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Empresa Distribuidora y Comercial Norte (EDN)

Filed: 27 Apr 16, 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, 2015 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.

Yeso Noþ

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.  Yeso Noþ

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 Noo

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 filero Accelerated filerþ Non-accelerated filero

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

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 17o Item 18o

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).  Yeso Noþ

 

 

 


 
 

 

 


 

 

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 basispriortoMarch 1, 2011, (ii) Edenor,Empresa Distribuidora Eléctrica Regional S.A. (“Emdersa”) andAeseba S.A. (“Aeseba”), between March 1, 2011 and March 31, 2013, (iii) Edenor and Emdersa”, between March 1, 2011 and September 30, 2013, and (iv) Edenor on a standalone basis, from October 1, 2013 through the date of filing of this annual report. References to Edenor, Emdersa and/or Aeseba ona standalone basis are made by naming each company as the case may be. For more information, see “Item 4Information on the CompanyHistory 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;

·        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, 2015, 2014, 2013, 2012 and 2011. This information should be read in conjunction with our audited financial statements as of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 (theFinancial Statements”), the related notes thereto and the information under “Item 5. Operating and Financial Review and Prospects.ˮ included elsewhere in this annual report. The financial data as of December 31, 2015, has been derived from our Financial Statements.

Our Financial Statements have been prepared in accordance with International Financing Reporting Standards (“IFRSˮ), as issued by the International Accounting Standards Board (“IASBˮ), and these have been approved by resolution of the board of directors’ meeting held on March 8, 2016.  See “Item 18—Financial Statements”.

The selected statement of comprehensive (loss) income data for the years ended December 31, 2015, 2014, 2013, 2012 and 2011, and the selected statement of financial position data as of December 31, 2015, 2014, 2013, 2012 and 2011 have been prepared in accordance with IFRS, as issued by the IASB, and have been derived from our financial statements, which were audited by Price Waterhouse & Co. S.R.L. (“PwC”), member firm of PricewaterhouseCoopers network. The financial data as of December 31, 2011, 2012 and 2013 is derived from our audited consolidated financial statements that are not included in this annual report, which were also audited by PwC.

Despite the delay in the implementation of certain provisions of the Adjustment Agreement, particularly in relation to the implementation of the semi-annual rate adjustments resulting from the CMM (as defined below) and the completion of the RTI process, the recent adoption of certain measures, such as Resolution No. 32/15 of the Argentine Secretariat of Energy (the “SE”) and Resolution No. 7/16 of the Ministry of Energy and Mining (the “Ministry of Energy”), has allowed us to not only maintain the quality and safety of our service but also to satisfy the constant year-on-year increase in demand for electricity following Argentina’s relative economic growth in recent years (especially, from 2012 through 2015). Accordingly, we have been able to absorb the higher costs associated with the increased supply of electricity and to carry out investments and essential operation and maintenance-related works as planned.

During 2015, we recorded positive operating and net income reversing the negative economic and financial situation experienced in previous years. Such improvement was achieved mainly as a consequence of the issuance on March 13, 2015 of Resolution No. 32/15 of the SE, which addressed the need for adjustment of the economic and financial situation of distribution companies granting us a temporary increase in income through funds provided by CAMMESA, applicable retroactively as from February 1, 2015, to cover costs and investments associated with the regular provision of the public service of distribution of energy on account of the future RTI.

Notwithstanding the foregoing, as of December 31, 2015, our negative working capital amounted to Ps. 1,811 million, which included debt owed to CAMMESA of Ps. 1,808.6 million plus accrued interest, as described under Note 2.c.IX.e to our Financial Statements, with respect to which we have submitted to CAMMESA a repayment plan in November 2015 based on available and projected cash flows data. As of the date of this annual report, negotiations with CAMMESA continue with respect to a final repayment schedule. On December 16, 2015, the Macri administration issued Decree No. 134/15, which declared the state of emergency with respect to the national electricity system, authoritizing the Ministry of Energy to implement a nation-wide plan of action for the generation, transmission and distribution of electricity and to take actions to guarantee the supply of the electricity under adequate economic and technical conditions.

During January 2016, the Ministry of Energy issued Resolutions No. 6/16 and No. 7/16 implementing a new tariff schedule that improved the income of distribution companies such as us to enable them to make investments, carry out maintenance works and expand their networks during 2016 Pursuant to such resolutions, the Argentine Electricity Agency (Ente Nacional Regulador de laElectricidad, the “ENRE”) implemented a VAD (as defined below) adjustment to the tariff schedule on account of the future RTI, and is expected to take all necessary action to conclude the RTI process by December 31, 2016.

 

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Notwithstanding the foregoing, our board of directors (the “Board of Directors”) continues evaluating the sufficiency of financial resources allocated to pay for operation costs, investment plans and debt service, together with the impact on the different variables that affect our business, such as demand behavior, losses, penalties and service quality, among others. In addition, our Board of Directors will continue to actively participate in the RTI process, which is expected to be concluded by December 31, 2016 in accordance with Section 5 of Resolution No. 7/16 of the Ministry of Energy.

Our Financial Statements are included in this annual report beginning on page F-1.

In accordance with the decision of our board of directors to divest and sell the subsidiary Aeseba as of March 31, 2013 and the subsidiaries Emdersa Holding S.A. (Emdersa Holdingˮ or “EHSA”), including 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”), as of December 31, 2011, we have classified the corresponding assets and liabilities associated to these subsidiaries in the consolidated financial statements as of December 31, 2013, 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 “Income (Loss) from discontinued operations” line item in our consolidated statements of comprehensive loss for the years ended December 31, 2012 and 2011. As of April 5, 2013, the Company sold its stake in Aeseba. The corresponding charges to results have been included within “Loss from Discontinued operations” line item in our consolidated statements of comprehensive loss for the year ended December 31, 2013.

 

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, 2015 have been translated into U.S. Dollars at the selling exchange rate for U.S. Dollars quoted by Banco de la Nación Argentina (the “Banco Nación”) on December 31, 2015, which was  Ps. 13.04 to U.S.$ 1.00, unless otherwise indicated. 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” and “Item 3.  Key Information—Risk Factors—Risks Relating to Argentina—Fluctuations in the value of the Argentine Peso could adversely affect the Argentine economy, which could, in turn adversely affect our results of operations.”

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, any discrepancies between the totals and the sums of amounts are due to rounding.

 

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Statement of comprehensive (loss) income *

 

  

2015

 

2015

 

2014

 

2013

 

2012

 

2011

  

US$

 

Ps.

 

Ps.

 

Ps.

 

Ps.

 

Ps.

Continuing operations

            

Revenue from sales (1)

 

291.6

 

3,802.2

 

3,598.4

 

3,440.7

 

2,976.2

 

2,302.0

Electric power purchases

 

(155.1)

 

(2,022.0)

 

(1,878.1)

 

(2,050.3)

 

(1,740.2)

 

(1,130.9)

Subtotal

 

136.5

 

1,780.2

 

1,720.3

 

1,390.4

 

1,236.0

 

1,171.1

Transmission and distribution expenses

 

(241.8)

 

(3,153.7)

 

(2,825.1)

 

(2,055.3)

 

(1,344.1)

 

(970.5)

(Loss) Gross income

 

(105.3)

 

(1,373.5)

 

(1,104.8)

 

(664.9)

 

(108.1)

 

200.6

  

 

 

 

 

 

 

 

 

 

 

 

Selling expenses

 

(63.9)

 

(832.8)

 

(657.9)

 

(548.3)

 

(352.9)

 

(261.9)

Administrative expenses

 

(54.1)

 

(706.1)

 

(496.8)

 

(324.8)

 

(249.4)

 

(196.6)

Other operating income

 

6.1

 

79.2

 

52.4

 

61.6

 

32.3

 

22.5

Other operating expense

 

(38.5)

 

(502.5)

 

(318.7)

 

(142.8)

 

(150.3)

 

(93.8)

Gain from acquisition of companies

 

-

 

-

 

-

 

-

 

-

 

435.0

Income from non-reimbursable customer contributions

 

0.1

 

0.8

 

0.8

 

0.7

 

-

 

-

Operating (loss) profit before SE Resolution 250/13 and subsequent Notes

 

(255.7)

 

(3,334.9)

 

(2,525.0)

 

(1,618.5)

 

(828.4)

 

105.8

Income recognition on account of the RTI - SE Resolution 32/15

 

385.4

 

5,025.1

 

-

 

-

 

-

 

-

Higher costs recognition - SE Resolution 250/13 and subsequents Notes

 

42.3

 

551.5

 

2,271.9

 

2,933.1

 

-

 

-

Operating profit (loss)

 

171.9

 

2,241.7

 

(253.1)

 

1,314.6

 

(828.4)

 

105.8

             

Financial income

 

7.4

 

96.2

 

235.5

 

287.1

 

75.5

 

53.5

Financial expenses (2)

 

(34.5)

 

(450.0)

 

(592.0)

 

(504.9)

 

(226.0)

 

(150.6)

Other financial expense

 

(43.1)

 

(561.7)

 

(324.5)

 

(273.1)

 

(168.1)

 

(93.5)

Net financial (expense) income

 

(70.2)

 

(915.5)

 

(681.0)

 

(490.9)

 

(318.6)

 

(190.6)

Profit (Loss) before taxes

 

101.7

 

1,326.2

 

(934.1)

 

823.7

 

(1,147.0)

 

(84.8)

 

            

Income tax

 

(14.1)

 

(183.8)

 

154.4

 

44.1

 

116.7

 

(82.2)

Profit (Loss) for the year from continuing operations

 

87.6

 

1,142.4

 

(779.7)

 

867.8

 

(1,030.3)

 

(167.0)

 

            

Discontinued operations

 

-

 

-

 

-

 

(95.1)

 

16.9

 

(124.4)

Profit (Loss) for the year

 

87.6

 

1,142.4

 

(779.7)

 

772.7

 

(1,013.4)

 

(291.4)

             

Profit (Loss) for the year attributable to:

            

Owners of the Company

 

87.6

 

1,142.4

 

(779.7)

 

771.7

 

(1,016.5)

 

(304.1)

Non-controlling interests

 

-

 

-

 

-

 

1.0

 

3.1

 

12.7

Profit (Loss) for the year

 

87.6

 

1,142.4

 

(779.7)

 

772.7

 

(1,013.4)

 

(291.4)

             

Profit (Loss) for the year attributable to the owners of the parent

            

Continuing operations

 

87.6

 

1,142.4

 

(779.7)

 

867.9

 

(1,030.3)

 

(167.0)

Discontinued operations

 

-

 

-

 

-

 

(96.2)

 

13.8

 

(137.1)

  

87.6

 

1,142.4

 

(779.7)

 

771.7

 

(1,016.5)

 

(304.1)

 

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Statement of comprehensive (loss) income *(continued)

 

  

2015

 

2015

 

2014

 

2013

 

2012

 

2011

  

US$

 

Ps.

 

Ps.

 

Ps.

 

Ps.

 

Ps.

Other comprehensive income

            

Items that will not be reclassified to profit or loss

            

Results related to benefit plans

 

(0.3)

 

(3.7)

 

(17.8)

 

(21.0)

 

7.9

 

(10.2)

Tax effect of actuarial income (losses) on benefit plans

 

0.1

 

1.3

 

6.2

 

7.4

 

(2.8)

 

3.6

Total other comprehensive loss from discontinued operations

 

-

 

-

 

-

 

-

 

(2.1)

 

(5.7)

Total other comprehensive (loss) income

 

(0.2)

 

(2.4)

 

(11.6)

 

(13.6)

 

3.0

 

(12.3)

             

Comprehensive income for the year attributable to:

            

Owners of the parent

 

87.4

 

1,140.0

 

(791.3)

 

758.1

 

(1,013.2)

 

(315.4)

Non-controlling interests

 

-

 

-

 

-

 

1.0

 

2.8

 

11.7

Comprehensive income (loss) for the year

 

87.4

 

1,140.0

 

(791.3)

 

759.1

 

(1,010.4)

 

(303.7)

             

Profit (Loss) for the year attributable to the owners of the parent

            

Continuing operations

 

87.4

 

1,140.0

 

(791.3)

 

757.1

 

(1,025.1)

 

(173.6)

Discontinued operations

   

-

 

-

 

1.0

 

11.9

 

(141.8)

  

87.4

 

1,140.0

 

(791.3)

 

758.1

 

(1,013.2)

 

(315.4)

             

Basic and diluted earnings (loss) per share:

            

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

 

0.10

 

1.27

 

(0.87)

 

0.97

 

(1.15)

 

(0.19)

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

 

-

 

-

 

-

 

(0.11)

 

0.02

 

(0.15)

             

Basic and diluted earnings (loss) per ADS (3):

            

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

 

1.95

 

25.40

 

(17.40)

 

19.40

 

(23.00)

 

(3.80)

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

 

-

 

-

 

-

 

(2.20)

 

0.40

 

(3.00)

 

(*)     Certain amounts of the presented financial data for comparative purposes (2014, 2013, 2012 and 2011) have been reclassified (with regard to the financial statements as of such dates) following the disclosure criteria used for the financial statements as of December 31, 2015, mainly due to discontinued operations.

(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 No. 347/12.

(2)    Net of interest capitalized at December 31, 2015, 2014, 2013, 2012 and 2011 for Ps. 255.9, Ps. 123.9 million, Ps. 24.5 million, Ps. 25.4 million and Ps. 16.1 million, respectively.

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

 

 

 

 

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Statement of financial position

 

 

 

2015

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

US$

 

Ps.

 

Ps.

 

Ps.

 

Ps.

 

Ps.

ASSETS

 

 

 

 

 

  

 

 

 

 

 

Non-current assets

 

 

 

 

 

  

 

 

 

 

 

Property, plant and equipment

 

681.4

 

8,885.8

 

6,652.5

 

5,189.3

 

4,344.6

 

3,995.3

Intangible assets

 

-

 

-

 

-

 

-

 

845.8

 

793.0

Interest in joint ventures

 

-

 

0.4

 

0.4

 

0.4

 

0.4

 

0.4

Deferred tax asset

 

3.8

 

50.0

 

87.2

 

-

 

-

 

-

Other receivables

 

11.8

 

153.8

 

249.2

 

199.4

 

195.0

 

50.3

Trade receivables

 

1.8

 

23.6

 

-

 

-

 

2.0

 

45.7

Total non-current assets

 

698.9

 

9,113.6

 

6,989.3

 

5,389.1

 

5,387.8

 

4,884.7

 

 

 

 

 

 

  

 

 

 

 

 

Current assets

 

 

 

 

 

  

 

 

 

 

 

Assets under construction

 

-

 

-

 

-

 

-

 

84.5

 

45.5

Inventories

 

10.3

 

134.9

 

74.0

 

83.9

 

85.0

 

45.3

Other receivables

 

82.8

 

1,079.8

 

250.3

 

522.1

 

127.2

 

76.3

Trade receivables

 

73.8

 

963.0

 

882.9

 

803.1

 

889.4

 

534.7

Financial assets at fair value through profit or loss

 

119.7

 

1,560.4

 

254.4

 

216.4

 

3.4

 

2.1

Derivative financial instruments

 

0.0

 

0.2

 

-

 

-

 

-

 

1.3

Cash and cash equivalents

 

9.9

 

129.0

 

179.1

 

243.5

 

71.1

 

130.5

Total current assets

 

296.6

 

3,867.3

 

1,640.7

 

1,869.0

 

1,260.6

 

835.7

Assets of disposal group classified as held for sale

 

-

 

-

 

-

 

-

 

223.4

 

1,291.1

TOTAL ASSETS

 

995.4

 

12,980.9

 

8,630.0

 

7,258.1

 

6,871.8

 

7,011.5

 

 

 

 

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

  

 

 

 

 

 

Capital and reserves attributable to the owners

 

 

 

 

 

  

 

 

 

 

 

Share capital

 

68.8

 

897.0

 

897.0

 

897.0

 

897.0

 

897.0

Adjustment to share capital

 

30.5

 

397.7

 

397.7

 

397.7

 

397.7

 

986.1

Additional paid-in capital

 

0.3

 

3.5

 

3.5

 

3.5

 

3.5

 

21.8

Treasury stock

 

0.7

 

9.4

 

9.4

 

9.4

 

9.4

 

9.4

Adjustment to treasury stock

 

0.8

 

10.3

 

10.3

 

10.3

 

10.3

 

10.3

Other comprehensive (loss) income

 

(3.2)

 

(42.3)

 

(39.9)

 

(28.3)

 

(14.6)

 

64.0

Accumulated deficit

 

19.1

 

249.4

 

(893.0)

 

(113.3)

 

(885.1)

 

(557.3)

Equity attributable to the owners

 

116.9

 

1,525.0

 

385.0

 

1,176.3

 

418.2

 

1,431.3

Non-controlling interest

 

-

 

-

 

-

 

-

 

71.1

 

415.9

TOTAL EQUITY

 

116.9

 

1,525.0

 

385.0

 

1,176.3

 

489.3

 

1,847.2

 

 

 

 

 

 

  

 

 

 

 

 

LIABILITIES

 

 

 

 

 

  

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

  

 

 

 

 

 

Trade payables

 

17.3

 

225.0

 

231.1

 

220.8

 

155.3

 

87.7

Other payables (1)

 

183.4

 

2,391.9

 

1,644.6

 

944.7

 

1,894.8

 

1,373.7

Borrowings

 

188.7

 

2,461.0

 

1,598.4

 

1,309.9

 

1,350.7

 

1,189.9

Deferred revenue

 

11.8

 

153.8

 

109.1

 

33.7

 

264.4

 

174.8

Salaries and social security taxes payable

 

6.1

 

80.0

 

62.9

 

26.0

 

17.5

 

23.6

Benefit plans

 

15.7

 

204.4

 

150.4

 

102.7

 

97.4

 

83.5

Deferred tax liability

 

-

 

-

 

-

 

73.4

 

230.4

 

348.7

Tax liabilities

 

0.1

 

1.9

 

3.2

 

4.4

 

10.0

 

17.7

Provisions

 

19.9

 

259.6

 

112.1

 

83.1

 

80.0

 

66.1

Total non-current liabilities

 

443.1

 

5,777.6

 

3,911.8

 

2,798.7

 

4,100.5

 

3,365.7

             

Current liabilities

 

 

 

 

 

  

 

 

 

 

 

Trade payables

 

343.2

 

4,475.4

 

3,299.6

 

2,481.2

 

1,208.5

 

623.7

Other payables (1)

 

11.6

 

151.7

 

187.1

 

147.2

 

150.4

 

128.6

Borrowings

 

3.7

 

48.8

 

34.0

 

40.6

 

103.1

 

59.0

Derivative financial instruments

 

-

 

-

 

5.9

 

-

 

-

 

-

Deferred revenue

 

0.1

 

0.8

 

0.8

 

-

 

-

 

-

Salaries and social security taxes payable

 

56.2

 

733.1

 

610.6

 

420.9

 

383.6

 

275.8

Benefit plans

 

2.2

 

28.3

 

10.6

 

-

 

15.0

 

11.3

Tax liabilities

 

13.0

 

169.7

 

160.5

 

182.5

 

253.6

 

147.7

Provisions

 

5.4

 

70.5

 

24.1

 

10.7

 

10.5

 

10.3

Total current liabilities

 

435.5

 

5,678.3

 

4,333.2

 

3,283.1

 

2,124.7

 

1,256.4

Liabilities of disposal group classified as held for sale

 

 

 

-

 

-

 

-

 

157.3

 

542.2

TOTAL LIABILITIES

 

878.5

 

11,455.9

 

8,245.0

 

6,081.8

 

6,382.5

 

5,164.3

 

 

 

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

995.4

 

12,980.9

 

8,630.0

 

7,258.1

 

6,871.8

 

7,011.5

 

(1)      Includes the amounts collected through the Program for the Rational Use of Electricity Power (PUREE). As of December, 31, 2014 and 2013 net of Ps. 2,235.1 million and Ps. 1,661.1 million, respectively, compensated pursuant to Resolution No. 250/2013 and Notes 6852/2013, 4012/14, 486/14 and 1136/14, which as of December 31, 2014, 2013, 2012 and 2011 amounted to Ps. 17.5 million, Ps. 108.6 million, Ps. 1,352 million and Ps. 928.7 million, respectively, included under current and 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 No. 1,037/07 of the SE. Since the issuance of Resolution No. 32/15, the PUREE funds are considered part of Edenor´s income on account of the future RTI.

 

 

6


 
Table of Contents
 

 

Statement of Cash flows

 

 

 

2015

 

2015

 

2014

 

2013

 

2012

 

2011

 

 

US$

 

Ps.

 

Ps.

 

Ps.

 

Ps.

 

Ps.

