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Empresa Distribuidora y Comercial Norte (EDN)

Filed: 29 Apr 13, 8:00pm

 

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

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2012

Commission File number: 001-33422

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

Distribution and Marketing Company of the North S.A.

Argentine Republic

(Translation of registrant’s name into English)

(Jurisdiction of incorporation or organization)

Avenida Del Libertador 6363

Ciudad de Buenos Aires, C1428ARG

Buenos Aires, Argentina
(Address of principal executive offices)

Leandro Montero

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

Chief Financial Officer

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

Title of each class:

Name of each exchange on which registered

Class B Common Shares

New York Stock Exchange, Inc.*

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

New York Stock Exchange, Inc.

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

__________

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

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

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

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

YesNoþ 

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.  YesNoþ 

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.  Yesþ No

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

Large accelerated filerAccelerated filerþ Non-accelerated filer

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

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

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).  YesNoþ 

 

 

 


 
 

 

Item 1.

Identity of Directors, Senior Management and Advisors

1

Item 2.

Offer Statistics and Expected Timetable

1

Item 3.

Key Information

1

Item 4.

Information on the Company

30

Item 4A.

Unresolved Staff Comments

75

Item 5.

Operating and Financial Review and Prospects

75

Item 6.

Directors, Senior Management and Employees

121

Item 7.

Major Shareholders and Related Party Transactions

132

Item 8.

Financial Information

136

Item 9.

The Offer and Listing

142

Item 10.

Additional Information

145

Item 11.

Quantitative and Qualitative Disclosures about Market Risk

173

Item 12.

Description of Securities Other than Equity Securities

174

Item 13.

Defaults, Dividend Arrearages and Delinquencies

175

Item 14.

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

175

Item 15.

Controls and Procedures

175

Item 16A.

Audit Committee Financial Expert

177

Item 16B.

Code of Ethics

177

Item 16C.

Principal Accountant Fees and Services

177

Item 16D.

Exemptions from the Listing Standards for Audit Committees

178

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

178

Item 16F.

Change in Registrant’s Certifying Accountant

178

Item 16G.

Corporate Governance

178

Item 16H.

Mine Safety Disclosures

178

Item 17.

Financial Statements

182

Item 18.

Financial Statements

182

Item 19.

Exhibits

182

Index to Financial Statements

F-1

 


 
 

 

Table of Contents

 

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 basisprior to March 1, 2011, (ii) Edenor,Empresa Distribuidora Eléctrica Regional S.A. (“Emdersa”) andAeseba S.A. (“Aeseba”) when references are made toinformation as of any date withinthe period between March 1, 2011 and December 31, 2012.  References to Edenor, Emdersa and/or Aeseba onstandalone basis are made by naming each company as the case may be.  Our financial statements as of December 31, 2012,include the financial data of Aeseba.  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 TarifariaIntegral 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, orArgentina” and particularly in the geographic market we serve;

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

·        electricity shortages;

·        potential disruption or interruption of our service;

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

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

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

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

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

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

·        additional matters identified in “Risk factors”.

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

SELECTED FINANCIAL DATA

The following tables present our summary financial data for the years ended December 31, 2012 and 2011. This information should be read in conjunction with our audited consolidated financial statements as of and for the years ended December 31, 2012  and 2011, and the related notes thereto (theConsolidated Financial Statementsˮ) and Item 5. Operating and Financial Review and Prospectsˮ included elsewhere in this annual report. The financial data as of December 31, 2012, is derived from our Consolidated Financial Statements. Our Consolidated Financial Statements are the first annual audited financial statements prepared in accordance with International Financial Reporting Standards (IFRSˮ), as issued by the International Accounting Standards Board (IASBˮ).  

Until the year ended December 31, 2011, our consolidated financial statements were prepared in accordance with generally accepted accounting principles in Argentina (Argentine GAAPˮ) and in accordance with the rules of the Argentine National Securities Commission (CNVˮ). For 2012, we have prepared our financial statements in accordance with IFRS, as issued by the IASB, and these have been approved by resolution of the Board of Directors’ meeting held on April 30, 2013.

The mandatory adoption of IFRS for public companies in Argentina is effective for fiscal years beginning January 1, 2012. Therefore, the consolidated financial statements as of December 31, 2011 for filing with the CNV were prepared in accordance with Argentine GAAP, which differs in certain respects from IFRS. The selected consolidated income statement data for the years ended December 31, 2012 and 2011 and the selected consolidated balance sheet data as of December 31, 2012 and 2011 have been prepared in accordance with IFRS and have been derived from our Consolidated Financial Statements,which were audited by Price Waterhouse & Co. S.R.L. (“PwC”), member firm of PricewaterhouseCoopers network, whose report dated April 30, 2013 is included elsewhere herein.  See Item 18 – “Financial Statements”.

We have prepared our annual financial statements for the fiscal year ended December 31, 2012 included herein, assuming that we will continue as a going concern. Our independent auditors, PwC, issued a report dated April 30, 2013, on our financial statements as of and for the years ended December 31, 2012 and 2011, which contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern.  As discussed in Note 1 to the Consolidated Financial Statements, the delay in obtaining tariff increases, the cost adjustments recognition requested by the Company in accordance with the terms of the Adjustment Agreement and the continuous increase in operating expenses that are necessary to maintain the level of service significantly affected 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 1. However, our Consolidated Financial Statements as of and for the years ended December 31, 2012 and 2011 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty.  See Item 3: “Key Information - Risk Factors - Risks Relating to Our Business - Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our 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 Consolidated Financial Statements are included on pages F-1 through F-101 of this annual report.

Our financial statements as of December 31, 2012, include the financial data of Aeseba. In preparing the Consolidated Financial Statements, the Company combined the financial statements of Aeseba, including its subsidiary, Empresa Distribuidora de Energía Norte S.A. (“Eden”), an electricity distribution company with the concession area in the northern part of the Province of Buenos Aires, line by line, adding together alike items of assets, liabilities, equity, income and expenses in compliance with International Accounting Standard (“IAS”) 27 and IFRS 10.   Furthermore, as of December 31, 2011, in accordance with the decision of the Board of Directors to divest and sell the subsidiaries of Emdersa Holding S.A. (Emdersa Holdingˮ or “EHSA”), including Empresa

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Distribuidora Eléctrica Regional S.A. (“Emdersa”) and its subsidiaries, Empresa Distribuidora de San Luis S.A. (“Edesal”), Empresa Distribuidora de La Rioja S.A. (“Edelar”), Empresa Distribuidora de Salta S.A. (“Edesa”) and Emdersa Generación Salta S.A. (“EGSSA”), we have classified the corresponding assets and liabilities associated to these subsidiaries in the Consolidated Financial Statements as of December 31, 2012 and 2011 as “Assets of disposal groups classified as held for sale” and “Liabilities of disposal groups classified as held for sale”. As of October 11, 2011, October 25, 2011 and May 10, 2012 the Company sold its direct and indirect stake in EGSSA (subject to a condition precedent related to EMDERSA’s spin-off), Edesal and Edesa, respectively. The corresponding charges to results have been included within “Loss from discontinued operations” line item in our consolidated statements of comprehensive loss for the years ended December 31, 2012 and 2011.

 

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, 2012 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, 2012 of Ps. 4.918 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.”

 

 

 

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Certain figures included in this annual report have been subject to rounding adjustments.  Accordingly, figures shown as totals may not sum due to rounding.

 

 

 

 

Consolidated Statements of Comprehensive Loss

 

IFRS

2012(*)

2012(*)

2011(*)

 

(figures in millions)

 

Continuing Operations

 

 

 

Revenue from sales (1)

U.S. $

 757.5

Ps.

 3,725.3

Ps.

2,805.8

Revenue from construction (2)

23.9

117.6

87.4

Electric power purchases

(419.3)

(1,740.2)

(1,130.9)

Cost of Construction

(23.9)

(117.6)

(87.4)

Subtotal

338.2

1,663.0

1,480.4

Transmission and distribution expenses

(319.3)

(1,570.1)

(1,094.8)

Gross Profit

18.9

93.0

385.5

 

Selling expenses

 

(87.5)

(430.4)

 

(310.3)

Administrative expenses

(60.3)

(296.4)

(224.3)

Gain from acquisition of companies (3)

-

-

435.0

Other operating income

6.8

33.3

27.9

Other operating expenses

(22.9)

(112.8)

(54.9)

Operating (expense) income

(145.0)

(713.3)

258.9

Financial Income

17.5

86.0

55.6

Financial Expenses (4)

(60.4)

(296.8)

(216.1)

Other financial results

(33.9)

(166.7)

(97.2)

Net Financial Expense

(76.8)

(377.5)

(257.8)

(Loss) Profit before taxes

(221.8)

(1,090.8)

1.1

Income Tax

20.3

99.8

(153.0)

Loss for the year from continuing operations

(201.5)

(991.0)

(151.9)

Loss from discontinued operations

(4.6)

(22.4)

(139.5)

Loss for the year

(206.1)

(1,013.4)

(291.4)

 

 

 

 

Loss for the year attributable to:

 

 

 

Owners of the parent

(206.7)

(1,016.5)

(304.1)

Non- controlling interests

0.6

3.1

12.7

Loss for the year

(206.1)

(1,013.4)

(291.4)

 

 

 

 

Loss for the year attributable to Owners of the parent:

 

 

 

 

Continuing Operations

(203.5)

(1,000.6)

(157.7)

Discontinued Operations

(3.2)

(15.8)

(146.4)

 

U.S. $  

 (206.7)

Ps.

 (1,016.5)

Ps.

 (304.1)

 

Other Comprehensive (income) loss

 

 

 

Items that will not be reclassified to profit or loss

 

 

 

Actuarial losses on benefit plans

1.0

4.7

(13.8)

Tax effect of actuarial losses on benefit plans

(0.3)

(1.6)

4.8

Total other comprehensive loss from discontinued operations

-

-

(3.4)

Total other comprehensive income (loss)

0.6

3.1

(12.3)

 

 

 

 

Comprehensive loss for the year attributable to:

 

 

 

Owners of the parent

(206.0)

(1,013.2)

(315.4)

Non- controlling interests

0.6

2,8

11.7

Comprehensive loss for the year

(205.4)

(1,010.4)

(303.7)

 

 

 

 

 

 

Comprehensive loss for the year attributable to owners of the parent:

 

 

 

 

 

Continuing Operations

(202.8)

(997.4)

(166.4)

Discontinued Operations

(3.2)

(15.8)

(149.0)

 

U.S. $ 

(206.0)

Ps.

(1,013.2)

Ps.

 (315.4)

 

 

 

 

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

 

 

 

 

 

 

 

Number of shares outstanding

897,042,600

897,042,600

897,042,600

 

 

 

 

Basic and diluted loss per share – from continuing operations

(0.228)

(1.12)

(0.17)

Basic and diluted loss per share – from discontinued operations

(0.004)

(0.02)

(0.16)

 

 

 

 

Basic and diluted loss per ADS attributable to owners of the parent(5):

 

 

 

Basic and diluted loss per ADS - from continuing operations

(4.536)

(22.31)

(3.52)

Basic and diluted loss per ADS - from discontinued operations

(0.072)

(0.35)

(3.26)

 

______________________

(*)       Consolidated financial data.

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

(2)      In accordance with IFRIC 12, the construction of the infrastructure necessary for the subsidiary EDEN S.A. to distribute electricity is considered a service rendered to the concession authority and the corresponding revenue is reflected at cost within the sales account.

(3)      The excess of the fair value of the net assets acquired from Emdersa and Aeseba, including those recognized in the reassessment of the purchase price allocation, over the consideration paid and the non-controlling interest has been considered as a gain in bargain purchase, because the seller had started a process for divesting its net assets in the region and, consequently, it sold them at values lower than their respective fair value. The acquisitions have been recorded in accordance with the purchase method on the basis of the fair value measurements of the acquired assets and liabilities.

(4)      Includes commercial interests accrued by CAMMESA of Ps. 55.2 million, under the Commercial Interest line item.

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

 

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Table of Contents

 

 

2012(*)

2012(*)

2011(*)

01.01.2011(*)

 

(figures in millions)

ASSETS

 

Non-current assets:

 

 

 

 

Property, plant and equipment

U.S.$                       883.4

Ps.                        4,344.6

Ps.                        3,995.3

Ps.                        3,712.3

Intangible Assets

172.0

845.8

793.0

-

Interest in joint ventures

0.1

0.4

0.4

0.4

Trade Receivables

9.7

47.7

45.7

45.5

Other receivables

14.3

70.5

50.3

18.5

Total non‑current assets

U.S.$                    1,079.5

Ps.                        5,309.1

Ps.                       4,884.7

Ps.                        3,776.8

Current assets:

 

 

 

 

Assets under construction

U.S.$                        17.2.

Ps.                             84.5

Ps.                            45.5

-

Inventories

17.3

85.0

45.3

12.4

Trade receivables

180.8

889.4

534.7

421.2

Derivative Financial Instruments

-

-

1.3

-

Financial Assets at fair value through profit or loss

0.7

3.4

2.1

430.8

Other receivables

27.6

135.6

76.3

40.1

Cash and cash equivalents

14.5

71.1

130.5

246.0

Total current assets

U.S.$                      258.0.

Ps.                       1, 269.0

Ps.                        835. 8

Ps.                       1,150.5

Assets of disposal groups classified as held for sale

45.4

223.4

1,291.1

-

TOTAL ASSETS

U.S.$                    1,383.0

Ps.                        6,801.4

Ps.                      7,011.6

Ps.                       4,927.3

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

 

Equity attributable to the owners

 

 

 

 

Share Capital

U.S $                          182.4

Ps.               ��            897.0

Ps.                         897.0

Ps.                         897.0

Adjustment to Share Capital

80.9

397.7

986.1

986.1

Additional paid- in capital

0.7

3.5

21.8

18.3

Treasury stock

1.9

9.4

9.4

9.4

Adjustment to treasury stock

2.1

10.3

10.3

10.3

Legal Reserve

-

-

64.0

64.0

Accumulated Deficit

(183.0)

(899.8)

(557.3)

(241.9)

Equity attributable to the owners

85.0

418.2

1,431.4

1,743.3

Non- controlling interests

14.5

71.1

415.8

-

TOTAL EQUITY

99.5

489.3

1,847.2

1,743.3

 

 

 

 

 

LIABILITIES

Non -Current liabilities:  

 

 

 

 

Trade payables

31.6

155.3

87.7

51.0

Deferred Revenues

53.8

264.4

174.8

-

Other liabilities(1)

385.3

1,894.8

1,373.7

984.5

Borrowings

274.6

1,350.7

1,189.9

1,035.1

Salaries and social security taxes payable

3.6

17.5

23.6

19.3

Benefit Plans

19.8

97.4

83.5

41.5

Provisions

16.3

80.0

66.1

6.8

Taxes Liabilities

2.0

10.0

17.7

9.0

Deferred Tax Liability

46.9

230.4

348.7

250.3

Total non- current liabilities

U.S. $                       833.8

Ps.                       4,100.5

Ps.                      3,365.7

Ps.                      2,397.5

Current liabilities:  

 

 

 

 

Trade payables

241.7

1,188.5

623.7

377.1

Borrowings

21.0

103.1

59.0

46.9

Derivative Financial Instruments

-

-

-

7.3

Salaries and social security taxes payable

78.1

384.3

275.8

180.4

Benefit plans

3.0

15.0

11.3

-

Taxes Liabilities

41.2

202.5

147.7

111.1

Other Liabilities(1)

30.6

150.4

128.6

5.9

Provisions

2.1

10.5

10.3

57.8

Total Current Liabilities

U.S. $                       417.7

Ps.                       2,054.4

Ps.                      1,256.5

Ps.                        786.5

     

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Liabilities of disposal groups classified as held for sale

32.0

157.3

542.2

-

TOTAL LIABILITIES

U.S.$                     1,283.5

Ps.                       6,312.2

Ps.                      5,164.4

Ps.                     3,184.0

TOTAL LIABILITIES AND EQUITY

U.S.$                      1,383.0

Ps.                        6,801.4

Ps.                       7,011.6

Ps.                      4,927.3

     

 

(*)   Consolidated financial data.

(1)    Includes the amounts collected through the Program for the Rational Use of Electricity Power (PUREE), which as of December 31, 2012, 2011 and January 1, 2011 amounted to Ps. 1,352.5 million, Ps. 928.7 million and Ps. 529.1, respectively.  For the years ended December 31, 2012 and 2011, Ps. 74.7 million and Ps. 61.6 million, respectively, corresponded to PUREE funds collected by Aeseba, included under current liabilities, and Ps. 1,277.8 million and Ps. 867.1 corresponded 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.

 

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Consolidated Statements of Cash Flows

 

 

 

 

 

 

 

Cash flows from operating activities

2012(*)

2012(*)

2011(*)

 

(Figures in millions)

 

 

 

 

Loss for the year

U.S.$                   (206.1)

Ps.                     (1,013.4)

Ps.                     (291.4)

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

 

 

 

Depreciation of property, plant and equipment

40.2

197.9

187.9

Amortization of intangible assets

5.1

24.9

20.1

Disposals of property, plant and equipment

0.4

1.9

1.9

Loss from retirement of intangible assets

1.6

8.0

10.7

Gain from the purchase of financial debt

-

-

(6.5)

Interest on loans and other liabilities

30.7

151.2

109.0

Exchange differences

39.5

194.1

102.8

Income Tax

(20.3)

(99.8)

153.0

Allowance for the impairment of trade receivables and other receivables

3.8

18.5

10.8

Provision of Contingencies, net of recovery

5.4

26.4

8.1

Adjustment to present value of the retroactive tariff increase arising from the application of the new electricity rate schedule and other trade receivables

(0.1)

(0.4)

(1.2)

Changes in fair value of financial instruments

(7.9)

(39.1)

(13.3)

Gain from acquisition of companies

(435.0)

Benefit Plans accrued

6.3

31.0

15.6

Discontinued Operations

50.1

246.2

202.3

 

Changes in operating assets and liabilities

(excluding previous adjustments)

Net increase in trade receivables

(69.5)

(342.0)

(136.6)

Net (decrease) increase in other receivables

2.4

11.7

(88.3)

Increase in inventories

(8.1)

(39.7)

(32.9)

Increase in assets under construction

(7.9)

(39.0)

(45.5)

Increase in trade payable

110.9

545.6

25.4

Increase in salaries and social security taxes

20.8

102.4

139.2

Decrease of benefit plans

(1.8)

(8.8)

(15.6)

Increase in taxes

10.1

49.7

36.5

Increase in deferred revenue

18.2

89.6

174.8

Increase in other liabilities

28.6

140.8

203.7

(Decrease) Increase in provisions

(2.5)

(12.4)

3.7

Income tax paid

(6.9)

(34.1)

(24.4)

Increase in funds obtained from PUREE (Res. SE N° 1037/07)(1)

83.5

410.7

338.0

Increase in funds obtained from PUREE (Res. MIVSPBA N° 252/07)

2.7

13.1

6.0

Net Cash Flows provided by operating activities

129.1

635.1

659.0

 

Cash flows from investing activities  

 

 

 

Increase from sale of financial assets at fair value

7.7

37.8

442.0

Additions of property, plant and equipment

(111.6)

(549.0)

(443.4)

Additions of intangible assets

(17.4)

(85.7)

(63.4)

Payment for acquisition of companies

-

-

(442.9)

Payment for acquisition of additional non controlling interests

-

-

(6.4)

Loans granted

(3.0)

(14.6)

-

Collection of loans proceed from borrowing

28.9

142.4

-

Collection for sale of discontinued operations

21.3

104.6

-

Discontinued Operations

(40.8)

(200.8)

(279.9)

Net Cash Flows used in investing activities

(115.0)

(565.5)

(794.0)

 

Cash flows from financing activities:

 

 

 

Loans taken

19.5

95.8

298.2

Repayment of borrowings

(42.8)

(210.3)

(380.4)

Change in non – controlling interest- Dividend Distribution Aeseba

 

(1.2)

 

(5.8)

 

Dividends paid(1)

(1.1)

(5.6)

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Discontinued Operations

(8.1)

(39.9)

98.5

Net cash flows (used in) provided by financing activities

(33.7)

(165.8)

16.3

Net decrease in cash and cash equivalents

(19.6)

( 96.2)

(118.8)

 

 

 

 

Cash and cash equivalents at beginning of year

U.S.$                     26.5

Ps.                    130.5

Ps.                      246.0

Gain from exchange differences in cash and cash equivalents

7.5

36.8

3.3

Changes in cash and cash equivalents

(19.6)

(96.2)

(118.8)

Cash and cash equivalents at end of the year

U.S.$                     14.5Ps.                      71.1Ps.                      130.5

 

Cash and cash equivalents in the statement of financial position

U.S.$                     14.5

Ps.                      71.1

Ps.                      130.5

Cash and cash equivalents included in assets of disposal groups classified as held for sale

2.3

11.2

28.3

Cash and cash equivalents at end of the year

U.S.$                     16.7Ps.                      82.3Ps.                      158.8

 

 

 

 

 

 

Supplemental cash flows information

2012

2012

2011

 

 

 

 

Financial cost charged to fixed assets

U.S.$                      1.3

6.4

4.1

 

 

 

 

Changes in assets for disposal classified as held for sale

 

 

 

Increased credit extended related companies

(8.5)

(41.7)

-

Decrease advance payments received related companies

(2.1)

(10.4)

-

Acquired Companies

-

-

 

119.0

Cash and cash equivalents

Property, plant and equipment and intangible assets

-

-

1,881.4

Inventories

-

-

4.3

Trade receivables

-

-

255.3

Other receivables

-

-

84.6

Trade payables

-

-

(257.8)

Borrowings

-

-

(450.0)

Deferred tax liability

-

-

(78.8)

Other liabilities

-

-

(331.0)

Net Assets

-

-

(1,227.0)

Non-controlling interests

-

-

(230.0)

Net assets acquired

-

-

996.9

Bargain Purchase

-

-

435.0

Cash Paid

-

-

(562.0)

Cash and cash equivalents in acquired companies

-

-

119.0

Net Cash Flows for acquisition of companies

-

-

(442.9)

 

(*) Consolidated financial data

(1) Correspond to Eden

 

 

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Year ended December 31,

 

2012

2011

2010

2009

2008

 

 

Operating data

Edenor

Aeseba

Edenor

Aeseba

 

 

 

Energy sales (in GWh):

20,760

2,868

20,098

2,791

19,293

18,220

18,616

Residential

8,662

648

8,139

619

7,796

7,344

7,545

Small Commercial

1,688

236

1,601

227

1,543

1,470

1,530

Medium Commercial

1,717

111

1,700

104

1,634

1,565

1,597

Industrial

3,335

814

3,442

807

3,378

3,204

3,277

Wheeling System(1)

4,261

294

4,156

291

3,891

3,622

3,700

Others:

 

 

 

 

 

 

 

Public Lighting

668

81

656

80

654

644

644

Shantytowns

410

675

384

657

377

351

304

Others(2)

20

9

20

6

20

20

19

Customers (in thousands) (3)

2,726

344

2,699

340

2,662

2,605

2,537

Energy Losses (%)

13.3%

10.6%

12.6%

10.4%

12.5%

11.9%

10.8%

MWh sold per employee

7,088.0

3,944.2

7,188.1

3,771.2

7,123.9

6,936.1

7,392.8

Customers per employee

931

473

965

460

971

978

997

        

______________________

         

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

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

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

 

 

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EXCHANGE RATES

From April 1, 1991 until the end of 2001, the Convertibility Law established a fixed exchange rate under which the Central Bank was obliged to sell U.S. Dollars at a fixed rate of one Peso per U.S. Dollar (the “Convertibility Regime”).  On January 6, 2002, the Argentine Congress enacted the Public Emergency Law No. 25,561 (the“Public Emergency Law”), formally putting an end to the regime of the ConvertibilityRegime 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,

 

 

 

 

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

2012

4.31

4.92

4.58(1)

4.92

 

 

 

 

 

Month

 

 

 

 

 

 

 

 

 

January 2013

4.93(2)

4.98(2)

4.95

4.98

February 2013

4.98(2)

5.05(2)

5.01

5.05

March 2013

5.12(2)

5.05(2)

5.08

5.12

April 2013(3)

5.13 (4)

5.18(4)

5.15

5.18

_____________________

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 29, 2013.

(4)           Represents the average of the lowest and highest daily rates from April 1 through April 29, 2013.

 

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RISK FACTORS  

Risks Related to Argentina

Overview

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

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

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

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

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

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

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

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

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

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

·        the regulatory environment continues to be uncertain;

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

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

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

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

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

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

Inflation has, in the past, materially undermined the Argentine economy and the Argentine Government’s ability to create conditions that permit growth. In recent years, Argentina has confronted inflationary pressure, evidenced by significantly higher fuel, energy and food prices, among other factors.  According to data published by theInstituto Nacional de Estadística y Censos (National Statistics and Census Institute or INDEC), the rate of inflation reached 10.9% in 2010, 9.5% in 2011 and 10.8% in 2012. The Argentine Government has implemented programs to control inflation and monitor prices for essential goods and services, including freezing the prices of supermarket products, and price support arrangements agreed between the Argentine Government and private sector companies in several industries and markets.

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

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

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

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

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

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. Holdout creditors that declined to participate in the exchanges commenced numerous lawsuits against Argentina in several countries, including the United States, Italy, Germany,and Japan. These lawsuits generally assert that Argentina has failed to make timely payments of interest and/or principal on their bonds, and seek judgments for the face value of and/or accrued interest on those bonds.  Judgments have been issued in several proceedings but to date judgment creditors have not succeeded in having those judgments enforced. In at least one case, plaintiffs have asserted that allowing Argentina to make payments under its newly issued bonds and remain in default on its pre-2002 bonds violates thepari passu clause in the original bonds and entitles the plaintiffs to enjoin such payments. The U.S. Court of Appeals for the Second Circuit has ruled in the case that the ranking clause in bonds issued by Argentina prevents Argentina from making such payments unless it makespro rata payments in respect of defaulted debt that rankspari passu with the performing bonds.  The judgment has been appealed, and we cannot predict when or in what form a final appellate decision will be granted. 

