, prices and conditions;

 ·a spot market, in which prices are established on an hourly basis as a function of economic production costs, represented by the short-term marginal cost of production and demand; and

 ·a stabilization fund, managed by CAMMESA, which absorbs the differences between purchases by distributors at seasonal prices and payments to generators for energy sales at the spot price.

Operation of the Wholesale Electricity Market

The operation of the wholesale electricity market is administered by CAMMESA.  CAMMESA was created in July 1992 by the Argentine government, which currently owns 20% of CAMMESA’s capital stock.  The remaining 80% is owned by various associations that represent wholesale electricity market participants, including generators, transmitters, distributors and large users.

CAMMESA is in charge of:

 ·managing the national interconnection system pursuant to the Regulatory Framework Law and related regulations, which includes:

 ·determining technical and economic dispatch of electricity (i.e., schedule of production for all generating units on a power system to match production with demand) in the national interconnection system;

 ·maximizing the system’s security and the quality of electricity supplied;

 ·minimizing wholesale prices in the spot market;

 ·planning energy capacity needs and optimizing energy use pursuant to the rules set out from time to time by the Secretary of Energy, and

 ·monitoring the operation of the term market and administering the technical dispatch of electricity pursuant to any agreements entered into in such market;

 ·acting as agent of the various wholesale electricity market participants;

 ·purchasing or selling electricity from or to other countries by performing the relevant import/export operations; and

 ·providing consulting and other services related to these activities.

The operating costs of CAMMESA are covered by mandatory contributions made by wholesale electricity market participants.  CAMMESA’s annual budget is subject to a mandatory cap equivalent to 0.85% of the aggregate amount of transactions in the wholesale electricity market projected for that year.

Wholesale Electricity Market Participants

The main participants in the wholesale electricity market are generation, transmission and distribution companies.  Large users and traders participate also in the wholesale electricity market but to a lesser extent.
 
Generators

According to a recent report issued by CAMMESA, there are 82 generation companies 23 auto-generation and three co-generation companies in Argentina, most of which operate more than one generation plant.  As of December 31, 2011, Argentina’s installed power capacity was 32,373 MW.  Of this amount, 58% was derived from thermal generation, 38% from hydraulic generation and 4% from nuclear generation.  Private generators participate in CAMMESA through the Asociación de Generadores de Energía Eléctrica de la República Argentina (Argentine Association of Electric Power Generators, or AGEERA), which is entitled to appoint two acting and two alternate directors of CAMMESA.

 
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Transmitters

Electricity is transmitted from power generation facilities to distributors through high voltage power transmission systems.  Transmitters do not engage in purchases or sales of power.  Transmission services are governed by the Regulatory Framework Law and related regulations promulgated by the Secretary of Energy.

In Argentina, transmission is carried at 500 kV, 300 kV, 220 kV and 132 kV through the national interconnection system.  The national interconnection system consists primarily of overhead lines and sub-stations (i.e., assemblies of equipment through which electricity delivered by transmission circuits is passed and converted into voltages suitable for use by end users) and covers approximately 90% of the country.  The majority of the national interconnection system, including almost all of the 500 kV transmission lines, has been privatized and is owned by Transener, which is indirectly co-controlled by Pampa Energía, our indirect controlling shareholder and the largest integrated electricity company in Argentina.  Regional transmission companies, most of which have been privatized, own the remaining portion of the national interconnection system.  Supply points link the national interconnection system to the distribution systems, and there are interconnections between the transmission systems of Argentina, Brazil, Uruguay and Paraguay allowing for the import and export of electricity from one system to another.

Transmission companies also participate in CAMMESA by appointing two acting and two alternate directors through the Asociación de Transportistas de Energía Eléctrica de la República Argentina (Argentine Association of Electric Power Transmitters, or ATEERA).

Distributors

Each distributor supplies electricity to consumers and operates the related distribution network in a specified geographic area pursuant to a concession.  Each concession establishes, among other things, the concession area, the quality of service required, the rates paid by consumers for the distribution service and an obligation to satisfy demand.  The ENRE monitors compliance by federal distributors, including us and Edesur with the provisions of the respective concessions and with the Regulatory Framework Law.  In turn, provincial regulatory agencies monitor compliance by local distributors with their respective concessions and with local regulatory frameworks.