Cash flows from operating activities

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Profit for the year

 

87.6

 

1,142.4

 

(779.7)

 

772.7

 

(1,013.4)

 

(291.4)

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

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation of property, plant and equipment

 

21.6

 

281.4

 

237.6

 

212.1

 

192.6

 

184.8

Loss on disposals of property, plant and equipment

 

0.3

 

3.5

 

1.0

 

1.2

 

1.8

 

1.8

Net accrued interest

 

25.6

 

333.7

 

341.0

 

196.6

 

182.6

 

95.3

Exchange differences

 

68.6

 

894.8

 

427.9

 

365.8

 

192.9

 

100.5

Income tax

 

14.1

 

183.8

 

(154.4)

 

(44.1)

 

(116.7)

 

82.2

Allowance for the impairment of trade and other receivables, net of recovery

 

1.8

 

24.1

 

19.7

 

33.7

 

54.4

 

13.2

Adjustment to present value of receivables

 

(0.4)

 

(5.4)

 

(8.1)

 

(2.4)

 

2.2

 

(1.2)

Provision for contingencies

 

17.4

 

226.4

 

75.4

 

36.0

 

24.8

 

16.6

Other expenses - FOCEDE

 

4.6

 

59.6

 

97.7

 

-

 

-

 

-

Changes in fair value of financial assets

 

(24.8)

 

(323.6)

 

(67.6)

 

(16.1)

 

(39.1)

 

(14.8)

Accrual of benefit plans

 

6.8

 

89.3

 

51.4

 

22.5

 

20.4

 

9.9

Gain from acquisition of companies

 

-

 

-

 

-

 

-

 

-

 

(435.0)

Higher costs recognition - SE Resolution 250/13 and subsequents Notes

 

(42.3)

 

(551.5)

 

(2,271.9)

 

(2,933.1)

 

-

 

-

Income recognition on account of the RTI - SE Resolution 32/15

 

(38.0)

 

(495.5)

 

 

 

 

 

 

 

 

Net gain from the repurchase of Corporate Notes

 

-

 

-

 

(44.4)

 

(88.9)

 

-

 

(6.5)

Income from non-reimbursable customer contributions

 

(0.1)

 

(0.8)

 

 

 

 

 

 

 

 

Discontinued operations

 

-

 

-

 

-

 

168.6

 

287.8

 

349.8

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Increase in trade receivables

 

(3.1)

 

(40.6)

 

(55.3)

 

(48.5)

 

(306.0)

 

(63.6)

Increase in other receivables

 

(26.7)

 

(347.9)

 

(134.7)

 

(111.7)

 

(15.6)

 

(44.0)

Decrease (Increase) in inventories

 

(4.7)

 

(60.9)

 

9.9

 

(42.7)

 

(18.3)

 

(10.5)

Increase in assets under construction

 

-

 

-

 

-

 

-

 

-

 

(8.6)

Increase (Decrease) in deferred revenue

 

3.5

 

45.5

 

76.2

 

(0.7)

 

16.9

 

17.5

(Decrease) Increase in trade payables

 

50.7

 

660.8

 

(528.4)

 

(87.0)

 

207.7

 

195.6

Increase in salaries and social security taxes payable

 

10.7

 

139.7

 

226.7

 

95.3

 

88.8

 

63.7

Decrease in benefit plans

 

(1.6)

 

(21.2)

 

(11.0)

 

(7.9)

 

(4.0)

 

(2.7)

(Decrease) Increase in tax liabilities

 

(10.8)

 

(141.0)

 

(28.7)

 

(44.9)

 

43.4

 

(19.2)

Increase in other payables

 

(4.8)

 

(62.1)

 

162.3

 

262.0

 

40.9

 

120.2

Funds obtained from the program for the rational use of electric power (PUREE) (SE Resolution No. 1037/07)

 

2.0

 

25.6

 

482.9

 

491.9

 

410.7

 

338.0

Net decrease in provisions

 

(2.5)

 

(32.6)

 

(33.0)

 

(25.3)

 

(12.1)

 

(11.0)

Subtotal before variations of debts with Cammesa

 

155.5

 

2,027.5

 

(1,907.5)

 

(794.9)

 

242.7

 

680.5

Increase in account payable and mutuum with Cammesa

 

91.2

 

1,189.5

 

3,455.5

 

2,231.5

 

295.7

 

10.1

Net cash flows provided by operating activities

 

246.7

 

3,217.0

 

1,548.0

 

1,436.6

 

538.4

 

690.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

 

 

 

 

Payment of property, plants and equipments

 

(160.7)

 

(2,095.5)

 

(1,400.1)

 

(892.4)

 

(537.9)

 

(434.7)

Net (payment for) collection of purchase / sale of financial assets at fair value

 

(77.6)

 

(1,012.1)

 

(64.6)

 

(97.4)

 

37.8

 

443.5

Payment for adquisition of companies

 

-

 

-

 

-

 

-

 

-

 

(442.9)

Payment for adquisition of additional non-controlling interests

 

-

 

-

 

-

 

-

 

-

 

(6.4)

Loans granted

 

-

 

-

 

-

 

-

 

(0.5)

 

(39.7)

Collection of financial receivables with related companies

 

-

 

-

 

-

 

2.1

 

142.4

 

90.6

Collection for sales of discontinued operations

 

-

 

-

 

-

 

-

 

-

 

126.7

Incorporation of Cash and Cash equivalents in acquired companies

 

-

 

-

 

-

 

-

 

-

 

119.0

Collection of receivables from sale of subsidiaries - SIESA

0.3

 

4.3

 

3.0

 

2.9

 

-

 

-

Discontinued operations

 

-

 

-

 

-

 

(124.2)

 

(232.1)

 

(610.9)

Net cash flows used in investing activities

 

(238.0)

 

(3,103.3)

 

(1,461.7)

 

(1,109.0)

 

(590.3)

 

(754.8)

 

 

7


 
Table of Contents
 

 

Statement of  Cash flows(continued)

 

  

2015

 

2015

 

2014

 

2013

 

2012

 

2011

  

US$

 

Ps.

 

Ps.

 

Ps.

 

Ps.

 

Ps.

Cash flows from financing activities

            

Loans taken

 

-

 

-

 

-

 

-

 

0.8

 

298.2

Repayment of principal on loans

 

-

 

-

 

(0.4)

 

(25.5)

 

(36.5)

 

(252.5)

Payment of interest on loans

 

(13.3)

 

(172.9)

 

(155.3)

 

(177.0)

 

(128.9)

 

(127.9)

Discontinued operations

 

-

 

-

 

-

 

25.4

 

136.8

 

55.9

Net cash flows used in financing activities

 

(13.3)

 

(172.9)

 

(155.7)

 

(177.1)

 

(27.8)

 

(26.3)

             

Net (decrease) / increase in cash and cash equivalents

 

(4.5)

 

(59.2)

 

(69.5)

 

150.5

 

(79.7)

 

(90.4)

             

Cash and cash equivalents at beginning of year

 

13.7

 

179.1

 

243.5

 

71.1

 

130.5

 

246.0

Cash and cash equivalents at beginning of year included in assets of disposal group classified as held for sale

 

-

 

-

 

-

 

11.2

 

28.3

 

-

Exchange differences in cash and cash equivalents

 

0.7

 

9.1

 

5.1

 

10.7

 

3.2

 

3.3

Net (decrease) increase in cash and cash equivalents

 

(4.5)

 

(59.2)

 

(69.5)

 

150.5

 

(79.7)

 

(90.4)

Cash and cash equivalents at the end of year

 

9.9

 

129.0

 

179.1

 

243.5

 

82.3

 

158.8

             
             

Cash and cash equivalents at the end of the year in the statement of financial position

 

9.9

 

129.0

 

179.1

 

243.5

 

71.1

 

130.5

Cash and cash equivalents at the end of the year included in assets of disposal group classified as held for sale

 

-

 

-

 

-

 

-

 

11.2

 

28.3

Cash and cash equivalents at the end of the year

 

9.9

 

129.0

 

179.1

 

243.5

 

82.3

 

158.8

            

-

             

Supplemental cash flows information

            

Non-cash operating, investing and financing activities

            
            

-

Financial costs capitalized in property, plant and equipment

(19.6)

 

(255.9)

 

(123.9)

 

(24.5)

 

(6.4)

 

4.1

            

-

Acquisitions of property, plant and equipment through increased trade payables

 

(12.8)

 

(166.8)

 

(144.8)

 

(126.4)

 

-

 

-

            

-

Decrease from offsetting of PUREE-related liability against receivables (SE Resolution 250/13 and SE Notes 6852/13 and 4012/14)

 

0.8

 

10.6

 

(574.0)

 

(1,661.1)

 

-

 

-

             

Decrease from offsetting of liability with CAMMESA for electricity purchases against receivables (SE Resolution 250/13 and SE Notes 6852/13 and 4012/14)

 

12.1

 

158.1

 

(2,218.4)

 

(1,152.3)

 

-

 

-

            

-

Decrease from offset of other liabilities with CAMMESA for loans for consumption (Mutuums) granted for higher salary costs (SE Resolution 32/15)

 

(38.0)

 

(495.5)

 

-

 

-

 

-

 

-

            

-

Decrease in financial assets at fair value from repurchase of Corporate Notes

 

-

 

-

 

91.6

 

165.1

 

-

 

-

            

-

            

-

Increase in financial assets at fair value from subsidiary sale

 

-

 

-

 

-

 

(334.3)

 

-

 

-

            

-

Decrease of other receivables for collection of corporate notes with related companies

 

-

 

-

 

-

 

52.8

 

-

 

-

            

-

Net increase of trade receivables from assets of disposal group classified as held for sale

 

-

 

-

 

-

 

(44.6)

 

-

 

-

            

-

Acquisitions of property, plant and equipment through increased debt FOTAE

 

-

 

-

 

(32.9)

 

(49.0)

 

-

 

-

             

Acquired Companies

            

Cash and Cash equivalents

 

-

 

-

 

-

 

-

 

-

 

119

Property, plant and equipment

 

-

 

-

 

-

 

-

 

-

 

1,881

Inventories

 

-

 

-

 

-

 

-

 

-

 

4

Trade receivables

 

-

 

-

 

-

 

-

 

-

 

255

Other receivables

 

-

 

-

 

-

 

-

 

-

 

85

Trade payables

 

-

 

-

 

-

 

-

 

-

 

(258)

Borrowings

 

-

 

-

 

-

 

-

 

-

 

(450)

Deferred tax liability

 

-

 

-

 

-

 

-

 

-

 

(79)

Other liabilities

 

-

 

-

 

-

 

-

 

-

 

(331)

Net Assets

 

-

 

-

 

-

 

-

 

-

 

1,227

Non-controlling interests

 

-

 

-

 

-

 

-

 

-

 

(230)

Net assets acquired

 

-

 

-

 

-

 

-

 

-

 

997

Bargain Purchase

 

-

 

-

 

-

 

-

 

-

 

435

Cash Paid

 

-

 

-

 

-

 

-

 

-

 

(562)

Cash and cash equivalents in acquired companies

 

-

 

-

 

-

 

-

 

-

 

119

Net Cash Flow for acquisition of companies

 

-

 

-

 

-

 

-

 

-

 

(443)

 

 

 

8


 
Table of Contents
 

 

 

 

Year ended December 31,

 

2015

 

2014

 

2013

 

2012

 

2011

Operating data

         

Energy sales (in GWh):

22,402

 

21,312

 

21,674

 

20,760

 

20,098

Residential

9,671

 

9,114

 

9,114

 

8,662

 

8,139

Small Commercial

1,878

 

1,714

 

1,780

 

1,688

 

1,601

Medium Commercial

1,828

 

1,712

 

1,828

 

1,717

 

1,700

Industrial

3,680

 

3,431

 

3,458

 

3,335

 

3,442

Wheeling System(1)

4,200

 

4,213

 

4,374

 

4,261

 

4,156

Public Lighting

688

 

678

 

683

 

668

 

656

Shantytowns

435

 

430

 

417

 

409

 

384

Others(2)

21

 

20

 

20

 

20

 

20

Customers (in thousands) (3)

2,835

 

2,800

 

2,773

 

2,726

 

2,699

Energy Losses (%)

14.90%

 

13.82%

 

13.00%

 

13.30%

 

12.60%

MWh sold per employee

5,122

 

4,920

 

6,024

 

7,088

 

7,188

Customers per employee

648

 

647

 

771 

 

931

 

965

 

(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.

 

 

 

EXCHANGE RATES

                                                                                                                       

From April 1, 1991 until the end of 2001, the Convertibility Law established a fixed exchange rate under which the Central Bank of Argentina (Banco Central de la República Argentina, 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 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, 2017.  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, although the government has the power to intervene by buying and selling foreign currency for its own account, a practice in which it may engage on a regular basis.

After several years of moderate variations in the nominal exchange rate, the Peso lost more than 30% of its value with respect to the U.S. Dollar in each of 2013 and 2014, and in 2015, the Peso lost approximately 52% of its value with respect to the U.S. Dollar, including a depreciation of approximately 34% mainly experienced after December 17, 2015 following the announcement of the lifting of a significant portion of exchange restrictions (See “—Risk Factors—Factors Relating to Argentina—Fluctuations in the value of the Peso could adversely affect the Argentine economy, and consequently, our results of operations or financial condition”).  This was followed by a devaluation of the Peso with respect to the U.S. Dollar of approximately 9.9% from January 1, 2016 through April 14, 2016.  There can be no assurance that the Argentine Peso will not depreciate or appreciate again in the future. 

 

9


 
Table of Contents
 

 

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 the 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,

        

2011

 

3.97

 

4.30

 

4,13(1)

 

4.30

2012

 

4.30

 

4.92

 

4,55(1)

 

4.92

2013

 

4.93

 

6.52

 

5,48(1)

 

6.52

2014

 

6.54

 

8.56

 

8,23(1)

 

8.55

2015

 

8.56

 

13.40

 

9,51(1)

 

13.04

         

Month

    

November-2015

 

9,56(2)

 

9,69(2)

 

9.63

 

9.69

December-2015

 

9,70(2)

 

13,40(2)

 

11.41

 

13.04

January-2016

 

13,20(2)

 

13,96(2)

 

13.65

 

13.96

February-2016

 

14,13(2)

 

15,80(2)

 

14.85

 

15.80

March-2016

 

14,39(2)

 

15,80(2)

 

14.95

 

14.70

April-2016(3)

 

14,33(2)

 

14,79(2)

 

14.55

 

14.33

         

_____________________

        

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 14, 2016.

 

 

 

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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 all of our revenues are earned in Argentina and all of our operations, facilities, and customers are located in Argentina.  Accordingly, our financial condition and results of operations depend to a significant extent on macroeconomic, regulatory, 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 to 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 (including tariffs and other compensation of public services), foreign exchange controls and taxes, have had and may in the future have a material adverse effect on private sector entities, including us.   For example, during the Argentine economic crisis of  2001, the Argentine government froze electricity distribution margins and caused the pesification of our tariffs, which had a materially adverse effect on our business and financial condition and led us to suspend payments on our financial debt at the time.

We cannot assure you that the Argentine government will not adopt other policies that could adversely affect the Argentine economy or our business, financial condition or results of operations.  In addition, we cannot assure you that future economic, regulatory, social and political developments in Argentina will not impair our business, financial condition or results of operations, or cause the market value of our ADSs and Class B common shares to decline.

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

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

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

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

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

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

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

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

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

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

 

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·        unemployment and informal employment remains high; and

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

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

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

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

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

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

 

  • Electricity system state of emergency and reforms.  The Macri administration declared the state of emergency of the national electricity system that will remain in effect until December 31, 2017. The state of emergency allows the Argentine government to take actions designed to guarantee the supply of electricity.  In addition, following the Macri administration’s announcement that it would reexamine energy subsidy policies, the Ministry of Energy increased electricity rates for the wholesale market for purchases made between February 1 and April 30, 2016.   This increase was used to reduce subsidies to the sector. On January 29, 2016, the ENRE, through Resolution No. 1/16 approved a new tariff structure which became effective on February 1, 2016, and introduced different prices depending on the categories of customers. Such resolution also contemplates a social tariff for residential customers who comply with certain consumption requirements, which includes a full exemption for monthly consumptions below or equal to 150 Kwh and tariffs benefits for customers who exceed such consumption level but achieve a monthly consumption lower than that of the same period in the immediately preceding year. On the same date, through Resolution No. 2/2016, the ENRE partially repealed Resolution No. 347/2012, discontinuing the FOCEDE (as defined below) and ordering us to open a special bank account with a Central Bank authorized entity where the funds received pursuant to Resolution No. 347/2012 must be deposited.

 

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

 

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  • Foreign exchange reforms. In addition, the Macri administration  implemented certain reforms to the foreign exchange market regulatory framework that provide greater flexibility and easier access to the foreign exchange market.  The principal measures adopted as of the date of this annual report include (i) the elimination of the requirement to register foreign exchange transactions in the Argentine Tax Authority’s (“AFIP”)database;, (ii) the elimination of the requirement to transfer the proceeds of new financial indebtedness transactions into Argentina and settle such proceeds through the single and free‑floating foreign exchange market (the “MULC”), (iii) the reestablishment of the U.S.$2.0 million monthly limit per resident on the creation of offshore assets, (iv) a decrease from 30% to 0% of the registered, non-transferable and non-interest-bearing deposit required in connection with certain transactions involving foreign currency inflows, (v) the reduction of the required period that the proceeds of any new financial indebtedness incurred by residents, held by foreign creditors and transferred through the MULC must be maintained in Argentina from 365 calendar days to 120 calendar days from the date of the transfer of the relevant amount and (vi) the elimination of the requirement of a minimum holding period (72 business hours) for purchases and subsequent sales of the securities. In addition, on December 17, 2015, following the announcement of the lifting of a significant portion of exchange restrictions, the Peso depreciated approximately 36% against the U.S. Dollar.  The exchange rate published by Banco Nación as of April 14, 2016 was 14.33 to U.S.$1.00.

 

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

 

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

 

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

 

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

Inflation has, in the past, materially undermined the Argentine economy and the Argentine government’s ability to create conditions that permit growth.  In recent years, Argentina has confronted inflationary pressures, evidenced by significantly higher fuel, energy and food prices, among other factors.  According to data published by theInstituto Nacional de Estadística y Censos (National Statistics and Census Institute or “INDEC”), the rate of inflation reached 10.6% in 2013, 21.4% in 2014 and 11.9% in the ten-month period ended October 31, 2015.  The wholesale price index (“WPI”) increased 12.7%, 13.1%, 14.8% and 28.3% in each of those years, respectively, and 10.6% in the ten-month period ended October 31, 2015.  In November 2015, the INDEC suspended the publication of the consumer price index (the “CPI”) and the WPI.  See “—The credibility of several Argentine economic indices has been called into question, which may lead to a lack of confidence in the Argentine economy and, in turn, limit our ability to access credit and the capital markets” below.  The previous administration has in the past implemented programs to control inflation and monitor prices for essential goods and services, including freezing the prices of supermarket products, and price support arrangements agreed between the Argentine government and private sector companies in several industries and markets. 

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

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

In January 2007, INDEC modified its methodology used to calculate the CPI, which is calculated as the monthly average of a weighted basket of consumer goods and services that reflects the pattern of consumption of Argentine households.  Since then, through 2015, the credibility of the CPI, as well as other indices published by the INDEC have been called into question.

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

In order to address the quality of official data, a new price index was put in place on February 13, 2014. The new price index represented the first national indicator to measure changes in prices of final consumption by households. Unlike the previous price index, which only measured inflation in the urban sprawl of the City of Buenos Aires, the new price index is calculated by measuring prices of goods across the entire urban population of the 24 provinces of Argentina. Using this new methodology, the consumer price index rose to 11.9% in the ten-month period ended October 31, 2015. Although this new methodology brought inflation statistics closer to those estimated by private sources, material differences between official inflation data and private estimates remained during 2015. In November 2015, the INDEC suspended the publication of the CPI and the WPI. 

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

 

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

The discontinuation of the publication of indices by the INDEC has generated uncertainty in Argentina’s economy, and any future required correction or restatement of the INDEC indices could result in a decrease in confidence in Argentina’s economy, which, in turn, could have an adverse effect on our ability to access international capital markets to finance our operations and growth, and which could, in turn, adversely affect our results of operations and financial condition andcause the market value of our ADSs and Class B common shares to decline.

Argentina’s ability to obtain financing from international markets is limited, in part due to the unresolved litigation with holdout bondholders, which may impair its ability to foster economic growth and, consequently, affect our business, results of operations and prospects for growth

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

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

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

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

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

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

 

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

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

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

Fluctuations in the value of the Peso may also adversely affect the Argentine economy, our financial condition and results of operations.  The devaluation of the Peso may have a negative impact on the ability of certain Argentine businesses to service their foreign currency-denominated debt, lead to very high inflation, significantly reduce real wages, jeopardize the stability of businesses whose success depends on domestic market demand including public utilities and the financial industry and adversely affect the Argentine government’s ability to honor its foreign debt obligations.  After several years of moderate variations in the nominal exchange rate, the Peso lost more than 30% of its value with respect to the US Dollar in each of 2013 and 2014, and in 2015, the Peso lost approximately 52% of its value with respect to the U.S. Dollar, including a depreciation of approximately 34% mainly experienced after December 17, 2015 following the announcement of the lifting of a significant portion of foreign exchange restrictions.  Since the devaluation in December 2015, the Central Bank has allowed the Peso to float and limited interventions to those needed to ensure the orderly functioning of the foreign exchange market. As of April 14, 2016, the exchange rate was Ps. 14.33 to U.S.$1.00.  We are unable to predict the future value of the Peso against the U.S. Dollar.  If the Peso devalues further, the negative effects on the Argentine economy could have adverse consequences for our business, our results of operations and the market value of our ADSs, including as measured in U.S.Dollars.