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

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

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

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

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

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

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

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

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

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

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

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

Since the enhancement of exchange controls began in late 2011, and upon the introduction of measures that have practically closed the foreign exchange market to retail transactions, it is widely reported that the peso/U.S. dollar exchange rate in the unofficial market substantially differs from the official foreign exchange rate. See “Exchange Rates” and “Item 10. Exchange Controls.”  In addition to the foreign exchange restrictions,  in June 2005 the Argentine Government adopted various rules and regulations that established new restrictive controls on capital inflows into the country, including a requirement that for certain funds remitted into Argentina an amount equal to 30% of the funds must be deposited into an account with a local financial institution as a U.S. Dollar deposit for a one-year period without any accrual of interest, benefit or other use as collateral for any transaction. The Argentine Government could impose 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. 

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

The nationalization of Argentina’s private pension funds caused an adverse effect in the Argentine capital markets and increased the Argentine Government’s interest in certain stock exchange, 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 asystem publicly administered by theAdministración Nacional de la Seguridad Social(the National Social Security Agency, or “ANSES”), eliminating the pension and retirement system previously administered by private managers. In accordance with the new law, private pension managers transferred all of the assets administered by them under the pension and retirement system to the ANSES. With the nationalization of Argentina’s private pension funds, the Argentine Government became a significant shareholder in many of the country’s public companies. In April 2011, the Argentine Government lifted certain restrictions pursuant to which ANSES was prevented from exercising more than 5% of its voting rights in any stock exchange listed company (regardless of the equity interest held by ANSES in such companies). ANSES has publicly stated that it intends to exercise its voting rights in excess of such 5% limit in order to appoint directors in different stock exchange listed companies in which it holds an interest exceeding 5%. ANSES’ interests may differ from those of other investors, and consequently, those investors may understand that ANSES’ actions might have an adverse effect on such companies. As of the date of this annual report ANSES, owns shares representing 20.96% of the capital stock of our subsidiary Emdersa and 26.8% of the capital stock of Edenor.

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

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

Argentine financial and securities markets are influenced, to varying degrees, by economic and financial conditions in other markets.  Argentina’s economy remains vulnerable to external shocks, including those related or similar to the global economic crisis that began in 2008 and the recent uncertainties surrounding European sovereign debt.   For example, the recent challenges faced by the European Union to stabilize certain of its member economies, such as Greece, Ireland, Italy, Portugal and Spain, have had international implications affecting the stability of global financial markets, which has hindered economies worldwide.  Should measures taken by the European Union be insufficient to restore confidence and stability to the financial markets, any recovery of the global economy, including the U.S. and European Union economies, could be hindered or reversed, which could negatively affect the Argentine economy, and in turn our business and results of operations. Although economic conditions can vary from country to country, investors’ perception of the events occurring in other countries have in the past substantially affected, and may continue to substantially affect capital flows to other countries and the value of securities in other countries, including Argentina.  The Argentine economy was adversely impacted by the political and economic events that occurred in several emerging economies in the 1990s, including those in Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia in 1998 and the Brazilian devaluation of its currency in January 1999.

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

 

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

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

 

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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 generation, distribution and transmission companies and included the freezing of distribution nominal margins, the revocation of adjustment and inflation indexation mechanisms of tariffs, a limitation on the ability of electricity distribution companies to pass on to the consumer increases in costs due to regulatory charges and the introduction of a new price-setting mechanism in the wholesale electricity market (the “WEM”) which had a significant impact on electricity generators and generated substantial price differences within the market.  The Argentine Government continues to intervene in this sector, including by granting temporary nominal margin increases, proposing a new social tariff regime for residents of poverty-stricken areas, creating specific charges to raise funds that are transferred to government-managed trust funds that finance investments in generation and distribution infrastructure and mandating investments for the construction of new generation plants and the expansion of existing transmission and distribution networks. 

Furthermore, on November 15, 2011, the Secretariat of Energy issued 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 Secretariat 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. In addition to the foregoing, several provincial governments have recently enacted new regulations in order to charge electricity end-users amounts corresponding to the cuts in the federal subsidy.

On November 27, 2012, the Secretariat of Energy issued Resolution 2016, which approved the seasonal WEM prices – subsidized and not subsidized − for the period of November 2012 through April 2013. The Subsidizes WEM Seasonal Reference Price was established at Ps. 320 per MWh. Each local authority is to define the local prices to be included in the local distributor’s tariff.

The Argentine Government has also announced an analysis of new measures that would change the current regulatory framework of the energy sector. On March 26, 2013, the Secretariat of Energy issued Resolution 95, which introduced a new scheme for the remuneration for the electricity generation sector and several modifications to the organization of the WEM, including the suspension of the administration of new contracts, or the renewal of existing contracts, in the term market of the WEM.

We cannot assure you that these or other measures that may be adopted by the Argentine Government will not have a material adverse effect on our business and results of operations or on the market value of our shares and ADSs or that the Argentine Government will not adopt emergency legislation similar to the Public Emergency Law, or other similar resolutions, in the future that may further increase our regulatory obligations, including increased taxes, unfavorable alterations to our tariff structures and other regulatory obligations, compliance with which wouldincrease 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 economiccrisis, 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 ConvertibilityRegime, distribution tariffs were calculated in U.S. Dollars and distribution margins were adjusted periodically to reflect variations in U.S. inflation indexes.  Pursuant to the Public Emergency Law, in January 2002 the Argentine government froze all distribution margins, revoked all margin adjustment provisions in distribution concessions and converted distribution tariffs into Pesos at a rate of Ps. 1.00 per U.S. $ 1.00. These measures, coupled with the effect of high inflation and the devaluation of the Peso, led to a decline in distribution revenues in real terms and an increase of distribution costs in real terms, which could no longer be recovered through adjustments to the distribution margin.  This situation, in turn, led many public utility companies, including us and other important distribution companies, to suspend payments on their financial debt (which continued to be denominated in U.S. Dollars despite the pesification of revenues), effectively preventing these companies from obtaining further financing in the domestic or international credit markets and making additional investments. Although the Argentine Government has granted temporary and partial relief to some distribution companies, including a limited increase in distribution margins, a temporary cost adjustment mechanism which was not fully implemented and the ability to apply certain additional charges, distribution companies are currently involved in discussions with the regulatory and government authorities on additional, permanent measures needed to adapt the current tariff scheme to the post-crisis situation of this sector.  We cannot assure you that these measures will be adopted or implemented or that, if adopted, they will be sufficient to address the structural problems created for us by the economic crisis and its aftermath. If we become unable to cover the costs of distribution or if we do not receive an adequate return on our asset 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 as an estimated average of approximately 5.0% per annum from 2003 through 2012. This increase in electricity demand since 2003, reflects the relative low cost, in real terms, of electricity to consumers due to the freezing of 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 transmission and distribution margins, and transmission and distribution companies are currently negotiating further increases and adjustments to their tariff schemes with the Argentine Government.  Although the increases in electricity transmission and distribution margins, which increased the cost of electricity to residential customers, have not had a significant negative effect on demand, we cannot make any assurances that these increases or any future increases in the relative cost of electricity will not have a material adverse effect on electricity demand or a decline in collections from customers. Further, in November 2011, the Argentine Government announced a cut in subsidies (which had no impact on our value added for distribution (“VAD”)) for electricity granted to certain customers that are presumed to be in a position to afford the cost without such subsidies. In this respect, we cannot assure you that these measures or any future measures (including increases on tariffs for residential users) will not lead electricity companies, like us, to record lower revenues and results of operations than currently anticipated, which may, in turn, have a material adverse effect on the market value of our ADSs.

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 financialcommitments.  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 constituteforce majeure. In the past, however, the Argentine authorities have taken a restrictive view offorce majeure and have recognized the existence offorce 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 constituteforce 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, or at all, has affected our capacity to perform our commercial obligations and could also have a material adverse effect on our capacity to perform our financial obligations. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern.

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”). However, the timeline for completing this process and the favorability to us of the final resolution are both uncertain 

The Adjustment Agreement currently contemplates a cost adjustment mechanism for the transition period during which the RTI is being conducted. This mechanism, known as the Cost Monitoring Mechanism (CMM), requires the ENRE to review our actual distribution costs every six months (in May and November of each year) and adjust our distribution margins to reflect variations of 5% or more in our distribution cost base. We may also request that the ENRE apply the CMM at any time that the variation in our distribution cost base is at least 10% or more.  Any adjustments, however, are subject to the ENRE’s assessment of variations in our costs, and we cannot guarantee that the ENRE will approve adjustments that are sufficient to cover our actual incremental costs. In the past, even when the ENRE has approved adjustments to our tariffs, there has been a lag between when we actually experience increases in our distribution costs and when we receive increased revenues following the corresponding adjustments to our distribution margins pursuant to the CMM. In addition, we have estimated that the actual distribution costs have been significantly higher than the ones determined with the CMM adjustments that have been requested. Despite the adjustment we were granted under the CMM in October 2007 and July 2008, we cannot assure you that we will receive similar adjustments in the future. As of the date of this annual report we have requested ten additional increases under the CMM beginning in May 2008, which increases are still being reviewed by the ENRE (other than the request submitted in May 2008). Under the terms of the Adjustment Agreement, these ten increases should have been approved in May 2008, November 2008, May 2009, November 2009, May 2010, November 2010, May 2011, November 2011, May 2012 and November 2012. 

During the years ended December 31, 2012 and 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 all of which has affected our capacity to perform our commercial obligations. In this context and in light of the situation that affects the electricity sector, the ENRE issued Resolution No. 347/12 in November 2012, which establishes the application of fixed and variable charges that have allowed the Company to obtain additional revenue as from November 2012. However, such additional revenue is insufficient to make up our operating deficit due to the constant increase in operating costs and the estimated salary or third-party costs increases for the year 2013.


                If we are not able to recover all of the incremental costs contemplated by the increase requests pursuant tothe 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 renegotiation of our tariff structure,  we may be unable to comply with our financial obligations, we may suffer liquidity shortfalls and we may need to restructure our debt to ease our financial condition, any of which, individually or in the aggregate, would have a material adverse effect on our business and results of operations and may cause the value of our ADSs to decline. As a result, there is substantial doubt with respect to the ability of the Company to continue as a going concern.

 

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We have prepared our annual financial statements for the fiscal year ended December 31, 2012 included herein, assuming that we will continue as a going concern. Our independent auditors, PwC, issued a report dated April 30, 2013, on our Consolidated Financial Statements as of and for the years ended December 31, 2012 and 2011, which contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. As discussed in Note 1 to our Consolidated Financial Statements, the delays in obtaining tariff increases and the cost adjustments recognition requested by the Company in accordance with the terms of the Adjustment Agreement, together with the continuous increase in operating expenses that are necessary to maintain the level of service, significantly affected 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 1. However, our financial statements as of and for the year ended December 31, 2012 and 2011 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty. See Item 18: “Financial Statements.”

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

Our 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, thedefensor 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 Unión de Usuarios y Consumidores filed an extraordinary federal appeal (“Recurso Extraordinario Federal”) against such decision, which was granted on March 11, 2011. The proceedings have been taken to the Supreme Court of Justice. 
               
              We cannot make assurances regarding how these complaints will be resolved nor can we make assurances that other actions or requests for injunctive relief will not be brought by these or other groups seeking to reverse the adjustments 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.

 

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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, 2012, December 31, 2011 and January 1, 2011, our consolidated accrued fines and penalties totaled Ps. 662.0 million, Ps. 542.2 million and Ps. 455.4 million, respectively (taking into account our adjustment to fines and penalties following the ratification of the Adjustment Agreement). If 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.

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

Our concession does not allow us to pass through to our customers the cost of additional energy purchased to cover any energy losses that exceed the loss factor contemplated by our concession, which is, on average, 10%.  As a result, if we experience energy losses in excess of those contemplated by our concession, we may record lower operating profits than we anticipate. Prior to the 2001 and 2002 economic crisis, we had been able to reduce the high level of energy losses experienced at the time of the privatization to the levels contemplated (and reimbursed) under our concession. However, during the last couple of years, our level of energy losses, particularly our non-technical losses, started to grow again, in part as a result of the increase in poverty levels and, with it, the number of delinquent accounts and fraud. Although we continue to make investments to reduce energy losses, these losses continue to exceed the 10% average loss factor 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 13.3% in 2012, 12.6% in 2011 and 12.5% in 2010. 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 forecloseon the pledgeof 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 forecloseon the pledgeof 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;

 

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

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

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

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

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

In 2012, the fines and penalties imposed on Edenor by the ENRE amounted to Ps. 116.9 million, which represented 4.0% of our energy sales.  See “Item 4. Information on the Company — Our Concession — Fines and Penalties.”

If the Argentine government were to forecloseon the pledgeof 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 governmenton the pledgeof our Class A common shares may be deemed to constitute a change of control under the terms of our Senior Notes due 2017 and due 2022. See “—We may not have the ability to raise the funds necessary to finance a change of control offer as required by the Senior Notes due 2017 and 2022.” If the Argentine government forecloseson the pledgeof our Class A common shares, our results of operations and financial condition could be significantly affected and the market value of our ADSs could also be affected.

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

If the Argentine government breaches its obligations in such a way that we cannot comply with our 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, 2012, approximately 83% and 86% of Edenor and Eden employees, respectively, were union members. Although our relations with unions are currently stable and we have had an agreement in place with the two unions representing our employees since 1995, we cannot assure you that we will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and revenues. We cannot assure you that we will be able to negotiate salary agreements on the same terms as those currently in effect, or that we will not be subject to strikes or work stoppages before or during the negotiation process. If we are unable to negotiate salary agreements or if we are subject to strikes or work stoppages, our results of operations, financial condition and the market value of our ADSs could be materially adversely affected.

 

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

We outsource a number of activities related to our business to third party contractors in order to maintain a flexible cost base.  As of December 31, 2012, Edenor had approximately 2,777 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. 

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

Our revenues are collected in Pesos pursuant to tariffs that are not indexed to the U.S. Dollar, while a significant portion of our existing financial indebtedness is denominated in U.S. Dollars, which exposes us to the risk of loss from devaluation of the Peso. In the past we used to hedge this risk in part by converting a portion of our excess cash denominated in Pesos into U.S. Dollars and investing those funds outside Argentina, as permitted by applicable Argentine Central Bank regulations at the time and by entering into currency forward contracts; however, pursuant to new regulations of the Argentine Central Bank we can no longer hedge this risk by converting a portion of our excess cash denominated in Pesos unto U.S. Dollars and because of that we continue to have substantial exposure to the U.S. Dollar. We cannot assure you whether the Argentine Government will mantain these exchange regulations or whether it will allow us to access the market to acquire U.S. Dollars in the manner that we have done in the past.  Although we may also seek to enter into hedging transactions to cover all or a part of our exposure, we have not been able to hedge any of our exposure to the U.S. Dollar on terms we consider viable for our company. If we continue to be unable to effectively hedge all or a significant portion of our currency risk exposure, a 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, 2012, our physical assets were insured for up to U.S. $887.7 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.

 

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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 forecloseon the pledgeof our Class A common shares held by the Argentine government, which could trigger a repurchase obligation under the terms of our restructured debt and our Senior Notes due 2017 and due 2022, and have a material adverse effect on our results of operations and financial condition.

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

Although our concession grants us the exclusive right to distribute electric energy within our service area, this exclusivity may be revoked in whole or in part if technological developments 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 partialrevocation 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 notenable competitionin our industrythatwouldadverselyaffect 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.

Our acquisitions of Emdersa and Aeseba and the subsequent divestitures of Aeseba and the subsidiaries of Emdersa are subject to perfunctory approval by the Argentine Antitrust Commission and, in some cases, by the ENRE

In March 2011, Edenor acquired EMDERSA and AESEBA and several related companies. Edenor has since then, decided to divest, and is currently divesting, such companies. 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 the 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. If we do not have the regulatory authorization to consummate the acquisitions and divestitures this could have an adverse effect on our financial condition and consolidated results of operations and the market value of our shares and ADSs.

 

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

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

 

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

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

We may not have the ability to raise the funds necessary to finance a change of control offer as required

by the Senior Notes due 2017 and 2022

 

As of the date of this annual report, approximately U.S.$324.8 million of our financial debt is representedby the Senior Notes due 2017 and 2022. Under the indentures for the Senior Notes due 2017 and 2022, if a changeof control occurs, we must offer to buy back any and all such notes that are outstanding at a purchase price equal to100% of the aggregate principal amount of such notes, plus any accrued and unpaid interest thereon and additionalamounts, if any, through the purchase date. We may not have sufficient funds available to us to make the requiredrepurchases of the Senior Notes due 2017 and 2022 upon a change of control. If we fail to repurchase such notes inthese circumstances that may constitute an event of default under the indentures, which may in turn triggercross-default provisions in other of our debt instruments then outstanding.

 

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

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

We are currently required by law to undertake a mandatory capital stock reduction and we may in the future be required to be dissolved and liquidated.

Our accumulated deficit at the end of 2012 exceeded our reserves plus 50% of our capital stock, and therefore we are required to reduce our capital stock pursuant to Article 206 of the Argentine Corporations Law.Accordingly, on April 25, 2013, Edenor’s general ordinary and extraordinary shareholders’ meeting resolved to reduce Edenor’s capital stock.  As a result of the mandatory capital stock reduction, the Company’s losses will be offset against the share premium (prima de emisión) and capital stock adjustment (ajuste sobre el capital social), as well as against 10% of the Company’s capital stock.

In addition, if our shareholders’ equity becomes negative (that is, if our total liabilities exceed our total assets) at any year-end, we will be required to dissolve and liquidate pursuant to Article 94 of the Argentine Corporations Law unless we receive a capital contribution or expect future revenues or results of operations which would result in our assets exceeding our liabilities. A mandatory capital stock reduction could adversely affect our results of operations and financial conditions and cause the market value of our ADSs and Class B common shares to decline.

The New York Stock Exchange and/or the Buenos Aires Stock Exchange may suspend trading and/or delist our ADSs and Class B common shares, respectively, if our shareholders’ equity becomes negative or if our financial situation further deteriorates

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

 

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

 

The BASE will suspend the listing of our Class B common shares if our financial statements or the financial information that we provide indicate that our shareholders’ equity becomes negative.  Furthermore, The BASE may cancel the listing of our Class B common shares if it determines that our shareholders’ equity and our financial and economic situation do not justify our access to the stock market or if the NYSE cancels the listing of our ADSs. 

 

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

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                     Adoption of IFRS affects the presentation of our financial information, which has thus far been prepared under Argentine GAAP.

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

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

 

The new Capital Markets Law No. 26,831 provides in Article 20 that the CNV may conduct an inspection on persons subject to its control (such as the Company). If after any inspection the CNV considers that a resolution of the board of directors of the Company violated the interests of minority shareholders or any holder of securities subject to the regime of a public offering, it may appoint a supervisor (veedor), who will have veto powers. Additionally, the CNV may suspend the board of directors for a period of 180 days, until the CNV rectifies the situation. This measure may only be appealed before the Ministry of Economy and Finance. If the CNV makes an inspection and considers that any right of a minority shareholder or holder of any security has been breached, it may proceed to suspend the board of directors for the 180-day period, in which case the economic and financial situation of the Company could be negatively affected.

 

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

 

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Our ability to pay dividends is limited

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

Our shareholders’ ability to receive cash dividends may be limited

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

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

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

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

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

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

Because we are a limited liability corporation, our shareholders are not liable for our obligations. Shareholders are generally liable only for the payment of the shares they subscribe. 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 asociedad anónima (stock corporation) under the laws of Argentina. Our principal executive offices are located at Avenida del Libertador 6363, Ciudad de Buenos Aires, C1428ARG, Argentina, and our general telephone number at this location is +54 11 4346 5000.

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

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

In June 1996, our shareholders approved the change of our name to Empresa Distribuidora y Comercializadora Norte S.A. (EDENOR S.A.) to more accurately reflect the description of our core business. The amendment to our by–laws related to our name change was approved by the 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 S.A. (“Pampa Energía” or “Pampa”) acquired all the outstanding capital stock of Dolphin Energía and IEASA from the then current shareholders of these companies, in exchange for common stock of Pampa Energía. Pampa Energía, which is managed by Grupo Dolphin’s former principals, owns a 50% interest in the company that co-controls the principal electricity transmission company in Argentina, Compañía de Transporte de Energía Eléctrica en Alta Tensión S.A. (Transener). In addition, Pampa Energía has controlling stakes in five generation plants located in the Salta, Mendoza, Neuquén and Buenos Aires provinces (Hidroeléctrica Nihuiles, Hidroeléctrica Diamante, Central Térmica Güemes, Central Térmica Loma de la Lata and Central Piedra Buena).  See “Item 7. Major Shareholders and Related Party Transactions.”

 

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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.”

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 242,999,553 of our Class B common shares, representing 26.8% of our capital stock.

Business Combinations


                Acquisition of EMDERSA and AESEBA

 

On March 4, 2011, our Board of Directors approved an offer from its indirect controlling company Pampa Energía. As a consequence, Edenor was appointed by Pampa as the acquiring party under the Pampa-AEI Agreement. Therefore, on March 4, 2011, we acquired from AEI Utilities, S.L. (“AEIU”) (i) 182,224,095 common shares of Emdersa representing 77.19% of Emdersa’s capital stock and votes (“Emdersa’s Shares”), (ii) 2 common shares of Empresa Distribuidora de San Luis S.A. (“Edesal”) representing 0.01% of Edesal’s capital stock and votes, (iii) 600 common shares of Emdersa Generación Salta S.A. (“EGSSA”)  representing 0.02% of EGGSA’s capital stock and votes, (iv) 1 common share of Empresa Distribuidora de Electricidad de la Rioja S.A. (“EDELAR”) representing 0.01% of EDELAR’s capital stock and votes, (v) 1 common share of Empresa de Sistemas Eléctricos Abiertos S.A. (“ESED”) representing 0.01% of ESED’s capital stock and votes, (all the shares mentioned in items (ii) through (v) hereinafter referred to as the “Residual Shares”) and (vi) 29,118,127 common shares of AESEBA S.A. representing 99.99% of AESEBA’s capital stock and votes (“AESEBA’s Shares”). The price paid by us for the aforementioned assets amounted to USD 90 million for Emdersa’s Shares and the Residual Shares acquired from AEIU and to USD 50 million for AESEBA’s Shares acquired from AEIU.

 

Within the framework of the offer made by Pampa and accepted by us, the parties additionally agreed that if within 3 years following acquisition date of Emdersa’s Shares, the Residual Shares and AESEBA’s Shares, we sold either totally or partially any of such shares, Pampa would be entitled to receive from the Company a payment equivalent to 50% of the amount received for the sale thereof in excess of the amount paid to AEIU for any of such Shares (Emdersa’s Shares and/or Residual Shares and/or AESEBA’s Shares).

 

In compliance with current regulations, we formally consulted the CNV about the steps to be followed with regards to the public offering for the acquisition of Emdersa’s shares that we are required to make to Emdersa’s minority shareholders due to the change in Emdersa´s control and in accordance with the provisions of the Capital Markets Law and the CNV’s regulations.

 

Spin-off Process – EMDERSA

 

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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 would be the shares owned by Emdersa in each of Edesal, EDESA and EGGSA, respectively. Emdersa’s shareholders’ meeting held on December 16, 2011, which was resumed on January 13, 2012 after a recess, 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 three companies referred to above, the share exchange relationship, the amount of shares of the three holding companies to be incorporated, which had to be delivered to Emdersa’s shareholders in exchange for the tendering of their shares in Emdersa, and 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.

 

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

 

Company sale agreements - Disposal group classified as "held for sale"

Offers for the acquisition of EMDERSA subsidiaries.

 

The Company’s Board of Directors approved the following offer letters:

 

                                i.           From Rovella Carranza S.A., on September 16, 2011, for the acquisition of the Company’s direct and indirect stake in Edesal (EDESAL Sale). 

 

                              ii.           From Pampa Energía S.A., on October 11, 2011, for the acquisition of the company’s direct and indirect stake in EGSSA (EGSSA Sale). 

 

                             iii.           From Salta Inversiones Eléctricas S.A. (SIESA), on April 23, 2012 for the acquisition of the company’s direct and indirect stake in Edesa (EDESA Sale

 

                            iv.           From Andes Energía Argentina S.A., on September 16, 2011 and December 15, 2011  to buy a purchase option for the acquisition of the company’s direct and indirect stake in Edelar (“EDELAR Offer”).

 

Additionally, in order for these transactions to be carried out, the Company was required to cause Emdersa to complete its partial spin-off process, which resulted in the creation of three new investment companies, EDESALH (holder of 99.99% of EDESAL’s capital stock and votes), EDESAH (holder of 90% of EDESA’s capital stock and votes) and EGGSAH (holder of 99.99% of EGGSA’s capital stock and votes).

 

EDESAL Sale

 

On September 16, 2011, the Board of Directors of the Company approved the offer for the acquisition of Edesal by Rovella Carranza S.A. for a total and final price of U.S. $ 26.7 million that was paid in two installments, the first of them, for U.S. $4.0 million was made within the three days of the acceptance of the offer, and the remaining balance was collected by Edenor on October 25, 2011.

 

Furthermore, as stipulated in the offer letter, on that date EDESAL repaid the financial loan granted by the company to EDESAL for an amount of Ps.37.5 million, plus interest accrued through the settlement date.