The 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.

Distributors participate in CAMMESA by appointing two acting and two alternate directors through the Argentine Association of Asociación de Distribuidores de Energía Eléctrica de la República Argentina (Electric Power Distributors, or ADEERA).
 
Large Users

The wholesale electricity market classifies large users of energy into three categories: Grandes Usuarios Mayores (Major Large Users, or GUMAs), Grandes Usuarios Menores (Minor Large Users, or GUMEs) and Grandes Usuarios Particulares (Particular Large Users, or 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.
 
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Large users participate in CAMMESA by appointing two acting and two alternate directors through the Asociación de Grandes Usuarios de Energía Eléctrica de la República Argentina (Argentine Association of Electric Power Large Users, or AGUEERA).

Traders

Since 1997, traders are authorized to participate in the wholesale electricity market by intermediating block sales of energy.  Currently, there are eight authorized traders in the wholesale electricity market, several of which conduct transactions with Comercializadora de Energía del Mercosur S.A. (CEMSA) in the export market.

Spot Market

Spot Prices

The emergency regulations enacted after the Argentine crisis in 2001 and 2002 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 last unit to be dispatched for the next unit as measured at the Ezeiza 500 kV substation, which is the system’s load center and is in close proximity of 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 not in the vicinity 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.
 
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 pricing ladder organized by level of customer consumption (which varies depending on the category of customer) charged by CAMMESA to distributors at a price significantly below the spot price charged by generators.  According to the current regulatory framework, the Secretary of Energy is required to adjust the seasonal price charged to distributors in the wholesale electricity market every three months and the ENRE must calculate the tariff scheme as a result of applying the adjustment.  However, between January 2005 and November 2008, the ENRE did not make these adjustments.  In November 2008, the ENRE passed Resolution 628/08 establishing a new distribution tariff as from October 1, 2008 and modified seasonal prices charged to federal distributors, including the consumption levels that make up the pricing ladder.
 
 
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On August 14, 2009, the ENRE adopted Resolution No. 433/2009 approving two tariff charts to be applied by us. The first one applied retroactively for the period from June 1, 2009 to July 31, 2009. The second rate chart was effective for the period from August 1, 2009 to September 30, 2009. These charts were based on the new subsidized seasonal prices set forth Resolution No. 652/09 issued by the Secretary of Energy. The new price charts aimed at reducing the impact of increased winter electric energy consumption on the invoicing of residential customers with bi-monthly consumption exceeding 1,000 kWh. The ENRE also instructed us to break down the floating charges of all invoices into the amounts subsidized and not subsidized by the Argentine government.

As of October 1, 2009, the tariff chart of October 2008 was reinstated pursuant to ENRE Resolution No. 628/2008. The floating charge of all invoices continues to be broken down into the amounts subsidized and not subsidized by the Argentine government.

During 2010, the seasonal rate chart was revised twice.  For the months of June and July, tariffs were revised so that residential customers with consumption levels above 1000 KWh received a full subsidy for their energy purchases.  For the months of August and September, residential customers with consumption levels above 1000 KWh received a subsidy equal to 70 percent of their energy purchase price.  In 2011, the seasonal revised chart was similarly revised and subsidies applied as in 2010.

On November 7, 2011 the Secretary of Energy issued Resolution No. 1301/11 establishing the seasonal summer programming, eliminating subsidies to certain economic activities according to the Resolution are in position to face the real costs to be incurred to achieve the supply of electricity demand. This provision has been extended to residential users discriminated by geographic area and type of residence. These revised rate schedules did not affect our VAD.

Prior to the implementation of the emergency regulations, seasonal prices were determined by CAMMESA based on an estimate of the weighted average spot price that would be paid by the next generator that would come on-line to satisfy a theoretical increase in demand (marginal cost), as well as the costs associated with the failure of the system and several other factors.  CAMMESA would use a seasonal database and optimization models in determining the seasonal prices and would consider both anticipated energy supplies and demand, including, expected availability of generating capacity, committed imports and exports of electricity and the requirements of distributors and large users.