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

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

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

In response to the global economic crisis, in December 2008, Law No. 26,425,  was passed by the Argentine Congress unifying the Argentine pension and retirement system into a system publicly administered by theAdministración Nacional de la Seguridad Social (the National Social Security Agency, or the “ANSES”), and eliminating the pension and retirement system previously administered by private managers.  In accordance with the new law, private pension managers transferred all of the assets administered by them under the pension and retirement system to the ANSES.  Prior to 2009, a significantportion of the local demand for securities of Argentine companies came from Argentine private pension funds.  With the nationalization of Argentina’s private pension funds, the Argentine government, through the ANSES, became a significant shareholder in many of the country’s public companies.  In April 2011, the Argentine government lifted certain restrictions pursuant to which ANSES had been prevented from exercising more than 5% of its voting rights in any stock exchange listed company (regardless of the equity interest held by ANSES in such companies).  ANSES has since exercised its voting rights in excess of such 5% limit in order to appoint directors in different stock exchange listed companies.  ANSES’s interests may differ from or conflict with those of the other investors in such companies.  In addition, in September 2015, Law No. 27,181 was enacted, which prohibits the sale of shares in Argentine public companies held by the Argentine government or any other action that limits, alters or modifies the use, ownership or nature of such shares, without the prior authorization of Congress.Additionally, Law No. 27,181 created the National Government Equity Holdings Agency (Agencia Nacional de Participaciones Estatales en Empresas), a decentralized agency operating under the scope of the Argentine Executive Branch, which is in charge of implementing any policies and actions related to the exercise by the Argentine government of any rights arising out of the shares it holds.As of the date of this annual report, ANSES owns shares representing 26.8% of our capital stock, and also owns shares of capital stock of our affiliates, Pampa Energía and Transener.

 

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Beginning in April 2012, the Fernández de Kirchner administration provided for the nationalization of YPF and imposed major changes to the legal framework in which oil companies operate, principally through the enactment of Law No. 26,741 and Decree No. 1,277/2012. In February 2014, theFernández de Kirchner administration and Repsol announced that they had reached agreement on the terms of the compensation payable to Repsol for the expropriation of the YPF shares.  Such compensation amounted to U.S.$5.0 billion, payable by delivery of Argentinesovereign bonds with various maturities.  Additionally, on December 19, 2012, the Fernández de Kirchner administrationissued Decree No. 2,552/2012, pursuant to which it ordered the expropriation of thePredio Rural de Palermo.  However, on January 4, 2013, the Federal Civil and Commercial Chamber granted an injunction that has temporarily blocked the enforcement of Decree No. 2,552/2012. Although the decision was appealed by the Argentine government, the Supreme Court of Justice rejected such appeal and confirmed the Federal Civil and Commercial Chamber’s injunction subject to a decision on the merits.

 

Notwithstanding the measures recently adopted by the Macri administration, we cannot assure you that these or other measures that may be adopted by the current or any future Argentine government, such as expropriation, nationalization, forced renegotiation or modification of existing contracts, new taxation policies, changes in laws, regulations and policies affecting foreign trade and investments will not have a material adverse effect on the Argentine economy and, as a consequence, adversely affect our financial condition, our results of operations or cause the market value of our ADSs and Class B common shares to decline.

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

During 2001 and the first half of 2002, Argentina experienced a mass withdrawal of deposits from the financial system as a result of a lack of confidence in the Argentine government’s ability to repay its debt and sustain the parity between the Peso and the U.S. Dollar. This caused a liquidity crisis in the Argentine financial system, which led the Argentine government to impose exchange controls and transfer restrictions, substantially limiting the ability of companies to retain foreign currency or make payments abroad.  After 2002, these restrictions, including those requiring the Central Bank’s prior authorization for the transfer of funds abroad to pay principal and interest on debt obligations, were substantially eased through 2007.  In addition to the foreign exchange restrictions applicable to outflows, in June 2005 the Argentine government adopted various rules and regulations that established new restrictive controls on capital inflows into Argentina, including a requirement that, for certain funds remitted into Argentina, an amount equal to 30% of the funds must be deposited into an account with a local financial institution as a U.S. Dollar deposit for a one-year period without any accrual of interest, benefit or other use as collateral for any transaction.

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

 

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

Notwithstanding the measures recently adopted by the Macri administration, in the future the Argentine government could impose exchangecontrols, transfer restrictions or restrictions on the movement of capital or take other measures in response to capital flight or a significant depreciation of the Peso, which could limit our ability to access the international capital markets and impair our ability to make interest, principal or dividend payments abroad.  Such measures could lead to renewed political and social tensions and undermine the Argentine government’s public finances, which could adversely affect Argentina’s economy and prospects for economic growth and, consequently, adversely affect our business and results of operations and cause the market value of our ADSs and Class B common shares to decline.  As of the date of this annual report, however, the transfer of funds abroad to pay dividends is permitted to the extent such dividend payments are made in connection with audited financial statements approved by a shareholders’ meeting of the Company.

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

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

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

 

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

Law No. 26,854, which regulates injunctions in cases in which the Argentine government is a party or has intervened, was promulgated on April 30, 2013 as part of a judicial reform bill approved by the Argentine Congress.  Among the principal changes implemented pursuant to the judicial reform bill is a time limitation on injunctions imposed in proceedings brought against the Argentine government and the creation of three new chambers ofCasación, each of which must hear an appeal before the matter is considered bythe Supreme Court of Justice of Argentina.  In addition, Law No. 26,855, which became effective on May 27, 2013, modified the structure and functions of the ArgentineConsejo de la Magistratura(judicial council), which has the authority to appoint judges, present charges against them and suspend or remove them.  As of the date of this annual report several aspects of this legislation have been struck down as unconstitutional by the Argentine Supreme Court.

 

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On August 7, 2014, Law No. 26,944 on State Responsibility was enacted to regulate government actions. Said law governs the responsibility of the Argentine government regarding the damages that its activity or inactivity may cause to individuals’ properties or rights. Such law establishes that the Argentine government’s responsibility is objective and direct, that the provisions of the civil and commercial codes are not applicable to the actions of the Argentine government in a direct nor subsidiary manner and that dissuasive financial penalties may be imposed on the Argentine Government, its agents or officers.

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

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

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

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

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

The effects of a global or regional credit crisis and related turmoil in the global financial system may have a negative impact on our business, financial condition and results of operations, an impact that is likely to be more severe on an emerging market economy, such as Argentina.  Such was the case in 2008, when the global economic crisis led to a sudden economic decline in Argentina in 2009, accompanied by inflationary pressures, depreciation of the Peso and a drop in consumer and investor confidence.

The effect of the economic crisis on our customers and on us cannot be predicted.  Weak global and local economic conditions could lead to reduced demand or lower prices for energy, which could have a negative effect on our revenues.  Economic factors such as unemployment, inflation and the availability of credit could also have a material adverse effect on demand for energy and, therefore, on our financial condition and operating results.  Weak global and local economic conditions could lead to reduced demand or lower prices for energy, which could have a negative effect on our revenues.  The financial and economic situation in Argentina or other countries in Latin America, such as Brazil, may also have a negative impact on us and third parties with whom we do, or may do, business. 

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

 

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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 is vulnerable to external shocks, including those related or similar to the global economic crisis that began in 2008 and the economic and financial conditions of Argentina’s major trading partners, in particular, Brazil.  Specifically, the current devaluation of the Brazilian currency and the slowdown of its economy may negatively affect the Argentine economy, and in turn, our business and results of operations.  Although economic conditions can vary from country to country, investors’ perception of the events occurring in other countries have in the past substantially affected, and may continue to substantially affect capital flows and investments in securities in other countries, including Argentina.  The Argentine economy was adversely impacted by the political and economic events that occurred in several emerging economies in the 1990s, including those in Mexico in 1994, the collapse of several Asian economies between 1997 and 1998, the economic crisis in Russia in 1998 and the Brazilian devaluation of its currency in January 1999.

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

The designation of veedores (supervisors) by the CNV or other regulator could adversely affect our business, financial condition and results of operations

The Capital Markets Law No. 26,831 provides that the CNV may inspect any entity subject to its oversight (such as the Company, its controlling shareholder or any of its affiliates subject to CNV oversight).  If after any inspection the CNV determines that a resolution of the board of directors of such entity violated the interests of its minority shareholders or any holder of its securities subject to the Argentine public offering regime, it may appoint aveedor (supervisor) with veto powers.  The CNV is additionally empowered to suspend a board of directors for a period of up to 180 days, subject to limited appeals and, alternatively, a veedor may be appointed through a judicial request.  Any determination by the CNV or any Argentine court that the right of our minority shareholders or holders of our securities issued in Argentina has been violated could result in the direct intervention of the CNV, including the potential suspension of our board of directors for up to 180 days, and, consequently, have an adverse effect on our business, financial condition and results of operations.  In this respect, on April 21, 2014, Molinos Rio de la Plata S.A., an Argentine company whose shares are publicly-traded in Argentina, reported the judicial appointment of aveedor at the request of ANSES, one of its shareholders, for a period of six months.  We cannot assure you that the CNV, or any other party, will not attempt to pursue a similar course of action with respect to the Company (or to its controlling shareholder), which may have a negative effect on the Company.

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 of 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 for 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 caused substantial price differences within the market.  The Argentine government has continued to intervene in this sector by, for example, granting temporary nominal margin increases, proposing a new social tariff regime for residents ofpoverty-stricken areas, removing discretionary subsidies,creating specific charges to raise funds that are transferred to government-managed trust funds that finance investments in generation and distribution infrastructure and mandating investments for the construction of new generation plants and the expansion of existing transmission and distribution networks. 

 

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Furthermore, on November 15, 2011, Note No. 8,752 of the SE 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 8,752, certain provincial governments have initiated legal proceedings to challenge the jurisdiction of the SE to issue Note 8,752, particularly because of the potential chilling effect that this regulation may have on the ability of the provincial governments to increase electricity tariffs. On November 27, 2012, Resolution No. 2,016/12 of the SE approved the seasonal WEM prices – subsidized and not subsidized − for the period from November 2012 through April 2013. The seasonal price format was modified, concluding in a single purchase price without considering any demand nor time segmentation and taking into account the structure of the demand as of October 2012 as the base. Subsequently, in June 2013, the SE adopted Resolution 408/13, which maintains both the single price and the criteria for raising subsidies during the winter season, with a reduction of the single price only for those months and a subsequent reversion of prices in October 2013.  The Argentine government has also announced an analysis of new measures that would change the current regulatory framework of the energy sector. On March 26, 2013, Resolution 95 of the SE 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.The price scheme established by Resolution No. 95/2013 of the SE was amended by Resolution No. 529/2014 of the SE, which provided for the modification of the methodology for calculation of the fixed costs remuneration, the implementation of a new remuneration to cover extraordinary maintenance works for thermal generators and the retroactive adjustment of prices as from February 2014.

On December 16, 2015, the Macri administration declared a state of emergency with respect to the national electricity system that will remain in effect until December 31, 2017. The state of emergency allows the Argentine government to take actions designed to guarantee the supply of electricity in Argentina such as instructing the Ministry of Energy to elaborate and implement, with the cooperation of all federal public entities, a coordinated program to guarantee the quality and security of the electricity system and rationalize public entities’ consumption of energy.

 

On February 3, 2016, Resolution No. 22/16 of the Ministry of Energy established adjustments to the remuneration of generators to support the operation and maintenance of the generation plants until the regulatory measures currently under review by the Argentine government are enacted and the operation of the WEM is normalized.

 

On January 25, 2016, the Ministry of Energy issued Resolution No. 6, approving the seasonal WEM prices for each category of users for the period from February 2016 through April 2016.  Such resolution adjusted the seasonal prices as required by the regulatory framework. Energy prices in the spot market were set by CAMMESA which determined the price to be charged by generators for energy sold in the spot market of the wholesale electricity market on an hourly basis.  The WEM prices resulted in the elimination of certain energy subsidies and a substantial increase in electricity rates for individuals.

 

Notwithstanding the recent measures adopted by the Macri administration, we cannot assure you that certain 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 increase our obligations, including increased taxes, unfavorable alterations to our tariff structures and other regulatory obligations, compliance with which would increase our costs and may 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. See “Item 4. Information on the Company—Our Business Overview—Edenor Concession.”

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 Convertibility Regime, distribution tariffs were calculated in U.S. Dollars and distribution margins were adjusted periodically toreflect 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 concession agreements 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 and an increase of distribution costs in real terms, which could no longer be passed on to users 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.

 

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In recent years, 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 to customers.  As of the date of this annual report, the Macri administration has been engaged in negotiations with distribution companies, including us, to reestablish the economic and financial equation of the concession agreements. We cannot guarantee 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. Our inability to cover the costs of distribution or to receive an adequate return on our asset base may further adversely affect our financial condition and results of operations.

 

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 customers to pay their electricity bills. In the years following the 2001 and 2002 economic crisis electricity demand experienced significant growth, increasing by an estimated average of approximately 6.0% per annum from 2003 through 2015. This increase in electricity demand since 2003, reflects the relative low cost, in real terms, of electricity to customers due to the freezing of distribution margins, the establishment of subsidies in the purchase price of energy and the elimination of the inflation adjustment provisions in distribution concessions, coupled with the devaluation of the Peso and inflation.  Transmission and distribution companies are currently negotiating increases and adjustments to their tariff schemes with the Argentine government.  Although the increases in electricity transmission and distribution margins, and the elimination of some subsidies, which increased the cost of electricity to end users, have not had a significant negative effect on demand in the past, we cannot make any assurances that these increases or any future increases in the cost of electricity will not have a material adverse effect on electricity demand or result in a decline in collections from customers. In this respect, we cannot assure you that any future tariff increase will not lead electricity utility companies, like us, to record lower revenues and results of operations, 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, government intervention and decreased results of operations

In recent years, the condition of the Argentine electricity market has provided little incentive to generators and distributors to further invest in increasing their generation and distribution capacity, respectively, which would require material long-term financial commitments.  As a result, the Argentine electricity market is currently operating at near full capacity and both generators and distributors may not be able to guarantee an increased supply of electricity to their customers, which could lead to a decline in the growth of such companies. During December 2013, an increase in demand for electricity resulted in energy shortages and blackouts in Buenos Aires and other cities around Argentina.  Under Argentine law, distribution companies, such as us, are responsible to their customers for any disruption in the supply of electricity. 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. 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.  Additionally, disruptions in the supply of electricity could expose us to intervention by the Argentinegovernment, which warned of such possibility during the blackouts of December 2013. Such claims, fines, penalties or government intervention 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.  See also “—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.”

 

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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 tariffs adjusted to reflect increases in our distribution costs in a timely manner or at all, has affected our capacity to perform our commercial obligations and could also have a material adverse effect on our capacity to perform our financial obligations.

Since execution of 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”) and as required by them, we have been engaged in an RTI with the ENRE. However, the timeline for completing this process and the favorability to us of the final resolution are both uncertain.  Resolution No. 7/16 issued on January 2016 by the Ministry of Energy established a new deadline for the completion of the RTI process at the end of 2016.

The Adjustment Agreement currently contemplates a cost adjustment mechanism for the transition period during which the RTI is being conducted. This mechanism, known as the Cost Monitoring Mechanism (“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 the ENRE’s approval of adjustments have not been sufficient to cover our actual incremental costs in a timely manner. In the past, even when the ENRE has approved adjustments to our tariffs, there has been a lag between the time when we actually experienced increases in our distribution costs and the time when we received increased income following the corresponding adjustments to our distribution margins pursuant to the CMM.

During the years ended December 31, 2012 and 2011, we recorded a significant decrease in net income and operating income (recording an operating loss in 2012), 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 affected the electricity sector, the ENRE issued Resolution No. 347/12 in November 2012, which established the application of fixed and variable charges that have allowed the Company to obtain additional revenue as from November 2012 through 2016. However, Resolution No. 250/13 and Notes No. 6,852/13, No. 4,012/14, No. 486/14 and No. 1,136/14 of the SE and additional revenue obtained through Resolution No. 347/12 were insufficient to make up our operating deficit in 2014, due to the constant increase in operating costs.

 

In March 2015,  Resolution No. 32/15 of the SE granted us a temporary increase in income through funds provided by CAMMESA, applicable retroactively as from February 1, 2015, to cover costs and investments associated with the regular provision of the public service of distribution of energy on account of the future RTI.

In January 2016, the Ministry of Energy issued Resolution No. 7/16, pursuant to which the ENRE implemented a VAD adjustment to the tariff schedule on account of the future RTI in effect as of February 1, 2016, and is expected to take all necessary action to conclude the RTI process by December 31, 2016.

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

Pursuant to Resolution No. 7/16, the ENRE issued Resolution No. 1/16 establishing a new tariff structure. However, if we are not able to recover all future cost increases, and/or if there is a significant lag of time between when we incur the incremental costs and when we receive increased income, and/orif 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.

 

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

 

Our inability to obtain tariff adjustments in line with the actual changes in costs could result in our inability to meet our trade obligations and could also have a material adverse effect on our ability to meet our financial obligations

                Although Resolution No. 7/16 of the Ministry of Energy and Resolution No. 1/16 of the ENRE established a new tariff scheme pursuant to the terms of the Adjustment Agreement and on account of the future RTI, it did not include any adjustment method to reflect future variations in costs. If inflation levels during 2016 continue the trend of 2015, the  increase in tariffs provided by Resolution No. 1/16 of the ENRE may prove insufficient to support the real variation in costs.

 Our inability to obtain tariff adjustments in line with future changes in costs could result in our inability to meet obligations vis-a-vis CAMMESA, our major supplier, and have a material adverse effect on our ability to meet our financial obligations as a result of a shortage in liquidity, which may result in the need to restructure our debt and may have a material adverse effect on our business and results of operations and could also adversely impact on our financial condition and the market value of the ADSs. Further, if we were unable to obtain such tariff adjustments, wecannot assure that CAMMESA or any other governmental entity will provide us the financing or that any future financing would be available in favorable terms, which may seriously impair our ability to continue providing the service.

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

In the recent years, our tariffs have been challenged by Argentine consumer associations, such as the action brought again us in December 2009, by an Argentine consumer association (Unión de Usuarios y Consumidores) seeking to annul certain retroactive tariff increases. In November 2010, the relevant administrative court upheld the claim. 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 FederalSala V) overturned the judgment of the lower administrative court. TheUnión de Usuarios y Consumidores filed a Federal Extraordinary Appeal (“Recurso Extraordinario Federal”) against such decision, which was granted on March 11, 2011. On October 1, 2013, the Supreme Court of Justice decided to dismiss the Federal Extraordinary Appeal that had been filed. A final judgment in our favor was therefore rendered.
               
              In February 2016, we adjusted our tariffs again, and as of the date of this annual report, there had not been any challenges thereto, but we cannot make assurances that any 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 were successful and prevented 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 in our financial condition and the market value of our ADSs.

 

We have been, and may continue to be, subject to fines and penalties that could have a material adverse effect on our financial condition and results of operations, in particular as a result of a recent measure adopted by the ENRE

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.  Since 2001, the amount of fines and penalties imposed on our company has increased significantly.  As of December 31, 2015, 2014 and 2013, our accrued fines and penalties totaled Ps.1,253.1 million (including Ps.186.3 million under the ENRE settlement (See “Item 4. Information on the Company—Our Business Overview—Fines and Penalties.”)), Ps. 1,102.8 million and Ps. 923.8 million, respectively (taking into account adjustments made to fines and penalties following the ratification of the Adjustment Agreement).

Although the Argentine government has agreed to waive a portion  of our accrued fines and penalties pursuant to the Adjustment Agreement and to allow us to repay the remaining balance over time, this waiver and repayment plan is subject to a number of conditions, including compliance with quality-of-service standards, reporting obligations and required capital investments. If we fail to comply with any of these conditions, the Argentine government may seek to obtain payment of these fines and penalties by us. 

 

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

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

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

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

In addition, we may incur significant 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. See “Item 4. Information on the Company—Our Business Overview—Fines and Penalties.”

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

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

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

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

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

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

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

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

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

·        we, or any existing shareholders or former shareholders of EASA who 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.

 

 

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In 2015, the fines and penalties amounted to an estimated Ps. 281.7 million, which represented 7.6% of our energy sales.  See “Item 4. Information on the Company—Our Concession—Fines and Penalties.”

If the Argentine government were to foreclose on the pledge of our Class A common shares, pending the sale of those shares, the Argentine government would also have the right to exercise the voting rights associated with such shares.  In addition, the potential foreclosure by the Argentine government on the pledge of our Class A common shares could be deemed to constitute a change of control under the terms of our Senior Notes due 2017 and 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 forecloses on the pledge of our Class A common shares, our results of operations and financial condition could be significantly affected and the market value of our ADSs could 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 obligations under our concession agreement or in such a way that our service is materially affected, we may request the termination of our concession, after giving the Argentine government a 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 an additional compensation established as a percentage of the bidding price, ranging from 10% to 30%, depending on the management period in which the sale occurs. Any such default could have a material adverse effect on our business and financial condition.

We may be unable to import certain equipment to meet the growing demand for electricity, which could lead to a breach of our concession contract and could have a material adverse effect on the operations and financial position of the Company

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

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, 2015, approximately 87% of Edenor employees were union members. Although our relations with unions are currently stable and we have had an agreement in place with the two unions representing our employees since 1995, we cannot assure you that we will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and revenues. We cannot assure you that we will be able to negotiate salary agreements or labor conditions 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.

We could 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, 2015, Edenor had approximately 2,927 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 will notinitiate legal actions to seek indemnification from us based upon a number of judicial rulings issued by labor courts in Argentina which have recognized joint and several liability between a 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 will be favorable to us. If we were to incur material labor liabilities in connection with our outsourcing, such liability could have an adverse effect on our financial condition, our results of operations and the market value of our ADSs. 