 

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At that time the Company transferred 24.80% of Emdersa’s shares and 0.01% of EDESAL’s shares to Rovella Carranza S.A. which set up a collateral trust, comprised by the parties and Deutsche Bank S.A. to ensure compliance with the parties’ obligations.

 

From the date of final payment and during the term of the trust, EDESAL’s management was in charge of a board of directors appointed by Emdersa, in accordance with the buyer’s proposal, which is comprised of five directors, four of whom were elected by the buyer and one of whom was elected by the seller, and equal number of alternate directors, four of whom were elected by the buyer and one of whom was elected by the seller.

 

As security for the compliance with the obligations undertaken, the company provided a performance bond in favour of Banco Itaú Argentina S.A. and Standard Bank Argentina S.A. for the total amount of Ps. 60 million as principal plus compensatory interest at an annual nominal rate of up to 16% as collateral for EDESAL’s payment obligations with respect to these banks. The performance bond was not enforced.

 

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

 

 

EGSSA sale

 

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

 

The condition precedent for the purchase and sale transaction was the carrying out of Emdersa’s spin-off within the maximum term of 24 months as from the date of acceptance of the offer, which condition was complied with in November 2012.

 

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

 

Furthermore, the offer implied the repayment by Pampa Energía of the financial loan granted by Edenor to EGSSA for an amount of U.S. $4.27 million, plus interest accrued through the settlement date, which was entered into on October 31, 2011.

 

As Emdersa’s spin-off process was concluded on November 22, 2012, shares representing 78.44% of the capital stock and votes of EGSSAH have been transferred in favor of Pampa Energía.

 

 

EDESA Sale

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

 

The transaction was carried out on May 10, 2012 at the offered price payable through the delivery of Argentina’s sovereign debt bonds (Boden 2012) for a value equivalent to Ps. 100.5 million. Such price was partially cancelled through the payment of Ps. 83.8 million, with a sixth of the agreed-upon price remaining outstanding, whose payment SIESA is required to make in five annual and consecutive installments in US dollars, with the first of them falling due on May 5, 2013, at an interest rate of LIBOR + 2%. Payments relating to the price will be made(i) in immediately and freely available US dollars through transfer to a bank account specified by the seller, or, alternatively and at the seller’s exclusive option (that may be exercised in respect of each of the payments), (ii) through the delivery to the seller of an amount of Argentina’s sovereign debt bonds.

 

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As part of the aforementioned transaction, EDESA fully repaid the loan granted by Edenor for a total principal amount of Ps.131.3 million, plus interest accrued, and the buyer released Emdersa from any liability related to the collateral granted by the latter to EDESA in connection with the syndicated loan held by EDESA with various banks. By virtue of this transaction, Emdersa Holding, a directly controlled company of Edenor S.A., transferred to SIESA the shares representing 28.93% of Emdersa’s capital stock and votes, while Edenor transferred to that company 0.01% of ESED’s capital stock and votes.

 

 

As agreed in the EDESA sale agreement, SIESA and Emdersa Holding, as trustors and beneficiaries, and Deutsche Bank S.A. (“DB”) as trustee, set up a collateral trust to which they transferred their shareholdings representing Emdersa’s capital stock and votes, with SIESA transferring the shares representing 28.93% of Emdersa’s capital stock and votes (which were received at the closing of the transaction), and Emdersa Holding transferring the remaining 24.84% of the shares.

 

Upon the conclusion of EMDERSA’s spin-off process, the shares representing 78.44% of the capital stock and votes of EDESAH, holder of 90% of EDESA’s shares and votes, were issued, and DB, as trustee, transferred to EHSA the totality of EMDERSA’s shares that had been transferred by SIESA and EHSA to the trust, resulting in SIESA holding 78.44% of EDESAH’s capital stock and votes.

 

As a consequence of this transaction, Edenor holds 0.13% interest in EDESA.

 

EDELAR Offer

 

The offer from Andes Energía Argentina S.A. (“Andes Energía”), which was accepted by the Company’s Board of Directors on September 16, 2011, consisted of a proposal to buy a purchase option for a price of U.S. $1.5 million to buy, if Emdersa’s spin-off was completed within a term of 2 years, 78.44% of the Company’s direct and indirect stake in EDELAR for U.S. $20.29 million, to be paid in two installments. The purchase option was paid by the buyer on September 16, 2011. 

                

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

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

 

Taking into consideration that the Company maintains its decision to sell these assets and that it has received other expressions of interests in connection thereto, such assets continue to be classified as assets available for sale.

 

Offer for the acquisition of EDEN

 

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

 

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

                At the closing date of the transaction (April 5, 2013), the Trust received as contributions Argentina's public debt securities for a face value amount equivalent to Ps.262 million considering the market value of each bond at the closing date, and including the guarantee the Company had received at the time of the acceptance of the offer. Moreover, the Purchaser is required to complete contributions on or prior to December 31, 2013, of Argentina´s sovereign bonds for an amount equivalent to approximately Ps. 64 million, taking into account the market value at the closing date. As a result of the liquidation of said securities that are contributed to the Management Trust, the Company's Class 7 and/or Class 9 Corporate Notes, maturing in 2022 and 2017, respectively, will be purchased.

                At the closing date of this transaction, the Company divested the AESEBA segment which will result in a loss in Edenor’s Financial Statements for 2013 of about Ps. 194.3 million (a Ps. 104.9 million loss after income tax effect). The repurchase of the Edenor´s Corporate Bonds will be recognized at the time the purchase transactions are executed.

                At December 31, 2012, the recording in the accounting of the Company's interest in AESEBA remained unchanged, given that at the end of the year such interest did not meet the criteria necessary to be classified and valued as "assets held for sale" in accordance with the international financial reporting standards for discontinued operations.

As of the date of this annual report, the Trust purchased U.S.$ 17.3 million of face value of our Notes due 2022 in the open market.

 

Discontinued Operations

Emdersa, through Edelar, supplies electricity to a service area with a population of approximately 290,000 that encompasses approximately 89,680 square miles in the Province of La Rioja. As of December 31, 2012, Edelar had approximately 118,068 customers and sold approximately 1,125 GWh of electricity in 2012.  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 Edelar, and Edelar holds an exclusive long-term renewable concession granted by the regulator of the Province of La Rioja.

 Edelar’s concession is divided into an initial period of 15 years (which expired in 2010) followed by eight successive ten-year periods. At the end of each such period a competitive bidding process for the sale of a minimum of 51% of the share capital of Edelar will take place. We can participate in the bidding and will only be required to sell and transfer control of our interest in Edelar 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 Edelar at the end of which the auction process would be held again. As of the date of this annual report, the competitive bidding process with respect to Edelar has not yet taken place.

Tariffs for Argentine electricity distribution companies are periodically reviewed by the regulators within the service area in which the concession is located. Edelar generally has RTIs every five years. 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. Edelar has been granted adjustments to its tariffs periodically to reflect increases in costs.

The table below summarizes energy sales information regarding Edelar, solely on the basis of public information filed by Emdersa in Argentina.

EDELAR’s Energy Sales

 

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Year Ended December 31,

 

2012

2011

2010

 

 

 

 

 

(in MWh, except percentages)

Residential..............................................................

412,516

36.6%

363,278

34.7%

353,009

33.9%

Commercial.............................................................

96,102

8.5%

90,577

8.6%

88,646

8.5%

Public lighting.........................................................

38,567

3.4%

37,926

3.6%

36,758

3.5%

Large users.............................................................

376,162

33.4%

359,627

34.3%

350,723

33.7%

Industrial................................................................

202,834

18.0%

196,841

18.8%

219,994

20.4%

Total.......................................................................

1,126,181

100.0%

1,048,249

100.0%

1,042,130

100.0%

 

  

 

Aeseba and its Subsidiaries

Aeseba is a holding company that owns 90% of the outstanding capital stock of Eden, an electricity distribution company that supplies electricity to a service area with a population of approximately 1.0 million that encompasses approximately 42,000 square miles in the northern part of the Province of Buenos Aires. As of December 31, 2012, Eden had approximately 344,065 customers and sold approximately 2,863 GWh of electricity in 2012. 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 of the Province of Buenos Aires.  Eden’s concession agreement is divided into nine administrative periods, the first of which lasted 15 years and expired on June, 2, 2012, followed by eight ten-year periods thereafter. At the end of the current term a competitive bid process which follows the same process described for Edelar above will take place.

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, 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 for the years ended December 31, 2012, 2011 and 2010, respectively.

 

 

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EDEN’s Energy Sales

 

Year Ended December 31,

 

2012

2011

2010

 

(in MWh, except percentages)

Residential

652,805

 22.80%

619,224

22.2%

598,619

22.6%

Commercial

346,821

 12.11%

331,086

11.9%

308,304

11.7%

Public lighting

80,783

 2.82%

79,716

2.9%

77,319

2.9%

Large users

1,488,579

 51.99%

1,462,983

52.5%

1,359,219

51.4%

Industrial (Grandes usuarios del MEM)

294,126

 10.27%

291,400

10.5%

299,936

11.3%

Total

2,863,114

 100%

2,784,409

100.0%

2,643,397

100.0%

      

 

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,

 

2012

2011

 

(figures in millions )

Net sales

U.S.$

 174.4

Ps.

 857.9

Ps.

 704.4

Cost of sales

(132.4)

(651.0)

(493.5)

Gross profit

42.1

206.9

210.9

Administrative and selling expenses

(25.7)

(126.3)

(88.5)

Operating income

16.4

80.6

122.4

Financial results

(5.2)

(25.8)

(27.1)

Other income or costs, net

(1.6)

(8.1)

1.6

Income before income taxes

9.5

46.7

96.9

Income Tax Expenses

(3.3)

(16.2)

(34.3)

Income for the Year

U.S $
6.2

Ps.

 30.5

Ps.

 62.6



 

 

Year ended December 31,

Balance Sheet:

2012

2011

 

(figures in millions)

Current assets

U.S $

 67.0

Ps.

329.7

Ps.

246.4

Non-Current assets

179.0

880.3

828.9

Total assets

246.0

1210.0

1075.4

Current liabilities

111.9

550.4

423.6

Non-Current liabilities

37.9

186.6

138.6

Total liabilities *

149.9

737.0

562.2

Total shareholders’ equity

96.2

473.0

513.2

Total liabilities and shareholders’ equity

U.S. $

 246.0

Ps.

1210.0

Ps.

1075.4

    

* 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.”

 

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Business Overview

We believe we are the largest electricity distribution company in Argentina and one of the largest in Latin America in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2012. 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, 2012, Edenor and Eden served 2,726,422 customers and 343,951 customers, respectivelyThe 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)

 

Eden´s

Demand

Edenor Demand as a % of the Wholesale Electricity Market

Eden’s demand as % of Wholesale

Electricity Market

2012

131,944

23,934

3,210

17.7%

2.4%

2011

116,418

23,004

3,116

19.9%

2.7%

2010

110,767

22,053

-

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.

 

 

                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 2012.  We serve the largest number of electricity customers in Argentina, which at December 31, 2012 amounted to 2,726,422 customers. Our electricity purchases, used to meet customer demand in our service area, accounted for approximately 17.7 % of total electricity demand in the country in 2012. 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 and 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 931 customers per employee and 7,088.1 MWh sold per employee in 2012.

 

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·        We have a well-balanced debt profile. As of December 31, 2012, Edenor's financial debt amounted to U.S. $283.3 millionon a standalone basis. 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 theRTI 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” On November 23, 2012, the ENRE issued Resolution 347/12 pursuant to which distribution companies were authorized, as from the issuance thereof, to include in their bills a fixed amount for small-demand (T1) customers and a variable amount for medium and large-demand (T2 and T3) customers, to be calculated as a percentage of their respective power charges. Such amounts, which will be clearly indicated in the bills sent to customers, will constitute a special account, which will be managed by a trust, and will be exclusively used for the execution of distribution infrastructure works and corrective maintenance of each distribution company’s facilities. On November 29, 2012, we, in our capacity as trustor, and Nación Fideicomisos S.A., as trustee, entered into a private Financial and Management Trust Agreement, whereby the Company, as settlor of the trust, agreed to assign and transfer to the trustee the fixed amounts set forth by Resolution 347/12 that are effectively collected, which will constitute the trust assets.  On December 18, 2012, we and Nación Fideicomisos S.A., signed the respective Operating Manual, in order to implement, standardize, and enable the collection and management of the trust assets.

·        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.

 

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                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, pursuant to the terms of the concession we could request, at our option, the extension of the initial management period for an additional 5-year period from the entry into force of the new tariff structure to be adopted under theRTI process, subject to the ENRE’s approval. We presented a request for such extension in May 2007 and on July 5, 2007, and 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 (Law No. 25,561), 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.

Pursuant to the Adjustment Agreement, the Argentine government granted us an increase of 28% in our distribution margin as a result of the implementation of a Temporary Tariff Structure (RTT), which is effective retroactively as from November 1, 2005. The Adjustment Agreement is intended to apply transitionally until we complete the RTI with the ENRE in accordance with the terms of the Adjustment Agreement. See “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Tariffs.”  In addition, 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 has been invoiced in 55 monthly installments since February 2007. 

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 until 2008, and, instead, we were allowed to retain the funds that we are required to collect and transfer to the fund established by the 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.

 

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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, by Note No. 83,818, 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 for the November 2007 – April 2008 period. As of the date of this annual report, the ENRE has not approved a new tariff scheme including this tariff increase nor has it authorized us to collect such increase by other means (for example through an off-setting mechanism against contributions made to the PUREE, as was the case in the past).

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

Assessment Period

Application Date

CMM Adjustment Requested

November 2007 – April 2008

May 2008

5.791%

May 2008 – October 2008

November 2008

5.684%

November 2008 – April 2009

May 2009

5.068%

May 2009 – October 2009

November 2009

5.041%

November 2009 – April 2010

May 2010

7.103%

May 2010 – October 2010

November 2010

7.240%

November 2010 – April 2011

May 2011

6.104%

May 2011 – October 2011

November 2011

7.721 %

November 2011 – April 2012

May 2012

8.529%

May 2012 – October 2012

November 2012

7.316%

Cumulative:

 

88.664%

 

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).

However, the Company has become aware of certain communications of the ENRE to the Under-Secretariat of Management Control and Coordination of the Ministry of Federal Planning, according to which the analysis made by them shows percentages similar to those calculated by the Company with regard to CMM ratios.
 

Based on this information, the Company has estimated that the claims effectively made for CMM adjustments, which were not transferred to tariffs nor authorized to be collected by other means, amount to approximately Ps. 1,999 million. In accordance with the Company’s estimations, the real major costs are significantly higher than the ones determined with the CMM adjustments that have been requested. These adjustments and any further adjustments granted under the CMM will remain in force until the approval of a new tariff structure under the RTI.


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

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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.

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

On November 23, 2012, the ENRE issued Resolution No. 347/2012, pursuant to which it established fixed and variable charges differentiated by category of customers, which the distribution companies will collect on account of the CMM adjustments stipulated in clause 4.2 of the Adjustment Agreement and will use exclusively to finance infrastructure and corrective maintenance of their facilities. Such charges, which will be clearly identified in the bills sent to customers, will be deposited in a special account to be managed by the trustee. Although in the whereas clauses of Resolution No. 374/2012 the ENRE recognizes the existence of CMM adjustment requests and it is indicated that the authorized charges are on account of CMM adjustments, nothing is said about what provisions will apply concerning the effect thereof for the period elapsed between the date such requests were made and the date of their application to the customer's bill.

On December 28, 2012, the Company filed a judicial remedy (acción de amparo) against ENRE seeking to protect the Company's constitutional rights relating to the provision of a secure and continuing public service of distribution of energy.  To file the amparo the Company has considered that the ENRE’s omission to implement the necessary measures to guarantee the provision of the public service of distribution of energy, such as failure to recognize the CMM adjustments that the Company has requested and the delay to implement the new tariff structure under the RTI, have led to an unstable situation which threatens the regular provision of the public service. As a consequence, the Company is seeking to obtain the necessary funds to provide the public service of distribution of energy as contemplated in its concession agreement. On February 19, 2013, the National Court of First Instance in Federal Administrative Claims Tribunal No. 12 (Juzgado Nacional de Primera Instancia en lo Contencioso Administrativo Federal No 12) served summons to ENRE and at the same time denied the preliminary injunction requested by the Company.  This resolution has been timely appealed by the Company.

 

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                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.).

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, theMinisterio 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 theRevisión Tarifaria Integral (Integral Tariff Revision, or RTI).

On October 25, 2005, Eden and the MIVySP signed theProtocolo de Entendimiento(Protocol of Understanding) by which they 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. TheProtocolo de Entendimiento was approved by Decree No. 2862/05 and ratified by the budget law of 2006.

TheProtocolo 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.

In accordance with theapplication of the revenue adjustment mechanism contemplated in theProtocol of Understanding, electricity rate increases have been grantedto Edensince 2005as detailed below:

a.      By Resolution No. 508/2005 dated September 12, 2005 issued by theMinistry of Infrastructure, Housing and Utilities of the Province, orMIVySP, it was authorized an adjustment toEden’s average rate of sale of 8.48%.

b.      By Resolution No. 17/2007 dated January 17, 2007, MIVySP 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 amongend users thereof, applicable to consumption after the publication of those regulations mentioned in the Official Gazette of the Province of Buenos Aires, which occurred on August 25, 2008.

 

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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 during 2010 in the form of three staggered stages in April, June 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.

f.       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.

g.       On July 20, 2012, the Infrastructure Ministry of the Province of Buenos Aires issued Resolution No. 243/2012, which established the new electricity rate schedules applicable to the July 1-July 31, 2012 and August 1-September 30, 2012 periods, and from October 1, 2012, totalizing an increase of 9%, representing a 15% increase in VAD, thereby restoring electricity rates in the concession area of Eden S.A. These electricity rate schedules were resolved with the aim of covering the increase in prices of the resources necessary to provide the service (labor, supplies and services), which have recorded a significant increase in prices.

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, 2012:

Operating territory

Area

(km2)

Customers

(in thousands)

% of Sales

 

 

 

Morón

1,761

873.8

32.0%

27.1%

Norte

164

845.8

31.0%

27.9%

Olivos

1,624

505.6

18.5%

23.0%

Pilar

1,088

501.6

18.4%

22.0%

Total

4,637

2,726.4

100.0%

100.0%

 

The table below sets forth certain information relating to operating territories of Eden as of and for the year ended December 31, 2012:

 

Lines

(km) (1)

Customers

(in thousands)

% of Sales

Operating territory

 

 

Arrecifes

1,219

23.3

6.8%

8.8%

Campana

2,098

51.8

15.1%

20.3%

Carlos Casares

2,309

29.2

8.5%

9.5%

Chivilcoy

2,066

59.2

17.2%

14.1%

Junín

2,111

52.0

15.1%

11.1%

Lincoln

1,558

25.3

7.4%

8.2%

Mercedes

2,307

53.3

15.5%

16.1%

San Nicolás

1,384

49.9

14.5%

11.7%

Total

15,052

344.1

100.0%

100.0%

 (1)  This figure does not include 3,226 km belonging to Transmission Lines between Operating Territories. Therefore, total length of lines is 18,278km.

 

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.

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

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

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

In addition, the Adjustment Agreement requires us and our shareholders and former shareholders to suspend all claims and legal proceedings (including arbitration actions) in administrative, state or federal courts located in Argentina or abroad, that are related to measures adopted since the Public Emergency Law was enacted.  After the completion of the RTI, we and our shareholders and former shareholders must completely waive and desist from all of the above mentioned claims and legal proceedings. If our shareholders or former shareholders do not desist from these claims, the Argentine government will have the right to forecloseon the pledgeof 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.

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

Category of user

 

Frequency of
interruptions
(maximum number of
interruptions per
semester)

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

High voltage

3

2 hours

Medium voltage

4

3 hours

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. 

The following table sets forth the frequency and duration of interruptions of our service in the periods indicated:

 

Year ended December 31,

 

2012

2011

2010

Average frequency of interruptions

6.31

4.50

5.13

Average duration of interruption (in hours)

17.53

11.00

10.62

    

The year 2012 was characterized by the occurrence of significant climatic adverse impacts on the area of concession such as high temperatures and strong storms with heavy rains that surpassed historic registrations by their concentration and frequency causing floods that obliged service cuts for security reasons of the public way. On the other hand, on April 4, 2012, a phenomenon without any precedent occurred, consisting of a tornado with hurricane force winds, which had surpassed the 200 km/hour, and affected the areas between the city of Gral. Rodriguez and Marcos Paz, from the West to the East. The main cities affected were Ituzaingó, Morón, La Matanza, Merlo and Moreno, among others. Approximately five 500 CT (Transformation Centers) MV/LV remained out of service, there were many material destructions as a consequence of the strong  winds, such as damages to  the wirings, private constructions, woods, signs and in general on the networks facilities.

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 offorce 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

_______________________

(1)                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:

 

·        SAIFI number of interruptions

 

 

Year ended December 31,

 

2012

2011

2010

First Half

5.40

4.00

4.72

Second Half

5.33

2.00

4.43

Full Year

10.73

6.00

9.15

 

·        SAIDI Hours / Client

 

��

Year ended December 31,

 

2012

2011

2010

First Half

12.17

7.09

10.07

Second Half

11.98

10.52

8.08

Full Year

24.14

17.61

18.15

 

 

Note: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 theReserva de Fondos de Terceros del ENRE (Third Party Reserve Fund of the ENRE) in an account atBanco 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 have not recorded any adjustments since 2009. In 2012, the fines and penalties imposed on Edenor by the ENRE amounted to Ps. 116.9 million, which represented 4%of our energy sales. As of December 31, 2012 our consolidated fines and penalties amounted to Ps. 662.0 million as compared to Ps. 542.2 million as ofDecember 31, 2011. 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 the remaining balance 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 standalone 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)

 

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

Accruals at beginning of year

531.9

455.4

377.5

331.6

281.4

241.1

169.7

99.2

63.4

49.0

19.0

13.6

ENRE Fines and Penalties

116.9

81.1

80.0

58.5

34.8

23.9

25.2

72.7

36.0

14.6

31.7

16.4

Accrued interests

5.1

Quality of Technical Service

75.7

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

12.4

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

6.8

5.1

3.0

2.4

1.6

1.1

1.2

1.2

0.5

1.5

1.7

Public Safety

17.7

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

0.2

0.6

0.4

0.3

0.3

0.2

0.4

0.2

0.2

0.2

Reporting Violations

3.4

4.2

6.6

3.7

2.9

4.4

5.6

33.7

12.2

1.7

4.9

1.9

Others

0.9

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

6.5

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

1.6

2.1

Transport Technical Function

--

0.2

0.3

0.1

0.4

0.2

Others

--

0.6

1.7

Total paid during period

6.5

4.5

2.0

12.6

1.6

1.7

0.7

2.3

0.1

0.2

1.6

11.0

Plus: Adjustment to fines and penalties pursuant to the ratification of the Adjustment Agreement

17.2

18.1

47.0

Accruals at year-end

647.4

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.

 

 Due to the disruption in service resulting from a power outage during a heat- wave that occurred between December 20 and December 31, 2010 in our concession area, the ENRE issued Resolution No. 32/11 in February 2011whereby we were fined in the amount of Ps.1.1 million and ordered to compensate those customers who had been affected by the power cuts for approximately Ps.21.2 million. We have filed a direct appeal with the Appellate Court in Contentious and Administrative Federal Matters No. 1, requesting that such resolution be declared null and void.

Additionally, we filed a petition for the granting of a precautionary measure which aimed at suspending the application of the fine imposed until a decision on the direct appeal is issued. On April 28, 2011, the court rejected the precautionary measure petition. As a consequence, we filed an extraordinary federal appeal (“Recurso Extraordinario Federal”) which was dismissed. We then filed an appeal (“Recurso de Queja por apelación denegada”) with the Supreme Court requesting that the rejected extraordinary federal appeal be sustained, which as of the date of this annual report has not been resolved. Furthermore, on July 8, 2011, we requested that notice of the substance of the case be served on the ENRE. Having this procedural step been carried out and the service of notice been answered, the proceedings are awaiting resolution. As of December 31, 2012, Edenor estimated a potential obligation of Ps. 30.4 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, 2012.

On April 24, 2013, the Company was notified that such direct appeal had been denied by the Appellate Court in Contentious and Administrative Federal Matters No. 1. As of the date of this annual report, the Company, together with its legal counsel, is assessing the situation, which involves the precautionary measure and the appeal of this last resolution.

On a separate note, on November 15, 2012, the Company was notified by the Regulatory Authorities of ENRE’s Resolution No.336/2012, pursuant to which the area in charge of applying and managing the ENRE’s Regulations was instructed to immediately initiate the corresponding penalty procedure in order for the distribution companies EDENOR and EDESUR S.A.( “Edesur’’) to: (a) determine the customers affected by the power cuts occurred as a consequence of failures between October 29 and November 14, 2012; (b) determine the discounts tobe recognized to each of the affected customers; and (c) credit them on account of the final discounts that will result from the evaluation of the Technical Service Quality relating to the six-month control period.

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In addition, it was resolved that the Company and Edesur shall compensate each small demand residential customer (T1R) who had been affected by the power cuts occurred during the aforementioned period. The amount of the compensation will depend on the length of the power cut, provided, however, that such power cut lasted more than 12 continuous hours. As of December 31, 2012, the provision recorded by the Company for penalties and compensations amounts to Ps.16.7 million.

 

Foreclosureon the Pledgeof Our Class A common shares or Revocation of Our Concession

Pursuant to the terms of the Adjustment Agreement, the Argentine government may forecloseon the pledgeof Edenor Class A common shares and sell them in a 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 forecloseon the pledgeof 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 grantor of the concession 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 theOrganismo de Control de Energía Eléctrica 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.