Stabilization Fund

The stabilization fund, managed by CAMMESA, absorbs the difference between purchases by distributors at seasonal prices and payments to generators for energy sales at the spot price.  When the spot price is lower than the seasonal price, the stabilization fund increases, and when the spot price is higher than the seasonal price, the stabilization fund decreases.  The outstanding balance of this fund at any given time reflects the accumulation of differences between the seasonal price and the hourly energy price in the spot market.  The stabilization fund is required to maintain a minimum amount to cover payments to generators if prices in the spot market during any relevant quarter exceed 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.

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, 2011, the stabilization fund balance was approximately Ps. 12,263 million, net of National Treasury contributions. This deficit has been financed by the Argentine government through loans to CAMMESA and with FONINVEMEM funds, but these continue to be insufficient to cover the differences between the spot price and the seasonal price.

 
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Term Market

Generators are able to 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 at times been lower than the seasonal price that distributors are required to pay in the spot market.  However, as a result of the emergency regulations, spot prices in the term market are currently higher than seasonal prices, particularly with respect to residential tariffs, making it unattractive for distributors to purchase energy under term contracts while prices remain at their current levels.

Energía Plus

In September 2006, the Secretary of Energy issued Resolution No. 1281/06 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 whose energy demand is 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

 ·large users in the wholesale electricity market and large customers of distribution companies (in both cases whose energy demand is above 300 kilowatts) must satisfy any consumption in excess of their base demand with energy from the Energía Plus system at unregulated market prices. The Energía Plus system consists in the supply of additional energy generation from new generation and/or generating agents, co-generators or autogenerators that are not agents of the electricity market or who as of the date of the resolution were not part of the wholesale electricity market. Large users in the wholesale electricity market and large customers of distribution companies can also enter into contracts directly with these new generators or purchase energy at unregulated market prices through CAMMESA.

Only the new generation facilities (which include generators that were not connected to the SADI as of September 5, 2006) and new generation capacity expansions in respect of existing capacity as of such date are entitled to sell electricity under the Energía Plus system.

The resolution also established the price large users are required to pay for excess demand, if not previously contracted under Energía Plus, which is equal to the generation cost of the last generation unit transmitted to supply the incremental demand for electricity at any given time. The Secretary of Energy established certain temporary price caps, to be paid by large users for any excess demand until December 2008 (Ps. 225/MWh for GUDIs and Ps. 185/Mwh for GUMEs and GUMAs).
 
These prices have been updated as follows:

 ·After August 2011, the median incremental charge for excess demand was set at 320 $/MWh GUMAs and GUMEs and 455 $/MWh for GUDIs; and

 ·After December 2011, median incremental charge for excess demand for those who are not subsidized was set at 360 $/MWh.

 
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ORGANIZATIONAL STRUCTURE

We are a subsidiary of Pampa Energía, the largest fully integrated electricity company in Argentina.  In addition to its indirect stake in us, Pampa Energía currently owns several investments in the Argentine electricity sector, including a 50% interest in the controlling shareholder of the principal electricity transmission company in Argentina, Transener, and controlling stakes in five generation plants located in the Buenos Aires, Salta, Mendoza and Neuquén provinces (Central Piedra Buena S.A., Hidroeléctrica Los Nihuiles S.A., Hidroeléctrica Diamante S.A., Central Térmica Güemes S.A. and Loma de la Lata S.A.).

The following diagram presents our current corporate structure, including our subsidiaries and their respective direct ownership interests, as of April 25, 2012:


As of the date of this annual report, we are in the process of spinning off and selling Edelar, Edesa and EGSSA and we have completed the sale of Edesal. See “Item 4.  Information on the Company—History and Development of the Company—Acquisition of Emdersa and Aeseba.”

All of the subsidiaries presented above have their jurisdiction of incorporation in the Republic of Argentina.  See “—History and Development of the Company—Acquisition of Emdersa and Aeseba.”