 

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Our performance is largely dependent on recruiting and retaining key personnel

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

We are currently not able to effectively hedge our currency risk in full and, as a result, increased 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 all of our existing financial indebtedness is denominated in U.S. Dollars, which exposes us to the risk of loss from increased devaluation of the Peso. We are currently hedging part of this risk 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 Central Bank regulations and by entering into currency forward contracts. In 2015, the Peso lost approximately 52% of its value with respect to the U.S. Dollar, including a depreciation of approximately 34% mainly experienced after December 17, 2015 following the announcement of the lifting of a significant portion of exchange restrictions, our hedging contracts did not cover all of our exposure to such depreciation. However, we cannot assure you that the Argentine government will maintain these exchange regulations or that we will find hedging transactions to cover all or a part of our exposure on terms we consider viable for us. If we continue to be unable to effectively hedge all or a significant portion of our currency risk exposure, a further 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 other 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, 2015, our physical assets were insured for up to U.S.$ 1,299.5 million. However, we do not carry insurance coverage for losses caused by our network or business interruption, including for 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 court 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 foreclose on the pledge of 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 2022, and have a material adverse effect on our results of operations and financial condition.

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

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 rest of the directors were appointed by the Class A shares.

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 repay our commercial debt with CAMMESA, our major supplier

As of December 31, 2015, we owed approximately Ps.3,360.6 million (Including interest) to CAMMESA. Although we submitted to CAMMESA a repayment plan in November 2015, as of the date of this annual report negotiations with CAMMESA continue with respect to a final repayment schedule. This debt is due and unpaid and we have not secured any waivers from CAMMESA. If CAMMESA requested that we repay such debt in a single payment, we may be unable to raise the funds to repay it and, consequently, we could be exposed to a cash attachment, which could in turn result in our filing for a voluntary reorganization proceeding (concurso preventivo), which could cause the market value of our ADSs and Class B common shares to decline (see “—Risks related to Our Business- All of ouroutstanding 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”).

 

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Downgrades in our credit ratings could materially and adversely affect our business, financial condition and results of operations.

A material downgrade of our credit ratings may have various effects including, but not limited to, the following: we may have to accept less favorable terms in our transactions with counterparties, including capital raising activities, or may be unable to enter into certain transactions; existing agreements or transactions may be cancelled; and we may be required to provide additional collateral in connection with derivatives transactions. Any of these or other effects resulting from a downgrade of our credit ratings could have a negative impact on the profitability of our treasury and other operations, and could adversely affect our regulatory capital position, financial condition and results of operations.

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.$ 191.1 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 2022, certain expropriation and condemnation events with respect to us may constitute an event of default, which, if declared, could trigger acceleration of our obligations under the notes and require us to immediately repay all such accelerated debt. In addition, all of our outstanding financial indebtedness contains certain events of default related to bankruptcy and voluntary reorganization proceedings (concurso preventivo). If we are not able to fulfill certain payment obligations as a result of our financial situation and if 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 timely obtained and immediate repayment are required, we 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 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.$191.1 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 2022, if a change of control occurs, we must offer to buy back any and all such notes that are outstanding at a purchase price equal to 100% of the aggregate principal amount of such notes, plus any accrued and unpaid interest thereon and additional amounts, if any, through the purchase date. We may not have sufficient funds available to us to make the required repurchases of the Senior Notes due 2017 and 2022 upon a change of control. If we fail to repurchase such notes in circumstances that may constitute an event of default under the indentures, which may in turn trigger cross-default provisions in other of our debt instruments then outstanding, our results of operations could be adversely affected and the market value of our ADSs and Class B common shares could decline.

 

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

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

The New York Stock Exchange (“NYSE”) and the Buenos Aires Stock Exchange (“BASE”) may suspend and/or cancel the listing of our ADSs and Class B common shares, in certain circumstances, including upon the occurrence of certain events relating to our financial situation. For example, the NYSE may decide such suspension or cancellation if our shareholders’ equity becomes negative.

 

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

 

The 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.

 

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

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

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

Weather conditions may influence the demand for electricity, our ability to provide it and the costs of providing it.  In particular, severe weather may adversely affect our results of operations by causing significant demand increases, which we may be unable to meet without a significant increase in operating costs. This could strongly impact the continuity of our services and our quality indicators. For example, the exceptional thunderstorms that occurred in April and December of 2013 and a heat wave that occurred in December of 2013 affected the continuity of our services, both in the low voltage and medium voltage networks.  See “Item 4. Information on the Company—Business Overview—QualityStandards – Edenor’s Concession".  Furthermore, any such disruptions in the provision of our services could expose us to fines and orders to compensate those customers affected by any such power cuts, as has occurred in the past (see “Item 4. Information on the Company—Business Overview—Quality Standards —Fines and Penalties”).  Our financial condition, results of operations and cash flows could therefore be negatively affected by changes in weather conditions and severe weather.

 

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

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

Risks relating to ADSs and our Class B common shares

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

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

Our ability to pay dividends is limited

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

Our shareholders’ ability to receive cash dividends may be limited

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

 

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

Our corporate affairs are governed by our by-laws and by Argentine corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the States of Delaware or New York, or in other jurisdictions outside Argentina. In addition, the rights of holders of the ADSs or the rights of holders of our common shares under Argentine corporate law to protect their interests relative to actions by our board of directors may be fewer and less well-defined than those 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 than in the United States, putting holders of our common shares and ADSs at a potential disadvantage.

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

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

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

Because we are a limited liability corporation, our shareholders are not liable for our obligations. Shareholders are generally liable only for the payment of the shares they subscribe to. However, shareholders who have a conflict of interest with us and who do not abstain from voting at the respective shareholders’ meeting may be liable for damages to us, but only if the transaction would not have been approved without such shareholders’ votes. Furthermore, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to the law or our by-laws may be held jointly and severally liable for damages to us or to other third parties, including other shareholders.

Provisions of Argentine securities laws could deter takeover attempts and have an adverse impact on the price of our shares and ADSs.

 

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Argentine securities laws contain provisions that may discourage, delay or make more difficult a change in control of Edenor, such as the requirement, upon the acquisition of a certain percentage of our capital stock, to launch a tender offer to acquire a certain percentage of our capital stock, which percentage ranges from 10% to 100% depending on several factors.  These provisions may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interest of our shareholders and may adversely affect the market value of our shares and ADSs.

 

 

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). The Company’s term of duration is 95 years. 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 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 (Inspección General de Justicia, the “IGJ”) 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 (“NYSE”) under the symbol “EDN,” and our Class B common shares are listed on the Buenos Aires Stock Exchange (“BASE”) 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.

EDESA Sale

On April 23, 2012, our 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.

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 Deutsche Bank, 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.

EDELAR Offer

An offer from Andes Energía Argentina S.A. (“Andes Energía”) was accepted by our board of directors. Such offer 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 two 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. On December 31, 2012, Andes Energía’s purchase option expired.

EDELAR/EMDERSA Sale

On September 17, 2013, our Board of Directors approved an irrevocable offer to Energía Riojana S.A. (ERSA) and the government of the Province of La Rioja for the (i) sale of our indirect stake in Emdersa, Edelar’s parent company, and (ii) assignment of certain account receivables that we had against Emdersa and Edelar. On October 4, 2013, ERSA and the government of the Province of La Rioja in its capacity as controlling shareholder of ERSA accepted the offer. The transaction closed on October 30, 2013. The price agreed upon was Ps. 75.2 million payable in 120 monthly and consecutive installments. In November 2015, we began to pay installments in accordance with the agreed upon schedule.

EMDERSA Holding Merger process

On October 7, 2013, the Company resolved to initiate the proceedings pursuant to which the Company will absorb Emdersa Holding in order to optimize its resources, simplifying its corporate, administrative and operating structure.

On December 20, 2013, the merger of Emdersa Holding into Edenor was approved by an extraordinary shareholders’ meeting, as well as all documentation and information required by applicableregulation towards that end. As of the date of this annual report, the administrative approval by the IGJ is pending. The effective reorganization date for all legal, accounting and tax purposes will be retroactive to October 1, 2013.

 

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AESEBA/EDEN Sale

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, our Board of Directors approved the acceptance of the offer 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 sale price was payable in Argentine government Bonar 2013 bonds, or similar bonds, in an amount equivalent to Ps. 334.3 million, considering the market price of such Argentine government securities at the time of the transaction. Such delivery was secured by the Purchaser's contribution to a trust (the "Management Trust" or the “Aeseba Sale Trust”) in Argentine public debt securities, valued at the closing date of the transaction. No debt instruments of the Company were contributed to the Trust.

Through this transaction, the Company divested the AESEBA business segment, recording a loss of Ps. 96.5 million, included in the results from continued operations. Subsequently the Trust used all the cash and bonds deposited to purchase Notes of the Company due 2017 and 2022. The result of the repurchase of those Notes was a gain of Ps. 116.1 million, which was recognized in “Other financial results” (Ps. 71.7 million in fiscal year 2013 and Ps. 44.4 million in fiscal year 2014).In April 2014, we closed the Management Trust and transferred and cancelled all the Edenor securities purchased.   See “Item 5.Operating and Financial Review and Prospects—Debt”.

 

Business Overview

We believe we are the largest electricity distribution company in Argentina and one of the largest in Latin America in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2015. 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, 2015, Edenor served 2,835,229 customers. The following table shows the percentage of the electricity produced and sold by generating companies that was purchased by us in the periods indicated:

 

Year

 

Electricity demand (1)

 

Edenor demand (2)

 

Edenor’s demand as % of total demand

2013

 

125,162

 

24,902

 

19.9%

2014

 

126,397

 

24,860

 

19.7%

2015

 

131,988

 

26,322

 

19.9%

 

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.

 

 

Edenor Concession

By a concession dated August 5, 1992, the Argentine government granted us 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 the RTI process, subject to the ENRE’s approval. We presented requests for such extension in May 2007 and on July 5, 2007, and the ENRE, pursuant to its Resolution No. 467/2007, agreed to extend the initial management period for an additional period of five years from the date when 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.

 

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On January 6, 2002, the Argentine Congress enacted the Public Emergency Law, which empowered the Argentine government to implement, among other things, monetary, financial and foreign exchange measures to overcome the economic crisis. These measures, combined with the devaluation of the Peso and high rates of inflation, have 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 is empowered to conduct a renegotiation of public utility contracts (including our concession) and the tariffs set therein (including our tariffs).

In September 2005, we entered into the Adjustment Agreement with the Argentine government, which was ratified 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.

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

·        a cost adjustment mechanism (CMM), pursuant to which 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 specific 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. 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, the ENRE applied a cost adjustment mechanism for the transition period during which theRTI process is being conducted.  The 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 CMM.  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. Because the Adjustment Agreement is effective retroactively as of November 1, 2005, in May 2006, 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, resulted 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 customers (excluding residential customers) the retroactive portion of the 38.3% increase (corresponding to the period from November 2005 to January 2007), which amounted to Ps. 218.6 million and has been invoiced in 55 monthly installments since February 2007. 

 

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In October 2007, Resolution No. 1,037/2007 of the SE, 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 Program for the Rational Use of Electricity Power (Programa de Uso Racional de la Energía Eléctrica, or “PUREE”), a program established by the Argentine government in 2003 in an attempt to curb increases in energy demand, to cover such CMM increase and future CMM increases.

In July 2008, we obtained an increase of approximately 17.9% in our distribution margin, which we incorporated into our tariff structure. This increase represented the 9.63% CMM increase corresponding to the period from May 2006 to April 2007 and the 7.56% CMM increase corresponding to the period from May 2007 to October 2007. These CMM adjustments were included in our tariff structure as of July 1, 2008 and resulted in an average increase of 10% for customers in the small commercial, medium commercial, industrial and wheeling system categories and in an average increase of 21% for residential customers with bi-monthly consumption levels over 650 kWh. In addition, by Note No. 83,818, the ENRE authorized us to be reimbursed from the PUREE funds for the retroactive portion of the 7.56% CMM increase amounting to Ps. 45.5 million for the period between November 2007 and June 2008.  

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.

 We had requested several additional increases under the CMM since May 2008, all of which have been recognized by ENRE pursuant to Resolution No. 250/13 and Resolution No. 32/15 with retroactive effect as of May 2008. However, these increases have not been incorporated into our tariff structure in a timely manner.

On November 23, 2012, the ENRE issued Resolution No. 347/15 pursuant to which distribution companies were authorized, as from the issuance thereof, to include a fixed amount for small-demand (T1) customers and a variable amount for medium and large-demand (T2 and T3) customers as an additional charge in their bills, calculated as a percentage of power charges. Such charges, which are clearly indicated in the bills sent to customers, were deposited into a special trust account created by Resolution No. 347/2012 (namely, the “FOCEDE”) and exclusively used for the execution of distribution infrastructure and corrective maintenance works on the facilities of each of the distribution companies. Resolution No. 2/2016 of the ENRE partially repealed Resolution No. 347/2012, discontinuing the FOCEDE and ordering us to open a special bank account with a Central Bank authorized entity where the funds received pursuant to Resolution No. 347/2012 must be deposited.

 

In March 2015, the SE issued Resolution No. 32/15 granting us a temporary increase in income through funds provided by CAMMESA, which was applicable retroactively as from February 1, 2015, to pay for costs and investments associated with the regular provision of the public service of distribution of energy on account of the future RTI. Such additional income resulted from the difference between the “theoretical” tariff schedules set forth in such resolution and the tariff schedule in force at each time for each category of user, according to calculations made by the ENRE, which had been reported monthly to the SE and CAMMESA. In this respect, CAMMESA had transfered the funds contributed by the Argentine government, in accordance with the values reported by the ENRE.

 

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

 

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

 

 

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

In January 2016, the Ministry of Energy issued Resolution No. 7/16, pursuant to which the ENRE implemented a VAD adjustment to the tariff schedule on account of the future RTI in effect as of February 1, 2016, and is expected to take all necessary action to conclude the RTI process by December 31, 2016.

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

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

               

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

Region I

Ciudad de Buenos Aires, San Isidro, Vicente López, San Martín and Tres de Febrero

Region II

La Matanza, Morón, Hurlingham, Ituzaingo, Merlo, Marcos Paz and Gral. Las Heras

Region III

Pilar, Escobar, Tigre, San Fernando, San Miguel, Malvinas Argentinas, José C. Paz, Moreno and Gral. Rodríguez

 

The table below sets forth certain information relating to operating territories of Edenor as of and for the year ended December 31, 2015:

 

Operating territory

Area

Customers

(km2)

(in thousands)

  

 

 

Region I

251.0

1,140.8

40.2%

Region II

1,761.0

903.4

31.9%

Region III

2,625.0

791.0

27.9%

Total

4,637.0

2,835.2

100.00%

 

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 bytariffs 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:

 

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·        the time required to connect new users;

·        voltage fluctuations;

·        interruptions or reductions in service; and

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

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

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, Clause 22.1 of  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 the Company to the Argentine government to secure obligations under our concession. The Adjustment Agreement requires that the pledge be extended to secure our obligations under such agreement.

Quality Standards – Edenor’s Concession

Pursuant to our 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 finedepends 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 changed 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 (FMIK), on average, of 2,761 and a maximum duration of interruption (TTIK), 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 (FMIK and TTIK) of our service in the periods indicated:

 

Year ended December 31,

 

2015

2014

2013

Average frequency of interruptions

8.23

8.84

7.14

Average duration of interruption (in hours)

19.97

24.23

18.20

 

Additionally, in order to satisfy quality standards, we must meet certain operating requirements relating to commercial service, including maintenance of the distribution network to minimize failures and to maximize the useful life of fixed assets and billing on actual meter records from which customer bills are generated. We may bill customers using estimates in cases offorce majeure, but we may not send a customer who is billed bi-monthly more than two successive estimated bills, or more than three successive estimated bills if billed otherwise.  Furthermore, estimated bills cannot exceed 8% of total billings in each category of customers.

Fines and Penalties

Under the terms of our concession, the ENRE may impose fines and penalties if we fail to comply with our obligations.

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.

 

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Fines and penalties that are not directly related to services rendered to our customers are owed to the ENRE. These include fines imposed on us by the ENRE for any network installations found to create a safety or security hazard in a public space, including streets and sidewalks. In addition, the ENRE may fine us for inconsistency in technical information that we are required to furnish to the ENRE.  Fines paid to the ENRE are deposited in the Third Party Reserve Fund of the ENRE(Reserva de Fondos de Terceros del ENRE) in an account held with Banco Nación.  Payments accumulate in the account until the amount deposited reaches Ps. 5.6 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 approved 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 waive approximately Ps. 58 million of accrued and unpaid fines and penalties. Under such payment plan, the penalties and fines to be paid to users were to be repaid in fourteen semiannual installments, with the first installment due upon the termination of a 180-day grace period beginning on the date the RTI’s resulting tariff structure comes into effect. Because the Adjustment Agreement was not ratified until January 2007, we recalculated the amounts of accrued fines and penalties credited thereof, according to the increase of the VAD charged to customers (including the CMM adjustments which have been transferred to customers for a total amount of Ps.17.2 million) up to the date of their credit to the customers’ accounts. On December 22, 2015, considering the existence of cash flow and the strong possibility that such penalties to be paid to users would not be waived, we decided to make the payment to users in the form of one single credit, which was made to the users’ accounts for an amount Ps.152.2 million in the aggregate. In addition, a total of Ps.33.7 million in the aggregate remains available for those clients which had not an active service as of December 22, 2015.

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

 The following table shows the adjustments to Edenor’s standalone accruals for 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:

 

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Year ended December 31,

 

(in millions of Pesos)

 

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

Accruals at beginning of year

1,102.8

923.8

647.4

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

281.7

278.8

287.5

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

170.2

177.7

176.3

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

29.0

19.8

18.7

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

14.2

10.6

13.9

6.8

5.1

3.0

2.4

1.6

1.1

1.2

-

1.2

0.5

1.5

1.7

Public Safety

64.3

57.5

37.6

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

-6.1

5.4

2.3

0.2

0.6

0.4

0.3

0.3

0.2

0.4

-

0.2

0.2

0.2

-

Reporting Violations

10.1

6.2

25.8

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

-

1.6

13.0

0.9

1.3

1.3

-

-

-

0.2

7.5

-

0.4

9.0

0.5

Less: Paid during period:

           

-

   

Quality of Technical Service

64.1

85.6

-

-

-

-

-

-

-

-

1.6

-

-

0.9

3.3

Quality of Technical Product

54.1

-

-

-

-

-

-

-

-

-

-

-

-

-

2.3

Quality of Commercial Service

16.8

14.2

11.1

6.5

4.5

1.9

3.7

-

1.5

0.4

0.1

0.1

0.1

0.3

1.4

Public Safety

79.8

-

-

-

-

0.1

8.9

1.6

-

-

-

-

-

-

2.1

Transport Technical Function

-

-

-

-

-

-

-

-

0.2

0.3

-

-

0.1

0.4

0.2

Others

102.9

-

-

-

-

-

-

-

-

-

0.6

-

-

-

1.7

Total paid during period

317.7

99.8

11.1

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

1,066.8

1,102.8

923.8

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. In 2015, accrued fines and penalties do not include Ps.186.3 million under the ENRE settlement.

 

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

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

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

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

 

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

Due to the disruption in the provision of service resulting from a power outage during a heat- wave occurred between December 20 and December 31, 2010 in our concession area, the ENRE issued Resolution No. 32/11 in February 2011 whereby we were fined in the amount of Ps.1.1 million and ordered to compensate those customers who had been affected by 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 injunctive relief aimed at suspending the application of the fine imposed until a decision on the direct appeal is rendered. On April 28, 2011, the court denied the request for injunctive relief. As a consequence, we filed a federal extraordinary appeal (“Recurso Extraordinario Federal”) which was subsequently rejected. We then filed another appeal (“Recurso de queja por apelación denegada”) with the Supreme Court requesting that the rejected extraordinary federal appeal be sustained. During 2014, the Appellate Court in Contentious and Administrative Federal Matters No. 1, denied the direct appeal requesting such resolution be declared null and granted the extraordinary appeal on the grounds that the matter corresponded to the scope and interpretations of a federal rule but not as to the arbitrariness of the judgment claimed by Edenor. Consequently, we then filed an appeal (“Recurso de queja por apelación denegada”) requesting that both appeals be entertained jointly. As of December 31, 2015, Edenor estimated a potential obligation of Ps. 34.9 million as a result of Resolution No. 32/2011of the ENRE and registered an accrual for this amount in its financial statements for the year ended December 31, 2014.

On November 15, 2012, the Company was notified of the ENRE’s Resolution No. 336/2012, pursuant to which the office in charge of enforcing the ENRE’s regulations was instructed to immediately initiate the corresponding sanction proceeding so as to have the distribution companies EDENOR and EDESUR S.A. (“Edesur’’): (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 such discounts towards 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 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 depends on the length of the power cut which must have lasted for more than 12 continuous hours. We have recorded a Ps. 16.7 million provision in connection with this compensation.

On January 7, 2014, we were notified of Resolution No. 1/2014 of the ENRE ordering the payment of compensation to each user affected by the extreme weather occurring in December 2013 and January 2014. A credit determined by the duration of the interruption of the service was recognized to each affected user in our invoices until such credit was fully cancelled, representing an additional 100% compensation for those users who had been affected by similar interruptions of supply in previous years. The total compensation paid amounted to Ps. 85.6 million.

