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Empresa Distribuidora y Comercial Norte (EDN)

Filed: 30 Apr 19, 3:17pm

As filed with the Securities and Exchange Commission on April 30, 2019

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, 2018 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 5510 / Fax: +54 11 4346 5325 Avenida Del Libertador 6363 (C1428ARG)
Buenos Aires, Argentina

Chief Financial Officer

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

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

Title of each class:

Name of each exchange on which registered

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, 418,825,357 Class B Common Shares and 1,952,604 Class C Common Shares

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

Yes¨ Nox

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Sections 13 or 15(d) of the Securities Exchange Act of 1934. Yes¨ Nox

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. Yesx No¨

Indicate by check mark whether the registrant has submitted electronically, every

Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx No¨

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

Large Accelerated Filer

¨

Accelerated Filer

x

Non-Accelerated Filer

¨

Emerging Growth Company

¨

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.¨

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

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


 
 

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

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


 
 

 

PART I

Item 1.

Identity of Directors, Senior Management and Advisors

2

Item 2.

Offer Statistics and Expected Timetable

2

Item 3.

Key Information

2

Item 4.

Information on the Company

34

Item 4A.

Unresolved Staff Comments

71

Item 5.

Operating and Financial Review and Prospects

71

Item 6.

Directors, Senior Management and Employees

110

Item 7.

Major Shareholders and Related Party Transactions

122

Item 8.

Financial Information

127

Item 9.

The Offer and Listing

132

Item 10.

Additional Information

139

Item 11.

Quantitative and Qualitative Disclosures about Market Risk

158

Item 12.

Description of Securities Other than Equity Securities

159

   

PART II

Item 13.

Defaults, Dividend Arrearages and Delinquencies

160

Item 14.

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

160

Item 15.

Controls and Procedures

160

Item 16A.

Audit Committee Financial Expert

162

Item 16B.

Code of Ethics

162

Item 16C.

Principal Accountant Fees and Services

162

Item 16D.

Exemptions from the Listing Standards for Audit Committees

162

Item 16E.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

162

Item 16F.

Change in Registrant’s Certifying Accountant

163

Item 16G.

Corporate Governance

163

Item 16H.

Mine Safety Disclosures

160

   

PART III

Item 17.

Financial Statements

170

Item 18.

Financial Statements

170

Item 19.

Exhibits

170

   

Index to Financial Statements

F-1


 
 

PART I

Item 1.       Identity of Directors, Senior Management and Advisors

Not applicable.

Item 2.       Offer Statistics and Expected Timetable

Not applicable.

Item 3.       Key Information

In this annual report, except as otherwise specified, references to “we”, “us”, “our” and “the Company” are references to (i) Empresa Distribuidora y Comercializadora Norte S.A., or “Edenor”, on a standalone basis priortoMarch 1, 2011, (ii) Edenor, Empresa Distribuidora Eléctrica Regional S.A. (“Emdersa”) and Aeseba 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 treatment of pending obligations after the Integral Tariff Revision (“RTI”);

·       uncertainties related to future Government interventions or legal actions;

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

·       the evolution of energy losses and the impact of fines and penalties and uncollectable debt;

·       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; and,

·       additional matters identified in “Risk factors”.

                                              

 

2


 
 

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

SELECTED FINANCIAL DATA

The following table presents our selected financial data for each of the years in the three-year period ended December 31, 2018. The selected statement of comprehensive income (loss) and statement of cash flow data for the years ended December 31, 2018, 2017 and 2016 and the selected statement of financial position as of December 31, 2018 and 2017, have been prepared in accordance with IFRS as issued by the IASB and have been derived from our Financial Statements included elsewhere in this annual report. The summary financial data as of and for each of the two years ended December 31, 2015 and 2014 have not been presented as these cannot be provided on a restated basis without unreasonable effort or expense.

Our Financial Statements have been restated to reflect the changes in the general purchasing power of the Company’s functional currency (the Argentine peso), in conformity with the provisions of both IAS 29 “Financial reporting in hyperinflationary economies” and General Resolution No. 777-18 of the Argentine Securities Commission (Comisión Nacional de Valores or “CNV”). As a result thereof, the Financial Statements are stated in terms of the measuring unit current at the end of the reporting period.

According to IAS 29, the restatement of financial statements is necessary when the functional currency of an entity is that of a hyperinflationary economy. To define a state of hyperinflation, IAS 29 provides a series of guidelines, including but not limited to (i) analyzing the behavior of population, prices, interest rates and wages faced with the development of price indexes and the loss of the currency’s purchasing power, and (ii) as a quantitative feature, which in practice, is the most weighted condition, verifying whether the cumulative inflation rate over three years approaches or exceeds 100%.

Although general price levels increased significantly in recent years, the cumulative inflation rate over the last three years in Argentina had remained below 100%. However, due to certain macroeconomic factors, the projected three-year inflation in 2018 surpassed 100% and the Argentine Government’s targets and other available projections indicate that this trend will not be reversed in the short-term.

Therefore, according to IAS 29, the Argentine economy should be regarded as hyperinflationary as from July 1, 2018. Pursuant to IAS 29, the adjustment will be resumed from the date on which it was last made which is February 2003. Additionally, on December 4, 2018 Law No. 27,468 was enacted and repealed the provisions of Executive Order No. 664/03, which did not allow for the filing of inflation-adjusted financial statements. This law states that the provisions of Section 62 of Law No. 19,550 the (“Argentine Corporations Law”) regarding the preparation of financial statements to reflect the effects of inflation will continue to apply, consequently reinstating adjustment for inflation.

Taking into consideration the above-mentioned index, in the fiscal years ended December 2018, 2017 and 2016, the inflation rate amounted to 47.7%, 24.8% and 40.9%, respectively.

During 2018, the regulatory and electricity rate environment continued to normalize and we improved the quality of our service and the amount and quality of our investments. However, certain unanticipated actions of the Argentine Government, the Ente Nacional Regulador de la Electricidad (“ENRE”) and the Province of Buenos Aires strained the Company’s ability to generate funds, such as: the lack of recognition of discounts to users with social tariffs for more than Ps.900 million, the deferral of 50% of the CPD that corresponded to apply as of August 1, 2018 in six consecutive monthly installments as of February 1, 2019 for an estimated total of Ps. 1 billion and the non-payment from low-income areas and shantytowns of consumption for more than Ps.1 billion.

In February 2018, electricity rates increased, incorporating the last 18% installment that had been deferred in 2017, together with the 11.99% inflation adjustment of the second half of 2017 and the 2.51% net reduction related to the “E” stimulus factor, which provides the transfer of a distributor’s users expected efficiency gains, and besides reflects the impact of certain investments added to the grid during the previous year. The deferred amounts from 2017 were retroactively applied to be collected in 48 installments were also included. In August 2018, pursuant to applicable regulations, electricity rates increased by 7.93% deferring until February 2019, the remaining 6.51% to complete the inflation adjustment of the first six-month period of 2018.

3


 
 

 Although the regulatory framework in effect is currently being applied, the Argentine Government’s decision to incorporate rate increases in the price of electricity of 23% in February 2018 and 36% in August 2018, respectively, in addition to the increases previously mentioned , combined with the deterioration of Argentina’s general economic situation, with household income falling as a result of the significant devaluation and the increasing inflation, gave rise to a public discussion regarding electricity rates. In connection with such discussion, Congress enacted a law to restore electricity rates to their 2017 values and incorporate certain controls over the investments and electricity rates. On May 31, 2018, the Macri administration vetoed this law.See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Sources and Uses of Funds”

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

In this annual report, except as otherwise specified, references to “U.S.$” and “Dollars” are to U.S. Dollars, and references to “Ps.”, “AR$” and “Pesos” are to Argentine Pesos. Solely for the convenience of the reader, we have converted certain amounts included in “Item 3. Key Information” and elsewhere in this annual report from Pesos into Dollars using, for the information provided as of December 31, 2018, the seller exchange rate reported by the Banco de la Nación Argentina (“Banco Nación”), as of December 31, 2018. which was Ps.37.70 to U.S.$1.00 unless otherwise indicated. These conversions should not be considered representations that any such amounts have been, could have been or could be converted into U.S. Dollars at that or at any other exchange rate. On April 26, 2019, the exchange rate was Ps. 45.97, to U.S.$1.00. As a result of fluctuations in the Dollar Peso exchange rate, the exchange rate at such date may not be indicative of current or future exchange rates. See “—Risk Factors—Factors Relating to Argentina—Fluctuations in the value of the Peso could adversely affect the Argentine economy and, in turn, adversely affect our results of operations”. The Federal Reserve Bank of New York does not report a noon buying rate for Pesos. For more information regarding historical exchange rates, see “Item 3.Key Information—Exchange Rates.”

 

4


 
 

  

Statement of comprehensive income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

2018

 

2017

 

2016

 

 

 US$

 

 Ps.

 

 Ps.

 

 Ps.