 

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·        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 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

·        if an Eden assembly approves, 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 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 transferred to a new purchaser 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 participate, 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, 2012, the system through which we supply electricity was composed of 72 Sub-Stations of high/high voltage, high/high/medium voltage and high/medium voltage, representing 14,703 MVA of transformer capacity and 1,410 kilometers of high-voltage power lines 220 kV, 132 kV and 27.7 kV. The distribution system of medium/low voltage was comprised of 15,636 transformers of medium/low voltage, representing 6,035 MVA of transformer capacity, 9,573 kilometers of medium‑voltage power lines 33 and 13.2 kV and 25,479 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,

 

2012

2011

2010

Kilometers of transmission lines  

 

 

 

High voltage

1,410

1,382

1,368

Medium voltage

9,573

9,446

9,364

Low voltage

25,479

25,328

25,123

Total

36,462

36,156

35,855

Transformer capacity (MVA)  

 

 

 

High voltage/high voltage

7,948

7,648

7,048

High voltage/medium voltage

6,755

6,695

6,571

Medium voltage/low voltage and medium voltage/medium voltage

6,238

6,025

5,849

Total

20,941

20,368

19,468

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 220 kV: Casanova, Colegiales, Malaver, Matheu, Morón, Talar and Zappalorto, and 132 kV Matanza, Ramos Mejía, Agronomía, Puerto Nuevo and Edison.

This transmission and subtransmission system (the “HV System”), together with the 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.

In May 2012, we finished the construction of the 220kV Edenor network linking of the local generation Central Puerto and Central Costanera, through Malaver substation. This extension was defined by the Resolution 1875/05 of the Secretary of Energy and it allows the increase in supply capacity by 600 MW. In December 2012, the third transformer of 300 MVA-220/132 kV was put into service in Malaver´s substation.

We are currently working with the Argentine government to construct a new entry point for our Substation Oscar Smith, whose enlargement was included in the Secretary of Energy Resolution No. 700/2011. 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 theSistema 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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As of December 31, 2012, the extension of the network, consists of 18,278 Km divided into 7,500 km in LV, 10,450 km in MV and 328 km in HV.

Systems

During 2012 we continued with the consolidation of the Systems Plan and Medium-Term Plan for Telecommunications. The major projects implemented were the following:

·        In November 2012 we finalized the second phase of implementation of CC&B (Customer Care & Billing), covering the commercial management of the small and medium customers, adding 2.7 million customers to the system, which had been operating since 2011 for the large customers. This has been a milestone for Edenor since it relies on a modern integral system that replaces a 15 year old obsolete technology.

·        We implemented a new system of consumption reading, which is compatible with CC&B, and allows load and transmission of data from new portable terminals that carry out the readers in field.

·        In December 2012, we finished the total replacement of the desk computers and notebooks under a contract signed with the company Dell. The project included, among others, the installation of new versions of compatible applications with Windows 7 and Office 2010, security policies redefinition and donation of all the equipments being replaced.

·        A new Intranet system was implemented, using the Microsoft SharePoint tool. The project also included the development of various IT collaborative spaces for the different departments of the Company.

 

·        In July 2012, EDEN finished the implementation of SAP, thus, installing a system model with features similar to ours and full functionality.

 

·        The module PM of SAP was implemented in order to carry out the management of traffic fleet and maintenance of buildings.

 

·        Within the framework of Information Security: 

·        A new product for passwords administration by the critical users was acquired.

·        A new antivirus was incorporated to the Windows licenses, thus, reducing the cost of licensing.

·        Penetration tests were carried out to evaluate the internal security of the installations.

 

Telecommunications

 

·        During the year 2012 the 450 km optical fiber connectivity was implemented on Low Voltage, which offers connectivity to Substations, Corporate Buildings and Commercial Offices. 

·        18 new nodes were acquired to update the remote control network. As a consequence, the SCADA connectivity will improve and will follow the technological development of the new remote control network. 

 

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·        A new platform of IVR of utlimate generation (GVP of Genesys) was set in motion with 120 ports of attention capacity, integrated to our technical system (Nexus) and to the new commercial system (CC&B) so that our clients can interact automatically before technical or commercial requests.

·        In order to adapt the installations of the Substations to new connectivity technologies, that comply with international policies, equipments that satisfy these policies were installed in the Substations of Rodriguez, Morón, Matanza, Colegiales, Edison and Pilar. This network will offer connectivity to protection and remote control equipments.

 

                Customers

The following graph shows the evolution of our customer base through December 31, 2012:

 

 

 

As of December 31, 2012, Edenor and Eden served 2,726,422 and 344,065 customers, respectively. 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 2012, this category accounted for approximately 42% of our electricity sales.

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

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

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·        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 2012, this category accounted for approximately 16% 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, 2012, the total number of such large users was 707, and in 2012 this category represented approximately 21% of our electricity sales.

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

·        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

 

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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,

 

2012

2011

2010

Residential

2,376,981

2,354,242

2,325,574

Small commercial

311,508

306,541

299,822

Medium commercial

30,681

30,678

29,820

Industrial

6,144

6,006

5,816

Wheeling system

707

682

643

Other*

401

399

393

Total

2,726,422

2,698,548

2,662,068

______________________

                * Represents public lighting and shantytown customers.

 

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 2012, this category accounted for approximately 23% of our electricity sales.

·        Small commercial (T1-G1, T1-G2 and T1GE): commercial customers whose peak capacity demand is less than 10kW.  In 2012, 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 2012, this category accounted for approximately 4% of our electricity sales.

·        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 2012, this category accounted for approximately 28% of our electricity sales.  This category does not include customers who purchase their electricity directly through the wholesale electricity market under the wheeling system.

 

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·        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, 2012, the total number of such large users was83, and in 2012 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 2012, 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 0.3% 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

·        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

 

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·        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,

 

2012

2011

2010

Residential

296,249

293,320

288,931

Small commercial

43,491

42,657

41,130

Medium commercial

1,462

1,446

1,372

Industrial

834

812

748

Wheeling system

83

81

83

Others*

1,946

1,918

1,748

Total

344,065

340,234

334,012

             * Represents public lighting and shantytown customers.

 

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.

 

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.

 

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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. 81.9 million as of December 31, 2011 to Ps. 137.1 million as of December 31, 2012. This increase in past due receivables was mainly due to the result of the preliminary injunction awarded pursuant to the request of the Ombudsman challenging the October 2008 adjustment of our tariffs, to late payments from our government customers and to a delay in delinquency actions resulting from the implementation of our billing system and distortions in the amounts billed under the stabilization factor.  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:

  

We also supply energy to low-income areas pursuant to theframework agreement with the Argentine government and the Province of Buenos Aires, for which certain payments are still owed to us.  See “—FrameworkAgreement (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. 

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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.

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. Since 2008, over 3 million 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 2002.

 

 

 

 

Year ended December 31,

 

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

Technical losses

 

10.5%

 

9.8%

 

9.8%

9.8%

9.8%

9.6%

8.6%

8.3%

8.1%

8.0%

7.8%

Non‑technical losses

 

2.8 %

 

2.8%

 

2.7%

2.1%

1.0%

2.0%

2.5%

2.7%

3.4%

4.7%

4.5%

Total losses..

13.3 %

12.6%

12.5%

11.9%

10.8%

11.6%

11.1%

11.0%

11.5%

12.7%

12.3%

 

 

As of December 31, 2012,totalenergy lossesrecorded by Edenwere 10.6% of which technical losses represented 8.2% and non-technical losses represented 2.4%.

                Framework Agreement (Shantytowns)

In accordance with the terms of its concession, Edenor supplies electricity to low-income areas and shantytowns located within its service area. In October 2003, Edenor, Edesur and Edelap entered into a framework agreement (the2003 Framework Agreement) with the Argentine Government and the Province of Buenos Aires to regulate their supply to low-income areas and shantytowns. Under this agreement, Edenor is compensated for the service Edenor provides to shantytowns by a commission formed in each shantytown that collects funds from residents of the shantytown.  In addition, Edenor is compensated separately by the municipality in which each shantytown is located, and, if there is any payment shortfall, by a special fund 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 an amount equal to 15.5%, of the compensation, net of taxes, paid by those customers with payment problems and meter irregularities who are regularized under the 2003 Framework Agreement. On June 23, 2008, Edenor 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 extending the terms of the 2003 Framework Agreement. This Amended 2003 Framework Agreement expired on December 31, 2010.

 

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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 Amended 2003 Framework Agreement. Such extension was approved on September 21, 2012 by Resolution No.248/12 issued by the ENRE and ratified by the Ministry of Federal Planning, Public Investment and Services pursuant to Resolution No. 247/2012.

 

As of  December 31, 2012 and 2011, our receivable balances with the Federal Government and the Government of the Province of Buenos Aires  for the supply of electricity to shantytowns amounted to Ps. 25.4 million and Ps. 25.7 million, respectively.

 

On October 18, 2012, we entered into an agreement for the settlement of non-financial obligations and subscription of Buenos Aires Province Government Bonds with respect to the amount owed to us by the Province of Buenos Aires as of December 31, 2010. Pursuant to the agreement, we agreed to receive an amount of Ps. 325,000 in cash and subscribe Series B Bonds for a residual nominal value of Ps. 6.1 million as settlement of the debt that the Province of Buenos Aires owed to us at December 31, 2010 for the electric power we supplied to low-income areas.

 

 

                Insurance

As of December 31, 2012, we had insurance for loss and damage to property, including damage due to floods, fires and earthquakes covering up to U.S. $887.7 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;

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

·        Optional life insurances for all our officers and employees

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, theInstituto 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 December 2012.

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 Secretaría de Ambiente y Desarrollo Sustentable de la Nación (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 theevent that our operations resulted in any environmental damage.

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Seasonality

Demand for our services fluctuates on a seasonal basis. For a discussion ofthisseasonality of demandsee “Item 5. Operating and Financial Review and Prospects—Demand—Seasonality of Demand.”

 

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 theDirección 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 createdAgua 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 theCompañía 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 theCompañía Argentina de Electricidad (Argentine Electricity Company, or CADE) toServicios 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.

 

 

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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.

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.

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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.

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;

 

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·        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 ConvertibilityRegime and, following the elimination of the ConvertibilityRegime 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.

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 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 theEnergía 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—Overview—Our obligations.”

 

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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 theFondo 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). 

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 theConsejo 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 theFondo 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.

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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.

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.

 

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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, as of December 31, 2012, there were 91 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, 2012, Argentina’s installed power capacity was 31,138 MW. Of this amount, 61% was derived from thermal generation, 36% from hydraulic generation and 3% from nuclear generation.  Private generators participate in CAMMESA through theAsociación 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.

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 theAsociación 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 ofAsociación de Distribuidores de Energía Eléctrica de la República Argentina (Electric Power Distributorsor ADEERA).

 

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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) andGrandes Usuarios Particulares (Particular Large Usersor 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.

Large users participate in CAMMESA by appointing two acting and two alternate directors through theAsociación 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.

 

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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.

On August 14, 2009, the ENRE adopted Resolution No. 433/2009 approving two tariff charts to be applied by Edenor, for the winter period of 2009. These charts were based on the new subsidized seasonal prices set forth by 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 Edenor to break down the floating charges of all invoices into the amounts subsidized and not subsidized by the Argentine government.

During the winter season for the period between 2009-2012, 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 1,000 kWh received a full subsidy for their energy purchases. For the months of August and September, residential customers with consumption levels above 1,000 kWh received a subsidy equal to a 70 percent of their energy purchase price.

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, 2012, the stabilization fund balance was approximately Ps. 20,208 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 theEnergía Plus system.

The resolution also established the price large users are required to pay for excess demand, if not previously contracted underEnergía 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).

Theseprices have been updated asfollows

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

·        After December2011, median incremental charge for excess demand for those who are not subsidized was set at 360 $/MWh

 

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ORGANIZATIONALSTRUCTURE 

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 six generation plants located in the Provinces of Buenos Aires, Salta, Mendoza and Neuquén (Central Piedra Buena S.A., Hidroeléctrica Los Nihuiles S.A., Hidroeléctrica Diamante S.A., Central Térmica Güemes S.A., EGSSA and Loma de la Lata S.A.).

The following diagram presents our corporate structure, including our subsidiaries and their respective direct ownership interests, as date of this annual report: 

 

 

 

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.”

 

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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 arenecessary 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, 2012 and 2011 was Ps.4,344.6 million and Ps. 4,738.3 million, respectively, out of which Ps. 34.3 million corresponds to Eden in 2012 and Ps. 35.7 million in 2011.

The total value of property, plant and equipment transferred by SEGBA on September 1, 1992 was allocated to individual assets accounts on the basis of engineering studies conducted by the Company. The value of property, plant and equipment was determined based on the price effectively paid by EASA for the acquisition of 51% of the Company’s capital stock. SEGBA neither prepared separate financial statements nor maintained financial information or records with respect to its distribution operations or the operations in which the assets transferred to EDENOR were used. Accordingly, it was not possible to determine the historical cost of transferred assets. Additions subsequent to such date have been valued at acquisition cost, net of the related accumulated depreciation. Depreciation has been calculated by applying the straight-line method over the remaining useful life of the assets, which was determined on the basis of the above-mentioned engineering studies. Furthermore, in order to improve the disclosure of the account, the Company has made certain changes in the classification of property, plant and equipment based on each technical process. In accordance with the provisions of IAS 23, borrowing costs in relation to any given asset are to be capitalized when such asset is in the process of production, construction, assembly or completion, and such processes, due to their nature, take long periods of time; those processes are not interrupted; the period of production, construction, assembly or completion does not exceed the technically required period;  the necessary activities to put the asset in condition to be used or sold are not substantially complete; and the asset is not in condition so as to be used in the production or start up of other assets, depending on the purpose pursued with its production, construction, assembly or completion. Subsequent costs (major maintenance and reconstruction costs) are either included in the value of the assets or recognized as a separate asset, only if it is probable that the future benefits associated with the assets will flow to the Company, being it possible as well that the costs of the assets may be measured reliably and the investment will improve the condition of the asset beyond its original state. The other maintenance and repair expenses are recognized in profit or loss in the year in which they are incurred.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).”

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, 2012 and 2011 and for the years ended December 31, 2012 and 2011, included in Item 18 in this annual report and “Selected Financial Data”, included in Item 3 herein. Our Consolidated Financial Statements have been prepared in accordance with IFRS as issued by the IASB. See “Item 3. Key Information—Selected Financial Data.”

We have prepared our annual financial statements for the fiscal year ended December 31, 2012 included herein, assuming that we will continue as a going concern. Our independent auditors, PWC, issued a report dated April 30, 2013, on our financial statements as of and for the years ended December 31, 2012 and 2011, which contains an explanatory paragraph expressing substantial doubt as to our ability to continue as a going concern. As discussed in Note 1 to the Consolidated Financial Statements, the delay in obtaining tariff increases and the cost adjustments recognition requested by the Company in accordance with the terms of the Adjustment Agreement and the continuous increase in operating expenses that are necessary to maintain the level of service significantly affected 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 1. However, our Consolidated Financial Statements as of and for the years ended December 31, 2012 and 2011 do not include any adjustments or reclassifications that might result from the outcome of this uncertainty.  See Item 3: “Key Information — Risk Factors — Risks Relating to Our Business - Failure or delay to negotiate further improvements to our tariff structure, including increases in our distribution margin, and/or to have our 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.”

 

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Effective January 1, 2012, we adopted IFRS as issued by the IASB, in replacement of the previous accounting principles which were under Argentine GAAP. IFRS differ in certain aspects from the Argentine GAAP. For further information, see Note 4 to our Consolidated Financial Statements. The transition date to IFRS for the Company under first time adoption is January, 1, 2011. Comparative data of the Company’s financial statements has been restated to retrospectively reflect the adoption of IFRS. For a description of the exceptions permitted or required under IFRS 1, please see Note 4 to our Consolidated 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 peopleand to the northern area of the Province of Buenos Aires throughtheEden Concessionwhich 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, 2012, we had 3,070,487 customers out of which 344,065 customers correspond to Eden and 2,726,422 to Edenor.

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 ten increases under the CMM beginning in May 2008, which increases are still being reviewed by the ENRE (other than the request submitted in May 2008). Under the terms of the Adjustment Agreement, these ten increases should have been approved in May 2008, November 2008, May 2009, November 2009, May 2010, November 2010, May 2011, November 2011, May 2012 and November 2012. 

 

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During the year ended December 31, 2012, 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 2013 we will continue to 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 shortfallsand 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.”

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 charged in our operating expenses approximately Ps. 116.9 million in fines and penalties in the year ended December 31, 2012 and Ps. 81.1 million in the year ended December 31, 2011. We incurred significantly higher levels of fines and penalties in 2011 and 2012, due to an increase in the underlying cost of energy factors upon which the fines and penalties are calculated.  

 

On November 15, 2012, the Company was notified by the Regulatory Authorities of ENRE’s Resolution No.336/2012, pursuant to which the area in charge of applying and managing the ENRE’s regulations was instructed to immediately initiate the corresponding penalty procedure in order for the distribution companies Edenor and Edesur to: (a) determine the customers affected by the power cuts occurred as a consequence of failures between October 29 and November 14, 2012; (b) determine the discounts to be recognized to each of the affected customers, and (c) credit them on account of the final discounts that will result from the evaluation of the Technical Service Quality relating to the six-month control period.

 

In addition, it was resolved that the Company and Edesur shall be ordered to compensate each small-demand residential customer (T1R) who had been affected by the power cuts occurred during the aforementioned period. The amount of the compensation will depend on the length of the power cut, provided, however, that such power cut lasted more than 12 continuous hours. The provision recorded by the Company for penalties and compensations amounts to Ps. 16.7 million, which is recorded in the “Other non-current liabilities” line item of our financial statements for the year ended December 31, 2012.  See “Item 4. Information on the Company—Fines and penalties.”

 

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The following table sets forth the composition of our net sales for the periods indicated:

 

 

 

 

Year ended December 31,

 

2012

2011

 

(figures in millions)

Energy sales

Ps

3,679.3

Ps 

 2,771.3

Connection charges

4.9

5.6

Reconnection charges

2.0

2.4

Pole leases

39.0

26.6

Net sales

Ps.

 3,725.3

Ps.

 2,805.8

_______________________

 

 

 

The following tables show Edenor´s energy sales by category of customer (in GWh) for the periods indicated:

 

 

 

 

 

 

 

Year ended December 31,

 

2012

2011

2010

2009

2008

 

Edenor

Eden

 

 

 

 

 

Residential

8,662

42%

648

23%

8,139

41%

7,796

40%

7,344

40%

7,545

41%

Small commercial

1,688

8%

236

8%

1,601

8%

1,543

8%

1,470

8%

1,530

8%

Medium commercial

1,717

8%

111

4%

1,700

9%

1,634

8%

1,565

9%

1,597

9%

Industrial

3,335

16%

814

28%

3,442

17%

3,378

18%

3,204

18%

3,277

18%

Wheeling system(1)

4,261

21%

294

10%

4,156

21%

3,891

20%

3,622

20%

3,700

20%

Others:

 

 

 

 

 

 

 

 

 

 

 

 

Public lighting

668

3%

81

3%

656

3%

654

3%

644

4%

644

3%

Cooperatives

675

24%

Shantytowns

03

2%

384

2%

377

2%

351

2%

304

2%

Others(2)

26

9

0%

20

20

20

19

Total

20,760

100%

2,791

100%

20,098

100%

19,292

100%

18,220

100%

18,616

100%

_______________________________

(1)                   Wheeling charges represent our tariffs for generators and 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, 2012

 

Edenor

Eden

 

(in million of Pesos)

Residential

Ps.

 983.2

35%

Ps.

 200.9

28%

Small Commercial

388.8

14%

102.8

14%

Medium Commercial

441.8

16%

41.2

6%

Industrial

707.8

26%

242.9

34%

Wheeling System(1)

171.3

7%

29.2

4%

Others:

 

 

 

 

Public Lighting

97.3

2%

24.3

3%

Cooperatives

 

 

 

 

Shantytowns and others(2)

31.0

1%

71.7

10%

Total

Ps.

 2,820.0

100%

Ps.

713.0

100%

 

 

 

 

Year ended December 31, 2011

 

Edenor

Eden

 

(in million of Pesos)

Residential

Ps.

 730.5

32%

Ps.

 162.1

28%

Small Commercial

348.7

15%

86.8

15%

Medium Commercial

366.9

16%

33.7

6%

Industrial

322.3

27%

193.7

33%

Wheeling System(1)

150.3

7%

22.8

4%

Others:

 

 

 

 

Public Lighting

55.9

2%

21.5

4%

Cooperatives

 

 

 

 

Shantytowns and others(2)

31.0

1%

61.2

11%

Total

Ps.

 2,0305.7

100%

Ps.

 581.9

100%

 

______________________

 

(1)      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.

(2)      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.

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 offiduciary funds to further enhance generation, transmission and distribution of electricity throughout the country, have set the stage for growth opportunities in our industry.

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

 

Year ended December 31,

 

2012

2011

2010

2009

2008

Real GDP (% change)

1.9

8.9

9.2

0.9

6.8

Nominal GDP (in millions of Pesos)

2,164,246

1,842,022

1,442,655

1,145,458

1,032,758

Real Consumption (% change)

4.8

10.7

9.1

1.5

6.6

Real Investment (% change)

(4.9)

16.6

21.2

(10.2)

9.1

Industrial Production (% change)

(1.2)

6.5

9.7

0.1

5.0

Consumer Price Index

10.0

9.8

10.5

6.3

8.6

Nominal Exchange Rate (in Ps. /U.S.$ at year end)

4.92

4.30

3.98

3.80

3.45

Exports (in millions of U.S.$)

81,205

83,950

68,187

55,672

70,018

Imports (in millions of U.S.$)

68,514

73,937

56,793

38,786

57,462

Trade Balance (in millions of U.S.$)

12,691

10,013

11,394

16,886

12,556

Current Account (% of GDP)

0.1

(0.4)

0.8

3.6

2.1

Reserves (in millions of U.S.$)

43,290

46,376

52,145

47,967

46,386

Tax Collection (in millions of Pesos)

679,799

540,134

409,900

304,930

269,375

Primary Surplus (in millions of Pesos)

(4,374)

4,921

25,115

17,286

32,529

Public Debt (% of GDP at December 31) *

40.9

41.3

44.1

55.1

54.1

Public Debt Service (% of GDP)

5.8

5.9

5.5

5.8

5.6

External Debt (% of GDP at December 31)

29.5

30.6

32.5

36.0

38.6

 

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 ConvertibilityRegime, 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 ConvertibilityRegime 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 ade 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 ConvertibilityRegime, 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 ConvertibilityRegime, 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. At the time of these privatizations, the capital structures of each privatized company were determined taking into account the ConvertibilityRegime 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.

 

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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 sectorhad adverse ramifications for the entire economy due to the significant role that sector plays in the Argentine economy.

At the end of 2008, the Argentine government enacted a series of measures aimed at counteracting the decline in the level of economic activity, including special tax rates and less stringent foreign exchange restrictions in connection with the repatriation and national investment of capital previously deposited abroad by Argentine nationals, extensions in the payment terms for overdue taxes and social security taxes, reductions in payroll tax rates for companies that increase their headcounts, creation of theMinisterio 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. 

 

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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).

      During 2012, according to the official information created and disseminated by the INDEC, the economy expanded 2.5%.  Although the real GDP continued growing during 2012, there was a marked deceleration with respect to the growth rate registered in 2011. 

 

      Despite the deceleration registered in all the components of the GDP, and in the private consumption itself, gross investment suffered the sharpest levels of deceleration as compared to 2011.

 

      There are several reasons that explained the deceleration of the growth rate registered during 2012, among the following: 

 

• The international financial uncertainty (especially during the first half of 2012).

 

• The low economic growth registered in the developed countries (mainly, in Europe).

 

• The deceleration of the rhythm of expansion in the relevant emerging economies for Argentina (Brazil and China).

 

• The drought produced during last summer which adversely affected the yield and the quantities produced by the farming sector during the campaign 2011/12.

 

• The application of certain internal economic policies measures, such as the limitations to the accumulation of currencies and to the imports, which generated uncertainty among consumers and entrepreneurs.

 

The deceleration of the economic activity that took place during 2012 had a negative impact on the performance of the public accounts. 

 

Outlook for 2013

In general, it is expected that the situation, in terms of economic growth, will improve in 2013. For the year, a recovery in activity (compared to the 2012 levels) is expected, with real GDP growth of around 4.0% according to official data, and of around 2.5% according to private estimates. In either case (considering one indicator or the other), the performance of the economy is expected to be better than that in 2012 for several reasons, mainly because of a more favorable external context than that in 2012.

Greater financial stability is expected in international markets (due to the fact that, though the problems in Europe are very far from being solved definitively, the risks of a total collapse of the Euro are today much lower than they were one year ago). Additionally, the agricultural harvest for the 2012-2013 campaign is expected to be greater than those of 2010-2011 and 2011-2012, with commodity prices also above levels recorded in the recent past. The combination of both factors is expected to provide more U.S. Dollars to the domestic economy. Further, Brazil’s recovery (the year on year expansion of the GDP projected for 2013 is 2.5%/3.0% versus an expansion of 1.0 % in 2012), and a lower rate of devaluation of the Real, are expected to contribute to the reactivation of the local industrial sector, which suffered during 2012.

However, there are some risks regarding the realization of that baseline scenario. First, as we do not control some of the variables of the external context or other exogenous factors, such as weather, we cannot provide assurances that there will not be changes that even significantly affect the above outlook, and that might have a negative impact on the domestic economy.  There are also some internal factors which have not been resolved, and which may limit the size of the recovery of economic activity in the short and medium term. These issues will still be present in 2013.

The fiscal performance of the Argentine Government (and also of the provinces) has suffered in recent years, and it is not likely that this situation will change in 2013, especially when considering the midterm elections of October 2013.