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

·      Edenor incurs 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 are not remedied upon request by the ENRE;

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

·      EASA or Edenor obstruct the sale of the Class A common shares at the end of any management period according to the terms of 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 prior approval; or

·      our shareholders or former shareholders fail to desist from any ICSID claim brought against the Argentine government following the completion of the RTI process 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 the terms of our concession, the Argentine government has the right to revoke our concession if we enter into bankruptcy and the Argentine government decides that we may 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 would 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 would be distributed among our shareholders.

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 toparticipate 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.

 

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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 Resolution No. 467/2007 of the ENRE, 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 may request the termination of our concession, after giving the Argentine government a 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, which 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, 2015, the system through which we supply electricity was composed of 75 Sub-Stations of high/high voltage, high/high/medium voltage and high/medium voltage, representing 15,839 MVA of transformer capacity and 1,438 kilometers of high-voltage power lines of 220 kV, 132 kV and 27.5 k. The distribution system of medium/low voltage was comprised of 16,930 transformers of medium/low voltage, representing 7,171 MVA of transformer capacity, 10,216 kilometers of medium‑voltage power lines of 33 and 13.2 kV and 26,248 kilometers of low-voltage power lines 380 V.

The following table provides certain information concerning our transmission and distribution system as of the dates presented:

 

 

As of December 31,

 

2015

2014

2013

Kilometers of transmission lines

      

High voltage

1,438

1,410

1,396

Medium voltage

10,216

9,978

9,738

Low voltage

26,248

26,030

25,806

Total

37,902

37,418

36,940

Transformer capacity (MVA)

             

High voltage/high voltage

8,128

7,828

7,908

High voltage/medium voltage

7,711

7,131

6,991

Medium voltage/low voltage and medium voltage/medium voltage

7,171

6,897

6,505

Total

23,010

21,856

21,404

 

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, Rodríguez, Talar and Zappalorto, and 132 kV Matanza, Ramos Mejía, Agronomía, Puerto Nuevo, Edison and Malvinas.

 

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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, supplying to end users with different voltages levels according to their requirements. In exceptional cases we supply energy in high voltages to certain users.

Construction works on the transformation system 220/132 kV in the Rodriguez Substation were partially completed in 2015. Additionally, in 2015, 220/132 kV works on the transformation system in the Rodriguez Substation were partially completed with the startup of one of the two 300 MVA transformers, and the connection to the 132 kV network has been completed through two electroducts links to the Malvinas and Pilar substation heads. The startup of the second 300 MVA 220/132 kV transformer is expected to be completed in the beginning of 2016 .  Furthermore, we continue working towards the installation of a new transformer  (500/220 kV) of 800 MVA in the Rodriguez Substation, with financing from the Administration of Transport and Electric Supply Works Trust (FOTAE). We believe that this addition will allow us to meet the increasing energy demand 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”.

               

Systems

During 2015, the Company implemented significant improvements in its technological platform, consolidating its leading position in the field. Main projects implemented were:

·      In 2015, the first stage of the project started in 2014 aimed at maximizing the operational management of the Company’s fixed assets as well as the labor force through the implementation of one integral management software has completed. This new technology provides the Company with a better understanding of its fixed assets and a better planning of maintenance actions. The first stage focused on  labor force administration (WOM) and addressed teams who carry out technical tasks. The project will continue during 2016 with the implementation of this project in connection with the commercial teams and assets maintenance system. 

·      In connection with the CC&B central system (Customer Service and Invoicing), in 2015, several features were added such as the introduction of electronic invoices, adjustments to support new features for self- administered management meters, and significant adjustments were made to modify the field activities to be carried out in the Technical Project (WOM) environment and adjustments to interact with Edenor 2.0.  

·      With reference to the Company’s technical system (Nexus), in 2015, the focus was set on new features and performance improvement, the connection with the Technical Project for the generation of repair work orders and improvement in the Service Quality and Product Quality Modules.

·      With respect to to the SAP (Data Processing Systems, Applications and Products),  in 2015, new modules were implemented and significant improvements were made to the Company’s administrative management, such as the feature called “shopping cart” for minor purchases through a web portal, new features on the suppliers’ portal, including the optimization of urgent purchase processes, decentralized purchases, internal payments, implementation of shopping cards. In addition, the electronic invoice issuance module was implemented.   

·      Within the Business Intelligence tool, in 2015, several dashboards for decision making have been developed such as for payment rate assessment, workforce evolution,  large customer consumption curves, invoice management, sustainable development contracts control and preparation of statistics of transformation centers which are out of order.    

 

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·      In connection with the Edenor 2.0 System for mobile devices and the web, adjustments were implemented to support 70% of paperwork usually carried out in commercial offices.

·      During 2015, Smartime was contracted and implemented, which is an attendance management system that centralizes employees’ attendance records using fingerprint registries. The project implied the automation of  the payroll system to the employees’ attendance and other reports. During 2016, the second phase of the project will be implemented which involves the decentralization of administrative tasks and corresponding approval flows. 

 

Telecommunications

Throughout 2015:

 

·        A new Corporate and operational IP telephone solution was implemented which meant the migration of 2,100 telephones using old technology to the IP technology and new corporate Wi-Fi systems were integrated therewith.

·      The implementation of the new surveillance video, access control and high-end HD dome systems continued.

·      We carried our infrastructure-related works such as the installation and launch of a telecommunications system, the extension of structure cabling, the installation of 56 new corporate network routers, fiber optic connection for Substation Malaver, Colegiales, Agronomía, and Tronador and Estomba buildings and the launch of cable laying in Urquiza, Vidal, Pilar substations and on the Pilar-Moreno sector.

 

                Customers

The following graph shows the evolution of our customer base through December 31 of each year:

 

As of December 31, 2015, Edenor served 2,835,229 customers. We define a “customer” as one meter.   

Edenor Tariff Categories

Edenor classifies its customers pursuant to the following tariff categories:

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

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

 

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

·      Industrial (T3): industrial customers whose peak capacity demand is equal to or greater than 50kW.  This category is applied to high-demand customers according to the voltage at which each customer is connected.  The voltage ranges included in this category are the following: (i) Low Voltage (LV): voltage less than or equal to 1 kV; (ii) Medium Voltage (MV): voltage greater than 1kV but less than 66 kV; and (iii) High Voltage (HV): voltage equal to or greater than 66kV.  In 2015, this category accounted for approximately 17% of our electricity sales.  This category does not include customers who purchase their electricity directly through the wholesale electricity market under the wheeling system.

·      Wheeling System: large users who purchase their electricity directly from generation or broker companies through the wholesale electricity market. These tariffs follow the same structure as those applied under the Industrial category described above. As of December 31, 2015, the total number of such large users was 708, and in 2015 this category represented approximately 19% of our electricity sales.

·      Others: public lighting (T1-PL) and shantytown customers whose peak capacity demand is less than 10kW.  In 2015, this category accounted for approximately 5% of our electricity sales.  See “Framework Agreement (Shantytowns)”.

We try to maintain an accurate categorization of our customers in order to charge the appropriate tariff to each of its customers. In particular, we focus 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.

We rely on the following measures to detect incorrectly categorized customers:

·      reporting by our employees tasked with reading meter information 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 we should further evaluate the peak capacity demand of a given customer whose use might exceed 10kW.

                                                                

Reading, Billing and Collecting

We bill our customers based on their category of service. Residential and small commercial customers are billed a fixed charge payable monthly and a variable charge based on each unit of energy consumed. The energy consumption savings obtained by customers are calculated by comparing the current consumption with the customer’s consumption registered on the same period in the immediately preceding year. As of January 29, 2016, since the issuance of Resolution No. 1/16, the ENRE established a new billing schedule on a monthly basis maintaining consumption readings on a bimonthly basis.

Our residential and small commercial customers are divided into subcategories based on their consumption, as follows:

Residential (Tariff 1-R or T1-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

 

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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.

 

 

As of December 31,

 

2015

2014

2013

Residential

2,467,757

2,443,670

2,418,725

Small commercial

325,149

317,237

314,383

Medium commercial

34,477

32,526

32,276

Industrial

6,706

6,552

6,386

Wheeling system

708

710

713

Other*

432

426

410

Total

2,835,229

2,801,121

2,772,893

 

______________________

                * 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 out on the field. Estimates of customer usage were significantly reduced as a result of this new billing system. Once the invoices are printed, independent contractors in each operating area, that are 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.

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 isentering into refinancing agreements with the municipalities. These procedures allowed us to reduce significantly the number of arrears accounts.

 

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Our past due receivables decreased from Ps. 229.3 million as of December 31, 2014 to Ps. 209.3 million as of December 31, 2015. The decrease was mainly due to a decrease in past due receivables with residential customers. By the end of 2014,  the preliminary injunction that prevented us from taking actions to rectify delinquent customer situations and suspend the supply of electricity to customers with consumption levels above 1000 kW/h was lifted. Accordingly, we were able to reduce the impact of delinquency on our operating balance.

 

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, though reduced through improvements in the network. We believe that the level of technical energy losses is approximately 7% in countries with similar distribution networks. The non-technical energy losses represent the remainder of our energy losses mainly due to the illegal use of its 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 average loss factor set at 10% pursuant to our concession.  Therefore, the reduction of energy losses reduces the amount of energy we have to purchase to satisfy apparent demand but cannot invoice, and increases the amount of electricity actually sold.

At the time of the 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 on 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.

 

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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.

Moreover, we are experimenting with other programs including teaching low-income customers how to ration their consumption, providing them with the option of paying in installments and the installation of prepaid meters, which reached a number of 8,000 prepaid meters installed in 2015.

In Regions II and III of our concession area, low-income neighborhoods continue to be detected and shantytowns have expanded. Energy theft remains the main cause of the increase in total energy losses within such regions. Throughout 2015, we continued working with the support of legal counsel to file criminal complaints against such frauds and to establish new technological criteria in order to reduce the vulnerabilities of the grid.

The following table illustrates our estimates of the approximate breakdown between technical and non-technical energy losses experienced in our concession area since 2006. We believe that non-technical losses could increase in 2016 following the establishment of the new tariff structure pursuant to Resolution No 1/16 of the ENRE.

 

 

Year ended December 31,

 

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

Technical losses

11.1%

10.8%

10.3%

10.5%

9.8%

9.8%

9.8%

9.8%

9.6%

8.6%

Non technical losses

3.8%

3.5%

2.7%

2.8%

2.8%

2.7%

2.1%

1.0%

2.0%

2.5%

Total losses

14.9%

14.3%

13.0%

13.3%

12.6%

12.5%

11.9%

10.8%

11.6%

11.1%

 

As of December 31, 2015, total energy losses recorded by us were 14.9%, out of which technical losses represented 11.1% and non-technical losses represented 3.8%.

Framework Agreement (Shantytowns)

In accordance with the terms of our concession and given the nature of public service that the law grants to the distribution of electricity, the Company is required to supply electricity to all users within the concession area, including low-income areas and shantytowns located within our concession area. In October 2003, Edenor, Edesur and Edelap entered into a framework agreement with the Argentine government and the Province of Buenos Aires (the “2003 Framework Agreement”) to regulate the supply of electricity to low-income areas and shantytowns. Under the 2003 Framework Agreement, the Company has the right to receive compensation for the services provided to shantytowns from funds collected from residents of each relevant shantytown, the Municipality in which it is located and, if there is a shortfall, by a special fund supported by the Argentine government and the government of the Province of Buenos Aires. The Argentine government and the Province of Buenos Aires contribute an amount equal to 21% and 15.5% of such compensation, respectively, net of taxes, paid by those customers with payment problems and meter irregularities, which are transferred to distributors such as Edenor as compensation. 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.

On July 22, 2011, the Company, together with Edesur and Edelap, entered into an addendum with the Argentine government and the government of the Province of Buenos Aires, to extend for an additional term of four years 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 Planning pursuant to Resolution No. 247/12. As of December 31, 2014 the Agreement expired.  As of the date of this annual report, negotiations with the Argentine government and the Government of the Province of Buenos Aires to enter into a new agreement are ongoing.

 

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As of December 31, 2015, 2014 and  2013, our receivable balances with the Argentine government and the government of the Province of Buenos Aires for the supply of electricity to shantytowns amounted to Ps. 75.8 million, Ps. 75.8 million and Ps. 56.9 million, respectively.

Due to the expiration of the 2003 Framework Agreement, no revenue was recognized on account of such concept during fiscal year 2015. During 2015 we have not recorded revenues for Ps. 32.4 million.

               Insurance

As of December 31, 2015, we had insurance for loss and damage to property, including damage due to floods, fires and earthquakes covering up to U.S.$ 1,299.5 million, with the following deductibles:

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

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

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

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

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

We are also insured against theft of cash and securities for a maximum amount of U.S.$ 150,000 and U.S.$ 5,000, respectively.

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

·        Directors’ and Officers’ Liability insurance;

·        Civil Liability insurance;

·        Automobile insurance;

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

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

                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 SE 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 required 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 coolant oils exceeding 50 ppm (parts per million), the limit established by National Law No. 25,670.

 

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As part of our investment plan, we made important improvements to our network and implemented technological innovations which reduced the impact of these improvements on the environment. We are required to apply for licenses from the ENRE for all our business activities, which include certain requirements related to environmental protection. We believe that we are in compliance in all material respects with all applicable environmental standards, rules and regulations established by the ENRE, the SE and other federal, provincial and municipal authorities. We have implemented environmental management programs to evaluate environmental impact and to take corrective actions when necessary. In addition, we have in place an environmental emergency plan designed to reduce potential adverse consequences should an environment contingency 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.

Regarding the addition of new installations and related construction works, all of the studies corresponding to the Environmental Impact Evaluation required by law are being made. These analyses are presented to local environmental authorities and submitted to consideration of the local communities in Public Audiences held as required by applicable regulations for the issuance of an Environmental Aptitude Certificate.

On October 19, 1999, the Argentine Institute of Normalization(Instituto Argentino de Normalización) 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 2015.

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 by the Argentine Environment Secretary (Secretaría de Ambiente y Desarrollo Sustentable de la Nación), 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. However, we also have an environmental emergency plan that details the steps that would be taken in the event that our operations resulted in any environmental damage.

Seasonality

Demand for our services fluctuates on a seasonal basis. For a discussion ofthisseasonality of demand, see “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.

 

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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 tariffs paid by users and improve quality of service through competition. The privatization process commenced in February 1992 with the sale of several large thermal generation facilities formerly operated by SEGBA, and continued with the sale of transmission and distribution facilities (including those currently operated by our company) and additional thermoelectric and hydroelectric generation facilities.

Regulatory and Legal Framework

 

Role of the Government

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

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

 

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

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

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

Distributors

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

·      Under Section 9 of Decree No. 1398/1992, a distribution company cannot own generation units. However, the shareholders of the electricity distributor may own generation units, either directly or through any other entity created with the purpose of owning or controlling generation units.

Definition of Control

The term “control” referred to in Section 31 of Law No. 24,065 (which establishes vertical restrictions) is not defined in the Electricity Regulation Framework. Section 33 of the Argentine Corporations 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.

 

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2001 Economic Crisis

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

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

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

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

·      empowered the Argentine Executive Branch to conduct a renegotiation of public utility contracts (including energy concessions), including the tariffs for public utility services.

These measures, combined with the devaluation of the Peso and high rates of inflation, had a severe effect on public utilities in Argentina, including on us. Because public utilities were no longer able to increase tariffs to cover their cost increases, the impact of inflation on costs led to decreases in their revenues in real terms and a deterioration of their operating performance and financial condition. Most public utilities had also incurred large amounts of foreign currency indebtedness under the fixed one-to-one Peso per Dollar exchange rate of the Convertibility Regime and, following the elimination of the Convertibility Regime and the resulting devaluation of the Peso, the debt service burden of these utilities increased sharply, which led many of these utilities to suspend payments on their foreign currency debt in 2002. This situation caused many Argentine electricity generators, transmission companies and distributors to defer making further investments in their networks. As a result, Argentine electricity market participants, particularly generators, are currently operating at near full capacity, which could lead to insufficient supply to meet a growing national energy demand. In addition, the economic crisis and the resulting emergency measures had a material adverse effect on other energy sectors, including oil and gas companies, which has led to a significant reduction in natural gas supplies to generation companies that use this commodity in their generation activities.

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 SE issued Resolution No. 1,281/06 in an effort to respond to the sustained increase in energy demand following Argentina’s economic recovery after the crisis. This resolution seeks to create incentives for energy generation plants in order to meet increasing energy needs. The resolution’s principal objective is to ensure that energy available in the market is used primarily to service residential users and those industrial and commercial users whose energy demand is at or below 300 kilowatts (kW) and who lack access to other viable energy alternatives. To achieve this, the resolution provides that:

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

·      large users in the wholesale electricity market and large customers of distribution companies (in both cases above 300 kilowatts) must satisfy any consumption in excess of their base demand with energy from the Energy Plus (Plus Energy) system at unregulated marketprices. 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.

 

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This resolution helped us to mitigate the risk of energy shortages due to a lack of electricity generation.  See “—Business Overview—Our obligations.”

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

Regulatory Authorities

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

(1)      the Secretariat of Electric Energy (“SEE”);

(2)      the ENRE; and

(3)      the Ministry of Energy.

The SE 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 “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.”

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.

Under the Law No. 24,065, the ENRE is managed by a five-member board of directors appointed by the Executive Branch of the Argentine government. Two of these five members are nominated by the Consejo Federal de la Energía Eléctrica (Federal Council on Electricity, or CFEE). The CFEE is funded with a percentage of revenues collected by CAMMESA for each MWh sold in the market. Sixty percent of the funds received by the CFEE are reserved for the Fondo Subsidiario para Compensaciones Regionales de Tarifas a Usuarios Finales (Regional Tariff Subsidy Fund for End Users), from which the CFEE makes distributions to provinces that have met certain specified tariff provisions. The remaining forty percent is used for investments related to the development of electrical services in the Argentine provinces.

 

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The Wholesale Electricity Market

Overview

The SE 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. Since March 2013, pursuant to Resolution 95/2013 of the SE, all large users have to buy their backup energy from CAMMESA at any relevant contractual maturity dates.

·      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 WEM 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.

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

cid:image001.jpg@01D04C66.B9E8C7C0

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 SE, and

 

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·      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; 

·      providing consulting and other services related to these activities;

·      supplying fuel pursuant to Resolution 95/2013 of the SE, which includes the management, acquisition, nationalization, control, reception, storage and distribution of liquid fuels to Generation Centrals through marine, river and land transportation;

·      administrating the expansion of  gas pipelines associated to natural gas supply to the new thermal centrals under construction;

·      managing the availability of the generation system, formalizing, controlling and supervising the works involved with supply commitment contracts. Implementation of the maintenance plans for the thermal system;

·      implementing  the increase in capacity of the central storage;

·      incorporating Biodiesel to the electricity generation matrix; and

·      developing related activities pursuant to the execution of new generation infrastructure and transport, managing the trust contracts for the new thermal and nuclear centrals, especially for non-conventional sources of energy or those works within the National Hydraulic Works Program.

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

 

 

Wholesale Electricity Market Participants

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

Generators

According to a recent report issued by CAMMESA, as of December 31, 2015, there were 123 generation companies – certain of which operate several plants such as Enarsa, Secco, Agrekko, Sullair-,  25 auto-generation and 3 co-generation companies in Argentina. As of December 31, 2015, Argentina’s installed power capacity was 33,493 MW, out of which 1,679 MW were subject to a start-up testing process. Of the installed capacity, 61.1% was derived from thermal generation, 33.2% from hydraulic generation, 5.2% from nuclear generation and 0.5% from non-conventional sources of energy.  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 SE.

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 inArgentina. 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.

 

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

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

Large Users

The wholesale electricity market classifies large users of energy into three categories: Major Large Users(Grandes Usuarios Mayores, or GUMAs), Minor Large Users(Grandes Usuarios Menores, or GUMEs) and Particular Large Users (Grandes Usuarios Particulares, or GUPAs).

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

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

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.

 

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

Seasonal Prices

The emergency regulations also made significant changes to the seasonal prices charged to distributors in the wholesale electricity market, including the implementation of a pricing ladder organized by level of customer consumption (which varies depending on the category of customers) charged by CAMMESA to distributors at a price significantly below the spot price charged by generators. According to the current regulatory framework, the SE 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 No. 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 SE. 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 2009-2013, the seasonal tariff 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% 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.

In November 2012, pursuant to Resolution No. 2,016/12 of the SE and in accordance with the Summer Seasonal Program approved for the period November 2012- April 2013, the seasonal price format was modified, concluding in a single purchase price without considering any demand nor time segmentation and taking into account the structure of the demand as of October 2012 as the base. Subsequently, the SE adopted Resolution No. 408/13, which maintained both the single price and the criteria for raising subsidies during the winter season.

During the winter season 2014,theResolution No. 2,016/12 was applied without any price reduction andresidential customers with consumption levels above 1,000 kWh did not received subsidy equivalent to that received in 2013.