Revenue   (1)

 

1,484.2

 

  55,953.6

 

  39,602.9

 

  25,826.8

Electric power purchases

 

(845.5)

 

  (31,875.7)

 

  (20,820.3)

 

  (11,989.6)

Subtotal

 

638.7

 

  24,077.9

 

  18,782.6

 

  13,837.2

Transmission and distribution expenses

 

(289.5)

 

  (10,912.7)

 

(9,247.1)

 

  (13,263.9)

Gross gain

 

349.2

 

  13,165.2

 

9,535.5

 

573.3

 

 

 

 

 

 

 

 

 

Selling expenses

 

(133.5)

 

(5,032.7)

 

(3,567.8)

 

(3,379.3)

Administrative expenses

 

   (76.2)

 

(2,872.1)

 

(2,504.5)

 

(2,288.0)

Other operating expense, net

 

   (35.0)

 

(1,320.8)

 

(1,102.7)

 

(913.1)

Gain from interest in joint ventures

 

-

 

   1.6

 

   10.1

 

-

Operating profit (loss) before income from provisional remedies higher costs recognition and SE Resolution 32/15

 

104.5

 

3,941.2

 

2,370.6

 

(6,007.1)

Recognition of income – provisional remedies – MEyM Note 2016-04484723

 

-

 

-

 

-

 

2,074.2

Income recognition on account of the RTI - SE Resolution No. 32/15

 

-

 

-

 

-

 

958.3

Higher costs recognition - SE Resolution No. 250/13 and subsequents Notes

 

-

 

-

 

-

 

185.4

Operating profit (loss)

 

104.5

 

3,941.2

 

2,370.6

 

(2,789.2)

 

 

 

 

 

 

 

 

 

Financial income

 

   17.8

 

671.8

 

453.8

 

384.6

Financial expenses

 

(132.0)

 

(4,976.7)

 

(2,570.3)

 

(2,589.2)

Other financial results

 

   (52.1)

 

(1,965.3)

 

(168.5)

 

   (87.3)

Net financial expense

 

(166.3)

 

(6,270.2)

 

(2,285.0)

 

(2,291.9)

 

 

 

 

 

 

 

 

 

Gain on net monetary position

 

225.6

 

8,503.9

 

5,505.1

 

5,469.1

 

 

 

 

 

 

 

 

 

Profit before taxes

 

163.8

 

6,174.9

 

5,590.7

 

388.0

 

 

 

 

 

 

 

 

 

Income tax

 

   (49.8)

 

(1,877.4)

 

(510.1)

 

(147.3)

 

 

 

 

 

 

 

 

 

Profit for the year

 

114.0

 

4,297.5

 

5,080.6

 

240.7

 

 

 

 

 

 

 

 

 

Profit for the year attributable to:

 

 

 

 

 

 

 

 

Owners of the Company

 

114.0

 

4,297.5

 

5,080.6

 

240.7

Profit for the year

 

114.0

 

4,297.5

 

5,080.6

 

240.7

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

Items that will not be reclassified to profit or loss

 

 

 

 

 

 

 

 

Results related to benefit plans

 

  (0.1)

 

   (5.6)

 

   22.2

 

   14.4

Tax effect of actuarial results on benefit plans

 

-

 

   1.7

 

   (7.2)

 

   (5.0)

Total other comprehensive results

 

   (0.1)

 

   (3.9)

 

   15.0

 

   9.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income for the year attributable to:

 

 

 

 

 

 

 

 

Owners of the parent

 

113.9

 

4,293.6

 

5,095.6

 

250.1

Comprehensive profit for the year

 

113.9

 

4,293.6

 

5,095.6

 

250.1

 

 

 

 

 

 

 

 

 

Basic and diluted earnings profit per share:

 

 

 

 

 

 

 

 

Basic and diluted earnings profit per share

 

  0.13

 

   4.83

 

   5.66

 

   0.27

 

 

 

 

 

 

 

 

 

Basic and diluted earnings profit per ADS (2):

 

 

 

 

 

 

 

 

Basic and diluted earnings profit per ADS from continuing operations

 

  2.56

 

96.43

 

  113.45

 

   5.58

 

Columns Ps. in millions of pesos stated in terms of the measuring unit current as of December 31, 2018, except for amounts per share and number of shares or as otherwise indicated

(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.

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

 

 

 

5


 
 

 

Statement of financial position

 

 

2018

 

2018

 

2017

 

2016

 

 

 US$

 

 Ps.

 

 Ps.

 

 Ps.

ASSETS

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

Property, plant and equipment

 

  1,657.2

 

   62,474.8

 

   57,060.2

 

   50,894.8

Interest in joint ventures

 

0.2

 

8.8

 

10.7

 

0.8

Other receivables

 

21.2

 

  800.7

 

62.7

 

93.0

Financial assets at fair value through profit or loss

 

 -

 

  -

 

  -

 

81.9

Total non-current assets

 

  1,678.6

 

   63,284.3

 

   57,133.6

 

   51,070.5

 

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Inventories

 

33.4

 

  1,259.8

 

  649.6

 

  801.7

Other receivables

 

6.4

 

  242.1

 

  296.2

 

  330.4

Trade receivables

 

  201.3

 

  7,587.9

 

  8,385.2

 

  7,188.5

Financial assets at fair value through profit or loss

 

89.7

 

  3,381.6

 

  4,278.0

 

  3,674.2

Financial assets at amortized cost

 

32.1

 

  1,208.8

 

17.0

 

2.8

Cash and cash equivalents

 

0.7

 

27.6

 

  122.3

 

  476.5

Total current assets

 

  363.6

 

   13,707.8

 

   13,748.3

 

   12,474.1

TOTAL ASSETS

 

  2,042.2

 

   76,992.1

 

   70,881.9

 

   63,544.6

 

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

Share capital and reserve attributable to the owners of the Company

 

 

 

 

 

 

 

 

Share capital

 

23.4

 

  883.3

 

  898.7

 

  897.0

Adjustment to share capital

 

  452.7

 

   17,065.6

 

   17,224.4

 

   17,220.5

Additional paid-in capital

 

6.4

 

  240.6

 

  229.9

 

  183.6

Treasury stock

 

0.6

 

23.1

 

7.8

 

9.4

Adjustment to treasury stock

 

6.0

 

  225.6

 

66.7

 

70.6

Cost treasury stock

 

(28.4)

 

  (1,068.8)

 

  -

 

  -

Legal reserve

 

4.1

 

  152.8

 

  152.8

 

  152.8

Opcional reserve

 

9.7

 

  367.1

 

  367.1

 

  367.1

Other reserve

 

  -

 

  -

 

  -

 

32.8

Other comprehensive loss

 

(3.6)

 

  (136.9)

 

  (132.9)

 

  (147.9)

Accumulated losses

 

  350.6

 

   13,216.6

 

  8,979.3

 

  3,898.7

TOTAL EQUITY

 

  821.5

 

   30,969.0

 

   27,793.8

 

   22,684.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

Trade payables

 

7.6

 

  286.2

 

  355.7

 

  429.2

Other payables

 

  202.2

 

  7,624.1

 

  8,910.0

 

  9,403.9

Borrowings

 

  190.8

 

  7,192.5

 

  6,189.3

 

  5,103.5

Deferred revenue

 

7.3

 

  275.4

 

  287.4

 

  368.5

Salaries and social security payable

 

4.3

 

  162.7

 

  176.7

 

  173.8

Benefit plans

 

10.2

 

  385.1

 

  477.8

 

  490.3

Tax payable

 

  213.5

 

  8,048.3

 

  7,290.2

 

  7,538.2

Tax liabilities

 

  -

 

  -

 

  -

 

1.3

Provisions

 

28.4

 

  1,070.2

 

  883.1

 

  629.0

Total non-current liabilities

 

  664.3

 

   25,044.5

 

   24,570.2

 

   24,137.7

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Trade payables

 

  387.5

 

   14,609.0

 

   13,577.5

 

   11,668.8

Other payables (1)

 

51.0

 

  1,922.0

 

  546.9

 

  248.3

Borrowings

 

28.6

 

  1,077.5

 

  105.1

 

98.9

Derivative financial instruments

 

  -

 

1.0

 

0.3

 

  -

Deferred revenue

 

0.1

 

5.3

 

5.0

 

1.4

Salaries and social security payable

 

46.2

 

  1,742.6

 

  1,801.5

 

  1,902.0

Benefit plans

 

0.9

 

32.4

 

46.4

 

61.5

Tax payable

 

16.4

 

  617.3

 

  689.1

 

  286.0

Tax liabilities

 

20.8

 

  784.0

 

  1,555.5

 

  2,293.2

Provisions

 

4.9

 

  187.5

 

  190.6

 

  162.2

Total current liabilities

 

  556.4

 

   20,978.6

 

   18,517.9

 

   16,722.3

TOTAL LIABILITIES

 

  1,220.7

 

   46,023.1

 

   43,088.1

 

   40,860.0

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND EQUITY

 

  2,042.2

 

   76,992.1

 

   70,881.9

 

   63,544.6

 

Columns Ps. in millions of pesos stated in terms of the measuring unit current as of December 31, 2018, except for amounts per share and number of shares or as otherwise indicated

 

6


 
 

 

Statement of Cash flows

         
  

2018

 

2018

 

2017

 

2016

  

 US$

 

 Ps.

 

 Ps.

 

 Ps.

Cash flows from operating activities

        

Profit for the year

 

            114.0

 

         4,297.5

 

         5,080.6

 

            240.8

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

        

Depreciation of property, plant and equipment

 

              67.9

 

         2,561.5

 

         2,148.1

 

         2,147.2

Loss on disposals of property, plant and equipment

 

                3.6

 

            134.5

 

               49.8

 

            244.5

Net accrued interest

 

            114.0

 

         4,296.4

 

         2,113.6

 

         2,198.0

Exchange differences

 

               69.8

 

         2,630.0

 

            564.1

 

            911.8

Income tax

 

               49.8

 

         1,877.4

 

            510.1

 

            147.3

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

 

               25.9

 

            977.5

 

            391.6

 

            433.4

Adjustment to present value of receivables

 

                     -

 

                 0.3

 

                 0.4

 

              (5.7)

Provision for contingencies

 

               19.2

 

            724.1

 

            542.4

 

            301.8

Changes in fair value of financial assets

 

            (18.6)

 

         (703.1)

 

         (437.6)

 

         (891.8)

Accrual of benefit plans

 

                 3.0

 

            112.2

 

            169.5

 

            194.2

Gain from interest in joint ventures

 

                     -

 

              (1.6)

 

            (10.1)

 

                     -

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

 

                     -

 

                     -

 

                     -

 

         (185.4)

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

 

                     -

 

                     -

 

                     -

 

         (958.3)

Recognition of income – provisional remedies – MINEM Note 2016-04484723

 

                     -

 

                     -

 

                     -

 

      (2,074.2)

Net gain from the repurchase of Corporate Bonds

 

              (0.1)

 

              (4.5)

 

                     -

 

              (0.1)

Income from non-reimbursable customer contributions

 

              (0.1)

 

              (5.6)

 

              (4.4)

 

              (1.5)

Other reserve constitution - Share bases compensation plan

 

                 0.3

 

               10.7

 

               11.5

 

               32.8

Gain on net monetary position

 

         (225.6)

 

      (8,503.9)

 

      (5,505.1)

 

      (5,469.1)

Changes in operating assets and liabilities:

        

Increase in trade receivables

 

            (56.5)

 

      (2,131.4)

 

      (2,623.7)

 

      (5,503.1)

Decrease in other receivables

 

               22.1

 

            834.0

 

               28.1

 

         1,968.0

Increase in inventories

 

            (21.7)

 

         (819.9)

 

         (530.1)

 

         (283.0)

Increase in deferred revenue

 

                 2.3

 

               88.4

 

                     -

 

               86.9

Increase in trade payables

 

               33.0

 

         1,242.9

 

         4,887.1

 

         4,853.9

Increase in salaries and social security payable

 

               15.0

 

            565.7

 

            314.8

 

            579.8

Decrease in benefit plans

 

              (1.5)

 

            (55.4)

 

            (56.6)

 

            (57.0)

(Decrease) Increase in tax liabilities

 

            (13.7)

 

         (515.7)

 

         (366.7)

 

         1,832.4

Increase in other payables

 

               85.4

 

         3,220.5

 

            438.2

 

         4,327.3

Decrease in provisions

 

              (8.6)

 

         (325.2)

 

            (58.9)

 

            (95.9)

Payment of Tax payable

 

            (23.5)

 

         (886.2)

 

         (390.8)

 

                     -

Net cash flows provided by operating activities

 

            255.4

 

         9,621.1

 

         7,265.9

 

         4,975.0

 

 

 

 

7


 
 

Statement of Cash flows (continued)

  

2018

 

2018

 

2017

 

2016

  

 US$

 

 Ps.