The situation in the foreign exchange market will probably remain unstable in the short term.  The increase in the monetary base and the utilization of international reserves by the Treasury (to pay public debt in foreign currency) have generated a situation in which U.S. Dollars are scarce and, therefore, where the desire to hold rather than use foreign currency is high.  In this context, it is probable that the spread between the official and the unofficial price of the U.S. Dollar will remain high.

Finally, another of the yet unresolved issues is the matter of competitiveness.  As has been the case in recent years, the rate of devaluation (in the official market) will be lower than the rate of inflation.  Therefore, and even though the deterioration is not expected to be as sharp as it was in previous years, the external competitiveness of domestic products and services is expected to be reduced in 2013. 

Considering the foregoing, economic growth will probably be around 2.5%/3.0% in 2013.  Inflation will likely remain stable (around 25% for the year), with a deceleration during the first half of the year, as a consequence of the prices agreements, and an expected acceleration during the second half of the year.  Trade surplus will likely increase slightly (mainly as a consequence of the anticipated better harvest), but the situation will likely continue to be unstable in the foreign exchange market.

 

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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. 

The following chart shows the variation in Edenor´s average tariff, including taxes, in Pesos per MWh in the periods indicated:

______________________

As for the year 2012 Energy Purchases for Eden were: Ps.$130.6/MWh, VAD:  Ps. $147.6/MWh and, Taxes: Ps. $141.1MWh.

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 the fixed and variable charges of the Resolution 347/12; and

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

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

Recognition of Cost of Electric Power Purchases

As part of our tariffs, we bill our customers for the costs of our electric power purchases, which include energy and capacity charges. In general, we purchase electric power at a seasonal price, which is approved by the ENRE every six months and reviewed quarterly. Our electric power purchase price reflects transportation costs and certain other regulatory charges (such as the charges imposed by theFondo Nacional de Energía Eléctrica(National Electricity Energy Fund)). 

 

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According to the current regulatory framework, the ENRE is required to adjust the seasonal price charged to distributors in the wholesale electricity market every six months. However, between January 2005 and November 2008, the ENRE did not make these adjustments. In November 2008, the ENRE issued Resolution No. 628/08, which established the new tariffs applied by Edenor as of October 1, 2008 (see “— Tariffs — Distribution margin or value added for distribution (VAD) — Adjustment Agreement”) and modified seasonal prices charged to distributors, including the consumption levels that make up the pricing ladder. The new pricing ladder sets prices according to the following levels of consumption:  bimonthly consumption up to 1,000 kWh; bimonthly consumption greater than 1,000 kWh and less than or equal to 1,400 kWh; bimonthly consumption greater than 1,400 kWh and less than or equal to 2,800 kWh; and bimonthly consumption greater than 2,800 kWh. In 2012, pursuant to Resolution No. 90688/2009, approximately 290,000 customers were exempted from paying the prices set forth by Resolution No. 628/2008 of the ENRE. In addition, the ENRE authorized us to pass through some regulatory charges associated with the electric power purchases to our customers, excluding residential customers with bi-monthly consumption levels below 1,000 kWh. In 2012, we collected Ps. 410.7 million through PUREE funds.

On November 7, 2011, through Secretary of Energy Resolution No. 1301/2011, a new unsubsidized tariff scheme applicable to non-residential customers grouped together by certain economic activities came into effect. According to this new tariff scheme, depending on the final seasonal schedule for the period November 2011 and April 2012 for the Wholesale Electricity Market, the affected customers will pay an average price of $320/MWh as from December 2011.

                On November 24, 2011, through joint resolution No.218 of the Undersecretary for Coordination and Management Control, Ministry of Federal Planning and resolution No.799 of the Budget Undersecretary of Ministry of Finance of the Ministry of Economy and Public Finance, the removal of subsidies as from the January 1, 2012 applied to certain residential areas within the City of Buenos Aires, including the neighborhoods of Puerto Madero, Barrio Parque, Recoleta, portions of Palermo and certain closed community neighborhoods in the northern part of the Greater Buenos Aires Metropolitan Area.

                On December 2, 2011, through joint resolution No. 229 of the Undersecretary for Coordination and Management Control, Ministry of Federal Planning and resolution No. 810 of the Budget Undersecretary of Ministry of Finance of the Ministry of Economy and Public Finance, the removal of subsidies as from January 1, 2012 applied to certain high-end residential type buildings in the City of Buenos Aires and to certain public agencies pertaining to the government of the City of Buenos Aires, as well as to the concessionaire of the highway network in the City of Buenos Aires.

                On December 5, 2011, the Secretary of Energy issued Resolution No. 1537/2011, which implemented the Volunteer Waiver Form Subsidy.

On May 8, 2012, the Secretary of Energy issued Resolution 2883/2012, whereby instructing the Company to apply a methodology to stabilize the bills, in order to minimize the effects of the seasonal consumption of all the residential customers. The application of this methodology is optional for these costumers.

Average consumption is determined based on the consumption recorded in the last six two-month consumption periods. The stabilization factor arises from the difference between the aforementioned average consumption and the current two-month consumption period. This value will be added to or subtracted from the two-month consumption period charges, and the result obtained will be the amount to be paid before the corresponding taxes. The adjustments that are to be made in accordance with the differences between average consumption and recorded consumption will be reflected in the bill for the last two-month consumption period of each calendar year.

The differences that arose as a consequence of comparing the annual average consumption to the current two-month consumption period have been recorded at the end of each period in the trade receivables balance sheet account, crediting or debiting the account, as the case may be, if the annual average consumption is higher or lower than the current two-month consumption period.

 

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We purchased a total of 19,653 GWh in 2012, 18,862 GWh in 2011 and 18,156 GWh in 2010 (excluding wheeling system demand). Until 2004, we purchased a portion of our energy needs under long-term supply contracts. Following the adoption of certain amendments to the pricing rules applicable to the wholesale electricity market pursuant to the Public Emergency Law, however, we currently purchase all of our energy supply in the wholesale electricity market at the spot price. We have not purchased any energy under long-term supply contracts since 2004 and we do not anticipate making any material purchases of energy in the term market in the near future.

Recognition of cost of energy losses

Energy losses are equivalent to the difference between energy purchased (including wheeling system demand) and energy sold. These losses 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 conductors and transformers that transmit electricity from the generating plants to the customers.  Non-technical losses represent the remainder of our energy losses and are primarily due to illegal use of our services. Energy losses require us to purchase additional electricity to satisfy demand and our concession allows us to recover from our customers the cost of these purchases up to a loss factor specified in our concession for each tariff category. Our loss factor under our concession is, on average, 10%. Our management is focused on taking the necessary measures to ensure that our energy losses do not increase above current levels because of their direct impact on our gross margins. However, due to the inefficiencies associated with reducing our energy losses below the level at which we are reimbursed pursuant to our concession (i.e., 10%), we currently do not intend to significantly lower our level of losses.

At the time of our privatization, our total energy losses represented approximately 30% of our energy purchases, of which more than two thirds were non-technical losses attributable to fraud and illegal use of our service. Beginning in 1992, we implemented a loss reduction plan (plan de disciplina del mercado, or market discipline plan) that allowed us to gradually reduce our total energy losses to 10.0% by 2000, with non-technical losses of 2.7%. However, beginning in mid-2001 and up until 2004, we experienced an increase in our non-technical losses, as the economic crisis eroded the ability of our customers to pay their bills, and in our technical losses in proportion with the increased volume of energy we supplied during those periods. Our total losses amounted to 12.5% in 2010, 12.6% in 2011 and 13.3% in 2012.

                      The following table sets forth the approximate breakdown between technical and non-technical energy losses experienced in Edenor concession area over the periods indicated:

 

Year ended December 31,

 

2012

2011

2010

Technical losses

10.5.%

9.8%

9.8%

Non‑technical losses

2.8%

2.8%

2.7%

Total losses

13.3%

12.6%

12.5%

 

Our capital expenditure program includes investments to improve and update our network, which we believe will allow us to maintain our technical losses at current levels despite further increases in demand. See “Item 4. Information on the Company—Business Overview —Energy losses.”

Distribution margin or value‑added for distribution (VAD)

Our concession authorizes us to charge a distribution margin for our services to seek to cover our operating expenses, taxes and amortization expenses and to provide us with an adequate return on our asset base.

Historical Overview of VAD.Our concession originally contemplated a fixed distribution margin for each tariff parameter with semiannual adjustments based on variations in the U.S. wholesale price index (67% of the distribution margin) and the U.S. consumer price index (the remaining 33% of the distribution margin). However, pursuant to the Public Emergency Law, all adjustment clauses in U.S. Dollars or other foreign currencies and indexation clauses based on foreign indexes or other indexation mechanisms included in contracts to be performed by the Argentine government were revoked. As a result, the adjustment provisions contained in our concession are no longer in force and, from January 2002 through January 2007, we were required to charge the same fixed distribution margin in Pesos established in 2002, without any type of currency or inflation adjustment. These measures, coupled with the effect of accumulated inflation since 2002 and the devaluation of the Peso, have had a material adverse effect on our financial condition, results of operation and cash flows, leading us to record net losses.

 

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Adjustment Agreement. On September 21, 2005, we entered into theActa Acuerdo sobre la Adecuación del Contrato de Concesión del Servicio Público de Distribución y Comercialización de Energía Eléctrica (Adjustment Agreement), an agreement with the Argentine government relating to the adjustment and renegotiation of the terms of our concession. Because a new Minister of Economy took office thereafter, we formally re-executed the Adjustment Agreement with the Argentine government on February 13, 2006 under the same terms and conditions originally agreed.  The ratification of the Adjustment Agreement by the Argentine government was completed in January 2007.  Pursuant to the Adjustment Agreement, the Argentine government granted us an increase of 28% in our distribution margin, which includes a 5% increase to fund specified capital expenditures we are required to make under the Adjustment Agreement.  See “—Liquidity and Capital Resources—Capital expenditures.” This increase was subject to a cap in the increase of our average tariff of 15%.  Although this increase was applied to the distribution margin as a whole, the amount of the increase was allocated to our non-residential customers (including large users that purchase electricity in the wheeling system) only, which, as a result, experienced an increase in VAD greater than 28%, while our residential customers did not experience any increase in VAD. The increase is effective retroactively from November 1, 2005 and will remain in effect until the approval of a new tariff scheme under the RTI.

The Adjustment Agreement also contemplates a cost adjustment mechanism for the transition period during which theRTI process is being conducted. This mechanism, known as the Cost Monitoring Mechanism, or CMM, requires the ENRE to review our actual distribution costs every six months (in May and November of each year).  If the variation between our actual distribution costs and our recognized distribution costs (as initially contemplated in the Adjustment Agreement or, if adjusted by any subsequent CMM, the most recent distribution cost base established by a CMM) is 5% or more, the ENRE is required to adjust our distribution margin to reflect our actual distribution cost base. The ENRE’s review is based on our distribution costs during the six-month period ending two months prior to the date on which the ENRE is required to apply the cost adjustment mechanism (on May 1 and November 1) and any adjustment will become effective from such date. The CMM takes into consideration, among other factors, the wholesale and consumer price indexes, current exchange rates, the price of diesel and construction costs and salaries, all of which are weighted based on their relative importance to operating costs and capital expenditures. We may also request that the CMM be applied at any time that the variation between our actual distribution costs and our then recognized distribution costs is at least 10% or more, and any adjustment to our distribution cost base that results from this CMM will become effective retroactively from the date we present the CMM request to the ENRE.  We cannot make any assurances, however, that we will receive any future increases under the CMM.

On January 30, 2007, the ENRE formally approved our new tariff schedule reflecting the 28% increase in the distribution margins charged to our non-residential customers contemplated by the Adjustment Agreement.  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 had increased by 8.032% (compared to the distribution cost base originally recognized in the Adjustment Agreement), and, accordingly, approved an equivalent increase in our distribution margins effective May 1, 2006. This increase, when compounded with the 28% increase granted under the Adjustment Agreement, resulted in an overall 38.3% increase in our distribution margins charged to our non-residential customers. In the November 2006 CMM, the ENRE determined that our distribution cost base had increased by 4.6% (compared to our distribution cost base as adjusted by the May 2006 CMM), and accordingly, did not approve any further increase in our distribution margins at such time.

The ENRE also authorized us to charge our non-residential customers the retroactive portion of these tariff increases for the period from November 2005 through January 2007, which amounted in the aggregate to Ps. 218.6million and, at December 31, 2011, had been fully invoiced.  In October 2007, the 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 PUREE to cover this CMM increase and future CMM increases.  In November 2007, we began accounting for the retroactive portion of the May 2007 CMM increase for the period from May 1, 2007 to October 31, 2007, which amounted to Ps. 49.6 million.

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In July 2008, we obtained an increase of approximately 17.9% to 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 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 for the period between November 2007 and June 2008, from the PUREE funds.  

Furthermore, we requested an additional increase to 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. The ENRE issued Note No. 81,399, which authorized a 5.791% increase under the CMM. As of the date of this annual report, the ENRE has not approved a new tariff scheme including this tariff increase nor has it authorized us to collect such increase by any other means (for example through an off-setting mechanism against contributions made to the PUREE, as was the case in the past). As of December 31, 2012, we had submitted to the ENRE ten requests for CMM adjustments as described in the table below, since May 2008:

Assessment Period

Application Date

CMM Adjustment Requested

November 2007 – April 2008

May 2008

5.791%

May 2008 – October 2008

November 2008

5.684%

November 2008 - April 2009

May 2009

5.068%

May 2009 – October 2009

November 2009

5.041%

November 2009 – April 2010

May 2010

7.103%

May 2010 – October 2010

November 2010

7.240%

November 2010 – April 2011

May 2011

6.104%

May 2011 – October 2011

November 2011

7.721%

November 2011 – April 2012

May 2012 – October 2012

Cumulative:

May 2012

November 2012

8.529%

7.316%

88.664%

 

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.

  

However, the Company has become aware of certain communications of the ENRE to the Under-Secretariat of Management Control and Coordination of the Ministry of Federal Planning, according to which the analysis made by them shows percentages similar to those calculated by the Company with regard to CMM ratios.

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

 

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

 

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              Although we believe that these increases comply with the terms of the CMM, we cannot assure you 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). 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.” and “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.”

On November 23, 2012, the ENRE issued Resolution No.347/2012, pursuant to which it established a fixed and variable charge differentiated by category of customers, which the distribution companies will collect on account of the CMM adjustments stipulated in clause 4.2 of the Adjustment Agreement, and will use exclusively to finance infrastructure and corrective maintenance of their facilities. Such charges, which will be clearly identified in the bills sent to customers, will be deposited in a special account to be managed by a Trustee. Although in the whereas clauses of Resolution No.347/2012 the ENRE recognizes the existence of CMM adjustment requests and it is indicated that the authorized charges are on account of CMM adjustments, nothing is said about what provisions will apply concerning the effect thereof for the period elapsed between the date such requests were made and the date of their application to the customer's bill.

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

 

 

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VAD

 

Average Taxes

 

Electric Power Purchases

 

Tariff(1)

November
2001

January
2005

February
2007

October 2008

Res.1301

2011(2)

November
2001

January
2005

February
2007

October 2008

Res.1301

2011(2)

November
2001

January
2005

February
2007

October 2008

Res.1301

2011(2)

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TIRI (0-300)

49.40%

44.50%

44.50%

44.69%

11.26%

28.70%

28.70%

28.70%

28.70%

28.70%

21.90%

26.80%

26.80%

26.61%

60.00%

TIRI2 (301-650)

36.20%

33.00%

33.00%

30.81%

4.80%

29.20%

29.20%

29.20%

29.23%

29.23%

34.60%

37.80%

37.80%

39.95%

65.91%

TIR# (651-800)

 

 

 

32.08%

4.55%

 

 

 

29.23%

29.23%

 

 

 

38.68%

66.15%

TIR4 (801-900)

 

 

 

31.63%

4.32%

 

 

 

29.23%

29.23%

 

 

 

39.13%

66.39%

TIR5 (90-1000)

 

 

 

32.75%

4.35%

 

 

 

29.23%

29.23%

 

 

 

38.02%

66.37%

TIR6 (1001-1200)

 

 

 

26.29%

4.19%

 

 

 

29.23%

29.23%

 

 

 

44.48%

66.51%

TIR 7 (1201-1400)

 

 

 

27.18%

3.98%

 

 

 

29.23%

29.23%

 

 

 

43.59%

66.73%

TIR8 (1401-2800)

 

 

 

25.94%

4.81%

 

 

 

29.23%

29.23%

 

 

 

44.83%

65.89%

TIR9 (> 2800)

 

 

 

22.50%

3.84%

 

 

 

29.23%

29.23%

 

 

 

48.26%

66.88%

Commercial - small demands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TIG1

55.10%

40.00%

47.80%

48.76%

21.91%

25.70%

25.70%

25.70%

25.68%

25.68%

19.20%

34.30%

26.50%

25.55%

52.34%

TIG2

53.60%

31.10%

43.60%

42.39%

15.97%

25.60%

25.60%

25.60%

25.64%

25.64%

20.70%

43.20%

30.70%

31.97%

58.29%

TIG3

 

 

 

37.40%

9.13%

 

 

 

25.63%

25.63%

 

 

 

37.57%

65.12%

Commercial - medium demand

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

T2

43.30%

27.90%

35.50%

38.03%

16.03%

25.60%

25.60%

25.60%

25.63%

25.63%

31.00%

46.40%

38.90%

36.34%

58.15%

Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

T3 low voltage below 300kw

44.20%

26.50%

34.30%

37.86%

15.37%

25.70%

25.70%

25.70%

25.66%

25.66%

30.10%

47.80%

40.10%

36.48%

58.84%

T3 low voltage over 300kw

42.60%

24.50%

32.10%

27.09%

11.99%

25.60%

25.60%

25.60%

25.62%

25.62%

31.80%

49.90%

42.30%

47.29%

62.29%

T3 medium voltage below 300kw

29.30%

14.10%

19.70%

25.25%

8.46%

25.70%

25.70%

25.70%

25.68%

25.68%

45.00%

60.30%

54.60%

49.06%

65.73%

T3 medium volgate over 300kw

27.30%

12.30%

17.50%

17.71%

7.09%

25.70%

25.70%

25.70%

25.69%

25.69%

47.00%

62.00%

56.80%

56.60%

67.11%

Average Tariff

41.20%

28.50%

33.90%

33.16%

9.57%

27.20%

27.20%

27.20%

27.24%

27.24%

31.50%

44.20%

38.90%

39.60%

63.10%

_______________________

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

(2)                  On November 7, 2011, the Energy Secretariat issued Resolution No. 1301/11, which established the summer scheduling, eliminating government grants to certain economic activities, which, in accordance with the provisions of the Resolution, are in conditions to pay the actual cost that needs to be incurred for being supplied with their demand of electricity. The removal of government grants has been extended to residential customers, who were classified by geographical areas and type of residence. The modification related only to electricity purchase prices in the Wholesale Electricity Market, for which reason the Company’s VAD (value added for distribution) remained practically unchanged.

Revisión Tarifaria Integral (Integral Tariff Revision, or RTI). Pursuant to the Adjustment Agreement, Edenor is currently engaged in anRTI process with the ENRE.

Our integral tariff proposal includes, among other factors, a recalculation of the compensation we receive for our distribution services, including taxes that are not currently passed onto our customers (such as taxes on financial transactions), a revised analysis of our distribution costs, modifications to our quality of service standards and penalty scheme and, finally, a revision of our asset base and rate of return. For this purpose, we have submitted to the ENRE a post-tax return on our asset base, which we calculate as operating income plus depreciation of property, plant and equipment, less the tax charge resulting from the application to this amount of the legal tax rate (currently, 35%), divided by the value of our gross asset base. We believe that this method of calculating our return on assets is consistent with the requirements of the Adjustment Agreement, although we cannot guarantee that the ENRE will not decide to use other factors or methods to calculate our return on assets.

 

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On April 30, 2007, the Secretary of Energy issued Resolution No. 434/2007, which established that the new tariff structure resulting from the RTI would take effect on February 1, 2008 and would be implemented in two installments, in February and August 2008.

In July 2008, the Secretary of Energy issued Resolution 865/2008, which reviews the RTI schedule contemplated by the Adjustment Agreement.  The Secretary of Energy revised the original RTI schedule and stated that the new tariff structure of the RTI would take effect in February 2009 and that if in February 2009 the tariff resulting from the RTI were greater than the tariff in place at that moment, the tariff increase would be applied in three stages: the first adjustment would take place in February 2009, the second in August 2009 and the last one in February 2010.

As of the date of this annual report, no resolution has been issued concerning the application of the electricity rate schedule resulting from the RTI, which was expected to be in effect since February 1, 2009.

On November 12, 2009, we submitted an integral tariff proposal to the ENRE’s Board of Directors as requested by ENRE Resolution No. 467/2008.  Our proposal included, among other factors, a recalculation of the compensation we receive for our distribution services, including taxes that are not currently passed onto to our customers (such as taxes on financial transactions), a revised analysis of our distribution costs, modification to our quality of service standards and penalty scheme and, finally, a revision of our asset base and rate of return. Our presentation included three different scenarios and related tariff proposals; two scenarios contemplated in Resolution No. 467/08 of the ENRE and a third scenario which contemplated a quality regime and cost of undelivered energy similar to the one currently in effect. Each scenario included the assumptions on which the hypothetical scenario was prepared and detailed supporting studies: projected demand, demand curve studies by client category, environmental management plan, capital base study, study of the group of facilities required to meet the demand of a certain homogeneous market in terms of consumption with the lowest costs (known as “Sistemas Eléctricos Representativos”), contemplated investment plan, operating costs analysis, profitability rate analysis, resulting revenue requirement and electricity rate adjustment criterion.  Each scenario assumed that the tariff increase would be implemented in three equal semiannual installments.

We stated to the ENRE that the sustainability of the proposals depends on the actual occurrence of the assumptions and that any change in the criteria and/or parameters contemplated in our proposal could directly affect the economic and financial equation that supports each of the proposed options. Furthermore, the calculations made in each of the three options took into account the implementation of the tariff in three equal semiannual installments.  The presentation included regulatory and legal considerations as well. Due to the lack of data provided by the ENRE, we were unable to include an electricity rate structure or schedule and included instead the revenue requirements per voltage level for each of the options we presented.

We anticipate that, once the ENRE has reviewed our integral tariff proposal, it will hold a public hearing on the proposal, following which we expect that the ENRE will adopt a revised tariff scheme. 

Based on the parameters of the RTI set forth in the Adjustment Agreement, we expect that this revised tariff scheme will maintain our current distribution margins following the increases granted under the Adjustment Agreement (including any increases granted pursuant to the CMM) and include a cost adjustment mechanism similar to the CMM. Because the RTI is provided for in the Adjustment Agreement, which was approved by the Argentine Congress and ratified by the Argentine Executive Branch, we believe that the ENRE’s decision will not be subject to ratification procedures.

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

 

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Social Tariff Regime. According to the Adjustment Agreement, we will be required to apply a social tariff regime as part of our revised tariff structure resulting from the RTI.  This regime is a system of subsidized tariffs for the poverty‑stricken sectors of the community to be approved by the ENRE in the context of the RTI.  The social tariff regime will provide poverty‑stricken sectors of the community with the same service and quality of service as other users.  The beneficiaries under this regime must register with the Argentine government and meet certain criteria, including not owning more than one home and having a level of electricity consumption that is not higher than a maximum to be established by the Argentine government.  According to the Adjustment Agreement, the Argentine government will subsidize the increased costs associated with the social tariff regime in part with contributions by users not subject to this regime.  We will be required to cover a portion of these costs by not charging the beneficiaries of this regime for reconnection expenses and installation of new equipment, updating our billing system and granting payment plans to beneficiaries for existing past-due electricity bills.  We currently anticipate that the incremental cost to us of providing services under the social tariff regime will not be significant.  However, we cannot guarantee that the social tariff regime will be implemented in the manner, or under the terms, we currently anticipate.

Demand

Energy demand depends to a significant extent on economic and political conditions prevailing from time to time in Argentina, as well as seasonal factors.  In general, the demand for electricity varies depending on the performance of the Argentine economy, as businesses and individuals generally consume more energy and are better able to pay their bills during periods of economic stability or growth.  As a result, energy demand is affected by Argentine governmental actions concerning the economy, including with respect to inflation, interest rates, price controls, foreign exchange controls, taxes and energy tariffs.

 

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Electricity demand

The following table sets forth the amount of electricity generated in Argentina and our electricity purchases in each of the periods indicated.

Year

Electricity Demand(1)

Edenor Demand(2)

 

Eden Demand(3)

Edenor’s Demand
as a% of Total Demand

Eden’s Demand
as a% of Total Demand(3)

(in Gwh)

1994

55,827

11,386

-

20.4%

-

1995

57,839

11,629

-

20.1%

-

1996

61,513

12,390

-

20.1%

-

1997

66,029

13,046

-

19.8%

-

1998

69,103

13,768

-

19.9%

-

1999

71,689

14,447

-

20.2%

-

2000

75,591

15,148

-

20.0%

-

2001

78,098

15,414

-

19.7%

-

2002

76,483

14,865

-

19.4%

-

2003

82,261

15,811

-

19.2%

-

2004

87,477

16,673

-

19.1%

-

2005

92,340

17,623

-

19.1%

-

2006

97,590

18,700

-

19.2%

-

2007

102,950

20,233

-

19.7%

-

2008

105,959

20,863

-

19.7%

-

2009

104,592

20,676

-

19.8%

-

2010

110,767

22,053

-

19.9%

-

2011

116,418

23,004

3,116

19.8%

2.7%

2012

131,944

23,934

3,210

17.7%

2.4%

______________________

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

(1)      Includes demand in theMercado Eléctrico Mayorista Sistema Patagónico (Patagonia wholesale electricity market, or MEMSP).