On January 25, 2016, the Ministry of Energy issued Resolution No. 6/16, approving the seasonal WEM prices for each category of users for the period from February 2016 through April 2016.  Such Resolution adjusted the seasonal prices as required by the regulatory framework. Energy prices in the spot market were set by CAMMESA, which determined the price to be charged by generators for energy sold in the spot market of the wholesale electricity market on an hourly basis.  The WEM prices resulted in the elimination of certain energy subsidies and a substantial increase in electricity rates for individuals. Resolution No. 6/16, introduced different prices depending on the categories of customers. Such resolution also contemplates a social tariff for residential customers who comply with certain consumption requirements, which includes a full exemption for monthly consumptions below or equal to150 Kwh and tariffs benefits for customers who exceed such consumption level but achieve a monthly consumption lower than that of the same period in the immediately preceding year.

 

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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, 2015, the stabilization fund balance was approximately Ps. 26,376 million, resulting from the Stabilization fund plus the over expenses of dispatch net of National Treasury contributions.  If  all the funds and accounts of energy and power are considered (including the Additional Energy, Fuel over expenses, Quality Supply, Surplus Demand pursuant to Resolution No. 1,281/07 of the SE, MEM, over expense contracts, etc.), this balance rises to Ps. 69,466 million. The 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.

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.

As from March 2013, pursuant to the SE’s Resolution No. 95/2013 all large users have to buy their backup energy from CAMMESA at any relevant contractual maturity date.

Plus Energy

In September 2006, the SE issued Resolution No. 1,281/06 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 Plus Energy system at unregulated market prices. The Plus Energy system consists in the supply of additional energy generation from new generation and/or generating agents, co-generators or autogenerators that are not agentsof 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.

 

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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 thePlus Energy system.

The resolution also established the price large users are required to pay for excess demand, if not previously contracted underPlus Energy, 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 SE established certain temporary price caps, to be paid by large users for any excess demand until December 2008 (Ps. 225/MWh for GUDIs and Ps. 185/Mwh for GUMEs and GUMAs).

These prices have been updated as follows:

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

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

·    pursuant to the SE’s Resolution No. 95/13 from March 22, 2013, as opposed to the backup contracts where a unique energy supplier is authorized by CAMMESA, the Plus Energy contracts still function are available to the large users and generators previously authorized by the  Argentine National Planning, Public Investment and Services Ministry. The customers under the GUDI  category, whose Energy Plus contracts mature, have the option of rehiring Energy Plus, reclassifying themselves under the GUME category; or continue buying  the total amount of their energy to the distributors, paying in case needed. Base Surplus Demand pursuant to Resolution SE No. 1,281/07; and

·   As of  March 13, 2015, the median incremental charge for excess demand was set at 450 $/MWh for GUMAs and GUMEs and 550 $/MWh for GUDIs.

 

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 as of the date of filing of this annual report owns several investments in the Argentine electricity sector, including a 50% interest in the controlling shareholder of the principal electricity transmission company in Argentina, Transener, and controlling stakes in five generation plants located in the 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., and Central Térmica Loma de la Lata S.A.).

The following diagram presents our corporate structure as of the date of filing of this annual report.

 

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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 are necessary for the rendering of an essential public service are not subject to attachment or attachment in aid of execution.

The net book value of our property, plant and equipment as recorded on our financial statements was Ps. 8,885.8 million, Ps. 6,652.5 million and Ps. 5,189.3 million as of December 31, 2015, 2014 and 2013, respectively. For a description of our capital expenditures plan see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Edenor’s Capital Expenditures”.

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 startup 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)—Integral Tariff Revision, or (RTI)”.

 Item 4A.     Unresolved Staff Comments

On December 30, 2015 and February 23, 2016, we received comment letters from the SEC on our Financial Statements, included in our Form 20-F for the fiscal year ended December 31, 2014. We have provided responses to, and are in contact with the Staff of the SEC regarding, such comments. As of the date of this annual report, there is one matter related to the classification of the cash flows related to the loans for consumption with CAMMESA in the statement of cash flows that is still open

Item 5.        Operating and Financial Review and Prospects

The following discussion should be read in conjunction with our audited financial statements as of  and for the years ended December 31, 2015, and 2014, included in Item 18 of this annual report and the “Selected Financial Data”, included in Item 3 herein. Our financial statements have been prepared in accordance with IFRS as issued by the IASB. See “Item 3. Key Information—Selected Financial Data.”

Despite the delay in the implementation of certain provisions of the Adjustment Agreement, particularly in relation to the implementation of the semi-annual rate adjustments resulting from the CMM and the completion of the RTI process, the recent adoption of certain measures, such as Resolution No. 32/15 of the SE and Resolution No. 7/16 of the Ministry of Energy, has allowed us to not only maintain the quality and safety of our service but also to satisfy the constant year-on-year increase in demand for electricity following Argentina’s relative economic growth in recent years (especially, from 2012 through 2015). Accordingly, we have been able to absorb the higher costs associated with the increased supply of electricity and to carry out investments and essential operation and maintenance-related works as planned.

 

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During 2015, we recorded positive operating income and net income reversing the negative economic and financial situation experienced in previous years. Such improvement was achieved mainly as a consequence of the issuance on March 13, 2015 of Resolution No. 32/15 of the SE, which addressed the need for adjustment of the economic and financial situation of distribution companies granting us a temporary increase in income through funds provided by CAMMESA, applicable retroactively as from February 1, 2015, to cover costs and investments associated with the regular provision of the public service of distribution of energy on account of the future RTI.

Notwithstanding the foregoing, as of December 31, 2015, our negative working capital amounted to Ps. 1,811 million, which included debt owed to CAMMESA of Ps. 1,808.6 million plus accrued interest, as described under Note 2.c.IX.e to our Financial Statements, with respect to which we have submitted to CAMMESA a repayment plan in November 2015 based on available and projected cash flows data. As of the date of this annual report, negotiations with CAMMESA continue with respect to a final repayment schedule. On December 16, 2015, the Macri administration issued Decree No. 134/15, which declared the state of emergency with respect to the national electricity system, authoritizing the Ministry of Energy to implement a nation-wide plan of action for the generation, transmission and distribution of electricity and to take actions to guarantee the supply of the electricity under adequate economic and technical conditions.

During January 2016, the Ministry of Energy issued Resolutions No. 6/16 and No. 7/16 implementing a new tariff schedule that improved the income of distribution companies such as us to enable them to make investments, carry out maintenance works and expand their networks during 2016 Pursuant to such resolutions, the ENRE implemented a VAD adjustment to the tariff schedule on account of the future RTI, and is expected to take all necessary action to conclude the RTI process by December 31, 2016.

Notwithstanding the foregoing, our Board of Directors continues evaluating the sufficiency of financial resources allocated to pay for operation costs, investment plans and debt service, together with the impact on the different variables that affect our business, such as demand behavior, losses, penalties and service quality, among others. In addition, our Board of Directors will continue to actively participate in the RTI process, which is expected to be concluded by December 31, 2016 in accordance with Section 5 of Resolution No. 7/16 of the Ministry of Energy.

Operating Results

We distribute electricity on an exclusive basis to the northwestern part of the greater Buenos Aires metropolitan area and the northern part of the City of Buenos Aires, comprising an area of 4,637 square kilometers, with an aggregate population of approximately seven million people.  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, 2015, we had 2,835,229| customers.

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.

Factors Affecting Our Results of Operations

Our net sales consist mainly of net energy sales to users in our concession area. Our net energy sales reflect the tariffs we charge our customers (which include our energy purchase costs). In addition, our net sales include connection and reconnection charges and leases of poles and other network equipment.

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.

 

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We had requested several additional increases under the CMM since May 2008, all of which have been recognized by ENRE pursuant to Resolution No. 250/13 and Resolution No. 32/15 with retroactive effect as of May 2008. However, these increases were not incorporated into our tariff structure in a timely manner to reflect increases in our distribution costs. In January 2016, the Ministry of Energy issued Resolution No. 7/16, through which the ENRE implemented a VAD adjustment to the tariff schedule on account of the future RTI in effect as of February 1, 2016. Pursuant to such resolution, the ENRE issued Resolution No. 1/16 on January 29, 2016 establishing a new tariff structure.

If, in the future, we are not able to recover the real incremental cost increases or there is a significant lag of time between when we incur the incremental costs and when we receive increased income, 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, suffer liquidity shortfallsand 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. 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 tariffs adjusted to reflect increases in our distribution costs in a timely manner or at all, has affected our capacity to perform our commercial obligations and could also have a material adverse effect on our capacity to perform our financial obligations.”

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

 

  

Year ended December 31

  

2015

 

2014

 

2013

  

(Figures in millions)

Sales of Electricity (1)

 

3,720.4

 

3,536.1

 

3,393.8

Right of use on poles

 

76.4

 

57.5

 

41.5

Connection Charges

 

4.2

 

3.9

 

4.2

Reconnection Charges

 

1.1

 

0.8

 

1.2

Net sales

 

3,802.1

 

3,598.3

 

3,440.7

 

_______________________________

(1)    Includes revenue from the application of Resolution No. 347/12 for Ps. 535.5 million, Ps. 508.1 million and Ps. 525.9 million for the years ended December 31, 2015, 2014 and 2013, respectively.

 

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

 

  

Year ended December 31,

  

2015

 

2014

 

2013

Residential

 

9,671

43%

 

9,114

43%

 

9,114

42%

Small Commercial

 

1,878

8%

 

1,714

8%

 

1,781

8%

Medium Commercial

 

1,828

8%

 

1,712

8%

 

1,828

8%

Industrial

 

3,680

16%

 

3,431

16%

 

3,458

16%

Wheeling System(1)

 

4,200

19%

 

4,213

20%

 

4,374

20%

Public Lighting

 

688

3%

 

678

3%

 

683

3%

Shantytowns

 

436

2%

 

430

2%

 

415

2%

Others(2)

 

21

0%

 

20

0%

 

21

0%

Total

 

22,402

100%

 

21,312

100%

 

21,674

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.

 

 

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.

 

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Argentine Economic Conditions and Inflation

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

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

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

 

 

Year ended December 31,

 

2015

2014

2013

2012

2011

Real GDP (% change)

2.5

0.4

3.1

0.7

8.3

Nominal GDP (in millions of Pesos)

6,041,476

4,425,694

3,406,265

2,765,575

2,312,009

Real Consumption (% change)

1.3

(0.5)

4.3

4.3

10.2

Real Investment (% change)

2.2

(5.5)

3.1

(7.0)

19.4

Industrial Production (% change)

0.1

(1.8)

0.0

(7.8)

6.5

Consumer Price Index **

11.9

21.4

10.6

10.0

9.8

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

13.4

8.6

6.5

4.9

4.3

Exports (in millions of U.S.$)

59,597

71,977

81,660

80,927

83,950

Imports (in millions of U.S.$)

57,420

65,324

73,656

68,508

73,937

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

2,177

6,653

8,005

12,419

10,013

Current Account (% of GDP)

(1.4)

(0.9)

(0.8)

(0.2)

(0.7)

Reserves (in millions of U.S.$)

25,563

31,443.0

30,599.0

43,290.0

46,376.0

Tax Collection (in millions of Pesos)

1,537.9

1,169.7

858.8

679,799.0

540,134.0

Primary Surplus (in millions of Pesos)

(106,522)

(38,561.9)

(22,479.0)

(4,374.0)

4,921.0

Public Debt (% of GDP at December 31)*

39.4

41.6

34.6

34.5

34.2

Public Debt Service (% of GDP)

2.8

2.5

2.6

1.9

2.6

External Debt (% of GDP at December 31)

14.7

15.8

11.7

11.8

12.9

 

 

Sources: INDEC; Central Bank; Ministry of Economy and Production.
* Includes hold-outs

** The CPI for 2015 was calculated for the ten-month period ended October 31, 2015. In November 2015, the INDEC suspended the publication of the CPI and the WPI.

Following years of hyperinflation and economic recession, in 1991 the Argentine government adopted an economic program that sought to liberalize the economy and impose monetary discipline. The economic program, which came to be known as the 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 aresult 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.

 

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

2001 Economic Crisis

Beginning in December 2001, the Argentine government implemented an unexpected number of monetary and foreign exchange control measures that included restrictions on the free disposition of funds deposited with banks and on the transfer of funds abroad without prior approval by the Central Bank, some of which are still in effect. On December 21, 2001, the Central Bank decided to close the foreign exchange market, which amounted to 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 WPI increased by approximately 118% and the Argentine CPI rose approximately 41%.

Following the adoption of the Public Emergency Law, the Argentine government implemented measures, whether by executive decree, Central Bank regulation or federal legislation, attempting to address the effects of the collapse of the 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).

 

 

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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.

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.

 

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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. 

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

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

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

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

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

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

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

According to the INDEC, Argentina´s real GDP grew around 2.9% in 2013, compared to 0.8% in 2012.

 

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

 

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

 

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

 

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

 

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

 

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In terms of supply, industrial production continued showing a poor performance, the exchange rate lag, restrictions to import intermediate goods, the deceleration of the main Argentine commercial partners’ growth and a weak domestic and external demand impacted on the performance of the manufacturing activity. In terms of expenses, consumption showed a good performance even though consumers continued acting with caution. 

 

With reference to inflationary issues, a significant deceleration in the increase of prices was observed during the first half of 2015, related with the high 2014 baseline. Throughout the last months of the year, retail prices relatively picked up although the average growth rate was lower than that of the previous year.   

 

In January 2016, the new INDEC authorities appointed by the Macri administration announced the discontinuation of the methodology used by the Fernandez de Kirchner administration to measure inflation and declared a state of administrative emergency in the national statistics system, suspending the publication of all indices until the INDEC is able to calculate such indices based on accurate official data. See“Item 3. Key Information—Risk factors—Risks Relating to Our Business—The impact of the recent congressional and presidential elections on the future economic and political environment of Argentina is uncertain, but likely to be material.”

On December 17, 2015, the Peso depreciated approximately 36% against the U.S. Dollar following the announcement of the lifting of a significant portion of exchange restrictions (See “—Risk Factors—Factors Relating to Argentina—Fluctuations in the value of the Peso could adversely affect the Argentine economy, and consequently, our results of operations or financial condition”), which caused the Peso to U.S. Dollar exchange rate to reach Ps.13.40 to U.S.$1.00 as of December 31, 2015.                       .                                                                                       

 

Outlook for 2016

Forecasts for 2016 are characterized by caution. The macroeconomic context and the imbalances (including high inflation, fiscal deficit, monetary and trade restrictions) deriving from certain policies adopted during recent years represent substantial obstacles for the Macri administration to introduce economic policy shifts. As of the date of this annual report, a drop in real GDP is expected for 2016, along with an inflation rate which would remain high, surpassing that of 2015.

 

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 tariffs, including taxes, in Pesos per MWh in the periods indicated:

   

 

 

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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 No. 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)). 

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 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 pricing ladder set 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.

On November 7, 2011, through Resolution No. 1301/2011 of the SE, 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 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 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, Resolution No. 1,537/2011 of the SE implemented the Volunteer Waiver Form Subsidy.

 

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On May 8, 2012, Resolution No. 2,883/2012 of the SE instructed 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 for the last two-month consumption periods. The stabilization factor results from the difference between the aforementioned average consumption and the current two-month consumption period. This value is added to or subtracted from the two-month consumption period charges, and the result obtained is the amount to be paid before the applicable taxes. Adjustments to be made in accordance with the differences between average consumption and recorded consumption will be reflected in consumer bills 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 in the Statement of Financial Position account, crediting or debiting the account as applicable, depending on whether the annual average consumption is higher or lower than the current two-month consumption period. Resolution No. 7/16 repealed the stabilization factor.

We purchased a total of 22,126 GWh in 2015, 20,694 GWh in 2014 and 20,552 GWh in 2013 (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 have purchased all of our energy supply in the wholesale electricity market at the spot price ever since. 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.

During 2015, the customers who are not subsidized continued paying a monomial price of Ps. 320 /MWh, as set by Resolution No 324/2008 of the SE.

On January 25, 2016, the Ministry of Energy issued Resolution No. 6/16, approving the seasonal WEM prices for each category of users for the period from February 2016 through April 2016.  Such Resolution adjusted the seasonal prices as required by the regulatory framework. Energy prices in the spot market were set by CAMMESA, which determined the price to be charged by generators for energy sold in the spot market of the wholesale electricity market on an hourly basis.  The WEM prices resulted in the elimination of certain energy subsidies and a substantial increase in electricity rates for individuals. Resolution No. 6/16, introduced different prices depending on the categories of customers.  Such resolution also contemplates a social tariff for residential customers who comply with certain consumption requirements, which includes a full exemption for monthly consumptions below or equal to 150 Kwh and  tariffs benefits for customers who exceed such consumption level but achieve a monthly consumption lower than that of the same period in the immediately preceding year.


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.

 

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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 to the increased volume of energy we supplied during those periods. Our total losses amounted to 14.9% in 2015, 14.3% in 2014, and 13% in 2013.

The following table sets forth our estimated breakdown between technical and non-technical energy losses experienced in our concession area since 2006. We believe that non-technical losses could increase in 2016 following the establishment of the new tariff structure pursuant to Resolution No 1/16 of the ENRE.

  

Year ended December 31,

  

2015

 

2014

 

2013

Technical losses

 

11.1%

 

10.8%

 

10.3%

Non‑technical losses

 

3.8%

 

3.5%

 

2.7%

Total losses

 

14.9%

 

14.3%

 

13.0%

 

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.

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 “Item 5. Operating and Financial Review and Prospects—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.

 

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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 from 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. 218.6 million and, at December 31, 2011, had been fully invoiced.  In October 2007, the SE issued Resolution No. 1,037/2007, 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.

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.  

We had requested several additional increases under the CMM since May 2008, all of which have been recognized by ENRE pursuant to Resolution No. 250/13 and Resolution No. 32/15 with retroactive effect as of May 2008. However, these increases were not incorporated into our tariff structure in a timely manner to reflect increases in our distribution costs.

On May 7, 2013, pursuant to the SE’s Resolution No. 250/2013, the company was authorized to compensate its debt registered under the PUREE against CMM recognitions for the period from May 2008 through February 28, 2013.

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In addition, CAMMESA was instructed to issue sale settlements with maturity dates to be determined for the surplus generated after compensation between the credits of the CMM and the PUREE debts, to partially compensate the debt with the WEM.

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 are being clearly identified in the bills sent to customers, are being deposited in a special account to be managed by a Trustee. Such amounts are being used exclusively to finance infrastructure and corrective maintenance of the facilities and will be taken into account towards ENRE’s RTI.

Pursuant to the SE’s Resolution No. 250/13 and Notes No. 6,852/13, No. 4,012/14, No. 486/14 and No. 1,136/14 of the SE, the Company was authorized to compensate its debt registered under the PUREE against CMM recognitions for the period from May 2008 through December 2014.

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

As from February 1, 2015, pursuant to Resolution No. 32/15 of the SE, PUREE funds were considered as part of Edenor’s income on account of the future RTI. We compensated up to January 31, 2015, the debts for PUREE, with claims arising from the calculation of CMM until that date, including the application of interest that could correspond to both concepts.

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

In addition, such resolution: (i) abrogated the PUREE; (ii) repealed Resolution No. 32/2015 as from the date the ENRE resolution implementing the new tariff schedule; (iii) discontinued the application of mechanisms that imply the transfer of funds from CAMMESA in the form of loan agreements with CAMMESA; and (iv) ordered the implementation of the actions required to terminate the trusts created pursuant to Resolution No. 347/2012 of the ENRE. Resolution No. 2/2016 of the ENRE partially repealed Resolution No. 347/2012, discontinuing the FOCEDE and ordering us to open a special bank account with a Central Bank authorized entity where the funds received pursuant to Resolution No. 347/2012 must be deposited. Pursuant to Resolution No. 7/16, the ENRE issued Resolution No. 1/16 establishing a new tariff structure.