 

 Ps.

 

 Ps.

Cash flows from financing activities

        

Proceeds from borrowings

 

   -

 

   -

 

   1,285.9

 

   -

Payment of interests

 

   (17.3)

 

   (652.7)

 

   (418.5)

 

   (516.8)

Repurchase of corporate notes

 

   (10.0)

 

   (375.5)

 

   -

 

  (9.8)

Payment of redemption on corporate notes

 

  -

 

   -

 

   -

 

   (420.8)

Acquisition of own shares

 

   (28.4)

 

   (1,068.8)

 

   -

 

   -

Net cash flows (used in) generated by financing activities

 

  (55.7)

 

   (2,097.0)

 

   867.4

 

   (947.4)

         

Decrease in cash and cash equivalents

 

  (21.2)

 

   (804.4)

 

   (375.5)

 

   (44.3)

         

Cash and cash equivalents at the beginning of year

 

 3.2

 

   122.2

 

   476.5

 

   237.6

Exchange differences in cash and cash equivalents

 

 4.1

 

   156.1

 

  (0.1)

 

  (9.0)

Result from exposure to inflation

 

  14.7

 

   553.6

 

   21.3

 

   292.2

Decrease in cash and cash equivalents

 

  (21.3)

 

   (804.4)

 

   (375.5)

 

   (44.3)

Cash and cash equivalents at the end of the year

 

 0.7

 

   27.5

 

   122.2

 

   476.5

         

Supplemental cash flows information

        

Non-cash activities

        
         
  

   -

      

Acquisitions of property, plant and equipment through increased trade payables

 

  (18.0)

 

   (677.2)

 

   (585.7)

 

   (379.1)

  

   -

      
  

   -

      
  

   -

      

Decrease of property, plant and equipment through increased other receivables

 

  11.7

 

   439.3

 

   -

 

   -

 

Columns Ps. in millions of pesos stated in terms of the measuring unit current as of December 31, 2018, except for amounts per share and number of shares or as otherwise indicated

 

 

Year ended December 31,

 

2018

 

2017

 

2016

Operating data

 

 

 

 

 

Energy sales (in GWh): 

21,172

 

21,584

 

22,253

     Residential

8,948

 

9,143

 

9,709

     Small Commercial

1,810

 

1,850

 

1,819

     Medium Commercial

1,668

 

1,745

 

1,821

     Industrial

3,646

 

3,687

 

3,677

     Wheeling System(1)

3,823

 

3,968

 

4,013

     Public Lighting

724

 

709

 

704

     Shantytowns

553

 

483

 

511

Customers (in thousands) (2)

3,040

 

2,950

 

2,866

Energy Losses (%)

18.2%

 

17.1%

 

17.0%

MWh sold per employee

4,301

 

4,507

 

4,743

Customers per employee

618

 

616

 

611

   

(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)     We define a user 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 user.

 

 

 

8


 
 

EXCHANGE RATES

In 2018, the Argentine Peso experienced a rapid devaluation against major foreign currencies, particularly against the U.S. dollar. According to the exchange rate information published by the Banco de la Nación Argentina, the Argentine Peso depreciated by 102.2% against the U.S. dollar during the year ended December 31, 2018 (compared to 17.4% and 21.9% in the years ended December 31, 2017 and 2016, respectively).

The following table sets forth the high, low, average and period-end exchange rates for the periods indicated, expressed in Pesos per U.S. Dollar and not adjusted for inflation. 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. There can be no assurance that the Peso will not depreciate or appreciate in the future. The Federal Reserve Bank of New York does not report a noon buying rate for Pesos. For more inform regarding see depreciation see “—Risk Factors—Factors Relating to Argentina—Fluctuations in the value of the Peso could adversely affect the Argentine economy and, which could, in turn adversely affect our results of operations.”  

 

 

Low

 

High

 

Average

 

Period End

 

 

(Pesos per U.S. Dollar)

Year ended December 31,

 

 

 

 

 

 

 

 

 

 

 

2016

 

13.20

 

 

16.03

 

 

14.79

(1)

 

15.89

2017

 

15.19

 

 

19.20

 

 

16.73

(1)

 

18.65

2018

 

18.41

 

 

41.25

 

 

29.26

(1)

 

37.70

 

 

 

 

 

 

 

 

 

 

 

 

Month

 

 

 

 

 

 

 

 

 

 

 

novembro-18

 

35.40

(2)

 

39.05

(2)

 

36.48

 

 

37.72

dezembro-18

 

36.50

(2)

 

38.60

(2)

 

37.83

 

 

37.70

janeiro-19

 

36.90

(2)

 

37.71

(2)

 

37.39

 

 

37.35

fevereiro-19

 

37.17

(2)

 

39.67

(2)

 

38.40

 

 

39.15

março-19

 

39.81

(2)

 

43.87

(2)

 

41.52

 

 

43.35

April-19 (3)

 

41.62

(2)

 

45.97

(2)

 

43.15

 

 

45.97

 

(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 26, 2019.

 

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 users 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 rates, inflation rates, currency exchange rates, taxes, interest rates, and other local, regional and international events and conditions that may affect Argentina in any manner. For example, slower economic growth or economic recession could lead to a decreased demand for electricity in our concession area or a decline in the purchasing power of our users, which, in turn, could lead to a decrease in collection rates from our users or increased energy losses due to illegal use of our service. Actions of the Argentine Government concerning the economy, including measures 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.

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.

 

9


 
 

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

The effects of a global or regional financial crisis and related turmoil in the global financial system may have a negative impact on our business, financial condition and results of operations, which is likely to be more severe on an emerging market economy, such as Argentina. This 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 effects of an economic crisis on our users and on us cannot be predicted. Weak global and local economic conditions could lead to reduced demand or lower prices for energy, hydrocarbons and related oil products and petrochemicals, which could have a negative effect on our revenues. Economic factors such as unemployment, inflation and the unavailability of credit could also have a material adverse effect on the demand for energy and, therefore, on our business, financial condition and results of operations. The financial and economic situation in Argentina or in 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. Once the aforementioned crisis was over, there were periods with low cost financing that Argentina did not take advantage of because of its particular internal situation.A similar global or regional financial crisis in the future could limit our ability to access the credit or capital markets at a time when we require financing, thereby impairing our flexibility to react to changing economic and business conditions. For these reasons, any of the foregoing factors could together or independently have an adverse effect on our results of operations and financial condition, and cause the market value of our ADSs to decline.

The Argentine economy remains vulnerable and any significant decline may adversely affect our business, results of operations, and 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, national employment levels and the circumstances of Argentina’s regional trade partners. The Argentine economy has been volatile since 2011. For example, Argentina’s economy grew in 2017, but contracted in 2018. The Argentine economy remains vulnerable, as reflected by the following economic conditions:

·

according to the revised calculation of 2004 Gross Domestic Product (“GDP”) published by theInstituto Nacional de Estadística y Censos(National Statistics and Census Institute or “INDEC”) on June 29, 2016, which forms the basis for the real GDP calculation for every year after 2004, and recent data published by the INDEC in 2019, for the year ended December 31, 2018, Argentina’s real GDP decreased by 2.5% compared to the same period in 2017. Argentina’s performance has depended to a significant extent on high commodity prices which, despite having favorable long-term trends, are volatile in the short-term and beyond the control of the Argentine Government and the private sector;

 

·

continued increases in public expenditures have resulted and could continue to result in fiscal deficit and affect economic growth;

 

·

inflation remains high and may continue at those levels in the future;

 

·

investment as a percentage of GDP remains low to sustain the growth rate of the past decade;


·

several protests or strikes took place during 2018, which adversely affects the stability of the political, social and economic environment and may negatively impact the global financial market’s confidence in the Argentine economy. We cannot guarantee that these kinds of events will not occur in the future;

10


 
 

·

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


·

unemployment and informal employment remain high; and

 

·

the Argentine Government’s economic expectations may not be met and the process of restoring the confidence in the Argentine economy may take longer than anticipated.

 

 

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.