PROPERTY, PLANT AND EQUIPMENT

Our main properties are transmission lines, substations and distribution networks, all of which are located in the northwestern part of the greater Buenos Aires metropolitan area and in the northern part of the City of Buenos Aires.  Substantially all of our properties are held in concession to provide the electricity distribution service, which, by its nature, is considered to be an essential public service.  In accordance with Argentine law and court precedents, assets which are necessary for the rendering of an essential public service are not subject to attachment or attachment in aid of execution.  The net book value of our property, plant and equipment as recorded on our balance sheet as of December 31, 2011, 2010 and 2009 was Ps. 4,738.3 million, Ps. 3,689.5 million and Ps. 3,482.4 million, respectively.
 
 
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Our gross asset base represents property, plant and equipment related to our distribution services.  Because our total property, plant and equipment represents substantially the same assets, but calculated at historical cost as adjusted by inflation through February 2003, we believe the inflation-adjusted value of our property, plant and equipment is an accurate measure of our asset base for purposes of calculating our return on our assets.  See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Tariffs—Distribution Margin or Value-Added for Distribution (VAD)—Revisión Tarifaria Integral (Integral Tariff Revision, or RTI).” The last adjustment for inflation to our property, plant and equipment was registered in February 2003 in accordance with Argentine GAAP.  Accordingly, we estimate the effects of inflation on our property, plant and equipment for periods after February 2003 for purposes of determining the value of our gross asset base in connection with our concession.  See Note 2 to our audited consolidated financial statements included elsewhere in this annual report.
 
Item 4A.                Unresolved Staff Comments

None.

Item 5.                Operating and Financial Review and Prospects

The following discussion should be read in conjunction with our audited consolidated financial statements as of December 31, 2011 and 2010 and for the years ended December 31, 2011, 2010 and 2009.  Our audited consolidated financial statements have been prepared in accordance with Argentine GAAP, which differ in certain significant respects from U.S. GAAP and IFRS.  Note 32 to our audited consolidated financial statements included elsewhere in this annual report provides a description of the significant differences between Argentine GAAP and U.S. GAAP, as they relate to us, and a reconciliation to U.S. GAAP of net (loss) income for the years ended December 31, 2011, 2010 and 2009 and shareholders’ equity as of December 31, 2011 and 2010.  Our financial statements have not been adjusted for inflation after February 28, 2003, in accordance with Argentine GAAP.  See “Item 3. Key Information—Selected financial data.”

In addition note 29 to our audited consolidated financial statements included elsewhere in this annual report provides a reconciliation between Argentine GAAP and IFRS of shareholders’s equity as of January 1, 2011(transition date) and December 31, 2011 and of net (loss) for the year ended December 31, 2011.

We have prepared our annual financial statements for the fiscal year ended December 31, 2011 included herein, assuming that we will continue as a going concern. Our independent auditors, PWC, issued a report dated April 26, 2012 on our financial statements as of and for the years ended December 31, 2011 and 2010, which contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern.  As discussed in Notes 2 and 8.c to the financial statements, the delays in obtaining tariff increases, recognition of cost adjustments  requested by the Company in accordance with the terms of the Adjustment Agreement  and the continuous increase in operating expenses have affected significantly the economic and financial position of the Company and have raised substantial doubt with respect to our ability to continue as a going concern.  Management's plans in response to these matters are also described in Note 2. However, our financial statements as of and for the year ended December 31, 2011 and 2010 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty.  See Item 3: “Key Information-Risk Factors - Risks Relating to Our Business - Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our tariff adjusted to reflect increases in our distribution costs in a timely manner, could have a material adverse effect on our capacity to perform our financial and commercial obligations. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern” and Item 18: “Financial Statements.”
 
OPERATING RESULTS

We distribute electricity on an exclusive basis to the northwestern part of the greater Buenos Aires metropolitan area and the northern part of the City of Buenos Aires, comprising an area of 4,637 square kilometers, with an aggregate population of approximately seven million people, and to the northern area of the Province of Buenos Aires through the Eden Concession, which comprises an area of 109,141 square kilometers.  Pursuant to our concession, we have the exclusive right to distribute electricity to all users within our concession area, including to wholesale electricity market participants.  At December 31, 2011, we had 3,038,669 customers (considering both Edenor and Eden).