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

(3)   Eden was purchased on March 4th, 2011 and on February 27, 2013, Edenor sold the shares representing 100% of Aeseba’s capital stock and voting rights, the controlling company of Eden. See Item4. “Information on the Company –History and Development of the Company –Offer for the acquisition of Eden.”

 

Electricity demand in our concession area has grown an average of 4.3% per annum since 1994. The evolution of demand shows two growth periods interrupted by a slight decline in demand in 2002 attributable to the economic crisis, and a slight decrease registered in 2009, as a consequence of theglobal financial crisis.

The following graph represents the annual growth of energy purchased to satisfy the demand of each operating area within Edenor concession area from 2000 through 2012:

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Beginning in mid-2001 through 2002, the decline in the overall level of economic activity and the deterioration in the ability of many of our customers to pay their bills as a result of the crisis led to an overall decrease in demand for electricity and an increase in non-technical energy losses. After the economic crisis, however, demand started growing again, increasing an average of 4.9% per annum from 2003 through 2012. This increase in demand was due to renewed growth in the Argentine economy since the second half of 2003 and the relative low cost of energy to consumers, in real terms, resulting from the freeze of our distribution margin and the elimination of the inflation adjustment provisions of our concession in 2002. Demand by residential customers increased by 6.7% in 2012, primarily due to the addition of new appliances and the relative low cost of energy, in real terms. Demand by our high-demand customers and wheeling system customers remained practically in the same levels as during 2011, mainly due to the deceleration that the industrial sector experienced in the second semester of 2012 (including the wheeling system demand). 

The small commercial category of customers registered a decrease in demand in 2002, but recovered slightly after the initial effects of the economic crisis due to the sensitivity of customers in this category to the economic status of their small businesses. The medium commercial category of customers has generally demonstrated the same volatility in demand as low-demand customers in recent years.

Public lighting demand has declined significantly over the past few years due to the introduction of low-consumption lighting. We believe that the public lighting category will continue to register low demand despite continued economic expansion and urban development. After having increased significantly in 2005, demand in shantytowns stabilized in 2006, remaining in line with historic growth levels, and was below the increase in demand for our low demand residential category of customers. However, overall demand in this category is relatively small in comparison to other larger categories of our customers. See “Item 4. Information on the Company—FrameworkAgreement (Shantytowns)” 

The Argentine government has also implemented the PUREE in an attempt to curb increases in energy demand by offering rewards to residential and small commercial customers who reduce their energy usage in comparison to their use in 2003. In 2005, the Argentine government implemented a second version of the PUREE (PUREE II), which rewards residential and small commercial customers based on their usage in 2003 and industrial customers based on their usage in 2004. The PUREE II also penalizes industrial customers whose usage exceeds 90% of the 2004 levels and penalizes residential customers with bi-monthly consumption levels at or above 300 KWh and small commercial customers whose usage exceeds 90% of their usage levels for 2003. Residential customers with consumption levels below 300 KWh are exempt from penalty. In spite of the PUREE and PUREE II, energy demand has continued to increase during the three years it has been in effect.

On October 31, 2008, the Secretary of Energy adopted Resolution 1170/08, which excludes all the T1G, T2, T3 and T1R customers with bi-monthly consumption levels over and above 1,000 KWh from receiving PUREE reward payments.

On March 2, 2010, the Secretary of Energy adopted Resolution 45/2010, which revised the calculation of the coefficient used to reward T1R customers with consumption levels below 1,000 KWh.This resolution decreased the rewards that such users are entitled to receive.

We cannot assure you that the tariffs that result from the RTI or future economic, social and political developments in Argentina, over which we have no control, will not have an adverse effect on energy demand in Argentina.  See “Item 3. Key Information—Risk factors—Risks related to the electricity distribution sector—Electricity demand may be affected by tariff increases, which may lead distribution companies, such as us, to record lower revenues.”

Capacity demand

Demand for installed capacity to deliver electricity generally increases with growth in demand for electricity.  However, since the 2001 and 2002 crisis, with the exception of the two thermal generation plants described below, no new generation plants have been built in Argentina. However, the Argentine government has implemented some economic incentives, such as those contained in theEnergía PlusProgram, which have served to increase generating capacity in existing generation plants such as Central Térmica Güemes and Central Loma de la Lata. A lack of generation capacity would place limits on our ability to grow and could lead to increased service disruptions, which could cause an increase in our fines. See “Item 3. Key Information—Risk factors—Risks Relating to the Electricity Distribution Sector—if we experience 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.”

 

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In response to the lack of private investment in new generation plants, the Argentine government undertook a project to construct two 800 MW thermal generation plants, Central Termoeléctrica Manuel Belgrano and Central Termoeléctrica General San Martín. Construction of these two plants was completed and operations commenced in 2009. The two plants were constructed with funds derived from three sources: net revenues of generators derived from energy sales in the spot market, a special charge to our non-residential customers per MWh of energy billed and a specific charge from CAMMESA applicable to large users. In addition to the construction of these two new thermal generation plants, 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 to meet increasing energy needs. The government has also required us to finance 24% and Edesur 26%, of the construction costs of two high-tension 220 kV lines between theCentral Puerto andCentral Costanera generators and theMalaver network, which will provide access to an additional 600MW of energy from theCentral Puerto andCentral Costanera generators that currently cannot be distributed due to saturation of their grids. In May 2012, we finished the construction of the 220kV linking lines of the local generators Central Puerto and Central Costanera with Edenor network, through Malaver substations. This extension was decided by the Resolution No.1875/05 of the Secretary of Energy and it allows an increase in supply capacity by 600 MW from Central Puerto and Central Costanera generators. In December 2012, the third transformer of 300 MVA-220/132 kV was put into service in Malaver´s substation.

We cannot assure you that these new generation plants will be able to serve our energy demands in the manner we anticipate.

Seasonality of Demand

Seasonality has a significant impact on the demand for electricity in our concession area, with electricity consumption peaks in summer and winter. The impact of seasonal changes in demand is registered primarily in our residential and small commercial customer categories.  The seasonal changes in demand are attributable to the impact of various climatological factors, including weather and the amount of daylight time, on the usage of lights, heating systems and air conditioners.

The impact of seasonality on industrial demand for electricity is less pronounced than on the residential and commercial sectors, primarily because different types of industrial activity by their nature have different seasonal peaks, such that the climatic effect is more varied. 

 

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The chart below shows seasonality of demand in Edenor’s residential customer category for the periods indicated.

The chart below shows seasonality of demand in Edenor’s small commercial customer category for the periods indicated.

 

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             The chart below shows seasonality of demand in Edenor’s medium commercial customer category for the periods indicated.

 

The chart below shows seasonality of demand in Edenor’s industrial customer category for the periods indicated.

 

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The chart below shows seasonality of demand in Eden’s residential customer category for the periods indicated.

 

The chart below shows seasonality of demand in Eden’s small commercial customer category for the periods indicated.

 

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The chart belowshows seasonality of demand in Eden’s medium commercial customer category for the periods indicated.

 

The chart below shows seasonality of demand in Eden’s industrial customer category for the periods indicated.

 

Taxes on Electricity Tariffs

Sales of electricity within our service area are subject to certain taxes, levies and charges at the federal, provincial and municipal levels. These taxes vary according to location and type of user. In general, residential and governmental users are subject to a lower tax rate than commercial and industrial users. Similarly, taxes are typically higher in the Province of Buenos Aires than in the City of Buenos Aires. All of these taxes are billed to our customers along with electricity charges.

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Framework Agreement (Shantytowns)

Since 1994, we have supplied electricity to low-income areas and shantytowns within our concession area under a special regime established pursuant to aseries of framework agreements.  For a discussion of these agreements and our ongoing negotiations to extend the most recentframework agreement, see “Item 4. Information on the Company—Framework Agreement (Shantytowns)”   

Operating Expenses

Our most significant operating expenses are transmission and distribution expenses, which include depreciation charges, salaries and social security taxes, outsourcing and purchases of materials and supplies, among others.

We seek to maintain a flexible cost base by achieving an optimal level of outsourcing, which allows us both to maintain a lower cost base and gives us the ability to respond more quickly to changes in our market. We had approximately 3,084and 3,096 third party employees under contract with us as of December 31, 2012 and2011, respectively. The number of third parties employees as of December 31, 2012 and 2011 includes 307 and 300 employees, respectively,under contract with us as a result of our acquisition of Aeseba. The number of third‑party employees under contract does not directly relate to the number of third‑party employees actually performing services for us at any given time, as we only pay for the services of these employees on an as-needed basis. See “Item 6. Directors, Senior Management and Employees—Employees.”

Our principal material and supply expenses consist of purchases of wire and transformers (i.e., electromagnetic devices used to change the voltage level of alternating‑current electricity), which we use to maintain our network.

Summary Historical Results of Operations

The following table provides a summary of our operations for the years ended December 31, 2012 and 2011.

 

Year ended December 31,

 

2012(*)

2011(*)

Continuing Operations

 

 

Revenue from sales (1)

Ps.

 3,725.3

Ps.

 2,805.8

Revenue from construction

117.6

87.4

Electric power purchases

(1,740.2)

(1,130.9)

Cost of Construction

(117.6)

(87.4)

Subtotal

1,663.0

1,480.4

Transmission and distribution expenses

(1,570.1)

(1,094.8)

Gross Profit..................................................... 

93.0

385.5

 

Selling expenses

(430.4)

 

(310.3

Administrative expenses

(296.4)

(224.3)

Gain from acquisition of companies

-

435.0

Other operating income

33.3

27.9

Other operating expenses

(112.8)

(54.9)

Operating (expense) / income

(713.3)

258.9

Financial Income

86.0

55.6

Financial Expenses(2)

(296.8)

(216.1)

Other financial results

(166.7)

(97.2)

Net Financial Expense

(377.5)

(257.8)

(Loss) Profit before taxes

(1,090.8)

1.1

Income Tax

99.8

(153.0)

Loss for the year from continuing operations

(991.0)

(151.9)

Loss from discontinued operations

(22.4)

(139.5)

Loss for the year

1,013.4

291.4

Loss for the year attributable to:  

 

 

Owners of the parent

(1,016.5)

(304.1)

Non- controlling interests

3.1

12.7

Loss for the year

(1,013.4)

(291.4)

Loss for the year attributable to

Owners of the parent from:

 

 

Continuing Operations

(1,000.6)

(157.7)

Discontinued Operations

(15.8)

(146.4)

Loss for the year

(1,016.5)

(304.1)

 

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(*) Consolidated financial data.

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

(2)      Includes commercial interests accrued by CAMMESA of Ps. 55.2 million, under the Commercial Interest line item.

 

 

Year Ended December 31, 2012 compared with Year Ended December 31, 2011.

Revenue from sales

Revenue from sales increased 32.8% to Ps. 3,725.3 million in the year ended December 31, 2012 from Ps. 2,805.8 million in the year ended December 31, 2011. Revenue from sales as of December 31, 2012was composed of Ps. 2,977.1 million of net sales of Edenor.   

The increase in revenue from sales represents a 29.3% increase compared with Edenor figures of 2011, basically due to the increase in the electric power price as a result of the subsidies cuts, which had no impact in the value added for distribution, additional income from the charges set forth by ENRE’s Resolution 347/2012, and also due to a 3.3% increase in the volume of energy sold which went from 20,098 GWh in 2011 to 20,760 GWh in 2012. This increase in energy sales is mainly due to a 2.3% increase in the average consumption per customer and a 1.0% increase in the number of customers.

                In the case of Eden the increase in Net sales was mainly due to the higher energy prices as a result of the tariff increases obtained in 2012 and also due to the subsidies cuts.

Net energy sales represented approximately 98.8% of our net sales in 2012 and 96.6% in 2011; late payment charges, pole leases, and connection and reconnection charges account for the remaining balance.

Electric Power Purchases

The amount of electric power purchases increased 55.6% to Ps. 2,062.2 million for the year ended December 31, 2012 from Ps. 1,325.5 millionfor the year ended December 31, 2011. Thisincrease ofPs. 736.7 million was due to the increase in the purchase price as a result of the subsidies cuts and in the case of Edenor, also due to the increase in the price at which the non-recognized energy losses are measured and the cost set for the mobile generation.

 

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The volume of electric power purchases of Edenor on a standalone basis increased 4.0% to 23,934 GWh for the year ended December 31, 2012 from 23,004 GWh for the year ended December 31,2011(in both cases excluding wheeling system demand).

Energy lossesincreasedto 13.3%for the year ended December 31, 2012 from 12.6%for the year ended December 31, 2011.  See “—Factors Affecting Our Results of Operations—Recognition of Cost of Energy Losses.”

Transmission and Distribution Expenses

Transmission and distribution expenses increased 43.4% to Ps. 1,570.1 millionfor the year ended December 31, 2012 from Ps. 1,094.8 millionfor the year ended December 31, 2011.This increase was mainly due to a Ps. 245.8 million increase in fees and remuneration for services due to an increase in contractor’s prices (99% compared to 2011) and a Ps. 119.7 million increase in salaries and social security taxes, attributable to an increase in employee compensation granted in 2012 (26% compared to 2011).

              As a percentageof net sales, transmission and distribution expenses increased to 42.1%for the year ended December 31, 2012 from 39.0% for the year ended December 31, 2011

The following table sets forth the principal components of our transmission and distribution expenses for the years indicated.The figures are presented on a consolidated basis.

 

 

Year ended December 31,

 

2012

% of 2012
net sales

2011

% of 2011
net sales

 

(in millions of Pesos)

Salaries and social security taxes

Ps. 582.4

37.1%

15.6%

Ps. 462.7

42.3%

16.5%

Supplies consumption

93.1

5.9%

2.5%

57.2

5.2%

2.0%

Fees and remuneration for services

495.3

31.5%

13.3%

249.5

22.8%

8.9%

Depreciation of property, plant and equipment

187.5

11.9%

5.0%

183.2

16.7%

6.5%

ENRE penalties

113.6

7.2%

3.1%

74.8

6.8%

2.7%

Others

98.2

6.3%

2.6%

67.4

6.2%

2.4%

Total

Ps. 1,570.1

100.0%

42.1%

Ps. 1,094.8

100.0%

39.0%

 

Gross profit

Our gross profit, including transmission and distribution expenses, decreased 75.9% to Ps. 93.0 millionfor the year ended December 31, 2012 from Ps. 385.5 millionfor the year ended December 31, 2011. Thisdecrease ofPs. 292.5 million was basically due to the increase in transmission and distribution expenses described above, which were partially offset by the increase in net sales.  

 

Selling Expenses

Our selling expenses are related to customer services provided at our commercial offices, billing, invoice mailing, collection and collection procedures, as well as allowances for doubtful accounts. 

Selling expenses increased 38.7% to Ps. 430.4 millionfor the year ended December 31, 2012 from Ps. 310.3 millionfor the year ended December 31, 2011.  Thisincrease ofPs. 120.1 millionwas mainly due to a Ps. 51.5 million increase in salaries and social security taxes (47% compared to 2011) (attributable to an increase inemployee compensation granted in 2012), a Ps. 41.2 million increase in fees and remuneration for services (32% compared to 2011) and a Ps. 7.7 million increase in allowances for doubtful account (71% compared to 2011).

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As a percentage of net sales, selling expenses increased to 11.6% in the year ended December 31, 2012 from 11.1% in the year ended December 31, 2011. 

The following table sets forth the principal components of our selling expenses for the years indicated. The figures are presented on a consolidated basis.

 

Year ended December 31,

 

2012

% of 2012
net sales

2011

% of 2011
net sales

 

(in millions of Pesos)

Salaries and social security taxes

Ps.

 161.8

37.6%

4.3%

Ps.

 110.3

35.5%

3.9%

Allowance for doubtful accounts

18.5

4.3%

0.5%

10.8

3.5%

0.4%

Fees and remuneration for services

170.5

39.6%

4.6%

129.3

41.7%

4.6%

Taxes and charges

32.5

7.6%

0.9%

27.0

8.7%

1.0%

Others

47.1

10.9%

1.3%

32.9

10.6%

1.2%

Total

Ps.

 430.4

100.0%

11.6%

Ps.

310.3

100.0%

11.1%

 

Administrative Expenses

Our administrative expenses include, among others, expenses associated with accounting, payroll administration, personnel training, systems operation, maintenance and advertising. 

Administrative expenses increased 32.1% to Ps. 296.4 millionfor the year ended December 31, 2012 from Ps. 224.3 millionfor the year ended December 31, 2011. Thisincrease ofPs. 72.1 million was mainly due to a Ps. 42.2 million increase in salaries and social security taxes attributable to an increase in employee compensation granted in 2012 (43% compared to 2011), a Ps. 15.6 million increase in fees and remuneration services (25% compared to 2011) and a Ps. 12 million increase in pension plan agreements (31% compared to 2011).

                As a percentage of net sales, administrative expenses remained the same level of 8.0% in the year ended December 31, 2012, as compared to year ended December 31, 2011.

 

Year ended December 31,

 

2012

% of 2012
net sales

2011

% of 2011
net sales

 

(in millions of Pesos)

Salaries and social security taxes

Ps.

 139.6

47.1%

3.7%

Ps.

97.4

43.4%

3.5%

Rent and insurance

18.5

6.2%

0.5%

14.5

6.5%

0.5%

Fees and remuneration for services

78.3

26.4%

2.1%

62.7

27.9%

2.2%

Pension plan

14.3

4.8

0.4%

2.3

1.0%

0.1%

Others

45.7

15.4

1.2%

47.4

21.2%

1.7%

Total

Ps.

 296.4

100.0%

8.0%

Ps.

 224.3

100.0%

8.0%

       

The following are the principal components of our administrative expenses for the years indicated. The figures are presented on a consolidated basis.

 

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Other (expense) income

Other operating expenses include mainlyretirement payments, severance payments and accrual for lawsuits. Other operating income expenses, net increased 194.5% to a loss of Ps. 79.5 millionfor the year ended December 31, 2012, compared to a loss of Ps. 27.0 millionfor the year ended December 31, 2011. Theincrease of Ps. 52.5 million was mainly due the impairment of other receivables (Ps. 37.3 million) and provision for contingencies (Ps. 18.3 million).

Net Financial Expense

Net financial expense was Ps. 377.5 millionfor the year ended December 31, 2012, compared to Ps. 257.8 millionfor the year ended December 31, 2011. This increase of Ps. 119.7 million was primarily due to an increase in commercial interest due to the debt with Cammesa and as a result of the variations in the exchange rate.

Income Tax

We recordedan income tax credit of Ps. 99.8 millionfor the year ended December 31, 2012, compared to an income tax charge of Ps. 153.0 millionfor the year ended December 31, 2011.

Loss for the year

We recordedaloss of Ps. 1,013.4 millionfor the year ended December 31, 2012, compared to a loss of Ps. 291.4 millionfor the year ended December 31, 2011. This increase in net loss was mainly due to an increase in operating expenses and in financial expenses and a decrease in other income,eachas described above.

 

Loss from discontinued operations

 

Loss from discontinued operations decreased 84%, from a loss of Ps. 139.5 million as of December 31, 2011 to a loss of Ps. 22.4 million as of December 31, 2012. As of December 31, 2012, this line item was comprised of a loss recognized on the remeasurement of assets of disposal group of Ps. 15.7 million and a loss from subsidiaries operations of Ps. 6.7 million. As of December 31, 2011, this line item was comprised of a loss recognized on the remeasurement of assets of disposal group of Ps. 177.7 million and a loss from assets classified as held for sale of Ps. 70.1 million, which losses were partially offset by gains from the tax effect of these line items of Ps. 40.4 million and from subsidiaries operations of Ps. 67.9 million.

 

 

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Liquidity and capital resources

Sources and Uses of Funds

Our cash flows from operations have been significantly affected in recent periods due to our failure to obtain adjustments to our tariffs to cover increases in our distribution costs, resulting in a working capital deficit as of December 31, 2012 and 2011. In order to preserve and guarantee the provision of the public service and improve the existing cash deficit, beginning in October 2012, the Company decided to only partially cancel, the obligations with the wholesale electricity market (CAMMESA) with surplus cash balances. This decision arose as a consequence of all the commitments necessary to ensure the provision of the public service, including investment plans and ongoing operation and maintenance tasks. As of the date of this annual report, the commercial debt with CAMMESA amounts to approximately Ps. 696.5 million. We expect to resume full payment of our payment obligations with CAMMESA once the economic and financial equation of Edenor is restored. In connection with the aforementioned, the Company has been ordered by the ENRE and CAMMESA to cancel such debt. In its reply to the ENRE, the Company rejected the Regulatory Authority’s competence to intervene in its commercial issues with third parties, and, in its reply to CAMMESA, the Company stated that the cash deficit that prevents it from canceling the total amount of the debt is a case of force majeure inasmuch as the Company does not have the possibility of approving its electricity rates, but, at the same time, has to maintain the priority given to the operation of the public service. If the conditions prevailing at the date of this annual report remain unchanged, the economic and financial situation will continue deteriorating. For fiscal year 2013, the Company also estimates negative cash flows and losses from operations, as well as a greater reduction in the financial ratios.

We are currently engaged in RTI with the ENRE, as required by the Adjustment Agreement, but the timeline for completing this process and the favorability to us of the final resolution are both uncertain. If we are not able to recover all of the incremental costs contemplated in the Adjustment Agreement and all such future cost increases or there is a significant lag 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. In this context and in light of the situation that affects the electricity sector, the ENRE issued Resolution No. 347/12 in November 2012, which establishes the application of fixed and variable charges that has allowed the Company to obtain additional revenue as from November 2012. However, such additional revenue is insufficient to make up the operating deficit due to the constant increase in operating costs and the estimated salary or third-party costs increases for the year 2013. Additionally, the Company cannot assure that it will be able to obtain additional financing on acceptable terms. 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.”

Our principal uses of cash are expected to be operating costs, the servicing of our financial debt and our capital expenditures plan.  We may need to incur indebtedness in the short term or increase our debt with the wholesale electricity market to cover operating costs, including further increases in our distribution costs and/or debt service payments. However, we are subject to limitations on our ability to incur new debt under the terms of our debt instruments so the Company cannot assure that it will be able to obtain additional financing on acceptable terms.  See “—Debt”. As of December 31, 2012 and 2011, our cash and cash equivalents amounted to Ps. 71.1 million and Ps. 130.5 million, respectively. We generally invest our cash in a range of instruments, including sovereign debt, corporate debt securities and other securities. The table below reflects our cashand cash equivalents position at the dates indicated and the net cash provided by (used in) operating, investing and financing activities during the years indicated:

 

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Year ended December 31,

 

2012

2011

 

(in millions of Pesos)

Cash and cash equivalents at the beginning of the year

Ps.

130.5

Ps.

 246.0

Net cash flows provided by operating activities

635.1

659.0

Net cash flows used in investing activities

(565.5)

(794.0)

Net cash flows (used in) provided by financing activities

(165.8)

16.3

Gain from exchange differences in cash and cash equivalents

36.8

3.3

Changes in cash and cash equivalents

(96.2)

(118.8)

Cash and cash equivalents at the end of the year

Ps.

 71.1

Ps.

 130.5

 

Net Cash flows provided by Operating Activities

Net cash flows provided by operating activities decreased by 3.6% to Ps. 635.1 million in the year ended December 31, 2012, compared to Ps. 659.0 million in the year ended December 31, 2011. 

This decrease is basically attributable to an increase in net loss from a net loss of Ps. 291.4 million for the year ended December 31, 2011, to a net loss of Ps. 1,013.4 million for the year ended December 31, 2012, mainly due to an increase in operating expenses during 2012, exchange rate differences and an interests in loans and other receivables, partially offset by a Ps. 99.8 million decrease in income tax. Moreover, the Company recognized a gain from acquisition of companies in 2011 and a loss on disposition of subsidiaries in 2012.

These negative impacts were partially offset by an increase in operating assets and liabilities, mainly due to a Ps. 410.7 million increase in funds collected through the Program on Rational Use of Electric Energy (PUREE), a Ps. 545.6 million increase in trade payables (including Ps. 189.9 million to the wholesale electricity market) and a Ps. 102.4 million increase in salaries and social security taxes payable. These increases in operating assets and liabilities were partially offset by a Ps. 342.0 million increase in trade receivables.

 

Net Cash flows used in Investing Activities

Net cash flows used in investing activities decreased 28.8% to Ps. 565.5 million in the year ended December 31, 2012 from Ps. 794.0 million in the year ended December 31, 2011.

Changes in net cash flows used in investing activities in 2012 were primarily due to variations in our capital expenditures and discontinued operations, partially offset by the collection of loans proceeds from borrowings (Ps. 142.4 million), and to the cash collected from the sale of Edesa (Ps. 83.0 million).

Net Cash flows (used in) provided by Financing Activities

In the year ended December 31, 2012, our cash flows from financing activities decreased by 1,117.1%, from a provision of Ps.16.3 million in the year ended December 31, 2011 to a use of Ps. 165.8 million in the year ended December 31, 2012, primarily as a result of the repayment of borrowings and discontinued operations, which was partially offset by the loans entered into during 2012 (68% lower than 2011).

Edenor’s Capital Expenditures

Edenor’s concession does not require us to make mandatory capital expenditures.  Edenor’s concession does, however, set forth specific quality standards that become progressively more stringent over time, which require us to make additional capital expenditures. Financial penalties are imposed on us for non-compliance with the terms of our concession, including quality standards.

Prior to our privatization, a low level of capital expenditures and poor maintenance programs adversely affected the condition of our assets. After our privatization in 1992, we developed an aggressive capital expenditure plan to update the technology of our productive assets, renew our facilities and expand energy distribution services, automate the control of the distribution network and improve customer service. Following the crisis, however, the freeze of our distribution margins and the pesification of our tariffs and our inability to obtain financing, coupled with increasing energy losses, forced us to curtail our capital expenditure program and make only those investments that were necessary to permit us to comply with quality of service and safety and environmental requirements, despite increases in demand in recent years.