In 2018, the Peso experienced a rapid devaluation against major foreign currencies, particularly against the U.S. dollar. According to the exchange rate information published by the Banco de la Nación Argentina, the Peso devaluated by 102.2% against the U.S. dollar during the year ended December 31, 2018 (compared to 17.4% and 21.9% in the years ended December 31, 2017 and 2016, respectively). As a result of the Peso’s increased volatility, the Argentine Government announced several measures to restore market confidence and stabilize its value. Measures implemented by the Central Bankof the Republic of Argentina (Banco Central de la República Argentina, the “Central Bank” or “BCRA”) include, among others, an increase of short term interest rates and selling foreign currency reserves. The Argentine Government in turn announced that it would accelerate the proposed reduction of the fiscal deficit. Further, on May 8, 2018, the current administration announced that the Argentine Government would initiate negotiations with the International Monetary Fund (the “IMF”) with a view to entering into a stand-by credit facility that would give Argentina access to financing by the IMF. On June 20, 2018, the executive board of the IMF approved the terms of the stand-by arrangement (the “SBA”), consisting of a stand-by credit facility for U.S.$50.0 billion, subject to adjustments and compliance with certain political and fiscal performance guidelines by the Argentine Government. On October 26, 2018, a first revision of the SBA concluded with the enlargement of the arrangement for U.S.$5.7 billion. We cannot predict whether the Argentine Government will be able to comply with all terms of the SBA. The ability of the Argentine Government to stabilize the foreign exchange market, restore economic growth and meet the terms of the SBA, is subject to uncertainty. The continued depreciation of the Peso and the failure to meet the terms of the SBA could have a material adverse effect on Argentina’s economy and, consequently, our cash flows, financial condition and results of operations.

Since October 2018, the Central Bank established an exchange rate band. The band in which the Central Bank would not intervene was initially defined between Ps.34 to U.S.$1.00 to Ps.44 to U.S.$1.00, which is adjusted upwards on a monthly basis. The Central Bank allows the free floating of the currency within this band. These measures implemented by the Central Bank have been complemented with, among others, an increase of short term interest rates and a strict control of the money supply. The intention of the Central Bank is to avoid excessive fluctuations of the exchange rate. The success of these measures is subject to uncertainty and the continued depreciation of the Peso could have a material adverse effect on our financial condition and results of operations.

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

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

Since taking office on December 10, 2015, the Macri administration has announced and implemented several significant economic and policy reforms, such as: (i) declaration of a state of emergency for the electricity system and reforms thereto; (ii) reforms affecting the transport and distribution of natural gas ; (iii) reforms concerning the INDEC; (iv) reforms affecting foreign exchange; (v) reforms affecting foreign trade; (vi) the modification of Argentina’s debt policy; (vii) the correction ofmonetary imbalances; (viii) the enactment of the Corporate Criminal Liability Law (as defined below); (ix) reform of Argentina’s capital markets; (x) reform of the pension framework; (xi) the extension of a tax on financial transactions; (xii) tax reform (the “Tax Reform”); and (xiii) the implementation of a fiscal consensus (Pacto Fiscal). As of the date of this annual report, the final impact that the aforementioned measures and any future measures to be taken by the current administration will have on the Argentine economy as a whole, and our business in particular, cannot be fully anticipated.

11


 
 

In this order, the measures announced by the National Government during the firsts days of April 2019, stablish that there will be no more rate increases for the rest of the year. The increases that has already been authorized by the Resolution 366/18 for Resident Clients on the periods of May and August, will be absorbed by the National State.

Further, the next presidential and congressional elections in Argentina will be held in October 2019, and their impact on the future economic and political environment is uncertain, but is likely to be material. No assurances can be made as to the policies that may be implemented by a new Argentine administration, or that political developments in Argentina will not adversely affect the Argentine economy and our business, financial condition and 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.

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

Historically, inflation has materially undermined the Argentine economy and the Argentine Government’s ability to create conditions that allow growth. In recent years, Argentina has confronted inflationary pressures, evidenced by significantly higher fuel, energy and food prices, among other factors. From 2011 to date, Argentina experienced increases in inflation as measured by the Wholesale Price Index (the “WPI”) that reflected the continued growth in the levels of private consumption and economic activity (including exports and public and private sector investment), which applied an upward pressure on the demand for goods and services, evidenced by significantly higher fuel, energy and food prices, among others. The INDEC resumed publication of the WPI for full year since 2016. The Argentine WPI increased by 18.8% in 2017, and 73.5% in 2018 on a year-over-year comparison.

According to data published by the INDEC, CPI rates for July, August, September, October, November and December 2018, and January, February and March 2019 were 3.1%, 3.9%, 6.5%, 5.4%, 3.2%, 2.6%, 2.9%, 3.8% and 4.7% respectively. See“—The credibility of several Argentine economic indexes was 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 implemented programs to control inflation and monitor prices for essential goods and services, including the freezing of prices of supermarket products, and through price support arrangements with private sector companies in several industries and markets. The Argentine Government’s adjustments to electricity and gas tariffs, as well as the increase in the price of gasoline have affected prices, creating additional inflationary pressure. Recently, the Macri administration announced the implementation of new price control agreements for different basic goods.

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 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 continues to be 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. The efforts undertaken by the current administration to reduce inflation have not achieved the desired results. A continuing inflationary environment could undermine our results of operations, adversely affect our ability to finance the working capital needs of our businesses on favorable terms, and it could adversely affect our results of operations and cause the market value of our ADSs  and our common shares to decline.

12


 
 

As of July 1, 2018, the Argentine Peso qualifies as a currency of a hyperinflationary economy and we are required to restate our historical financial statements in terms of the measuring unit current at the end of the reporting year, which could adversely affect our results of operation and financial condition

As of July 1, 2018, the Peso qualifies as a currency of a hyperinflationary economy and we are required to restate our historical financial statements by applying inflationary adjustments to our financial statements, which could adversely affect our results of operation and financial condition.

Pursuant to IAS 29 “Financial Reporting in Hyperinflationary Economies”, the financial statements of entities whose functional currency is that of a hyperinflationary economy must be restated for the effects of changes in a suitable general price index. IAS 29 does not prescribe when hyperinflation arises, but includes several characteristics of hyperinflation. The IASB does not identify specific hyperinflationary jurisdictions. However, in June 2018, the International Practices Task Force of the Centre for Quality (“IPTF”), which monitors “highly inflationary countries”, categorized Argentina as a country with projected three-year cumulative inflation rate greater than 100%. Additionally, some of the other qualitative factors of IAS 29 were present, providing prima facie evidence that the Argentine economy is hyperinflationary for the purposes of IAS 29. Therefore, Argentine companies using IFRS are required to apply IAS 29 to their financial statements for periods ending on and after July 1, 2018.

Adjustments to reflect inflation, including tax indexation, such as those required by IAS 29, were prohibited by Law No. 23,928. Additionally, Decree No. 664/03, issued by the Argentine Government (“Decree 664”), instructed regulatory authorities, such as the Public Registries of Commerce, the Superintendence of Corporations of the City of Buenos Aires and the Argentine Securities Commission (Comisión Nacional de Valores or  “CNV”), to accept only financial statements that comply with the prohibitions set forth by Law No. 23,928. However, on December 4, 2018, Law No. 27,468 (“Law 27,468”) abrogated Decree 664 and amended Law No. 23,928 indicating that the prohibition of indexation no longer applies to the financial statements. Some regulatory authorities, such as the CNV and the IGJ, have required that financial statements for periods ended on and after December 31, 2018 that are to be submitted to them should be restated for inflation following the guidelines in IAS 29. However, for purposes of  determination of the indexation for tax purposes, Law No. 27,468 substituted the WPI for the CPI, and modified the standards for triggering the tax indexation procedure.

During the first three years as from January 1, 2018, the tax indexation will be applicable if the variation of the CPI exceeds 55% in 2018, 30% in 2019 and 15% in 2020. The tax indexation determined during any such year will be allocated as follows: 1/3 in that same year, and the remaining 2/3 in equal parts in the following two years. From January 1, 2021, the tax indexation procedure will be triggered under similar standards as those set forth by IAS 29.

We cannot predict the future impact that the eventual application of tax indexation and related inflation adjustments described above will have on our financial statements or their effects on our business, results of operations and financial condition.

The credibility of several Argentine economic indexes was 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

Prior to 2015, the credibility of the CPI, as well as other indices published by the INDEC were called into question.

The Fernández de Kirchner administration implemented a new price index on February 13, 2014. Such 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 was calculated by measuring prices of goods across the entire urban population of the 24 provinces of Argentina. Although this 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, based on its determination that the INDEC had failed to produce reliable statistical information, particularly with respect to CPI, GDP, inflation and foreign trade data, as well as with poverty and unemployment rates, the Macri administration declared a state of administrativeemergency for the national statistical system and the INDEC. The INDEC suspended the publication of certain statistical data until a reorganization of its technical and administrative structure to recover its ability to produce reliable statistical information was finalized in June 2016. During the suspension period, the INDEC published CPI figures published by the City of Buenos Aires and the Province of San Luis for reference as an estimated benchmark for national inflation. In June 2016, the INDEC resumed publishing an official inflation rate using a new methodology for calculating the CPI.

13


 
 

On September 22, 2016, the INDEC resumed publication of its essential goods and services basket assessment. On July 11, 2017, the INDEC began publishing a national CPI (the “National CPI”). The National CPI is based on a survey conducted by INDEC and several provincial statistical offices in 39 urban areas including each of Argentina’s provinces. The official CPI inflation rate for the year ended December 31, 2018 was47.6%.

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

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

Argentina’s history of defaults on its external debt and the protracted litigation with holdout creditors, summarized below, may reoccur in the future and prevent Argentine companies such as us from accessing the international capital markets readily or may result in higher costs and more onerous terms for such financing, and may therefore negatively affect our business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations.

Following the default on its external debt in 2001, Argentina sought to restructure its outstanding debt by offering holders of the defaulted bonds two opportunities to exchange them for newly issued debt securities, in 2005 and again in 2010. Holders of approximately 93% of Argentina’s defaulted debt participated in the exchanges. Nonetheless, a number of bondholders held out from the exchange offers and pursued legal actions against Argentina in the courts of the United States and several other jurisdictions.

After almost 15 years of litigation, and following the beginning of Macri Administration, in February 2016 Argentina negotiated and reached settlement agreements with a significant portion of its holdout creditors. As required by the settlement, on March 31, 2016, the Argentine Congress voted to repeal Laws No. 26,017 (known as “Ley Cerrojo”) and 26,984 (known as “Ley de Pago Soberano”), which prohibited Argentina from offering to the holdouts better conditions than those offered in the debt swaps of 2005 and 2010. On April 13, 2016, Argentina announced that it would proceed with a new bond offering of up to U.S.$12.5 billion to repay the holdouts. After issuing U.S.$16.5 billion of new bonds to international investors, on April 22, 2016 Argentina notified the competent U.S. court that it had made full payment under the settlement agreements with the holdout creditors. Although the size of the claims involved has decreased significantly, litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in several jurisdictions.