 
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We serve two markets: the regulated market, which is comprised of users who are unable to purchase their electricity requirements directly through the wholesale electricity market, and the unregulated market, which is comprised of large users that purchase their electricity requirements directly from generators in the wholesale electricity market.  The terms and conditions of our services and the tariffs we charge users in both the regulated and unregulated markets are regulated by the ENRE and the OCEBA.

Factors Affecting Our Results of Operations

Our net sales consist mainly of net energy sales to users in our service area.  Our net energy sales reflect the tariffs we charge our customers (which include our energy purchase costs) and reflect deductions for fines and penalties we incur during the year.  Any adjustments, however, to our accrual for fines and penalties resulting from increases in our distribution margins are recorded under financial income (expenses) and holding gains (losses).  See “Item 4. Information on the Company—Our concession —Fines and penalties.”

In addition, our net sales include late payment charges that we bill our customers for delays in payment of their bills, connection and reconnection charges and leases of poles and other network equipment.

We are currently engaged in RTI with the ENRE, as required by the Adjustment Agreement.  The Adjustment Agreement currently contemplates a cost adjustment mechanism for the transition period during which the RTI is being conducted.  This mechanism, known as the Cost Monitoring Mechanism (CMM), requires the ENRE to review our actual distribution costs every six months (in May and November of each year) and adjust our distribution margins to reflect variations of 5% or more in our distribution cost base.  We may also request that the ENRE apply the CMM at any time that the variation in our distribution cost base is at least 10% or more.  Despite the adjustment we were granted under the CMM in October 2007 and July 2008, we cannot assure you that we will receive similar adjustments in the future. As of the date of this annual report we have requested eight increases under the CMM beginning in May 2008, which increases are still being reviewed by the ENRE. Under the terms of the Adjustment Agreement, these eight increases should have been approved in May 2008, November 2008, May 2009, November 2009, May 2010, November 2010, May 2011 and November 2011.

During the year ended December 31, 2011, we recorded a significant decrease in net income and operating income, and our working capital and liquidity levels were negatively affected, primarily as a result of the delay in obtaining a tariff increase and in having our tariff adjusted to reflect increases in our distribution costs, coupled with a constant increase in operating costs to keep adequate service levels.  We currently believe that our financial situation will continue worsening, and we estimate that during 2012 we will have negative cash flows and operating results.  If we are not able to recover all of the incremental costs contemplated by the increase requests pursuant to the CMM and all such future cost increases or there is a significant lag time between when we incur the incremental costs and when we receive increased revenues, and/or if we are not successful in achieving a satisfactory re-negotiation of our tariff structure, we may be unable to comply with our financial and commercial obligations, we may suffer liquidity shortfalls and we may need to restructure our debt to ease our financial condition, any of which, individually or in the aggregate, would have a material adverse effect on our business and results of operations and may cause the value of our ADSs to decline. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern and our auditors’ report included elsewhere in this annual report contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern.   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 Business—Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our tariff adjusted to reflect increases in our distribution costs in a timely manner, could have a material adverse effect on our capacity to perform our financial and commercial obligations.  As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern.”
 
 
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In addition, if we fail to comply with the obligations under our concession, we may become subject to fines and penalties imposed by the ENRE, which may include the forfeiture of the Edenor concession.  Some of these fines and penalties are payable by granting credits or bonuses to our customers to offset a portion of their electricity charges.  Fines and penalties that are not directly related to our customers, such as fines for public safety violations, are paid directly to the ENRE.  We deducted approximately Ps. 81.1 million in fines and penalties from our revenues in the year ended December 31, 2011, Ps. 80.0 million in the year ended December 31, 2010 and Ps. 58.5 million in the year ended December 31, 2009.  We incurred significantly higher levels of fines and penalties in 2009, 2010 and 2011, due to an increase in the underlying cost of energy factors upon which the fines and penalties are calculated.   In addition, on February 8, 2011, ENRE passed Resolution 32/2011, imposing fines on us and obligating us to compensate customers for any disruption in service resulting from a power outage during a heat-wave that occurred from December 20 to December 31, 2010 in alleged violation of our concession.  The approximate amount of the fines was Ps. 25.3 million, which is recorded in the Other non-current liabilities line item of our financial statements for the year ended December 31, 2011.  See “Item 4. Information on the Company—Fines and penalties.”