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

 

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VAD

 

Average Taxes

 

Electric Power Purchases

Tariff(1)

 

November

 

January

 

February

 

October 2008

 

Res.1301

 

Res. 1

 

November

 

January

 

February

 

October 2008

 

Res.1301

 

Res. 1

 

November

 

January

 

February

 

October 2008

 

Res.1301

 

Res. 1

 

2001

 

2005

 

2007

  

2011(2)

 

2016(3)

 

2001

 

2005

 

2007

  

2011(2)

 

2016(3)

 

2001

 

2005

 

2007

  

2011(2)

 

2016(3)

Residential

                                    

TIRI (0-300)

 

49.40%

 

44.50%

 

44.50%

 

44.69%

 

11.26%

 

30.63%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

21.90%

 

26.80%

 

26.80%

 

26.61%

 

60.00%

 

40.65%

TIRI2 (301-650)

 

36.20%

 

33.00%

 

33.00%

 

30.81%

 

4.80%

 

15.40%

 

29.20%

 

29.20%

 

29.20%

 

29.23%

 

29.23%

 

29.23%

 

34.60%

 

37.80%

 

37.80%

 

39.95%

 

65.91%

 

55.33%

TIR# (651-800)

       

32.08%

 

4.55%

 

14.48%

       

29.23%

 

29.23%

 

29.23%

       

38.68%

 

66.15%

 

56.23%

TIR4 (801-900)

       

31.63%

 

4.32%

 

13.91%

       

29.23%

 

29.23%

 

29.23%

       

39.13%

 

66.39%

 

56.81%

TIR5 (90-1000)

       

32.75%

 

4.35%

 

14.04%

       

29.23%

 

29.23%

 

29.23%

       

38.02%

 

66.37%

 

56.69%

TIR6 (1001-1200)

       

26.29%

 

4.19%

 

15.98%

       

29.23%

 

29.23%

 

29.23%

       

44.48%

 

66.51%

 

54.73%

TIR 7 (1201-1400)

       

27.18%

 

3.98%

 

15.25%

       

29.23%

 

29.23%

 

29.23%

       

43.59%

 

66.73%

 

55.47%

TIR8 (1401-2800)

       

25.94%

 

4.81%

 

17.83%

       

29.23%

 

29.23%

 

29.23%

       

44.83%

 

65.89%

 

52.88%

TIR9 (> 2800)

       

22.50%

 

3.84%

 

14.81%

       

29.23%

 

29.23%

 

29.23%

       

48.26%

 

66.88%

 

55.92%

                                     

Commercial - small demands

                                    

TIG1

 

55.10%

 

40.00%

 

47.80%

 

48.76%

 

21.91%

 

53.18%

 

25.70%

 

25.70%

 

25.70%

 

25.68%

 

25.68%

 

25.68%

 

19.20%

 

34.30%

 

26.50%

 

25.55%

 

52.34%

 

21.11%

TIG2

 

53.60%

 

31.10%

 

43.60%

 

42.39%

 

15.97%

 

41.52%

 

25.60%

 

25.60%

 

25.60%

 

25.64%

 

25.64%

 

25.64%

 

20.70%

 

43.20%

 

30.70%

 

31.97%

 

58.29%

 

32.79%

TIG3

       

37.40%

 

9.13%

 

26.24%

       

25.63%

 

25.63%

 

25.63%

       

37.57%

 

65.12%

 

48.04%

                                     

Commercial - medium demand

                                    

T2

 

43.30%

 

27.90%

 

35.50%

 

38.03%

 

16.03%

 

44.80%

 

25.60%

 

25.60%

 

25.60%

 

25.63%

 

25.63%

 

25.63%

 

31.00%

 

46.40%

 

38.90%

 

36.34%

 

58.15%

 

29.47%

                                     

Industrial

                                    

T3 low voltage below 300kw

 

44.20%

 

26.50%

 

34.30%

 

37.86%

 

15.37%

 

43.74%

 

25.70%

 

25.70%

 

25.70%

 

25.66%

 

25.66%

 

25.66%

 

30.10%

 

47.80%

 

40.10%

 

36.48%

 

58.84

 

30.53%

T3 low voltage over 300kw

 

42.60%

 

24.50%

 

32.10%

 

27.09%

 

11.99%

 

22.80%

 

25.60%

 

25.60%

 

25.60%

 

25.62%

 

25.62%

 

25.62%

 

31.80%

 

49.90%

 

42.30%

 

47.29%

 

62.29

 

51.55%

T3 medium voltage below 300kw

 

29.30%

 

14.10%

 

19.70%

 

25.25%

 

8.46%

 

30.72%

 

25.70%

 

25.70%

 

25.70%

 

25.68%

 

25.68%

 

25.68%

 

45.00%

 

60.30%

 

54.60%

 

49.06%

 

65.73

 

43.51%

T3 medium volgate over 300kw

 

27.30%

 

12.30%

 

17.50%

 

17.71%

 

7.09%

 

14.50%

 

25.70%

 

25.70%

 

25.70%

 

25.69%

 

25.69%

 

25.69%

 

47.00%

 

62.00%

 

56.80%

 

56.60%

 

67.11

 

59.77%

                                     

Average Tariff

 

41.20%

 

28.50%

 

33.90%

 

33.16%

 

9.57%

 

28.33%

 

27.20%

 

27.20%

 

27.20%

 

27.24%

 

27.24%

 

27.24%

 

31.50%

 

44.20%

 

38.90%

 

39.60%

 

63.10%

 

44.38%

 

_______________________

(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 SE issued Resolution No. 1,301/11, 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.

(3)                  On January 29, 2016, the ENRE issued Resolution No. 1/16establishing a new tariff structure.

Integral Tariff Revision (RTI).

An 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 will submit 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, at 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.

On April 30, 2007, the SE 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.

 

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In July 2008, the SE issued Resolution No. 865/2008, which reviews the RTI schedule contemplated by the Adjustment Agreement. The SE 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.

On November 12, 2009, we submitted an integral tariff proposal to the ENRE’s Board of Directors as requested by Resolution No. 467/2008 of the ENRE.  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 customer 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 tariff adjustment criterion. Each scenario assumed that the tariff increase would be implemented in three equal semiannual installments.

Additionally, in June 2013, we filed a complaint against the Argentine government claiming full compliance with the Adjustment Agreement and compensation for damages as a result of non-compliance of the commitments established therein. The complaint was amended so as to extend it in November 2013. In February 2014, we filed for injunctive relief with the Federal Court requesting that the Argentine government be compelled to provide us with economic assistance during the course of litigation. The petition was rejected in both first and second instance in June and December 2014, respectively.

In our opinion, the RTI process will have to factor in 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, and the balances and other issues resulting from the measures recently adopted by the Argentine government to provide us with temporary and partial relief.

Such issues include, among other: (i) the treatment to be given to the outstanding amounts granted under the loans for consumption (mutuums) to cover the insufficiency of the funds deriving from the FOCEDE; (ii) the conditions for the settlement of the outstanding debt with CAMMESA as of the date of issuance of Resolution No. 32/15, for which purpose we have submitted and are currently negotiating a repayment plan; (iii) the treatment to be given to the penalties and discounts determined prior and subsequent to the Adjustment Agreement (in our opinion the generation and accumulation of unpaid balances for this concept are not attributable to us inasmuch as the inaction and discretionary decisions of the Argentine government in the past have led to the deterioration of our economic and financial equation, thus preventing us from complying with its basic and elemental obligations for the provision of the public service) ; (iv) an agreement on quality levels and a new system of penalties and discounts that provides for an adequate transitional period until the tariff schedule resulting from the RTI is fully implemented; and (v) the termination and liquidation of the FOCEDE and its effects.

The outcome of the renegotiation of 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 tariffs adjusted to reflect increases in our distribution costs in a timely manner or at all, has affected our capacity to perform our commercial obligations and could also have a material adverse effect on our capacity to perform our financial obligations”.

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 willsubsidize 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.

 

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In January 2016, through Resolution No. 6/16, the Government introduced a social tariff for residential customers who comply with certain consumption requirements, which includes a full exemption for monthly consumptions below or equal to 150 Kwh and preferential tariffs for customers who exceed such consumption level but achieve a monthly consumption lower than that of the same period in the immediately preceding year.

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.

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 in Gwh(1)

 

Edenor demand in Gwh(2)

 

Edenor’s demand as % of total demand

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

 

19.8%

2012

 

131,944

 

23,933

 

18.1%

2013

 

125,162

 

24,902

 

19.9%

2014

 

126,397

 

24,860

 

19.7%

2015

 

131,988

 

26,322

 

19.9%

______________________

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

(1)    Includes 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.

 

 

 

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Electricity demand in our concession area has grown an average of 6% 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 2015:

  

 

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 4.3% per annum from 2003 through 2013. 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. In 2015, the demand increased by 6% compared to 2014, principally due to a 9.5% increase in small commercial customers and a 6% increase on average in residential and medium commercial customers.

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.

 

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On October 31, 2008, the SE adopted Resolution No. 1,170/08, 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 SE adopted Resolution No. 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.

On January 25, 2016, through Resolution No. 7/16 the Ministry of Energy abrogated the PUREE.

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 thePlus EnergyProgram, 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 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, government intervention and decreased results of operations.”

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 SE issued Resolution No. 1,281/06 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  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. 1,875/05 of the SE 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.

 

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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.  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.

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

  
 

 

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The chart below shows seasonality of demand in Edenor’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.

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 CompanyFramework Agreement (Shantytowns)”   

Operating Expenses

Our most significant operating expenses are transmission and distribution expenses, which include depreciation charges, salaries and social security taxes, outsourcing, fines and penalties, 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 to respond more quickly to changes in our market. We had approximately 4,297 employees and 1,847 third party employees under contract with us as of December 31, 2015, respectively. 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, 2015, 2014 and 2013.

Statement of comprehensive income (loss)*

 

 

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2015

 

2015

 

2014

 

2013

  

US$

 

Ps.

 

Ps.

 

Ps.

Continuing operations

        

Revenue from sales (1)

 

291.6

 

3,802.2

 

3,598.4

 

3,440.7

Electric power purchases

 

(155.1)

 

(2,022.0)

 

(1,878.1)

 

(2,050.3)

Subtotal

 

136.5

 

1,780.2

 

1,720.3

 

1,390.4

Transmission and distribution expenses

 

(241.8)

 

(3,153.7)

 

(2,825.1)

 

(2,055.3)

(Loss) Gross income

 

(105.3)

 

(1,373.5)

 

(1,104.8)

 

(664.9)

  

 

 

 

 

 

 

 

Selling expenses

 

(63.9)

 

(832.8)

 

(657.9)

 

(548.3)

Administrative expenses

 

(54.1)

 

(706.1)

 

(496.8)

 

(324.8)

Other operating income

 

6.1

 

79.2

 

52.4

 

61.6

Other operating expense

 

(38.5)

 

(502.5)

 

(318.7)

 

(142.8)

Gain from acquisition of companies

 

-

 

-

 

-

 

-

Income from non-reimbursable customer contributions

 

0.1

 

0.8

 

0.8

 

0.7

Operating (loss) profit before SE Resolution 250/13 and subsequent Notes

 

(255.7)

 

(3,334.9)

 

(2,525.0)

 

(1,618.5)

Income recognition on account of the RTI - SE Resolution 32/15

 

385.4

 

5,025.1

 

-

 

-

Higher costs recognition - SE Resolution 250/13 and subsequents Notes

 

42.3

 

551.5

 

2,271.9

 

2,933.1

Operating profit (loss)

 

171.9

 

2,241.7

 

(253.1)

 

1,314.6

         

Financial income

 

7.4

 

96.2

 

235.5

 

287.1

Financial expenses (2)

 

(34.5)

 

(450.0)

 

(592.0)

 

(504.9)

Other financial expense

 

(43.1)

 

(561.7)

 

(324.5)

 

(273.1)

Net financial (expense) income

 

(70.2)

 

(915.5)

 

(681.0)

 

(490.9)

Profit (Loss) before taxes

 

101.7

 

1,326.2

 

(934.1)

 

823.7

 

        

Income tax

 

(14.1)

 

(183.8)

 

154.4

 

44.1

Profit (Loss) for the year from continuing operations

 

87.6

 

1,142.4

 

(779.7)

 

867.8

 

        

Discontinued operations

 

-

 

-

 

-

 

(95.1)

Profit (Loss) for the year

 

87.6

 

1,142.4

 

(779.7)

 

772.7

         

Profit (Loss) for the year attributable to:

        

Owners of the Company

 

87.6

 

1,142.4

 

(779.7)

 

771.7

Non-controlling interests

 

-

 

-

 

-

 

1.0

Profit (Loss) for the year

 

87.6

 

1,142.4

 

(779.7)

 

772.7

         

Profit (Loss) for the year attributable to the owners of the parent

        

Continuing operations

 

87.6

 

1,142.4

 

(779.7)

 

867.9

Discontinued operations

 

-

 

-

 

-

 

(96.2)

  

87.6

 

1,142.4

 

(779.7)

 

771.7

 

 

 

 

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2015

 

2015

 

2014

 

2013

  

US$

 

Ps.

 

Ps.

 

Ps.

Other comprehensive income

        

Items that will not be reclassified to profit or loss

        

Results related to benefit plans

 

(0.3)

 

(3.7)

 

(17.8)

 

(21.0)

Tax effect of actuarial income (losses) on benefit plans

 

0.1

 

1.3

 

6.2

 

7.4

Total other comprehensive loss from discontinued operations

 

-

 

-

 

-

 

-

Total other comprehensive (loss) income

 

(0.2)

 

(2.4)

 

(11.6)

 

(13.6)

         
         
         

Comprehensive income for the year attributable to:

        

Owners of the parent

 

87.4

 

1,140.0

 

(791.3)

 

758.1

Non-controlling interests

 

-

 

-

 

-

 

1.0

Comprehensive income (loss) for the year

 

87.4

 

1,140.0

 

(791.3)

 

759.1

         

Profit (Loss) for the year attributable to the owners of the parent

        

Continuing operations

 

87.4

 

1,140.0

 

(791.3)

 

757.1

Discontinued operations

   

-

 

-

 

1.0

  

87.4

 

1,140.0

 

(791.3)

 

758.1

         

Basic and diluted earnings (loss) per share:

        

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

 

0.10

 

1.27

 

(0.87)

 

0.97

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

 

-

 

-

 

-

 

(0.11)

         

Basic and diluted earnings (loss) per ADS (3):

        

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

 

1.95

 

25.40

 

(17.40)

 

19.40

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

 

-

 

-

 

-

 

(2.20)

 

(*)  Translated into U.S. Dollars at the selling exchange rate for U.S. Dollars quoted by Banco de la Nación Argentina (the “Banco Nación”) on December 31, 2015, which was Ps. 13.04  to U.S.$ 1.00.

(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 No. 347/12.

(2)  Net of interest capitalized at December 31, 2015, 2014 and 2013  for Ps. 255.9 million, Ps. 123.9 million and Ps. 24.5 million, respectively.

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

 

 

Year Ended December 31, 2015 compared with Year Ended December 31, 2014.

Revenue from sales

Revenue from sales increased 5.7% to Ps. 3,802.2 million for the year ended December 31, 2015, from Ps. 3,598.4 million for the year ended December 31, 2014.

This increase was mainly due to an increase in the volume of energy sold, which went from 21,312 GWh in 2014 to 22,402 GWh in 2015, representing a 5.1% increase, and to an increase of Ps.19 million in revenue from pole leases.

Net energy sales represented approximately 97.8% of our net sales in 2015 and 98.3% in 2014; late payment charges, pole leases, and connection and reconnection charges account for the balance.

Electric Power Purchases

The amount of electric power purchases increased 7.7 % to Ps. 2,022.0 million for the year ended December 31, 2015, from Ps. 1,878.1 million for the year ended December 31, 2014. This increase of Ps. 143.9 million was mainly due to an increase in the volume of energy sold and to an increase in energy losses due to an increase in non-technical losses.

The volume of electric power purchases of Edenor increased 5.9% to 26,322 GWh for the year ended December 31, 2015, from 24,860 GWh for the year ended December 31, 2014 (in both cases including wheeling system demand).

 

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Energy losses increased to 14.9% for the year ended December 31, 2015, from 14.3% for the year ended December 31, 2014.  See “—Factors Affecting Our Results of Operations—Recognition of Cost of Energy Losses.”

Transmission and Distribution Expenses

Transmission and distribution expenses increased 11.6 % to Ps. 3,153.7 million for the year ended December 31, 2015, from Ps. 2,825.1 million for the year ended December 31, 2014. This increase was mainly due to a Ps. 486.5 million increase in salaries and social security taxes attributable to an increase in employee compensation granted in 2015, along with an increase in the number of employees. This increase was partially offset by a decrease of Ps.251.1 million in fees and remuneration for services.

As a percentage of revenue from sales, transmission and distribution expenses increased to 82.9% for the year ended December 31, 2015, from 78.5% for the year ended December 31, 2014.

The following table sets forth the principal components of our transmission and distribution expenses for the years indicated.

 

 

Year ended December 31,

 

2015

   

% of 2015

 

2014

   

% of 2014

    

net sales

    

net sales

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and social security taxes

1,859.70

 

59.0%

 

48.9%

 

1373.2

 

48.6%

 

38.2%

Supplies consumption

211.40

 

6.7%

 

5.6%

 

205.9

 

7.3%

 

5.7%

Fees and remuneration for services

463.20

 

14.7%

 

12.2%

 

714.3

 

25.3%

 

19.9%

Depreciation of property, plant and equipment

236.80

 

7.5%

 

6.2%

 

208.5

 

7.4%

 

5.8%

ENRE penalties

257.30

 

8.2%

 

6.8%

 

233.9

 

8.3%

 

6.5%

Others

125.30

 

3.9%

 

3.3%

 

89.3

 

3.2%

 

2.5%

Total

3,153.7

 

100%

 

82.9%

 

2,825.1

 

100%

 

78.5%

 

 

Gross (loss) profit

Our gross loss, including transmission and distribution expenses, increased by Ps. 268.7 million, or 24.3%,  to Ps. 1,373.5 million for the year ended December 31, 2015, from a gross loss of Ps. 1,104.8 million for the year ended December 31, 2014. This increase was basically due to the increase in transmission and distribution expenses described above, which were partially offset by the slight increase in revenue from 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 26.6 % to Ps. 832.8 million for the year ended December 31, 2015, from Ps. 657.9 million for the year ended December 31, 2014. This increase of Ps. 174.9 million was mainly due to a Ps. 66.7 million increase in fees and remuneration for services, a Ps. 50.8 million in salaries and social security taxes (attributable to an increase in employee compensation granted in 2015), and a Ps. 19.6 million increase in communications expenses.

As a percentage of net sales, selling expenses increased to 21.9 % of net sales in the year ended December 31, 2015, from 18.3 % for the year ended December 31, 2014. 

The following table sets forth the principal components of our selling expenses for the years indicated.

 

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Year ended December 31,

 

2015

   

% of 2015

 

2014

   

% of 2014

    

net sales

    

net sales

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and social security taxes

299.8

 

36.0%

 

7.9%

 

249.0

 

37.8%

 

6.9%

Allowance for the impairment of trade and other receivables

24.1

 

2.9%

 

0.6%

 

21.5

 

3.3%

 

0.6%

Communication expenses

58.7

 

7.0%

 

1.5%

 

39.1

 

5.9%

 

1.1%

Fees and remuneration for services

329.5

 

39.6%

 

8.7%

 

262.8

 

39.9%

 

7.3%

ENRE penalties

24.4

 

2.9%

 

0.6%

 

18.4

 

2.8%

 

0.5%

Others

96.3

 

11.6%

 

2.5%

 

67.1

 

10.2%

 

1.9%

Total

832.8

 

100%

 

21.9%

 

657.9

 

100%

 

18.3%

 

Administrative Expenses

Our administrative expenses include, among others, expenses associated with accounting, payroll administration, personnel training, systems operation third-party services and taxes.

Administrative expenses increased 42.1% to Ps. 706.1 million for the year ended December 31, 2015, from Ps. 496.8 million for the year ended December 31, 2014. This increase of Ps. 209.3 million was mainly due to a Ps. 86.3 million increase in salaries and social security taxes attributable to an increase in employee compensation granted in 2015, a Ps. 65.7 million increase in fees and remuneration for services, and Ps. 23.0 million increases in rent and insurance.

As a percentage of revenue from sales, administrative expenses increased to 18.6% for the year ended December 31, 2015, as compared to 13.8% for the year ended December 31, 2014.

The following are the principal components of our administrative expenses for the years indicated.

 

Year ended December 31,

 

2015

   

% of 2015

 

2014

   

% of 2014

    

net sales

    

net sales

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and social security taxes

328.4

 

46.5%

 

8.6%

 

242.1

 

48.7%

 

6.7%

Rent and insurance

58.2

 

8.2%

 

1.5%

 

35.2

 

7.1%

 

1.0%

Fees and remuneration for services

213.8

 

30.3%

 

5.6%

 

148.1

 

29.8%

 

4.1%

Security Services

24.1

 

3.4%

 

0.6%

 

15.1

 

3.0%

 

0.4%

Others

81.6

 

11.6%

 

2.1%

 

56.3

 

11.3%

 

1.6%

Total

706.1

 

100%

 

18.6%

 

496.8

 

100%

 

13.8%

 

Other operating (expenses) income

Other operating expenses include mainly retirement payments, severance payments and accrual for lawsuits. Other operating expenses, increased by 59.1% to a loss of Ps. 422.5 million for the year ended December 31, 2015, compared to a loss of Ps. 265.5 million for the year ended December 31, 2014. The negative variation of Ps. 157 million was mainly due to a Ps. 151 million increase in accrual for lawsuits, a Ps.27.1 million increase in fees for services provided to third parties and a Ps. 20.4 million increase in debit and credit taxes partially offset by a decrease of Ps.38.1 million in expenses related to FOCEDE.

Operating  profit (loss)

 

Our operating profit increased Ps. 2,494.8 million to a gain of Ps. 2,241.7 million for the year ended December 31, 2015, from a loss of Ps. 253.1 million for the year ended December 31, 2014, mainly due to the recognition of additional income as set forth in Resolution No. 32/15 of the SE of Ps. 5,025.1 million, partially offset by an increase in other operating expenses described above and a decrease of 75.7% in the partial recognition of CMM adjustment pursuant to Resolution No. 250/13 and subsequent notes of the SE, of Ps. 1,720.4 million.

 

 

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Net Financial Expense

Net financial expense totaled Ps. 915.5 million for the year ended December 31, 2015, compared to Ps. 681.0 million for the year ended December 31, 2014. This increase of Ps. 234.5 million was primarily due to a Ps. 466.9 million increase in exchange differences as a result of exchange rate variations, a Ps. 122.4 million increase in financial expense, which was partially offset by a decrease of Ps. 267.2 million in interest due on the debt with CAMMESA, and to a Ps. 279.5 million gain derived from changes in fair value of financial assets.