However, even though Argentina has accessed the international capital markets since the settlement, there continues to be a risk that the country will not attract the foreign direct investment and financing needed to restart the investment cycle and achieve sustainable rates of economic growth. If that risk occurs, Argentina’s fiscal condition could be adversely affected, which could lead to more inflation and undermine the Argentine Government’s ability to implement economic policies designed to promote growth. The difficulty of sustaining over time economic growth with reasonable price stability could result in a renewed episode of economic instability.

Further, on May 8, 2018, the current administration announced that the Argentine Government would initiate negotiations with the IMF with a view to entering into a stand-by credit facility that would give Argentina access to financing by the IMF. These negotiations were culminated with the execution of a stand-by agreement that was approved by the IMF Board on June 20, 2018 and a first revision under thementioned stand-by arrangement that was approved by the IMF Board on October 26, 2018, which included the enlargement of the arrangement for U.S.$5.7 billion.

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In addition, the foreign shareholders of several Argentine companies,  together with public utilities and certain bondholders that did not participate in the exchange offers described above, filed claims with the International Centre for Settlement of Investment Disputes (“ICSID”) alleging that the emergency measures adopted by the Argentine Government in 2002 do not meet the just and equal treatment requirements of several bilateral investment treaties to which Argentina is a party. Several of these claims have been resolved against Argentina.

Past situations, such as the lawsuits with creditors that did not accept to the debt exchange, the claims before the ICSID, and the economic policy measures adopted by the Argentine Government or any future default of Argentina regarding its financial obligations may harm Argentine companies’ ability to obtain financing. Further, the financial conditions of such access could be disadvantageous to Argentine companies and, therefore, may adversely affect our business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations.

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

After several years of moderate variations in the nominal exchange rate, the Peso lost more than 50% of its value with respect to the U.S. dollar in 2015 and approximately 22% in 2016 and 21.9% in 2017. In 2018, the depreciation of the Peso with respect to the U.S. Dollar reached approximately 102.2%. We are unable to predict the future value of the Peso against the U.S. Dollar. If the Peso devaluates further, the negative effects on the Argentine economy could have adverse consequences on our business, our results of operations and the market value of our ADSs, including as measured in U.S. Dollars.

From time to time, the Central Bank may intervene in the foreign exchange market in order to maintain the currency exchange rate. Additional volatility, appreciation or depreciation of the Peso against the U.S. dollar or reduction of the Central Bank’s reserves as a result of currency intervention could adversely affect the Argentine economy and our ability to service our debt obligations and could affect the value of  our ADSs and Class B common shares.

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 overall effects of the weakening of the Argentine economy.

Fluctuations in the value of the Peso may also adversely affect the Argentine economy, our financial condition and results of operations. The Peso has been subject to significant devaluation against the U.S. dollar in the past and may be subject to further fluctuation in the future. A depreciation of the Peso against major foreign currencies may also have an adverse impact on our capital expenditure program and increase the Peso amount of our trade liabilities and financial debt denominated in foreign currencies.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 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.

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

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

Notwithstanding the measures adopted by the Macri administration and its planned liberalization of the economy, we cannot assure you that measures that may be adopted by the current or any futureArgentine 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.

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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

Starting in December 2001, the Argentine Government imposed a number of monetary and foreign exchange control measures in an attempt to prevent capital flight and a further depreciation of the Peso. These measures included restrictions on the free disposition of funds deposited with banks, the exchange of Argentine currency into foreign currencies and the transfer of funds abroad without prior approval by the Central Bank were implemented in circumstances where a serious imbalance developed in Argentina’s balance of payments.

Although several of such exchange controls and transfer restrictions were subsequently suspended or terminated, in June 2015 the Argentine Government issued a decree that established new controls on capital flows, which resulted in a decrease in the availability of international credit for Argentine companies. Through a combination of foreign exchange and tax regulations from 2011 until President Macri assumed office in December 2015, the Fernández de Kirchner administration significantly curtailed access to the foreign exchange market by individuals and private-sector entities. In response, an unofficial U.S. Dollar trading market was developed in which the Peso-U.S. Dollar exchange rate in such market differed substantially from the official Peso-U.S. Dollar exchange rate. See “Item 10—Exchange Controls.”

As of the date of this annual report, the Macri administration has eliminated all foreign exchange restrictions that were implemented by the Fernández de Kirchner administration.

Notwithstanding the measures adopted by the Macri administration, in the future the Central Bank and Argentine Government could re-introduce exchange controls, impose restrictions on transfers abroad, restrictions on the movement of capital or take other measures in response to capital flight or a significant depreciation of the Argentine Peso, which could limit our ability to access the international capital markets. Such measures could lead to political and social tensions and undermine the Argentine Government’s public finances, as has occurred in the past, which could have an adverse effect on economic activity in Argentina 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 Argentine economy remains vulnerable to external shocks that could be caused by significant economic difficulties of Argentina’s major regional trading partners, particularly Brazil, or by more general “contagion” effects. Such external shocks and “contagion” effects could have a material adverse effect on Argentina’s economic growth, and consequently, our results of operations and financial condition

Weak, flat or negative economic growth of any of Argentina’s major trading partners such as Brazil could adversely affect Argentina’s economic growth. Argentina’s economy is vulnerable to external shocks. For example, economic slowdowns, especially in Argentina’s major trading partners, led to declines in Argentine exports in the last few years. Specifically, fluctuations in the price of the commodities sold by Argentina and a significant revaluation of the Peso against the U.S. dollar could harm Argentina’s competitiveness and affect its exports. 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.

The economy of Brazil, Argentina’s largest export market and the principal source of imports to Argentina, has experienced heightened negative pressure due to the uncertainties stemming from the ongoing political crisis and extensive corruption investigations. The Brazilian economy contracted by 3.6% during 2016. Although the Brazilian economy slightly expanded by 1% in 2017 and1.1%in 2018, adeterioration of economic conditions in Brazil may reduce demand for Argentine exports and increase demand for Brazilian imports. In October 2018, Jair Bolsonaro was elected president of Brazil. As a result, political uncertainty has increased in Brazil, in relation to future actions that may be taken by the president, which might include substantial economic reforms and changes in Brazil’s foreign policy, as was proposed during Jair Bolsonaro’s campaign. A further deterioration of economic conditions in Brazil could reduce the demand for Argentine exports and increase demand for Brazilian imports. There is a possibility that continued uncertainty with respect to Brazil’s economic and political conditions or the occurrence of an economic and political crisis in Brazil might result in an impact on the Argentine economy, and in turn, have a material adverse effect on our business, financial condition and result of operations.

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Financial and securities markets in Argentina are also influenced by economic and market conditions in other markets worldwide. U.S. monetary policy has significant effects on capital inflows and asset price movements in emerging market economies. Increases in U.S. interest rates result in the appreciation of the U.S. dollar and decreases in prices for raw materials, which can adversely affect commodity-dependent emerging economies.

Additionally, a slowing of China’s GDP growth has led to a reduction in exports to China, which in turn has caused oversupply and price declines in certain commodities. Decreases in exports may have a material adverse effect on Argentina’s public finances due, among others, to a loss of tax on exports, and cause an imbalance in the country’s exchange market.

On June 23, 2016, the United Kingdom voted in favor of exiting the European Union. As of the date of this annual report, the actions that the United Kingdom will take to effectively exit from the European Union or the length of such process are uncertain. The results of the United Kingdom’s referendum and the initiation of the Brexit process have caused, and are anticipated to continue to cause, volatility in the financial markets, which may in turn have a material adverse effect on our business, financial condition and results of operations. The United Kingdom was due to leave the EU on March 29, 2019 at 11 pm UK time. However, the period for negotiating a Withdrawal Agreement was extended. Brexit could lead to additional political, legal and economic instability in the European Union and produce a negative impact on the commercial exchange of Argentina with that region.

On November 8, 2016, Donald J. Trump was elected President of the United States and he assumed office in January 2017. The results of the presidential election have created significant uncertainty about the future relationship between the United States and other countries, including with respect to the trade policies, treaties, government regulations and tariffs that could apply to trade between the United States and other nations. Even though President Trump's protectionist measures are not, for the time being, aimed at Argentina, we cannot predict how they will evolve, nor can we predict the effect that the same or any other measure taken by the Trump administration could cause on global economic conditions and the stability of global financial markets. Furthermore, the ongoing trade tensions between United States and China due to tariffs placed on goods traded between them, may have a potential impact in trade-dependent countries such as Argentina.

On October 27, 2017, the regional government of Catalonia declared independence from Spain. In response to this declaration, the Spanish national government rejected the declaration and intervened dissolving the regional parliament and convening new elections to elect new regional authorities. These conflicts in the European Union in general, and in Spain in particular, may have political, regulatory and economic implications on the international markets.

During August 2018, an increase in inflation and a sustained deficit in current accounts, as well as the protectionist measures taken by the United States which included the doubling of the tariffs on steel and aluminum from Turkey, caused a collapse of the Turkish lira against the Dollar. Such collapse triggered a wave of sales of assets from emerging markets and the significant drop in the value of shares from emerging markets, generating a contagion effect in international markets and several stock exchanges in the world, including Argentina.

Although economic conditions vary from country to country, investors’ perceptions of events occurring in other countries have in the past substantially affected, and may continue to substantially affect, capital flows into and investments in securities from issuers in other countries, including Argentina. 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 internationalinvestors. Argentina could be adversely affected by negative economic or financial developments in other countries, which in turn may have an adverse effect on our financial condition and results of operations.

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Argentina could be adversely affected by negative economic or financial developments in other emerging and developed 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 and Class B common shares.