The following table sets forth the composition of our net sales for the periods indicated:
 
  
Year ended December 31,
 
  
2011(1)
  2010  2009 
  (in millions of Ps.) 
Energy sales Ps.3,524.8  Ps.2,205.4  Ps.2,094.3 
Fines and penalties  (81.1)  (80.0)  (58.5)
Net energy sales  3,443.7   2,125.4   2,035.8 
Late payment charges  31.3   22.2   20.7 
Connection charges  8.6   5.6   5.7 
Reconnection charges  2.4   2.4   2.0 
Pole leases  79.1   18.1   13.6 
Net sales Ps.
3,565.0
  Ps.
2,173.6
  Ps.
2,077.9
 
 

(1)Consolidated financial data as of December 31, 2011 includes Edenor, Aeseba and Emdersa.

The following tables show our energy sales by category of customer (in GWh and in Pesos) for the periods indicated:
 
        Year ended December 31, 
  2011  2010  2009  2008  2007 
  Edenor  AESEBA  EMDERSA                                  
  (in GWh) 
Residential  8,139   41%  619   22%  1,390   36%  7,796   40%  7,344   40%  7,545   41%  7,148   40%
Small commercial  1,601   8%  227   8%        1,543   8%  1,470   8%  1,530   8%  1,485   8%
Medium commercial  1,700   9%  104   4%  1,191   31%  1,634   8%  1,565   9%  1,597   9%  1,552   9%
Industrial
  3,442   17%  807   29%  385   10%  3,378   18%  3,204   18%  3,277   18%  3,628   20%
Wheeling system(1)
  4,156   21%  291   10%  699   18%  3,891   20%  3,622   20%  3,700   20%  3,111   17%
Others:                                                        
Public lighting
  656   3%  80   3%  189   5%  654   3%  644   4%  644   3%  643   4%
Cooperatives        657   24%                                      
Shantytowns
  384   2%              377   2%  351   2%  304   2%  301   2%
Others(2) 
  20      6   0%        20      20      19      19    
Total
  20,098   100%  2,791   100%  3,853   100%  19,292   100%  18,220   100%  18,616   100%  17,886   100%
 

(1)           Wheeling charges represent our tariffs for large users, which consist of a fixed charge for recognized technical losses and a charge for our distribution margins but exclude charges for electric power purchases, which are undertaken directly between generators and large users.
(2)           Represents energy consumed internally by our company and our facilities.
 
 
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Year ended December 31, 2011
 
                   
  Edenor  Aeseba  Emdersa 
  (in millions of Pesos) 
    
Residential Ps.730.5   32%  162.1   28%  311.0   38%
Small commercial  348.7   15%  86.8   15%      
Medium commercial  366.9   16%  33.7   6%  314.6   38%
Industrial  322.3   27%  193.7   33%  99.9   12%
Wheeling system(3)
  150.3   7%  22.8   4%  60.6   7%
Others:                        
Public lighting  55.9   2%  21.5   4%  38.1   5%
Cooperatives          61.2   11%      
Shantytowns and others(4)
  31.0   1%            
Total Ps. 2,305.7   100%  581.9   100%  824.1   100%
 
  Year ended December 31, 
  2010  2009  
2008(2)
  
2007(1)
 
                         
  (in millions of Pesos)             
Residential Ps. 692.0   31% Ps.679.6   32% Ps.575.8   30% Ps.488.7   29%
Small commercial  336.1   15%  322.3   15%  307.7   16%  276.5   16%
Medium commercial  349.5   16%  335.4   16%  317.4   17%  288.1   17%
Industrial  607.6   27%  569.2   27%  498.2   26%  481.9   28%
Wheeling system(3)
  142.0   6%  139.2   7%  113.6   6%  84.9   5%
Others:                                
Public lighting  56.6   3%  55.3   3%  55.9   3%  55.2   3%
Shantytowns and others(4)
  21.6   1%  (6.7)  0%  47.6   2%  29.1   2%
Total Ps. 2,205.4   100% Ps.2,094.3   100% Ps.1,916.2   100% Ps.1,704.4   100%
 

(1)Does not include the retroactive portion (Ps. 218.6 million ) of our February 2007 VAD increase.