 

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We are not subject to any limitations on the amount of capital expenditures we are required to make pursuant to our concession and applicable laws or regulations.

Our capital expenditures consist of net cash used in investing activities during a specified period plus supplies purchased in prior periods and used in such specified period. The following table sets forth our actual capital expenditures for the years indicated:

 

 

 

 

Year ended December 31,

 

2012

2011

 

(in millions of Pesos)

Supplies

Ps.

 287.4

Ps.

 323.3

Network maintenance and improvements

208.9

55.7

Legal requirements(1)

11.7

6.1

Communications and telecontrol

5.5

9.1

Others

30.8

40.4

Total

Ps.

 544.3

Ps.

 434.7

_______________________

(1)    Capital expenditures required to be made to comply with the ENRE quality standard and other regulations.

In 2012, in accordance with our capital expenditure program, we invested Ps. 544.3 million, a substantial portion of which was dedicated to increasing the capacity of our grid in line with the growth of our customer base, which increased 1.0% in 2012. In addition, we made investments in order to meet our quality standards levels. Historical information on capital expenditures is not indicative of future capital expenditures.

Debt

The economic crisis in Argentina had a material adverse effect on our operations.  The devaluation of the Peso caused the Peso value of our U.S. Dollar-denominated indebtedness to increase significantly, resulting in significant foreign exchange losses and a significant increase, in Peso terms, in our debt service requirements.  At the same time, our cash flow remained Peso-denominated and our distribution margins were frozen and pesified by the Argentine government pursuant to the Public Emergency Law.  Moreover, the 2001 and 2002 economic crisis in Argentina had a significant adverse effect on the overall level of economic activity in Argentina and led to deterioration in the ability of our customers to pay their bills.  These developments caused us to announce on September 15, 2002 the suspension of principal payments on our financial debt.  On September 26, 2005, our board of directors decided to suspend interest payments on our financial debt until the restructuring of this financial debt was completed.

The purpose of the restructuring was to restructure all, or substantially all, of our outstanding debt, in order to obtain terms that would enable us to service our financial debt. We believe that the restructuring was the most effective and equitable means of addressing our financial difficulties for our benefit and that of our creditors. We developed a proposal that we believed was necessary to address our financial and liquidity difficulties, while we continued to pursue tariff negotiations with the Argentine government to improve our financial condition and operating performance.

On January 20, 2006, we launched a voluntary exchange offer and consent solicitation to the holders of our outstanding financial debt. All of these holders elected to participate in the restructuring and, as a result, on April 24, 2006, we exchanged all of our then-outstanding financial debt for the following three series of newly issued notes, which we refer to as the restructuring notes:

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·        U.S. $123,773,586 Fixed Rate Par Notes due December 14, 2016, with approximately 50% of the principal due and payable at maturity and the remainder due in semiannual installments commencing June 14, 2011, and bearing interest starting at 3% and stepping up to 10% over time;

·        U.S. $12,656,086 Floating Rate Par Notes due December 14, 2019, with the same payment terms as the Fixed Rate Par Notes and bearing interest at LIBOR plus a spread, which starts at 1% in 2008 and steps up to 2% over time; and

·        U.S. $239,999,985 Discount Notes due December 14, 2014, with 60% of the principal due and payable at maturity and the remainder due in semiannual installments commencing on June 14, 2008, and bearing interest at a fixed rate that starts at 3% and steps up to 12% over time.

As of the date of this annual report, all of the restructuring notes have been repaid and cancelled.

In October 2007, we completed an offering of U.S. $220 million aggregate principal amount of our 10.5% Senior Notes due 2017, which we refer to as the Senior Notes due 2017. We used a substantial portion of the proceeds from that offering to redeem in full our Discount Notes due 2014 in several transactions throughout the period from October through December 2007.

During 2008, we repurchased and cancelled in several market transactions U.S. $32.5 million principal amount of our Fixed Rate Par Notes due December 2016 and repurchased U.S. $17.5 million of our Senior Notes due 2017, of which U.S. $6 million Senior Notes due 2017 were cancelled.

In May 2009, we issued Ps. 75.7 million principal amount of Par Notes due 2013 under our Medium Term Note Program. The Par Notes due 2013 are denominated and payable in Pesos and accrue interest on a quarterly basis at a rate equal to the private BADLAR, as published by the Central Bank, for each such quarter plus 6.75%.  Principal on the notes is payable in 13 quarterly installments, starting on May 7, 2010. As of December 31, 2012, the outstanding amount was Ps. 11.7 million.

During 2009, we repurchased and cancelled U.S. $32.2 million Fixed Rate Par Notes due 2016 and repurchased U.S. $53.8 million Senior Notes due 2017, U.S. $24.5 million of which was transferred to us as a consequence of the dissolution of the discretionary trust described below.

On October 25, 2010, we issued Senior Notes due 2022 with a face value of U.S. $ 230.3 million, of which U.S. $ 140 million were subscribed under a cash offer and U.S. $ 90.3 million were exchanged, as a result of an exchange offer, for Senior Notes due 2017, paying in cash U.S. $ 9.5 million plus accrued unpaid interest on those Senior Notes due 2017. Edenor lunched an offer to purchase under which we purchased Senior Notes due 2017 with a face value of U.S. $33.6 million for U.S. $35.8 million, including payment of accrued and unpaid interest on the Senior Notes due 2017.

 The Senior Notes due 2022 have a 12-year maturity and were issued at par, with interest accruing from the date of issuance at a fixed rate of 9.75% and payable semi-annually on October 25 and April 25 of each year, with the first interest payment on April 25, 2011.  

During 2010 we repurchased and cancelled in several market transactions approximately U.S. $7.3 million in principal amount of our Fixed Rate Par Notes due 2016 and U.S. $0.04 million of our Senior Notes due 2017.  Additionally, on October 18, 2010, we cancelled Senior Notes due 2017 with a nominal value of U.S. $65.3 million.

In addition, on October 25, 2010, November 4, 2010, and December 9, 2010, we cancelled Senior Notes due 2017 for a face value of U.S. $122.6 million, U.S. $1.3 million, and U.S. $0.04 million, respectively, representing approximately 83.3% of the Senior Notes due 2017 then outstanding.  As of December 31, 2012, the outstanding amount of Senior Notes due 2017 was U.S. $24.8 million.

On December 13, 2010, we cancelled the outstanding amount of our Fixed Rate Par Notes due 2016.

 

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In February 2011, JPMorgan Chase Bank N.A., Sucursal Argentina, Deutsche Bank S.A., Banco Macro S.A., Banco de la Nación Argentina and Standard Bank Argentina S.A. granted us a series of short-term loans for a total of Ps. 280 million, at an average annual interest rate of 14.5% and for an average term of 90 days. The proceeds of these loans were used to grant short-term loans to certain of our affiliates. Such affiliates used the proceeds of these short-term loans to repay a portion of their own indebtedness. Below is a brief description of the Short-Term Loans we received and of the short-term loans we granted to certain of our affiliates. 

Short-Term Loansreceived by Edenor

·        Banco Macro S.A. granted us a loan in an aggregate principal amount of Ps. 60 million (approximately U.S. $15 million) maturing on May 13, 2011 and bearing interest at an annual rate of 15.16%, payable in a single installment at maturity;

·        Deutsche Bank S.A. granted us a loan in an aggregate principal amount of Ps. 60 million (approximately U.S. $15 million) maturing on May 13, 2011 and bearing interest at an annual rate of 14.85%. Accrued interest had been payable monthly and principal had been repaid in a single installment at maturity;

·        Standard Bank Argentina S.A. granted us a loan in an aggregate principal amount of Ps. 55 million (approximately U.S. $13.75 million) maturing on May 13, 2011 and bearing interest at an annual rate of 14.75%. Accrued interest had been payable monthly and principal had been repaid in a single installment at maturity;

·        Banco de la Nación Argentina granted us loans in an aggregate principal amount of Ps. 81 million (approximately U.S. $20.25 million), in three different tranches: (i) Ps. 50 million (approximately U.S. $12.5 million) were disbursed on February 16, 2011; this tranche beared interest at an annual rate equal to the BADLAR Rate (as defined below) plus 400 bps and matured on August 16, 2011, (ii) Ps. 21 million (approximately U.S. $5.25 million) were disbursed on February 16, 2011; this tranche beared interest at an annual rate of 11% and was renewable for fifteen-day periods until September 30, 2011, and (iii) Ps. 10.0 million (approximately U.S. $2.5 million) were disbursed on March 4, 2011; this tranche beared interest at an annual rate equal to the BADLAR Rate plus 400 bps and matured on September 5, 2011. The BADLAR Rate was the interest rate for a 30 to 35 day fixed-term deposit of more than Ps. 1.0 million in Argentine private banks, which is published daily by the Central Bank; and

·        JPMorgan Chase Bank N.A., Sucursal Argentina granted us a loan in an aggregate principal amount of Ps. 24 million (approximately U.S. $6 million) which matured on May 13, 2011 and beared interest at an annual rate of 12%. Accrued interest was payable monthly and principal was repaid in a single installment at maturity.

Short-Term Loans grantedby usto certain of our affiliates:

 

·        Loan granted to Eden in an aggregate principal amount of Ps. 80.0 million (approximately U.S. $20.0 million). This loan was canceled on May 2, 2012;

·        Loan granted to Edelar in an aggregate principal amount of Ps. 31.2 million (approximately U.S. $7.80 million);

·        Loan granted to Edesa in an aggregate principal amount of Ps. 131.3 million (approximately U.S. $32.83 million). This loan was cancelled when Edesa was sold to SIESA; and

·        Loan granted to Edesal in an aggregate principal amount of Ps. 37.5 million (approximately U.S. $9.37 million). This loan was canceled when Edesal was sold to Rovella.

 

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The proceeds of these short-term loans were applied by Edelar, Edesa and Edesal to repay certain overdrafts of Edelar, Edesa and Edesal, and a portion of the balance under the loan agreement dated July 15, 2010, among Edelar, Edesa, Edesal, Standard Bank Argentina S.A., Banco Hipotecario S.A., Banco de Galicia y Buenos Aires S.A., Banco Ciudad de Buenos Aires y Banco Itaú Argentina S.A.

On March 4, 2011, as a result of the change of control in Eden triggered by our acquisition of Aeseba, Eden prepaid its loan with Standard Bank Argentina S.A. and HSBC Argentina S.A. Such repayment was made with Eden’s funds and with the proceeds from the short-term loan that we granted to Eden in an aggregate amount equal to Ps. 80.0 million.

On the same date, we redeemed and cancelled all of our Floating Rate Par Notes due 2019.

In addition,on April 4, 2011,we and Pampa Energía S.A. entered into an agreement pursuant to which the Company would receive aU.S. $5 million two-year term loan at an annual rate of 5%. The loan was used to finance several investmentsof the Company.This loan was repaid on November 3, 2011.

 

On April 26, 2011, we issued approximately U.S. $69.7 million Senior Notes due 2022. This issuance constituted a reopening of the Senior Notes due 2022 originally issued in 2010; the new notes have the same terms as the Senior Notes due 2022 originally issued in 2010. The first interest payment on the new notes was made on October 25, 2011 and its cash proceeds were used to cancel the Short-Term Loans.

In the last week of April, we used the cash proceeds from the reopening of the Senior Notes due 2022 to cancel the Short-Term Loans.

On April 29, 2011, we entered intoone-year term loans (with a maturity date of April 30, 2012) with each of Eden, Edesal, Edelar and Edesato refinance the loans we granted to them at the timethat we acquired them, with the purpose of allowing for the restructuring of their financial loans,in the amounts of  Ps. 80.0 millionin the case of Eden, Ps. 31.2 million in the case of Edelar, Ps. 131.3 million in the case of Edesa and Ps. 37.5 million in the case of Edesal,eachat an annual nominal rate of 16% withsemiannualinterestpayments due on October 31, 2011 and April 30, 2012.These financing conditions are in accordance with those usually obtained in the market for this type oftransaction. 

At December 31, 2012, we recorded an allowance of Ps. 37.3 million for the total amount of the loan granted to Edelar, as we consider unlikely that such subsidiary, considering its current cash flows, will comply with payment when due. With the exception of this loan to Edelar, at the date of issuance of this annual report, the other loans have been totally repaid by the subsidiaries.

Furthermore, on November 3, 2011, we granted a loan to Eden forU.S. $3.1 million at an annual rate of 8.50% and final maturity on November 2, 2012, which was used by Eden to pay its management fee to EASA.

Additionally, on July 8, August 5 and December 29, 2011, Eden made payments for Ps. 2.0 million, Ps. 2.5 million and Ps. 1.5 million, respectively, as earlyrepayments of the loan granted by us, and in February 2012, Eden paidan additionalPs. 60.0 million. On May 2, 2012, Eden canceled the balance due under this loan.

Also, in June 2012 Eden canceled the U.S. $ 3.1 million loan granted by us in November 2011. In April 2012, the Company capitalized in EDELAR’s loan, the interest due and refinanced the loan on the same terms as the original agreement.

On May 10, 2012, the Edesa Sale was carried out, and as part of the transaction, Edesa fully repaid the loan granted by us for a total principal amount of Ps. 131.3 million, plus accrued interest.

On August 29, 2012, the Company signed a loan agreement with Emdersa for an amount of Ps.400 thousand maturing on November 29, 2012. It was granted at a nominal rate of 16%. At the maturity date, the accrued interests were capitalized and the loan was refinanced for a period of six months, under the same conditions.

 

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Also, on November 20, 2012, the Company granted Emdersa loans for a total amount of Ps.1 million, at an annual fixed rate of 16%, with semiannual interest, to be paid in two amortizations due on May 31 and November 20, 2013. As of the date of this annual report, the amount due under this facility was Ps. 266 thousands.

Line of Credit –Edenor –Banco Ciudad Loan

In order to optimize our management of working capital, in August 2011, as part of our line of credit withBanco Ciudad, we received a six-month loan for Ps. 5.8 million, with principal payment at the maturity.  We made monthly interest payments on accrued interest at a fixed annual rate of 14.8%. This loan waspaid in full andcanceledbefore its maturity, which was scheduled for February2014. 

Line of Credit – Edenor–Banco de la Provincia de Buenos Aires Loans

In March and June 2011, the company entered into loans for a total aggregate amount of Ps. 22 million, from Banco de la Provincia de Buenos Aires, with principal payments at maturity (March 2012, May 2012 and June 2014). We made monthly interest payments on accrued interest at a fixed annual rate of 14.0%.

As of December 31, 2012 and 2011, the outstanding balance under these loans amounted to Ps. 1.2 million and Ps. 13.9 million, respectively.

Line of Credit – Eden– Banco Nación Argentina – Banco Santander Río.

On February 10, 2012, EDEN entered into a loan agreement of Ps. 60 million with Banco Nación Argentina, with monthly amortization and monthly interest payments at an annual interest rate at Badlar rate plus a spread of 4% and final maturity in February 2014. These funds were applied to the repayment of the financial loan granted by Edenor.

 

On June 22, 2012, EDEN entered into an overdraft agreement with Banco Santander Rio, the main terms of which are the following: (i) the bank commits to provide financial assistance  up to Ps.35 million which Eden may draw by no more than three requests under the agreement; (ii) the proceeds will be mainly used to refinance working capital; (iii) the final maturity of thefirst two drafts of Ps.5 million each, will be on July 23and August 21, 2012, respectively; and the remaining draft of Ps.25 million, will fall due on February 27, 2013; (iv) the drafts will accrue compensatory interest at an annual nominal rate of 16.50%, 16.75% and 21.75% respectively; and (v) Eden will pay default interest at an annual nominal rate equivalent to 50% of the applicable interest rate.

 

Short–debt Securities Program – Eden

 

On April 13, 2012, EDEN Shareholders’ Meeting approved: (i) the creation of a short-term debt securities program of up to Ps.200.0 million (or its equivalent in other currencies) outstanding at any time, in the form of unsecured, subordinated or not, non-convertible into shares, with or without third-party guarantee, short-term corporate notes, promissory notes and/or short-term securities, under the umbrella of the special system of short-term debt securities established in the CNV’s regulations;  (ii) the issuance, under the framework of the Program,  such short-term securities for up to the maximum amount permissible at any time, to be issued in one or more classes and/or series and denominated in pesos and/or in any other currency; and (iii) the application for the registration of this program in the special registry created by the CNV for the purpose of the issuance and public offering (to qualified investors only) of these short-term debt securities.

 

As of the date of this annual report, such short-debt securities program’s approval by CNV is still pending.

 

 

Derivatives Contracts

Management of derivative financial instruments

 

The Company has carried out transactions with derivative financial instruments with the aim of using them as economic instruments in order to mitigate the risk generated by the fluctuations in the US dollar rate of exchange.

 

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a.      Corporate Notes – Cash flows SWAP

 

In November 2010, the Company carried out a transaction with a derivative financial instrument with JP Morgan Chase Bank N.A. with the aim of hedging the foreign currency exchange rate of the cash flows and the interest payments to be made under its financial debt transactions.

 

This instrument provides an economic and financial hedge of the amounts in foreign currency that the Company must pay on the interest payment dates of its financial debt, arising from the Class 9 Fixed Rate Notes for up to US$ 230.3 million, due on April 25, 2011, October 25, 2011, April 25, 2012 and October 25, 2012, in the event of fluctuations in foreign currency exchange rates.

 

Additionally, in April 2011, the Company carried out a transaction with a derivative financial instrument with Deutsche Bank S.A. with the aim of hedging the foreign currency exchange rate of the cash flows and interest payments arising from the new issuance of Class 9 Fixed Rate Notes for up to US$69.7 million, payable on October 25, 2011, April 25, 2012 and October 25, 2012.

 

At December 31, 2012, the economic impact of these transactions resulted in a loss of Ps 2.2 million, which has been recorded in the financial expenses account of the Consolidated Statement of Comprehensive Loss.

 

 

b.      Forward and Future Contracts

 

During the years ended December 31, 2012 and 2011, the Company entered into forward and futures contracts in order to mitigate the risk generated by the fluctuations in the US dollar rate of exchange.

 

As of December 31, 2011, the aforementioned transactions were fully settled. As of December 31, 2012, the Company did not enter into forward and future contracts.

 

 

Critical accounting policies and estimates

A summary of our significant accounting policies is included in Note 6 to our Consolidated Financial Statements, which are included elsewhere in this annual report. The preparation of financial statements requires our management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying footnotes. Our estimates and assumptions are based on historical experiences and changes in the business environment. However, actual results may differ from estimates under different conditions, sometimes materially. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results of operation and require management’s most subjective judgments.  Our most critical accounting policies and estimates are described below.

Allowances for the impairment of receivables

The Company is exposed to impairment losses of receivables. Management estimates the final collectability of accounts receivable.

The allowance for the impairment of accounts receivable is evaluated based on the historical level of collections for services billed through the end of each year and collections subsequent thereto. Additionally, Management records an allowance based on an individual analysis of the recoverability of receivable accounts in litigation and of those customers included in the Framework Agreement.

Revenue recognition

Revenue is recognized on an accrual basis upon delivery to customers, which includes the estimated amount of unbilled distribution of electricity at the end of each year. We consider our accounting policy for the recognition of estimated revenue critical because it depends on the amount of electricity effectively delivered to customers which is valued on the basis of applicable tariffs. Unbilled revenue is classified as current trade receivables.

 

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Impairment of long-lived assets

Long-term assets, including identifiable intangible assets, are tested for impairment at the lowest level at which independent cash flows can be identified (cash generating units, or CGU).

The Company’s subsidiaries constitute a cash generating unit as they have a concession area for the distribution of electricity. Consequently, each subsidiary represents the lowest asset disaggregation level that generates independent cash flows.

The Company analyzes the recoverability of its non-current assets on a periodical basis or when events or changes in circumstances indicate that the recoverable amount of assets, which is measured as the value in use at the end of the year, may be impaired.

The value in use is determined based on projected and discounted cash flows, using discount rates that reflect the time value of money and the specific risks of the assets considered.

Cash flows are prepared on the basis of estimates concerning the future performance of certain variables that are sensitive to the determination of the recoverable amount, among which the following can be noted: (i) nature, opportunity and modality of electricity rate increases and cost adjustment recognition in accordance with the Adjustment Agreement; (ii) demand for electricity projections; (iii) evolution of the costs to be incurred, and; (iv) macroeconomic variables, such as growth rates, inflation rates and foreign currency exchange rates.

The future increase in electricity rates used by the Company to assess the recoverability of its long-lived assets as of December 31, 2012, is based on the Company’s contractual right derived from the concession contract and the adjustment agreement described in Note No. 2. C. I. of our Consolidated Financial Statements. Furthermore, the actions taken to maintain and guarantee the provision of the public service, the filings made to the regulatory authorities, the status quo of the discussions that are being held with government representatives, the announcements made by government officials concerning possible changes in the sector’s revenues to restore the economic and financial equation, and certain measures recently adopted, such as the new fixed and variable charges described in Note 2 of our Consolidated Financial Statements, have also been considered. In light of the aforementioned, the Company’s Management estimates that it is reasonable to expect that new increases in revenues will be obtained as from 2013.

In spite of the current economic and financial situation, the Company has made its projections under the assumption that the electricity rates will be improved according to the circumstances. However, the Company may not ensure that the future performance of the variables used to make its projections will be in line with what it has estimated. Therefore, significant differences may arise in relation to the estimates used and assessments made as of the date of this annual report.

In order to contemplate the estimation risk contained in the projection of the aforementioned variables, the Company has considered three different probability-weighted scenarios. Although in all of them an acceptable agreement with the Argentine National Government resulting in gradual tariff increases is assumed, the Company has considered different timing and magnitude of expected VAD increases. The three scenarios consider VAD increases as a result of the RTI process since 2013. These three scenarios can be classified into optimistic, intermediate and pessimistic cash flows depending on the opportunity of the application and magnitude of the expected CMM. The Company has assigned for these scenarios the following percentages of probability of occurrence based primarily on the experience with past delays in the tariff renegotiation process: optimistic scenario: 30%, intermediate scenario: 50%, and pessimistic scenario: 20%.

Based on the above description, the Company has determined that the valuation of property, plant and equipment does not exceed their recoverable amount as of December 31, 2012.

 

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Current and deferred income tax/ Tax on minimum presumed income  

In order to determine the income tax provision, it is necessary to make estimates inasmuch as the Company will have to evaluate, on an ongoing basis, the positions taken in tax returns in respect of those situations in which the applicable tax legislation is subject to interpretation. Whenever necessary, the Company is required to make provisions based on the amount expected to be paid to the tax authorities.

When the final taxable result differs from the amounts initially recognized in the provision as a consequence of estimates, such differences will affect both income tax and the determination of deferred tax assets and liabilities.

If the final taxable result differs by 10% from the estimates made, the Company would need to:

·                    Increase the net deferred tax liability by Ps.11.4 million, if the difference was unfavorable; or

·                    Decrease the net deferred tax liability by Ps.11.4 million, if the difference was favorable.

A significant degree of judgment is required to determine the income tax provision. There are many transactions and calculations for which the ultimate tax determination is uncertain. The Company recognizes liabilities for eventual tax claims based on estimates of whether additional taxes will be due in the future. When the final tax outcome of these matters differs from the amounts initially recognized, such differences will impact on current and deferred income tax assets and liabilities in the period in which such determination is made.

Deferred tax assets are reviewed at each reporting date and reduced in accordance with the low probability that the sufficient taxable base will be available to allow for the total or partial recovery of these assets. Deferred tax assets and liabilities are not discounted. In assessing the realization of deferred tax assets, management considers that it is likely that a portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income in the periods in which these temporary differences become deductible. To make this assessment, management takes into consideration the scheduled reversal of deferred tax liabilities, the projections of future taxable income and tax planning strategies.

Going concern

The Consolidated Financial Statements have been prepared in accordance with the accounting principles applicable to a going concern, assuming that the Company will continue to operate normally. Therefore, they do not include the effects of the adjustments or reclassifications, if there were any, which might be necessary to make if the situation described in Note 1 to our Consolidated Financial Statements is not resolved.

In the years ended December 31, 2012 and 2011, the Company recorded negative operating and net results, with its liquidity level and working capital having been affected as well. This situation is due mainly to both the continuous increase of its operating costs that are necessary to maintain the level of the service, and the delay in obtaining rate increases and higher costs recognition (“CMM”), requested in the presentations made until the date of this annual report by the Company in accordance with the terms of the Adjustment Agreement.

It is worth mentioning that the Company has not only maintained the quality of the distribution service but also satisfied the constant year-on-year increase in the demand for electricity that has accompanied the economic growth of recent years. Due to both the continuous increase recorded in the costs associated with the provision of the service and the need for additional investments to meet the increased demand, the Company has adopted a series of measures aimed at mitigating the negative effects of this situation on its financial structure, such as reducing certain specified costs, selling certain investments, reducing top management personnel’s fees, seeking new financing options, refinancing the financial debt with extended maturity terms and/or deferring the timing for certain estimated capital expenditures; provided that these measures do not affect the sources of employment, the execution of the investment plan or the carrying out of the essential operation and maintenance works that are necessary to maintain the provision of the public service.

 

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In this regard, and among other measures, the Company has (i) entered into an agreement with unions in order to grant interim advances, which were included in salaries as from January 2013; (ii) made arrangements and obtained payments in advance by the Federal Government of amounts relating to the Framework Agreement; (iii) collected the total amount of the loans granted to the subsidiary company EDEN, and (iv) sold its shareholding in connection with EDESA’s assets and collected the totality of the loan granted to such subsidiary company.