The application of certain laws and regulations could adversely affect our results of operations and financial condition

Law No. 26,854, which regulates the procedure applicable to injunctions that are requested against or by the Argentine Government or any of its decentralized entities, was promulgated on April 30, 2013 as part of a judicial reform bill approved by the Argentine Congress. The principal changes implemented pursuant to Law No. 26,854 include: (i) prior to issuing a ruling on injunctions requested against the Argentine Government or decentralized entities, judges must request a report on the relevant matters from the competent administrative agency (the "Preliminary Report"), within five days in ordinary proceedings and three days in abbreviated proceedings and in amparo actions. Also, judges are authorized to request an opinion on the matter from the relevant representative of the General Prosecuting Office, (ii) judges are permitted to order interim measures before ruling on the injunction request, in the event that "exceptional circumstances, objectively insurmountable" are present. Such interim measures are effective until the competent administrative authority has produced the Preliminary Report or until the term for producing such report has expired, and (iii) injunctions that are ordered against the Argentine Government or its decentralized entities must have a "reasonable term of effectiveness" (a maximum term of six months if the injunction is granted within the framework of an ordinary judicial procedure or three months if it is an abbreviated proceeding or an amparo action). In addition, Law No. 26,855, which became effective on May 27, 2013, modified the structure and functions of the Argentine Consejo de la Magistratura (judicial council), which has the authority to appoint judges, present charges against them and suspend or remove them. As of the date of this annual report, several aspects of this legislation have been struck down as unconstitutional by the Argentine Supreme Court.

On August 7, 2014, Law No. 26,944 on State Responsibility was enacted to regulate the liability of the Argentine Government and public officers, including state liability for unlawful and lawful actions Such law governs the responsibility of the Argentine Government regarding the damages that its activity or inactivity may cause to individuals’ properties or rights. Additionally, Law No. 26,944 establishes that the Argentine Government’s responsibility is objective and direct, that the provisions of the civil and commercial codes are not applicable to the actions of the Argentine Government in a direct or subsidiary manner and that no dissuasive financial penalties may be imposed on the Argentine Government, its agents or officers. Additionally, Law No. 26,944 provides that the Argentine Government shall not be liable for the damages caused by public services concessionaires.

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. 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 Argentina in case of a shortage of supply. The Supply Law 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 legal entities and individuals. Additionally, on September 18, 2014 the Argentine Congress enacted Law No. 26,993, amending, among other laws, Law No. 25,156, which provides (i) the creation of a preliminary system where consumers may request a settlement of their complaints with companies, (ii) the incorporation of a new branch within the Judicial Power, namely the “National Courts on Consumer Relations” and (iii) the amendment of Law No. 24,240 (the “Consumer Defense Law”). Such reforms and creation of the Observer of Prices of Goods and Services could adversely affect our operations.

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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. In addition, more recently the Argentine Congress has passed certain laws such as those reforming the pension system and establishing corporate criminal liability for certain corrupt practices and a tax law reform (see “The impact of congressional and presidential elections on the future economic and political environment of Argentina remains uncertain, but likely to be material”).

The implementation of the aforementioned legislation had modified Argentina’s legal system. Future changes in applicable laws and regulations (including as a result of a change in government administration), administrative or judicial proceedings, including potential future claims by us against the Argentine Government, cannot be predicted and we cannot assure you that such changes will not adversely affect our business, financial condition and results of operations.

Current investigations being conducted on corruption in Argentina could have an adverse impact on the development of the Argentine economy and on investor confidence

As of the date of this annual report, several Argentine businessmen, mainly related to the public works, and former government officials of the former Fernández de Kirchner administration are being investigated for inappropriate gifts and unlawful association. On September 17, 2018, prosecution for unlawful association began against the former president of Argentina, Cristina Fernández de Kirchner, and several businessmen and the Argentine court with jurisdiction over the process ordered an attachment on some of their assets worth Ps. 4 billion.

Depending on the results of such investigations and the time it takes to complete them, the companies involved could face, among other consequences, a decrease in their credit rating, claims from their investors, as well as restrictions on financing through capital markets. These adverse effects could hinder the ability of these companies to meet their financial obligations on time. In relation to the above, the lack of future financing for these companies could affect the realization of the projects or works that are currently in execution.

Likewise, the effects of these investigations or any future investigation could affect the levels of investment in infrastructure in Argentina, as well as the continuation, development and completion of public works projects and public-private participation (PPP) projects, which could ultimately lead to lower growth of the Argentine economy.

We cannot estimate the impact that these investigations could have on the Argentine economy. Similarly, the duration of the corruption investigations cannot be predicted, nor can it be determined what other companies might be involved or how far-reaching the effects of these investigations might be, particularly in the energy sector, or if there will be any other future investigations in this or other industry, which may negatively impact the Argentine economy. In turn, the decrease in investor confidence resulting from any of these, among other issues, could have a significant adverse effect on the growth of the Argentine economy, which could, in turn, harm our business, our financial condition and the results of our operations, and affect the trading price of our Class B common shares and ADSs.

Any downgrade in the credit rating or rating outlook of Argentina could adversely affect both the rating and the market price of our ADS and our Class B common shares

Argentina’s long-term debt denominated in foreign currency is currently rated “B2” by Moody’s, “B” by S&P and “B” by Fitch. Although Moody’s currently maintains a stable outlook, on November 7, 2018, Fitch revised its outlook of Argentina’s long-term and short-term sovereign credit rating from stable to negative, primarily as a result of the sharply weaker economic activity and uncertain prospects for multiyear fiscal consolidation and market financing availability as IMF funds are utilized, posing risks to sovereign debt sustainability. In addition, on November 13, 2018, S&P downgraded Argentina’s long-term and short-term sovereign credit ratings from “B+” to “B,” primarily as a result of an erosion of the Argentine debt profile, the economic growth trajectory and the dynamics of inflation against the backdrop of the implementation of a challenging economic adjustment program. There can be no assurance that Argentina’s credit rating or rating outlook will not be downgraded in the future, which could have an adverse effect both on the rating and the market price of our ADS and Class B common shares.

Risks Relating to the Electricity Distribution Sector

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The Argentine Government has intervened in the electricity sector in the past, and may continue intervening

Historically, the Argentine Government has exerted a significant influence on the economy, including the energy sector, and companies such as us that operate in such sector have done so in a highly regulated context that aims mainly at guaranteeing the supply of domestic demand.

To address the Argentine economic crisis in 2001 and 2002, the Argentine Government adopted the Public Emergency Law and other regulations, which made a number of material changes to the regulatory framework applicable to the electricity sector. These changes severely affected electricity generation, distribution and transmission companies and included the freezing of nominal distribution 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 user increases in costs due to regulatory charges and the introduction of a new price-setting mechanism in the wholesale electricity market (the “WEM”) which had a significant impact on electricity generators and generated substantial price differences within the market. From time to time, the Argentine Government intervened in this sector by, for example, granting temporary nominal margin increases, proposing a new social tariff regime for residents of poverty-stricken areas, removing discretionary subsidies, creating specific charges to raise funds that were 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.

On December 17, 2015, the Argentine Government issued Decree No. 134/15 declaring the emergency of the national electricity sector which was in effect until December 31, 2017, and instructing the ME&M to adopt any measure the ME&M deemed necessary regarding the generation, transmission and distribution segments, to adjust the quality and guarantee the provision of electricity. The emergency declaration was not renewed.

During 2017, the Argentine Government, through the relevant agencies enacted several resolutions to establish the penalties regime and adjust tariffs. On February 1, 2017, the RTI process was completed and a new tariff scheme for the following five year period was enacted.

Notwithstanding the recent measures adopted, we cannot assure you that certain other regulations or 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 regulations in the future that may increase our obligations, including increased taxes, unfavorable alterations to our tariff structures or remuneration scheme 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.”

The Argentine Government signed an agreement with the Province of Buenos Aires and the City of Buenos Aires for the transfer of the public service of electricity distribution.

Pursuant to Law No. 27,467, which enacted the 2019 Federal Budget of Expenditures and Resources, the Executive Branch was instructed to promote the transfer of Edenor’s jurisdiction to the jurisdiction of the Province of Buenos Aires and the City of Buenos Aires as from January 1, 2019 and the creation of a new oversight body. On February 28, 2019, the Argentine Government, the Province of Buenos Aires and the City of Buenos Aires entered into an agreement for the transfer of the public service of electricity distribution duly awarded to Edenor under the Concession Agreement (as defined below) entered into by the Argentine Government (including the Concession Agreement), to the joint jurisdiction of the Province of Buenos Aires and the City of Buenos Aires. Pursuant to such agreement, the Province of Buenos Aires and the City of Buenos Aires will create a new entity in lieu of the ENRE, in charge of controlling and regulating the distribution service. It was also agreed that the Federal Government shall be the sole responsible for any and all debts and credits relating to the distribution service awarded to Edenor which cause is prior to February 28, 2019. As of the date of this annual report there are certain major issues related to such transfer still to be defined, including,  among others, the continuation of the existing Concession Contract as is; whether the federal legal and regulatory framework shall continue to apply or not; and the solution of claims and debts between Edenor and the Federal Government resulting from the Contractual Transition Period ended on January 31, 2016. Anagreement addressing those matters is expected to be entered into between the Company and the Federal Government, the Province of Buenos Aires and the City of Buenos Aires within the next months. We cannot assure that such transfer or any action or omission from the transferees following the consummation of such transfer will not have an adverse effect on our business, financial condition or results of operations or would not have a negative impact on the market value of our ADSs and Class B common shares.

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 There is uncertainty as to what other measures the Argentine Government may adopt in connection with tariffs on public services and their impact on the Argentine economy

As explained in other risk factors in this annual report, following the economic crisis of 2001-2002, the subsequent freeze on electricity rates in Pesos and the significant devaluation of the Argentine Peso against the U.S. Dollar, there was a lack of investment in the distribution capacities of electricity and, at the same time, demand for electricity increased substantially.

In response, the Macri administration announced several measures, including the revision of subsidy policies, Decree No. 134/2015 of December 16, 2015, which placed the national electricity system in a state of emergency until December 31, 2017 and Decree No. 367/2016 of February 16, 2016, which instructed the ministries, including the ME&M to continue the procedures related to the renegotiation of contracts related to the provision of public services and their RTI, among which are the distribution of electricity.