Income Tax

 The Company’s income tax charge includes three effects: (i) the current tax payable for the year pursuant to tax legislation applicable to the Company; (ii) the effect of applying the deferred tax method on temporary differences arising out of the asset and liability valuation according to tax versus financial accounting criteria; and (iii) the analysis of recoverability of deferred tax assets. We recorded an income tax charge of Ps.183.8 million in 2015, compared to an income tax credit of Ps. 154.4 million in 2014, mainly as a result of the increase in the additional income derived from the application of Resolution No. 32/15 of the SE, partially offset by a tax loss carry forward generated in recent years.  

Profit (Loss) for the year

We recorded a profit of Ps. 1,142.4 million for the year ended December 31, 2015, compared to a loss of Ps. 779.7 million for the year ended December 31, 2014 mainly as a consequence of the additional income derived from the application of Resolution No. 32/15 of the SE.

 

Year Ended December 31, 2014 compared with Year Ended December 31, 2013.

Revenue from sales

Revenue from sales increased 4.6% to Ps. 3,598.4 million for the year ended December 31, 2014, from Ps. 3,440.7 million for the year ended December 31, 2013.

Although the volume of energy sold went from 21,674 GWh in 2013 to 21,312 GWh in 2014, which represents a decrease of 1.7%, the increase in revenue from sales is attributable to the removal in 2014 of subsidies on tariffs for certain categories of users.

Net energy sales represented approximately 98.3% of our net sales in 2014 and 98.6% in 2013; late payment charges, pole leases, and connection and reconnection charges account for the remaining balance.

Electric Power Purchases

The amount of electric power purchases decreased 8.4% to Ps. 1,878.1 million for the year ended December 31, 2014, from Ps. 2,050.3 million for the year ended December 31, 2013. This decrease of Ps. 172.2 million was mainly due to a decrease in the cost of mobile generation (which is the cost of hiring transportable diesel fuel generators to address the failures in the grid), which has been reduced in its use and partially recognized as “distributed energy” (which is subject to lower pricing than energy derived from mobile generation) since November 2013.

The volume of electric power purchases of Edenor for 2014 remained stable compared to purchases registered in 2013, at 24,860 GWh and 24,902 GWh, respectively (in both cases including wheeling system demand).

Energy losses increased to 14.3% for the year ended December 31, 2014, from 13.0% for the year ended December 31, 2013.  See “—Factors Affecting Our Results of Operations—Recognition of Cost of Energy Losses.”

 

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Transmission and Distribution Expenses

Transmission and distribution expenses increased 37.5 % to Ps. 2,825.1 million for the year ended December 31, 2014, from Ps. 2,055.3 million for the year ended December 31, 2013. This increase was attributable to a Ps. 582.6 million increase in salaries and social security taxes mainly as a result of an increase in the number of employees, and an increase in employee compensation granted in 2014 (7 % as from January 2014 , 15% as from May 2014 and 10% as from July 2014), along with increases in payments for seniority and working modality, and to a lesser extent to a Ps. 84 million increase in supplies consumption and Ps.49.2 million increase in fees and remuneration for services.

As a percentage of revenue from sales, transmission and distribution expenses increased to 78.5% for the year ended December 31, 2014, from 59.7% for the year ended December 31, 2013, basically due to higher expenses not accompanied by increases in tariffs.

The following table sets forth the principal components of our transmission and distribution expenses for the years indicated.

 

 

Year ended December 31,

 

2014

   

% of 2014

 

2013

   

% of 2013

    

net sales

    

net sales

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and social security taxes

1,373.20

 

66.8%

 

38.2%

 

790.7

 

38.5%

 

23.0%

Supplies consumption

205.90

 

10.0%

 

5.7%

 

121.9

 

5.9%

 

3.5%

Fees and remuneration for services

714.30

 

34.8%

 

19.9%

 

665.1

 

32.4%

 

19.3%

Depreciation of property, plant and equipment

208.50

 

10.1%

 

5.8%

 

194.8

 

9.5%

 

5.7%

ENRE penalties

233.90

 

11.4%

 

6.5%

 

234.8

 

11.4%

 

6.8%

Others

89.30

 

4.3%

 

2.5%

 

48.0

 

2.3%

 

1.4%

Total

2,825.1

 

137%

 

78.5%

 

2,055.3

 

100%

 

59.7%

 

 

Gross (loss) profit

Our gross loss, including transmission and distribution expenses, increased by Ps. 439.9 million, or 66.2%,  to Ps. 1,104.8 million for the year ended December 31, 2014, from a gross loss of Ps. 664.9 million for the year ended December 31, 2013. This increase was basically due to the increase in transmission and distribution expenses described above, which were partially offset by the increase in revenue from sales.

Selling Expenses

Selling expenses increased 20.0 % to Ps.657.9 million for the year ended December 31, 2014, from Ps. 548.3 million for the year ended December 31, 2013. This increase of Ps. 109.7 million was mainly due to a Ps. 69.7 million increase in salaries and social security taxes (attributable to an increase in employee compensation granted in 2014 as explained under the line item “Transmission and Distribution Expenses” above and to an increase in the number of employees), a Ps. 64.4 million increase in fees and remuneration for services (a 32.4 % increase as compared to 2013), which was partially offset by Ps. 34.3 million decrease in ENRE penalties.

As a percentage of net sales, selling expenses increased to 18.3 % of net sales in the year ended December 31, 2014, from 15.9 % for the year ended December 31, 2013. 

The following table sets forth the principal components of our selling expenses for the years indicated.

 

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Year ended December 31,

 

2014

   

% of 2014

 

2013

   

% of 2013

    

net sales

    

net sales

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and social security taxes

249.0

 

37.8%

 

6.9%

 

179.4

 

32.7%

 

5.2%

Allowance for the impairment of trade and other receivables

21.5

 

3.3%

 

0.6%

 

38.0

 

6.9%

 

1.1%

Communication expenses

39.1

 

5.9%

 

1.1%

 

32.6

 

5.9%

 

0.9%

Fees and remuneration for services

262.8

 

39.9%

 

7.3%

 

198.5

 

36.2%

 

5.8%

ENRE penalties

18.4

 

2.8%

 

0.5%

 

52.7

 

9.6%

 

1.5%

Others

67.1

 

10.2%

 

1.9%

 

47.1

 

8.6%

 

1.4%

Total

657.9

 

100%

 

18.3%

 

548.3

 

100%

 

15.9%

 

Administrative Expenses

Administrative expenses increased 53.0% to Ps. 496.8 million for the year ended December 31, 2014, from Ps. 324.8 million for the year ended December 31, 2013. This increase of Ps. 172 million was mainly due to a Ps. 92.2 million increase in salaries and social security taxes attributable to an increase in employee compensation granted in 2014, a Ps. 44.7 million increase in fees and remuneration for services, and Ps. 13.3 million increases in rent and insurance.

As a percentage of revenue from sales, administrative expenses increased to 13.8% for the year ended December 31, 2014, as compared to 9.4% for the year ended December 31, 2013.

The following are the principal components of our administrative expenses for the years indicated.

 

Year ended December 31,

 

2014

   

% of 2014

 

2013

   

% of 2013

    

net sales

    

net sales

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and social security taxes

242.1

 

48.7%

 

6.7%

 

149.9

 

46.2%

 

4.4%

Rent and insurance

35.2

 

7.1%

 

1.0%

 

21.9

 

6.7%

 

0.6%

Fees and remuneration for services

148.1

 

29.8%

 

4.1%

 

103.4

 

31.8%

 

3.0%

Security Services

15.1

 

3.1%

 

0.4%

 

10.4

 

3.2%

 

0.3%

Others

56.3

 

11.3%

 

1.6%

 

39.2

 

12.1%

 

1.1%

Total

496.8

 

100%

 

13.8%

 

324.8

 

100%

 

9.4%

 

   

Other operating (expenses) income

Other operating expenses, increased by 229.8% to a loss of Ps. 265.5 million for the year ended December 31, 2014, compared to a loss of Ps. 80.5 million for the year ended December 31, 2013. The negative variation of Ps. 185.1 million was mainly due to a Ps. 97.7 million increase in expenses related to FOCEDE, Ps. 39.4 increase in accrual for lawsuits, Ps. 16.2 in fees for services provided to third parties and a Ps. 9.2 million increase in debit and credit taxes.

Operating (loss) profit

 

Our operating loss was Ps. 253.1 million for the year ended December 31, 2014, from a profit of Ps. 1,314.6 million for the year ended December 31, 2013. This increase in operating losses was mainly due to the increase in other operating expenses described above and a  22.5% decrease in the partial recognition of a CMM adjustment pursuant to Resolution No. 250/13 and Notes No. 6,852/13, No. 4,012/14, No. 486/14 and No. 1,136/14 of the SE, of Ps. 661.2 million, given that the retroactive effect of higher costs (in accordance with the provisions of Section 4.2 of the Adjustment Agreement) was recognized in 2013 for the period May 2007 through September 2013.

Net Financial Expense

Net financial expense totaled Ps. 681.1 million for the year ended December 31, 2014, compared to Ps. 490.9 million for the year ended December 31, 2013. This increase of Ps. 190.2 million was primarily due to an increase of Ps. 87.2 million in financial expense, including interest due in connectionwith debt with CAMMESA of Ps. 133.9 million, a Ps. 62.1 million increase in exchange differences as a result of exchange rate variations , and a Ps.48.1. million decrease in financial income due to lower recognition of interest due in connection with lower income during 2014 arising from the recognition of CMM adjustments (which covered the period October 2013 through December 2014) pursuant to Resolution No. 250/2013 and Notes No. 6,852/13, No. 4,012/14, No. 486/14 and No. 1,136/14 of the SE, in 2014, as compared to non-recurrent higher income during 2013 as a result of the recognition of CMM adjustments (which covered the period May 2007 through September 2013, which period is greater than the period covered by the CMM recognition during 2014).

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Income Tax

We recorded an income tax credit of Ps.154.4 million in 2014, compared to an income tax credit of Ps. 102.5 million in 2013. Regarding current tax expenses, we generated a tax loss carry forward in 2014 of Ps. 240.1 million at the applicable tax rate as a result of the increase in operating costs described above, which was offset by an allowance for impairment of tax loss carry forward, compared to a tax payable of Ps. 288.3 million in 2013 due to an increase in taxable income as a result of higher cost recognition in 2013 under Resolution No. 250/13 and Note No.6,852/of the SE. Regarding the deferred tax, in 2014 we recorded a net deferred taxbenefit of Ps. 154.4 million compared to Ps. 44.1 million in 2013, mainly due to the gain generated by the tax effects of temporary differences related to other payables for ENRE penalties and salaries and provisions made in connection with seniority-based bonus payments.

(Loss) / Profit from discontinued operations

 

During 2012 and 2013, Edenor completed the sale of its formerly controlled companies (see “Item 4. Information on the Company”).  As a result, in 2014 Edenor did not present results from discontinued operations. In 2013, loss from discontinued operations totaled Ps. 95.1 million mainly as a result of AESEBA/EDEN’s assets sale which resulted in a loss of Ps. 96.5 million, after tax related effects.

Profit (Loss) for the year

We recorded a loss of Ps. 779.7 million for the year ended December 31, 2014, compared to a profit of Ps. 772.7 million for the year ended December 31, 2013 mainly as a consequence of the increase in other operating costs as described above and lower income during 2014 arising from the recognition of CMM adjustments (which covered the period October 2013 through December 2014) pursuant to Resolution No. 250/2013 and Notes No. 6,852/13, No. 4,012/14, No. 486/14 and No. 1,136/14 of the SE, as compared to non-recurrent higher income during 2013 as a result of the recognition of CMM adjustments (which covered the period May 2007 through September 2013, which period is greater than the period covered by the CMM recognition during 2014).

 

 

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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, 2015, 2014 and 2013. In order to preserve and guarantee the provision of the public service and improve the existing cash deficit, beginning in October 2012, the Company decided to only partially cancel the obligations with 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. In 2015, following the issuance of Resolution No. 32/2015, we resumed full payment of our commercial obligations with CAMMESA, but did not cancel past commercial debt. As of December 31, 2015 the commercial debt with CAMMESA amounts to approximately Ps. 2,714.3 million including interests. In November 2015, we submitted to CAMMESA a repayment plan. As of the date of this annual report, negotiations with CAMMESA continue with respect to a final repayment schedule. See “Item 3. Risk FactorsRisk relating to our BusinessWe may not have the ability to raise the funds necessary to repay our commercial debt with CAMMESA, our major supplier.”

Since entering into the Adjustment Agreement in February 2006, we have been engaged in an Integral Tariff Revision or RTI with the ENRE, relating to the adjustment and renegotiation of the terms of the concession. 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 of 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, all 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.

 

The Argentine government adopted a series of measures such as the issuance of Resolution No. 347/2012 of the ENRE, Resolution No. 32/15 of the SE and the granting of certain economic assistance program (through the extension of loans for consumption (mutuums)) (the “Program”) for us to be able to  cope with our cash needs for specific purposes.  We consider the funds received through the Program as a supplementary measure to being granted increases in tariffs/rates. In connection with the foregoing, following the adoption of a new transitional tariff schedule as from February 1, 2016 and until completion of the RTI process, Resolution No. 7/16 of the Ministry of Energy suspended the transfer of funds that we received under the Program. Considering the funds received through the Program temporarily substituted or replaced the funds that we should have received through the collection of adjusted tariffs pursuant to the Concession Agreement and that such an atypical situation is not expressly covered by the accounting framework applicable to us, the obligations deriving from such economic assistance programs were classified in our financial statements as “Other payables” and the related costs as “Financial expenses”.

 

On June 24, 2014, by Note No. 4012/14, the SE instructed CAMMESA to enter into a loan for consumption (mutuum) and assignment of secured receivables agreement with us in order to pay the higher salary costs indicated in “Item 6. Directors, Senior Management and Employees – Employees”. The aforementioned agreement was entered into on July 10, 2014. The agreement was guaranteed by us with the assignment of the future surplus sale settlements with maturity dates to be determined (Liquidaciones de Venta con Fecha de Vencimiento a Definir - LVFVD) , as a result of the application of Resolution No. 250/13 of the SE.

 

As of December 31, 2014, our debt related to this financing amounted to Ps. 298 million (comprised of Ps.280.6 million in principal and Ps. 17.4 million in accrued interest).

 

In September 2014, the SE, through Resolution No. 65/14, instructed CAMMESA to enter into a Loan and Guarantee Assignment Agreement with us in order to provide the necessary financing to cover the Extraordinary Investment Plan approved by the SE as a consequence of a temporary insufficiency of funds received through Resolution No. 347/12. During 2015, after several amendments, such loan agreement reached Ps. 2,913 million for the entire plan.

 

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Resolution No. 32/15 resolved that LVFVDs be issued in our favor for the amounts generated by the salary increases deriving from the application of Resolution No. 836/14 of the Ministry of Labor, Employment and Social Security for which payment we received this loan (Mutuum); allowing the offsetting of any amounts discussed thereunder against outstanding balances of LVFVDs. The LVFVDs were issued on July 16, 2015 to offset the debt under the loan for consumption (mutuum) and assignment of secured receivables agreement entered into to pay for the higher salaries cost.

 

As of December 31, 2015, the total debt under these loans (mutuums agreements) amounted to Ps. 1,099.8 million, comprised of Ps. 923.6 million in principal for the actual disbursements, and Ps. 176.2 million in accrued interest.

As explained before, these loans were discontinued as from February 1, 2016 under the terms of Resolution No. 7/16 of the Ministry of Energy.

Our principal uses of cash are expected to be operating costs, the servicing of our financial debt and our investment plan. 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”.

Although the ENRE is expected to take all necessary action to conclude the RTI process by December 31, 2016, the outcome of such process is uncertain as to its final form. Thus, if in the future: (i) the new electricity rate schedules are not issued pursuant to the RTI by the ENRE; (ii) we are not granted any other recognition of additional revenue or any other mechanism to compensate for cost increases, and/or; (iii) we do not obtain from the Argentine government any other financing to cover cost increases, it is likely that we will have insufficient liquidity and will therefore be obliged to pursue measures similar to those applied in the past in order to preserve cash and enhance our liquidity.

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 tariffs adjusted to reflect increases in our distribution costs in a timely manner or at all, has affected our capacity to perform our commercial obligations and could also have a material adverse effect on our capacity to perform our financial obligations.”

As of December 31, 2015, 2014 and 2013, our cash and cash equivalents amounted to Ps. 129.0; Ps. 179.1 million and Ps. 243.5 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:

 

  

Year ended December 31

  

2015

 

2014

 

2013

  

(Figures in millions)

Cash and cash equivalents at beginning of year

 

179.1

 

243.5

 

71.1

Net cash flows provided by operating activities (1)

 

3,217.0

 

1,547.9

 

1,436.6

Net cash flows used in investing activities

 

(3,103.3)

 

(1,461.7)

 

(1,109.0)

Net cash flows used in financing activities

 

(172.9)

 

(155.7)

 

(177.1)

Cash and cash equivalents at beginning of year included in assets of disposal group classified as held for sale

 

-

 

-

 

11.2

Exchange differences in cash and cash equivalents

 

9.1

 

5.1

 

10.7

Cash and cash equivalents at the end of year

 

129.0

 

179.1

 

243.5

 

(1)     Includes CAMMESA financing of Ps. 1,189.6 million; Ps.3,455.8 million, and Ps. 2,231.5 million as of December 31, 2015, December 31, 2014 and December 31, 2013, respectively.

 

Net Cash flows provided by operating activities

Net cash flows provided by operating activities increased 107.8% to Ps. 3,217.0 million in the year ended December 31, 2015, from Ps. 1,548.0 million in the year ended December 31, 2014.

Changes in net cash flows provided by operating activities in 2015 were primarily due to the income recognized pursuant Resolution No.32/15, partially offset by a decrease in debt with CAMMESA of Ps. 2,266.0 million. The Company understands the debt with CAMMESA as a type of assistance program tocope with the company’s need of cash for specific purposes. All these supplementary measures were used by the Argentine Government so as to avoid increasing the tariffs.

 

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Net cash flows provided by operating activities increased by 7.7% to Ps. 1,547.9 million in the year ended December 31, 2014, from Ps. 1,436.6 million in the year ended December 31, 2013.

Changes in net cash flows provided by operating activities in 2014 were primarily due to an increase in debt with CAMMESA (Ps. 3,455.5 million) and to the funds obtained from PUREE (Ps. 482.9 million), partially offset by the recognition of higher costs under Resolution No. 250/13 of the SE and subsequent notes of the SE (Ps. 2,271.9 million), to a decrease in net loss (Ps. 779.7 million) and a decrease in trade payables (Ps. 528.4 million).

Net cash flows provided by operating activities increased 166.8% to Ps. 1,436.6 million in the year ended December 31, 2013, from Ps. 538.4 million in the year ended December 31, 2012.

Changes in net cash flows provided by operating activities in 2013 were primarily due to an increase in debt with CAMMESA (Ps. 2,231.5 million), to the funds obtained from PUREE (Ps. 491.9 million) and to an increase in net profit (Ps. 772.7 million), partially offset by the recognition of higher costs by Resolution No. 250/13 and subsequent notes of the SE (Ps. 2,933.1 million).

Net Cash flows used in investing activities

Net cash flows used in investing activities increased by 112.3% to Ps. 3,103.3 million in the year ended December 31, 2015, from Ps. 1,461.7 million in the year ended December 31, 2014.

Changes in net cash flows used in investing activities in 2015 were primarily due to an increase in our capital expenditures (Ps. 695.4 million) and in net payments for the purchase of financial assets at fair value (Ps. 947.5 million).

Net cash flows used in investing activities increased by 31.8% to Ps. 1,461.7 million in the year ended December 31, 2014, from Ps. 1,109 million in the year ended December 31, 2013.

Changes in net cash flows used in investing activities in 2014 were primarily due to variations in our capital expenditures (Ps. 1,400.1 million) and in net payments for the purchase of financial assets at fair value (Ps. 64.6 million).

Net cash flows used in investing activities increased by 87.9% to Ps. 1,109 million in the year ended December 31, 2013, from Ps. 590.3 million in the year ended December 31, 2012.

Changes in net cash flows used in investing activities in 2013 were primarily due to variations in our capital expenditures (Ps. 892.4 million) and, to a lesser extent to variations in discontinued operations (Ps. 124.2 million) and in net payments for the purchase of financial assets at fair value (Ps. 97.4 million).

Net Cash flows used in financing activities

Net cash flows used in investing activities increased by 11.0% to Ps. 172.9 million in the year ended December 31, 2015, from Ps. 155.7 million in the year ended December 31, 2014, primarily as a result of the payment of interest on loans (Ps. 172.9 million).

Net cash flows used in investing activities decreased by 12.1% to Ps. 155.7 million in the year ended December 31, 2014, from Ps. 177.1 million in the year ended December 31, 2013, primarily as a result of the payment of interest on loans (Ps. 155.3 million).

Net cash flows used in investing activities increase by 537.1% to Ps. 177.1 million in the year ended December 31, 2013, from Ps. 27.8 million in the year ended December 31, 2012, primarily as a result of the payment of interest on loans (Ps. 177 million).

 

 

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 stringentover 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.

 

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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.

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,

 

2015

 

2014

 

2013

 

(Figures in millions)

      

Network Infraestructure (1)

1,468.5

 

1,284.2

 

835.5

Network maintenance and improvements

307.5

 

201.4

 

174.3

Legal requirements (2)

2.9

 

6.1

 

11.0

Communications and telecontrol

64.4

 

55.7

 

13.3

Others

674.9

 

154.3