Furthermore, the Company has made a series of presentations before control and regulatory authorities in order to jointly instrument the necessary mechanisms to contribute to an efficient provision of the distribution service, the maintenance of the level of investments and the compliance with the increased demand. In this context and in light of the situation that affects the electricity sector, the ENRE has issued Resolution No. 347/12 (see note 2.c.V to the Consolidated Financial Statements), which establishes the application of fixed and variable charges that have allowed the Company to obtain additional revenue as from November 2012. However, such additional revenue is insufficient to make up the aforementioned deficit due to the constant increase of operating costs and the expectations regarding salary or third-party costs increases for the year 2013.

In view of the foregoing, and given the inefficacy of the administrative and judicial actions pursued and presentations made by the Company, on December 28, 2012, an action for the protection of the Company’s rights (“acción de amparo”) was brought against the ENRE so that the Regulatory Authority, in the performance of its duties, could adopt those measures which, in the Company’s opinion, are not only urgently needed but also essential for the provision of the public service of electricity distribution that the Company is required to provide under the concession agreement on a continuous, regular and safe basis. Specifically, this action was brought not only to abate the ENRE’s unlawful omission, as the Application Authority, to adjust the electricity rate schedule in accordance with the variations recorded in costs, as established in the applicable agreement and the law, thus preventing the Company from receiving, in consideration of the service currently provided, sufficient revenues to face the necessary operating costs and the indispensable and imperative investments to provide the service in a continuous, regular, and, especially, safe manner, but also as a protection against corporate, personal and criminal liability that could eventually arise from the conditions under which the Company is forced to provide the service.

With the aim of maintaining and guaranteeing the provision of the public service, and in order to mitigate the effects of our adverse financial situation, given the aforementioned cash deficit, as from October 2012 the Company found itself forced to partially cancel, on a temporary basis, the obligations with the Wholesale Electricity Market with surplus cash balances after having complied with the commitments necessary to guarantee the provision of the public service, including the investment plans underway and operation and maintenance works. We consider this situation as a transitional measure to be applied until the new regulatory model announced by the National Authorities, aimed at restoring the economic and financial equation of the Concession Agreement, is implemented. In connection with the foregoing, the Company has been ordered by the ENRE and CAMMESA to cancel such debt. In its reply to the ENRE, the Company rejected the Regulatory Authority’s competence to intervene in its commercial issues with third parties, and, in its reply to CAMMESA, the Company stated that the cash deficit that prevents it from canceling the total amount of the debt is a case of force majeure inasmuch as the Company does not have the possibility of approving its electricity rates, but, at the same time, has to maintain the priority given to the operation of the public service.

Should the conditions existing at the date of the Consolidated Financial Statements continue, the Board of Directors believes that the Company’s economic and financial situation will continue to deteriorate and cash flows and operating results for the year 2013, and financial ratios, will be negatively impacted.

Furthermore, the negative results recorded by the Company as of December 31, 2012, require the use of 100% of the Company’s reserves and more than 50% of it’s capital stock. Section 206 of the Commercial Companies Act provides for a compulsory reduction of capital stock when this situation occurs and, therefore this loss of capital stock must be dealt with and resolved by the Company's shareholders.

 

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In light of the foregoing the Company’s Board of Directors continues analyzing different scenarios and possibilities to mitigate or reduce the negative impact of the Company’s situation on its operating cash flows and thereby present the shareholders with diverse courses of action. Nevertheless, the improvement of revenues so as to balance the economic and financial equation of the concession continues to be the most relevant aspect.

The outcome of the overall electricity rate review is uncertain as to both its timing and final form. Therefore, the uncertainties of the year 2011continued during 2012 . Thus if in fiscal year 2013: (i) the new electricity rate schedules are not issued by the ENRE; (ii) the Company is not granted another mechanism to compensate for it’s cost increases, in addition to the revenue obtained as a result of Resolution 347/12 or the funds derived from the PUREE, and/or; (iii) the Company does not obtain from the Federal Government another mechanism that provides it with financing for cost increases, it is likely that the Company will have insufficient liquidity and will therefore be obliged to implement various measures to preserve cash and enhance its liquidity. Additionally, the Company may not assure you that it will be able to obtain additional financing on acceptable terms.  Therefore, should any of these measures, individually or in the aggregate, not be achieved; there is significant risk that such situation will have a material adverse impact on the Company’s operations. Edenor may need to enter into a renegotiation process with its suppliers and creditors in order to obtain changes in the terms of its obligations to ease the aforementioned financial situation.

Given the fact that the realization of the projected measures to revert the manifested negative trend depends, among other factors, on the occurrence of certain events that are not under the Company’s control, such as the requested electricity rate increases or their replacement by a new remuneration system, the Board of Directors has raised substantial doubt about the ability of the Company to continue as a going concern in the term of the next fiscal year.

Nevertheless, the Consolidated Financial Statements have been prepared in accordance with the accounting principles applicable to a going concern, assuming that the Company will continue to operate normally. Therefore, they do not include the effects of the adjustments or reclassifications, if there were any, that might result from the outcome of this uncertainty.

Benefit plans

The liability recognized by the Company is the best estimate of the present value of the cash flows representing the benefit plan obligation at the closing date of the year together with the adjustments for actuarial losses. Cash flows are discounted using the interest rate of high-quality corporate bonds denominated in the same currency in which the benefits will be paid. Such estimate is based on actuarial calculations made by independent professionals in accordance with the projected unit credit method.

ENRE Penalties and Discounts - PUREE

We consider our accounting policy for the recognition of ENRE Penalties and Discounts critical because it depends on the penalizable events which are valued on the basis of management best estimate, at the date of the Consolidated Financial Statements, of the expenditure required to settle the present obligation. The balances corresponding to ENRE Penalties and Discounts are adjusted in accordance with the regulatory framework applicable thereto.

The balances corresponding to the Program for the Rational Use of Electric Power (PUREE) are the best estimate of the expenditure required to settle the present obligation.

Allocation of the purchase price in business combinations

The Company accounts for business combinations by applying the acquisition method, which requires that identifiable assets acquired and liabilities assumed be recorded at their respective fair value at the acquisition date. The determination of the fair values of identifiable assets acquired and liabilities assumed requires management to make estimates and use valuation techniques, including the use of independent appraisers, when the market value is not easily available. The excess of the acquisition cost over the fair value of the net identifiable assets acquired is allocated to goodwill.

 

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If the fair value of the net identifiable assets acquired is higher than their acquisition cost, Management must reassess whether all acquired assets and all liabilities assumed have been properly identified before recognizing a bargain purchase in order to ensure that the measurements properly reflect the consideration of all the available information as from the acquisition date. Once the Company is certain that measurements are appropriate, the resulting gain must be recognized on the acquisition date. The gain is attributed to the acquiring entity.

The valuation assumptions underlying each of these valuation methods are based on the current available information, including discount rates, estimated cash flows, market risk rates and other.

The purchase price allocation is subject to changes during the twelve-month period subsequent to the acquisition date, with the adjustments reflected prospectively. At present, there are no balances related to purchase accounting subject to change. We consider our accounting policy for the valuation of acquisitions critical because the judgments made to determine the estimated fair value and expected useful lives assigned to each class of assets and liabilities acquired may impact the value of the asset or liability, including the impact on deferred taxes, the respective amortization periods and ultimately net income (loss). Therefore, the use of other valuation methods, as well as other assumptions underlying these valuation methods, could impact the determination of our financial position and results of operations.

On March 4, 2011, our Board of Directors approved an offer from the Company’s indirect controlling company Pampa Energía. As a consequence, Edenor was appointed by Pampa as the acquiring party under the Pampa-AEI Agreement. Therefore, on March 4, 2011, we acquired from AEI Utilities, S.L. (“AEIU”) (i) 182,224,095 common shares of Emdersa representing 77.19% of Emdersa’s capital stock and votes (“Emdersa’s Shares”), (ii) 2 common shares of Empresa Distribuidora de San Luis S.A. (“Edesal”) representing 0.01% of Edesal’s capital stock and votes, (iii) 600 common shares of Emdersa Generación Salta S.A. (“EGSSA”)  representing 0.02% of EGGSA’s capital stock and votes, (iv) 1 common share of Empresa Distribuidora de Electricidad de la Rioja S.A. (“EDELAR”) representing 0.01% of EDELAR’s capital stock and votes, (v) 1 common share of Empresa de Sistemas Eléctricos Abiertos S.A. (“ESED”) representing 0.01% of ESED’s capital stock and votes, (all of the shares mentioned in items (ii) through (v) hereinafter referred to as the “Residual Shares”) and (vi) 29,118,127 common shares of AESEBA S.A. representing 99.99% of AESEBA’s capital stock and votes (“AESEBA’s Shares”). The price paid by us for the aforementioned assets amounted to U.S. $ 90 million for Emdersa’s Shares and the Residual Shares acquired from AEIU and to U.S. $50 million for AESEBA’s Shares acquired from AEIU.

Within the framework of the offer made by Pampa and accepted by us, the parties additionally agreed that if within 3 years following acquisition date of Emdersa’s Shares, the Residual Shares and AESEBA’s Shares, we sold either totally or partially any of such shares, Pampa would be entitled to receive from the Company a payment equivalent to 50% of the amount received for the sale thereof in excess of the amount paid to AEIU for any of such Shares (Emdersa’s Shares and/or Residual Shares and/or AESEBA’s Shares).

In compliance with current regulations, we formally consulted the CNV about the steps to be followed with regards to the public offering for the acquisition of Emdersa’s Shares that we are required to make to Emdersa’s minority shareholders due to the change in Emdersa´s control and in accordance with the provisions of the Capital Markets Law and the CNV’s regulations.

The acquisitions have been recorded in accordance with the purchase method on the basis of the fair value measurements of the acquired assets and liabilities.

The consideration paid, the amount of the net acquired assets recognized at the acquisition date and the generated gain are as follows:

 

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$

Consideration:

 

Cash

(561,953)

Consideration transferred

(561,953)

Fair value of net assets acquired

996,912

Gain burgain purchase

434,959

 

In addition, under IFRS the excess of the fair value of the net assets acquired, including those recognized in the reassessment of the purchase price allocation, over the consideration paid and the non-controlling interest has been considered as a gain in bargain purchase, because the seller had started a process for divesting its net assets in the region and, consequently, it sold them at values lower than their respective fair value.

This gain from acquisition of companies is included in the consolidated statement of comprehensive loss.

The fair value of the assets acquired and liabilities assumed, recognized at the date of acquisition, as well as the fair value of the non-controlling interest are as follows:

 

 

Fair

value

Cash and cash equivalents

119,042

Property, plant and equipment

1,120,925

Intangible assets

760,479

Inventories

4,256

Trade receivables

255,260

Other receivables

84,649

Trade payables

(257,770)

Borrowings

(450,018)

Deferred tax liability

(78,845)

Other liabilities

(331,026)

Net assets

1,226,952

Non-controlling interests

(230,040)

Net assets acquired

996,912

 

 

 

Assets available for sale

As a consequence of the tariffs delay, and with the aim of mitigating unfavorable financial and economic aspects, the Company considered the disposition of certain subsidiaries. In this context, it has decided to sell certain subsidiaries with the consequent loss of control. In accordance with IFRS, when the following criteria are met (even if the entity retains a non-controlling interest in its former subsidiary after the sale), the Company will classify all the associated assets and liabilities as available for sale:

                    i.                       Its carrying amount will be recovered mainly through a sale transaction, rather than by its continued use.

                   ii.                       It must be available, in its current conditions, for immediate sale, subject exclusively to the usual terms for the sale of this subsidiary.

                 iii.                       Its sale must be highly probable, for which purpose management must be committed to a plan to sell, and an active program to locate a buyer and complete such plan must have been initiated. Moreover, the sale of the subsidiary must be actively negotiated at a sale price reasonable in relation to its present fair value. Furthermore, it must be expected that the sale will comply with the conditions to be recognized as a completed sale within a year of classification as held for sale (unless the delay is caused by events or circumstances that are not under the entity’s control, and sufficient evidence exists that the entity is still committed to its plan to sell the subsidiary), and the actions required to complete the plan indicate that it is unlikely that the plan will be significantly changed or withdrawn.

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The assets and liabilities associated to those subsidiaries that the Company intends to sell, which comply with the aforementioned conditions, were reclassified in a single line item within current assets and current liabilities, denominated “Assets of disposal groups classified as held for sale” and “Liabilities of disposal groups classified as held for sale”, respectively. In addition, these assets and liabilities have been valued at the lower of carrying amount or fair value less costs to sell, recognizing a loss when the first value is higher than the second.

Measurement on fair value less costs to sell implies assumptions that are determined based on current available information, such as offers, if any, and market conditions.

 Contingencies and provisions for lawsuits  

The Company is a party to several complaints, lawsuits and other legal proceedings, including customer claims, in which a third party is seeking payment for alleged damages, reimbursement for losses or compensation. The Company’s potential liability with respect to such claims, lawsuits and legal proceedings may not be accurately estimated. Management, with the assistance of its legal advisors (attorneys), periodically analyzes the status of each significant lawsuit and evaluates the Company’s potential financial exposure.  If the loss deriving from a complaint or legal proceeding is considered probable and the amount can be reasonably estimated, a provision is recorded.

Provisions for contingent losses represent a reasonable estimate of the losses that will be incurred, based on the information available to management at the date of the financial statements preparation, taking into account the Company’s litigation and settlement strategies. These estimates are mainly made with the help of legal advisors. However, if the management’s estimates proved wrong, the current provisions could be inadequate and result in a charge to profits that could have a material adverse effect on the statements of financial position, comprehensive income, changes in equity and cash flows.

 

 

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Off-Balance Sheet Arrangements

We did not have any off-balance sheet arrangements as of December 31, 2012 and 2011.

Tabular Disclosure of Contractual Obligations

The following table summarizes our contractual liabilities and commitments as of December 31, 2012.  Peso amounts have been translated from U.S. Dollar amounts at the buying rate for U.S. Dollars quoted by Banco Nación on December 31, 2012 of Ps. 4.918 to U.S. $1.00.

 

Payments due by period

 

Total

Less than
1 year

1‑3
years

4‑5
years

More than
5 years

 

(in millions of Pesos)

Long term debt obligations and commercial debt obligations (1)

Ps.4,082.2

1,457.0

 

171.9

561.8

1,891.4

Accrued fines and penalties(2)

662.0

45.0

617.0

Financial assistance fees(3)

12.2

12.2

Operating leases(4)

53.2

16.7

31.6

4.9

Capital expenditures(5)

Total

Ps.4,809.6

Ps. 1,530.9

Ps. 820.5

Ps. 566.7

Ps. 1,891.4

      

_______________________

(1)                Includes amortization of principal and interest payments. All of our financial indebtedness is unsecured. None of our financial indebtedness is guaranteed.  See “—Debt” in this section for a broader description of our financial debt.

(2)                   Includes adjustments made to reflect the ratification of the Adjustment Agreement.  We were required to make an adjustment to a portion of our accrued fines and penalties totaling (i) Ps. 47.0 million to reflect the increase to our VAD pursuant to the Adjustment Agreement and the May 2006 CMM and (ii) Ps. 17.2 million and Ps. 18.1 million to reflect the CMM adjustment for the years ending December 31, 2008 and 2007, respectively.  In addition, pursuant to the terms of the Adjustment Agreement, the Argentine government agreed, subject to the fulfillment of certain conditions, to forgive, upon the completion of the RTI, approximately Ps. 71.4 million of our accrued fines and penalties and allow us to pay the balance of these fines and penalties in semi-annual installments over a 7-year period commencing 180 days after 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.  See “Business—Our Concession—Fines and Penalties.”

Fees payable under our financial services agreement with EASA, our controlling shareholder.  This agreement expired in 2010 and was renewed for a five-year period.  See “Related Party Transactions—Financial Services Agreement with EASA.”

(3)                Represents our minimum required lease payments.

(4)                Our concession does not require us to make any specified amount of capital expenditures, but requires us to meet certain quality and other service standards.  See “—Liquidity and Capital Resources—Capital Expenditures.”

 

 

 

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Item 6.        Directors, Senior Management and Employees

DIRECTORS AND SENIOR MANAGEMENT

Board of Directors

Our business and affairs are managed by our board of directors in accordance with our bylaws and the Argentine Companies Law.  Our bylaws provide that our board of directors will consist of twelve directors and up to the same number of alternate directors.  Pursuant to the Argentine Companies Law, a majority of our directors must be residents of Argentina.

Edenor bylaws provide that holders of our Class A common shares are entitled to elect seven directors and up to seven alternate directors, one of which must be independent in accordance with CNV regulations, holders of our Class B and Class C common shares are entitled to elect five directors and up to five alternate directors, one of which must be independent in accordance with CNV regulations. Holders of Class C common shares vote jointly as a single class with the holders of Class B common shares in the election of directors.  In the absence of a director elected by holders of a class of shares, any alternate director elected by holders of the same class may legally attend and vote at meetings of our board of directors.  The board of directors elects among its members a chairman and a vice president.

Directors and alternate directors serve for one-year periods, indefinitely renewable.Our directors and alternate directors are as follows:

 

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Name

Position

Age

Year of appointment
(class electing director)

Ricardo Torres

Chairman

55

2013 (Class A)

Gustavo Mariani

Vice Chairman

42

2013(Class A)

Pablo Díaz

Director

45

2013 (Class A)

Marcos Marcelo Mindlin**

Director

48

2013 (Class A)

Maximiliano Alejandro Fernández*

Director

52

2013 (Class A)

Eduardo Llanos*

Director

68

2013 (Class A)

Edgardo Alberto Volosín

Director

59

2013 (Class A)

Emmanuel Alvarez Agis*

Director

31

2013 (Class B/C)

Patricia Charvay *

Director

30

2013 (Class B/C)

Marcela Sacavini*

Director

27

2013 (Class B/C)

Victoria Von Storch*

Director

35

2013 (Class B/C)

Valeria Martofel*

Director

34

2013 (Class B/C)

Diego Martín Salaverri

Alternate Director

48

2013 (Class A)

Jaime Barba

Alternate Director

49

2013 (Class A)

Damian Miguel Mindlin **

Alternate Director

46

2013 (Class A)

Leandro Montero

Alternate Director

37

2013 (Class A)

Daniel Flaks

Alternate Director

48

2013 (Class A)

Mariano Batistella

Alternate Director

30

2013 (Class B/C)

Diana Mondino*

Alternate Director

54

2013 (Class A)

Eduardo Setti*

Alternate Director

[ ]

2013 (Class B/C)

Edgardo Ruibal *

Alternate Director

39

2013 (Class B/C)

Diego Leiva *

Alternate Director

37

2013 (Class B/C)

Eduardo Endeiza *

Alternate Director

37

2013 (Class B/C)

Pablo Martínez Burket*

Alternate Director

47

2013 (Class B/C)

 

 

 

______________________

*      Independent under Argentine law and under Rule 10A-3 under the Securities Exchange Act of 1934, as amended.

**    The following family relationships exist within the board of directors: Marcos Marcelo Mindlin and Damián Miguel Mindlin are brothers.

 

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The following is a brief description of our current directors’ and alternate directors’ background, experience and principal business activities:

Ricardo Alejandro Torreswas born on March 26, 1958.  He has been a member of our board of directors since November 2005 and was reelected as a director in 2011.  From 1993 and 2001 Mr. Torres served as Financial Director of Inversiones y Representaciones S.A. and as a director of Alto Palermo, Brazil Realty, Emprendimentos e Participacoes S.A., Abril S.A. and Inversora Bolivar S.A.  Mr. Torres is, since March 2012 President of Edenor.  Mr. Torres has also held a post as a professor of Tax and Finance at the School of Economics of the Universidad de Buenos Aires. He currently serves as director of Pampa Real Estate S.A., Pampa Participaciones II S.A., HINISA, HIDISA, Inversora Nihuiles S.A, Inversora Diamante S.A, Darwin Chile Inversora Inmobiliaria S.A., Veredit S.A., Central Térmica Güemes, Powerco S.A. Darwin Chile II Inversora Inmobiliaria S.A., Loma de la Lata, Central Piedra Buena, Corporación Independiente de Energía S.A., Dolphin Energía S.A, IEASA S.A, Inversora Ingentis S.A., Energía Distribuida S.A., Pampa Generación S.A., Petrolera Pampa S.A., Pampa Participaciones S.A., Central Hidroeléctrica Lago Escondido S.A., Empresa Distribuidora de Salta S.A., Inversora Ingentis S.A., Empresa Distribuidora de La Rioja S.A., Esed S.A.and Bodega Loma de la Lata S.A. and as alternate director of Emdersa, Citelec, Transba and Transener. Mr. Torres holds a degree in Public Accounting from the Universidad de Buenos Aires and a Masters degree in Business Administration from the Instituto de Altos Estudios Empresariales—Escuela de Negocios de la Universidad Austral.

Marcos Marcelo Mindlinwas born on January 19, 1964.  He has been Chairman of our board of directors since June 16, 2006, and was reelected as Chairman in 2009.  From 1989 to 2004, Mr. Mindlin served as the founder, Senior Portfolio Manager and a shareholder of Grupo Dolphin.  From 1991 to 2003, Mr. Mindlin was also a shareholder, Vice-Chairman and Chief Financial Officer of Inversiones y Representaciones S.A. (IRSA), a leading Argentine real estate company listed on the New York Stock Exchange.  In November 2003, Mr. Mindlin resigned from IRSA to focus his work on Grupo Dolphin.  Mr. Mindlin has extensive expertise in Latin America through his role as Chairman of the board of directors of Grupo Dolphin and several of its affiliates.  From 1999 to 2004, Mr. Mindlin also served as Vice President of Alto Palermo S.A. (a leading owner and operator of shopping centers in Buenos Aires), Vice President at Cresud S.A.I.C. (one of the largest listed agricultural companies in Argentina) and as Director and member of the Executive Committee of Banco Hipotecario, the leading mortgage bank in Argentina. Mr. Mindlin also serves as director of Edenor, Grupo Dolphin S.A., Dolphin Energía S.A., Electricidad Argentina S.A., IEASA S.A., Citelec, Transba, HINISA, HIDISA,  Transelec Argentina S.A., Loma de la Lata, Comunicaciones y Consumos S.A., Préstamos y Servicios S.A., Powerco S.A., Central Térmica Güemes, Inversora Diamante S.A., Inversora Nihuiles S.A., Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Dolphin Inversora S.A., Grupo ST S.A., Inversora Ingentis S.A., Central Piedra Buena, Corporación Independiente de Energía S.A., Petrolera Pampa S.A., Pampa Participaciones II S.A., Energía Distribuida S.A., Pampa Generación S.A., Central Hidroeléctrica Lago Escondido S.A., Pampa Participaciones S.A., Bodega Loma de la Lata S.A., Pampa Real Estate S.A. and Enron Pipeline Company Argentina S.A.. In 2008, Mr. Mindlin founded and since that time has directed a charity foundation called “Fundación Todo X los Chicos,” whose purpose is to improve childhood development and education.  Mr. Mindlin is also a member and was Chairman of the Board of the Executive Committee of Tzedaka, a leading Jewish-Argentine foundation.  He is a member of the Council of the Americas.  Mr. Mindlin received a Master of Science in Business Administration from the Universidad del CEMA (Center of Macroeconomic Studies).  He also holds a degree in Economics from the Universidad de Buenos Aires.

Pablo Díaz was born on June 26, 1957. Mr. Díaz has been member of our board of directors since 2012. Previously he has served as alternate director.  Mr. Díaz currently serves as an advisor to the president of Grupo Dolphin S.A. He also serves as an alternate director at Transba S.A. and a Director of Inversora Ingentis S.A., Inversora Nihuiles S.A., Inversora Diamante S.A., Pampa Participaciones II S.A., Central Térmica Güemes S.A., Corporación Independiente de Energía S.A., Hidroeléctrica Diamante S.A., Hidroeléctrica Nihuiles S.A., Citelec S.A. and Transener S.A. Previously, he was an Advisor at the Argentine Undersecretary for Electrical Energy(Subsecretaría de Energía Eléctrica) and has held various positions in the electricity industry.

Gustavo Mariani was born on September 9, 1970. He has been a member of our board of directors since November 2005 and was reelected as a director in 2012.  Mr. Mariani joined Grupo Dolphin in 1993 as an analyst and also served as an investment portfolio manager. He currently serves as Director of Grupo Dolphin S.A., Dolphin Energía S.A., Dolphin Finance S.A, Electricidad Argentina S.A., Edenor, HINISA, HIDISA, Inversora Nihuiles S.A, Inversora Diamante SA, Enron Pipeline Company Argentina S.A., TGS, Compañía de Inversiones deEnergía S.A., Central Térmica Güemes, IEASA S.A., Transelec Argentina S.A., Loma de la Lata, Pampa Participaciones S.A., Pampa Real Estate S.A., Comunicaciones y Consumos S.A., Compañía Buenos Aires S.A., Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Dolphin Inversora S.A., Inversora Ingentis S.A., Central Piedra Buena, Corporación Independiente de Energía S.A., Petrolera Pampa S.A., Pampa Participaciones II S.A., Energía Distribuida S.A., Pampa Generación S.A., Central Hidroeléctrica Lago Escondido S.A., and Bodega Loma de la Lata S.A.,and as alternate director of Citelec, Transba, Préstamos y Servicios S.A. y Grupo ST S.A. Mr. Mariani holds a degree in Economics from the Universidad de Belgrano and a Masters degree in Business Administration from the Universidad del CEMA.

 

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Maximiliano Alejandro Fernándezwas born on April 21, 1960.  He has been a director of Edenor since 2007 and has served as a director of EASA from 2005 to 2007.  Mr. Fernández has been an associate at Impsat Fiber Network since 1998, and currently serves as president of Red Alternative S.A.  Mr. Fernández served as the chairper