On February 1, 2017, the RTI process wascompleted. Through Resolution No. 63/17 (amended by ENRE Resolutions No. 82/17 and No. 92/17), the ENRE approved a rate of return for us of 12.46% before taxes. The resulting income was determined by applying the Net Replacement Value (“NRV”) methodology, over a slightly lower base capital than the one we had submitted in our proposal, reaching an amount of Ps.34 billion. The difference with our proposal was mainly explained by the fact that the ENRE excluded the fully depreciated assets from the regulatory net asset base. Moreover, the ENRE stated that our acknowledged remuneration as of December 2015 was Ps.12.5 billion, which adjusted to February 2017 reached to Ps.17.2 billion. The ENRE also established a non-automatic mechanism to adjust our tariffs, as it had done under the original Concession Agreement and the Adjustment Agreement (as defined below),  in order to preserve the economic and financial sustainability of the concession in the event of price fluctuations in the economy. This mechanism has a biannual basis and includes a combined formula of wholesale and consumer price indexes (WPI, CPI and salaries increases) which trigger the adjustment of tariffs when the result is above 5%.

Edenor filed an administrative appeal (recurso de reconsideración) against ENRE´s Resolution No. 63/17. On October 25, 2017, the ENRE, through Resolution No. 524/17, rejected the appeal filed by Edenor.

On January 31, 2018, the ENRE issued Resolution No. 33/18 which approved the new distribution cost for Edenor to be applied as from February 1, 2018 and the new tariff scheme.

Furthermore, such resolution approved the new CPD adjustments (last stage of 17% according to Resolution. No 63/17, including the inflation adjustment of 11.9% for the period July 2017-December 2017 and a stimulus factor “E” of negative 2.51%) and determined the deferred income to be recovered in 48 instalments for a total amount of Ps.6,343.4 million. Additionally, it reported that the price of the average tariff reached Ps.2.4627/ KWh.

 Notwithstanding the measures adopted recently, there is uncertainty as to what measures the Argentine Government may adopt in connection with tariffs, whether tariffs will be updated from time to time to reflect an increase in operating costs, and their impact on the Argentine economy.

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

Distribution tariffs include a regulated margin that is intended to cover the costs of distribution and provide an adequate return over the distributor’s asset base. Under the Convertibility Regime, which established a fixed exchange rate of one Peso per U.S. Dollar, distribution tariffs were calculated in U.S. Dollars and distribution margins were adjusted periodically to reflect variations in U.S. inflation indexes.However the Public Emergency Law, which came into effect in January 2002, froze all distribution margins, revoked all margin adjustments 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 recovered through adjustments to the distribution margin. This situation, in turn, led many public utility companies, including us and other important distribution companies, to suspend payments on their commercial 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 the past, the Argentine Government granted temporary and partial relief to some distribution companies, including limited increases in distribution margins, a temporary cost adjustment mechanism which was not fully implemented and the ability to apply certain additional charges to users.

Although as of the date of this annual report, the Argentine Government completed the process after RTI for distributors and the declaration of emergency expired and was not renewed.We cannot assure you that these recent measures will be sufficient to address the structural problems created for our Company by the economic crisis and in its aftermath. Our inability to cover the costs 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

From 2013 through 2018, electricity demand in Argentina increased by 6%, which in part reflects the relative low cost, in real terms, of electricity to users 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 through 2018.

We cannot make any assurance that recent 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 users. In this respect, we cannot assure you that these measures or any future measure will not lead electricity 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 the demand forenergy is increased suddenly, the difficulty in increasing the capacity of distribution companies in a short or medium term,could adverselyaffect the Company, which in turn could result incustomer complaints andsubstantial fines for any interruptions

In recent years, the increase in electricity demand was greater than the structural increase in electricity distribution capacities, which led to power shortages and disruptions, in certain occasions. A sustained increase in electricity demand could generate future shortages. In addition, 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. Although there were several investments in generation during 2017 and 2018, which would increase the installed capacity power in the coming years, the highest density of investments was concentrated in the Greater Buenos Aires area. It is still necessary to make several investments in the transmission and distribution system to guarantee the delivery of electricity to the user and reduce the frequency of interruptions. During December 2013, an increase in demand for electricity resulted in energy shortages and blackouts in Buenos Aires and other cities around Argentina.

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Additionally, according to Argentine law, distribution companies, such as us, are responsible to their users for any disruption in the supply of electricity. Consequently, customers can direct their claims to the distribution companies. Also, distribution companies are subject to fines and penalties for service disruptions caused by energy shortages, unless the respective Argentine authorities determine that energy shortages constitute force majeure events. As a result, we could face user claims and fines and penaltiesfor service disruptions caused by energy shortages unless the relevant Argentine authorities determine that energy shortages constitute force majeure. Additionally, disruptions in the supply of electricity could expose us to intervention by the Argentine Government, which warned of such possibility during the blackouts of December 2013.  We cannot assure that we will not experience a lack in the supply of energy or that 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.

 

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Risks Relating to Our Business

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

We conduct our business pursuant to our Concession Agreement granted by the Argentine Government. Such agreement contains several requirements regarding the operation of our business and compliance with laws and regulations. Compliance with our obligations under our Concession Agreement is, in certain cases, secured by a pledge of our shares in favor of the Argentine Government. Accordingly, upon the occurrence of specified events of default under our Concession Agreement, the Argentine Government would be entitled to foreclose on its pledge of our Class A common shares to a third party. Such sale would have a severe negative impact on our ability to operate a material portion of our business, and as a result, our results of operations would be materially adversely affected. Finally, our Concession Agreement also generally provides for termination in the case of our insolvency or bankruptcy. If our Concession Agreement is terminated or if the Argentine Government forecloses its pledge over Class A common  shares, we may not be able to continue to operate as a going concern, and in turn our consolidated results of operations would be materially adversely affectedand the market value of our Class B common shares and ADSs could decline.

If we are not able to effectively hedge our currency risk in full and a devaluation of the Argentine Peso occurs, our results of operations and financial condition could be materially adversely affected

Our revenues are mainly collected in Pesos, although the remuneration scheme (i) set forth by the Electric Energy Secretariat (“SEE”) Resolution No. 1/19 establishes U.S. Dollar denominated prices, but the  payment is made in Pesos by applying the Central Bank’s exchange rate effective on the day before the expiration date, and (ii) for other contracts withCompañía Administradora del Mercado Mayorista Eléctrico Sociedad Anónima (“CAMMESA”) established U.S. Dollar -denominated prices but the payment is made in Pesos by applying the Central Bank’s exchange rate effective on the last business day of the month of the applicable transaction, adjusted through credit or debit notes, as appropriate, to consider the Central Bank’s exchange rate of the day before the expiration date, in accordance with CAMMESA’s procedures. As a result, we areexposed to an exchange rate risk between the collection date and the payment date (in the event of CAMMESA does not pay at the date) of U.S. Dollars-denominated financial indebtedness. In addition, a significant portion of our existing financial indebtedness is denominated in U.S. Dollars, which exposes us to the risk of loss from the devaluation of the Peso. During 2018, our hedging contracts did not cover all of our exposure to such depreciation.If we are not able to effectively hedge all or a significant portion of our currency risk exposure, a devaluation of the Peso, may significantly increase our debt service burden, which, in turn, may have a material adverse effect on our financial condition and results of operations.

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

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

Our business is subject to risks arising from natural disasters, catastrophic accidents and terrorist attacks. Additionally, our businesses are subject to the risk of mechanical or electrical failures and any resulting unavailability may affect our ability to fulfill our contractual commitments and thus adversely affect our business and financial performance

The electric power distribution infrastructure that we rely on, may be damaged by flooding, fires, earthquakes and other catastrophic disasters arising from natural or accidental or intentional human causes. We could experience severe business disruptions, significant decreases in revenues based on lower demand arising from catastrophic events, or significant additional costs to us not otherwise coveredby business interruption insurance clauses. There may be an important time lag between a major accident, catastrophic event or terrorist attack and our definitive recovery from our insurance policies, which typically carry non-recoverable deductible amounts, and in any event are subject to caps per event. In addition, any of these events could cause adverse effects on the energy demand of some of our customers and of consumers generally in the affected market. Some of these considerations, could have a material adverse effect on our business, financial condition and our result of operations.

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Additionally, our assets are subject to the risk of mechanical or electrical failures and may experience periods of unavailability affecting our ability to fulfill our contractual commitments. Any unplanned unavailability of our assets may adversely affect our financial condition or results of operations and our ability  to fulfill our contractual commitments, so we could be subject to fines and penalties.

Our operations could cause environmental risks and any change in environmental laws could increase our operating costs

Some of our operations are subject to environmental risks that could arise unexpectedly and cause material adverse effects on our results of operations and financial condition. In addition, the occurrence of any of these risks could lead to personal injury, loss of life, environmental damage, repair and expenses, equipment damage and liability in civil and administrative proceedings. We cannot assure you that we will not incur additional costs related to environmental issues in the future, which could adversely affect our results of operations and financial condition. In addition, we cannot ensure that our insurance coverage is sufficient to cover the losses that could potentially arise from these environmental risks.

In addition, we are subject to a broad range of environmental legislation, both in Argentina. Local, provincial and national authorities in Argentina may implement new environmental laws and regulations and may require us to incur higher costs to comply with new standards. The imposition of more stringent regulatory and permit requirements in relation to our operators in Argentina could significantly increase the costs of our activity.

We cannot predict the general effects of the implementation of any new environmental laws and regulations on our financial condition and results of operations.

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, affected our capacity to perform our commercial obligations and could also have a material adverse effect on our ability to perform our financial obligations

Since the execution of the agreement entered into between us and the Argentine Government in February 2006 relating to the adjustment and renegotiation of the terms of our concession (Acta Acuerdo sobre la Adecuación del Contrato de Concesión del Servicio Público de Distribución y Comercialización de Energía Eléctrica orthe “Adjustment Agreement”) and as required by them, we were engaged in an RTI with the ENRE through February 1, 2017.

The Adjustment Agreement contemplated a cost adjustment mechanism for the transitional period during which the RTI process was being conducted. This mechanism, known as the Cost Monitoring Mechanism (“CMM”), required 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 could also request that the ENRE apply the CMM at any time that the variation in our distribution cost base was at least 10% or more. Any adjustments, however, were subject to the ENRE’s assessment of variations in our costs, and the ENRE’s approval of adjustments were not sufficient to cover our actual incremental costs in a timely manner. During such time, even when the ENRE approved adjustments to our tariffs, there was 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.