(2)Does not include CMM adjustments collected through PUREE funds in 2008, which amounted to Ps. 84.6 million.

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

(4)In 2009, Shantytowns sales totaled Ps. 28.4 million, which was more than offset by an adjustment due to the reversal of the rate chart that determines the prices we charged our customers for electrical power purchases in June and July 2009.  See “Item 5. Operating and Financial Review and Prospects—Factors Affecting our Results of Operations—Recognition of Cost of Electric Power Purchases.”

Our revenues and results of operations are principally affected by economic conditions in Argentina, changes in our regulated tariffs and fluctuations in demand for electricity within our service area.  To a lesser extent, our revenues and results of operations are also affected by service interruptions or reductions in excess of those contemplated by our concession, which may lead us to incur fines and penalties imposed by the ENRE and OCEBA.

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.

 
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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 Argentine government in favor of the electricity sector, such as incentives for the construction of additional generation facilities and the creation of fiduciary 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:
 
  
Year ended December 31,
 
  
2011
  
2010
  
2009
  
2008
  
2007
 
Real GDP (% change)
  8.9   9.2   0.9   6.8   8.7 
Nominal GDP (in millions of Pesos)
  1,842,022   1,442,655   1,145,458   1,032,758   812,456 
Real Consumption (% change)
  10.7   9.1   1.5   6.6   8.8 
Real Investment (% change)
  16.6   21.2   (10.2)  9.1   13.6 
Industrial Production (% change)
  6.5   9.8   0.4   5.0   7.6 
Consumer Price Index
  9.7   10.5   6.3   8.6   8.8 
Nominal Exchange Rate (in Ps. /U.S.$ at year end)  4.32   4.01   3.82   3.47   3.15 
Exports (in millions of U.S.$)
  84,269   68,134   55,751   70,021   55,933 
Imports (in millions of U.S.$)
  73,922   56,502   38,771   55,423   44,780 
Trade Balance (in millions of U.S.$)
  10,347   11,632   16,980   12,598   11,153 
Current Account (% of GDP)
  0.0   0.8   3.7   2.2   2.5 
Reserves (in millions of U.S.$)
  46,376   52,145   48,548   46,386   46,176 
Tax Collection (in millions of Pesos)
  540,134   409,901   304,930   269,375   199,940 
Primary Surplus (in millions of Pesos)
  4,921   25,115   17,286   32,529   25,719 
Public Debt (% of GDP at December 31) *
  37.6   41.9   53.0   51.2   60.3 
Public Debt Service (% of GDP)
  5.9   5.5   5.8   5.6   5.8 
External Debt (% of GDP at December 31)
  32.6   35.5   38.4   40.3   48.3 
 
Sources: INDEC; Central Bank; Ministry of Economy and Production.
* Includes hold outs

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 co-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.

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.

 
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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 vice-president 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 wholesale price index increased by approximately 118% and the Argentine consumer price index 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.

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.
 
 
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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.

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,
 
 
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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 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 8.9%,  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).

Tariffs

Our revenues and margins are substantially dependent on the composition of our tariffs and on the tariff setting and adjustment process contemplated by our concession.  Our management is currently focused on the renegotiation of our tariff structure, which, if successful, would have a significant impact on our results of operations.
 
 
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The following chart shows the variation in our average tariff, including taxes, in Pesos per MWh in the periods indicated:

 

As for the year 2011 Energy Purchases for Eden were: $85/MWh, VAD:  $123.5/MWh and,Taxes: $99.3MWh.

Our tariffs for all of our customers (other than customers in the wheeling system) are composed of:

 ·the cost of electric power purchases, which we pass on to our 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 our energy losses in our distribution activities (determined by reference to a fixed percentage of energy and power capacity for each respective voltage level set forth in our concession);

 ·our regulated distribution margin, which is known as the value-added for distribution, or VAD; and