As a result of the foregoing, during the years ended December 31, 2014, 2012 and 2011, we recorded negative operating results and net results, and thus our working capital and liquidity levels were negatively affected (even in 2013), primarily as a result of the delay in obtaining tariff increases to reflect increases in our distribution costs, coupled with a constant increase in operating costs to maintainadequate service levels all of which 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 allowed the Company to obtain additional revenue as from November 2012 through 2016. However, changes made by 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 for our operating deficit in 2014, due to the constant increase in operating costs.

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In March 2015, Resolution No. 32/15 of the former SE granted us a temporary increase in income through funds provided by CAMMESA applicable retroactively as from February 1, 2015 through February 1, 2016, to cover costs and investments associated with the regular provision of the public service of distribution of energy on account of the RTI.

In January 2016, the ME&M 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.

In addition, such resolution: (i) abrogated the PUREE; (ii) repealed Resolution No. 32/15 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; (iv) ordered the implementation of the actions required to terminate the trusts created pursuant to Resolution No. 347/12 of the ENRE and (v) prohibited the distribution of dividends in accordance with Section 7.04 of the Adjustment Agreement.

However, pursuant to Resolution No. 7/16, the ENRE issued Resolution No. 1/16 establishing a new tariff structure, which remained in force (with certain suspensions as a result of injunctions, which are no longer in effect) until February 2017, when the RTI process was completed.

Prior to the completion of the RTI process, several regulatory mechanisms, programs or changes were implemented from time to time by the ENRE to adjust our tariffs to reflect increased costs. Any requested adjustments were usually subject to the ENRE’s assessment of variations in our costs, and not sufficient to cover our actual incremental costs in a timely manner.

On April 1, 2016, the ENRE issued Resolution No. 55/16, which approved the program for the review of the distribution tariff scheme, establishing the criteria and methodologies for completing the RTI process.

On September 5, 2016, pursuant to Resolution No. 55/16, we submitted our rate schedule proposal for the following five-year period. On October 28, 2016, a public hearing was held to provide information and listen to the public opinion on the RTI.

The RTI was completed on February 1, 2017, on which date the ENRE issued Resolution No. 63/17, through which it approved a new tariff scheme that established our new distribution added value (VAD) for the following five-year period.For more information, see “Item 5—Operating and Financial Review and Prospects—Integral Tariff Revision”. On January 31, 2018, the ENRE issued Resolution No. 33/18 approving the new distribution cost for Edenor applicable as from February 1, 2018 and the new tariff scheme applicable to Edenor. On July 31, 2018, the ENRE issued Resolution No. 208/18, pursuant to which it approved, the CPD for January 2018 through June 2018 of which 7.93% was applied as of August 1, 2018, and 6.51% in six consecutive monthly installments as of February 1, 2019. The CPD amounted to 15.85%.

However, if we are not able to recover all future cost increases and have them reflected in our tariffs, and/or if there is a significant lag of time between when we incur the incremental costs and when we receive increased income 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, could have a material adverse effect on our business and results of operations and may cause the value of our ADSs and Class B common shares to decline.

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 against us in December 2009, by an Argentine consumer association (Unión deUsuarios y Consumidores) seeking to annul certain retroactive tariff increases, which was ultimately dismissed by the Argentine Supreme Court of Justice on October 1, 2013.

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In May 2016, we were notified by several courts of the Province of Buenos Aires of certain injunctions granted to individual and collective users against Resolution No. 6/16 and Resolution No. 1/16 issued by the ENRE (which authorized our new tariff schedule as from February 2016). Consequently, the then applicable tariff schedule, which included the WEM prices established by Resolution No. 6/16, were not applied during certain periods in 2016 (i) to the entire concession area as a result of the injunctions issued in the “Abarca” case and (ii) to the districts of “Pilar” and “La Matanza”, where injunctions remained in effect until October 24 and November 11, 2016, respectively, when they expired. Therefore, as of those dates, tariff increases have been applied to all users.If any future legal challenge were successful and prevented us from implementing any tariff adjustments granted by the Argentine Government, we could face a decline in collections from our users, and a decline in our results of operations, which could have a material adverse effect in our financial condition and the market value of our ADSs and Class B common shares.

 

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

We operate in a highly regulated environment and have been, and in the future may continue to be, subject to significant fines and penalties imposed 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, 2018, 2017 and 2016, our accrued fines and penalties totaled Ps.6,933 million, Ps.6,133 million and Ps.6,511 million, respectively (taking into account adjustments made to fines and penalties following the ratification of the Adjustment Agreement and recent regulation). See “Item 4. Information on the Company—Our Business Overview—Fines and Penalties.”

On October 19, 2016, pursuant to Note No. 123,091 the ENRE established the average rate values (Ps./KWh) to be applied as from December 2012, for calculating the penalties payable to the Argentine Government. In accordance with the terms of the Concession Agreement, such values should correspond to the average sale price of energy charged to users. Since the amounts set forth in the note were not consistent with the principle contained in our Concession Agreement, on November 1, 2016, the Company submitted a claim to the ENRE requesting that the amounts in Note No. 129,061 be modified to reflect the amounts contained in the Concession Agreement.As of the date of this annual report, we had received the response from the ENRE (Note No. 129,061), which clarified that the increases or adjustments are not applicable, and only the values paid by the users should be considered.

On February 1, 2017, the ENRE issued Resolution No. 63/17, through which it approved new parameters related to the quality standards, with the purpose of achieving an acceptable quality level by the end of the 2017-2021 period. In this regard, the ENRE established a penalty regime to be applied in the event of non-compliance with the requisite quality rates.

On March 29, 2017, through Note No. 125,248 the ENRE established a new methodology for the calculation of fines and penalties, determining that they must be valued according to the KWh values in effect as of the first day of the six-month period during which the event giving rise to the penalty occurred or the KWh values in effect as of the day of the occurrence of the event in the case of penalties arising from specific events.

In addition, fines and penalties, accrued and not imposed during the transition period of the Adjustment Agreement must be updated using the CPI that the Central Bank uses to elaborate the Multilateral Real Exchange Rate Index (“TCRM”), corresponding to the month prior to the six-month period during which the event giving rise to the penalty occurred or the month prior to that on which the specific penalty event occurred, till the previous month of the day on which the penalty was imposed. Those fines and penalties accrued and imposed since the date of issuance of the Note No. 120,151 through the completion of the RTI on February 1, 2017 (i.e., the period between April 2016 and February 2017) must also be updated using the CPI.

Furthermore, we cannot assure that we will have the ability to comply with the quality standards set forth by Resolution No. 63/17. In the case of penalties which had been imposed but are still unpaid,the 30-day interest rate of theBanco Nación corresponding to commercial discounts applies, as from the day when the penalty was imposed through the date of payment.

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Despite the issuance of Resolution No. 63/17,the treatment to be given to the penalties and reductions is still pending settlement.

We cannot assure you that we will not 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 and Class B common shares.

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 users 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 in Argentina, we were able to reduce the high level of energy losses experienced at the time of the privatization down 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, in turn, in the number of delinquent accounts and fraud. Although we continue to make investments to reduce energy losses, these losses continue to exceed the average 10% loss factor contemplated by the concession and, based on the current tariff schedule and thr economic turmoil, we do not expect these losses to decrease in the near term. Our energy losses amounted to18.2% in 2018,17.1% in 2017 and 17.0% in 2016. We cannot assure you that our energy losses will not continue to increase in future periods, which may lead to lower margins and could adversely affect our financial condition, our results of operations and the market value of our Class B common shares and ADSs.

The Argentine Government could foreclose on its pledge over 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 Agreement and the provisions of the Adjustment Agreement, the Argentine Government has the right to foreclose on its pledge over our Class A common shares and sell these shares to a third party buyer if:

·

the fines and penalties incurred in any given year exceed 20% of 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 creates any lien or encumbrance over our Class A common shares (other than the existing pledge in favor of the Argentine Government);

·

our controlling shareholder 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.

 

 

On February 1, 2017, the ENRE issued Resolution No. 63/17 establishing the new tariff scheme resulting from the completion of the RTI process, for the following five-year period. In accordance with the provisions of the Adjustment Agreement, Electricidad Argentina S.A. (“EASA”) (currently merged into Pampa Energía S.A.) andEDF International S.A. (“EDFI”)withdrew their ICSID claim, and on March 28, 2017, the ICSID acknowledged the discontinuance of the procedure.

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In 2018, our fines and penalties remained below 20% of our gross energy sales. See “Item 4. Information on the Company—Our Concession—Fines and Penalties.”

If the Argentine Government were to foreclose on its 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 its pledge over our Class A common shares could be deemed to constitute a change of control under the terms of our Senior Notes due 2022. See “—We may not have the ability to raise the funds necessary to finance a change of control offer as required by the Senior Notes due 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 Class B common shares and 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, in writing. Upon termination of our concession, all our assets used to provide the 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 Agreement and could have a material adverse effect on the operations and financial position

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). 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, results of operations and/or the market value of our ADSs and Class B common shares.

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, 2018, approximately 83% of our employees were union members. Although our relations with unions are currently stable and we have had an agreement in place with the two unions representing our employees since 1995, we cannot assure you that we will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and revenues. 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 demonstrations or work stoppages, our results of operations, financial conditions and the market value of our ADSs and Class B common shares 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, 2018, we had approximately 7,397 third-party employees under contract. Although we have very strict policies regarding compliance with labor and social security obligations by contractors, we are not in a position to ensure that contractors will not initiate legal actions to seek indemnification from us based upon a number of judicial rulings issued bylabor courts in Argentina which have recognized joint and several liability between the contractor and the entity to which it is supplying services under certain circumstances. We cannot make any assurances that such proceedings will not be brought against us or that the outcome of such proceedings would be favorable to us. If we were to incur material labor liabilities in connection with our outsourcing, such liabilities could have an adverse effect on our financial condition, our results of operations and the market value of our Class B common shares and 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 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 involved in various legal proceedings which could result in unfavorable decisionsfor uswhich could in turn have a material adverse effect on our financial position and results of operations

We are party to a number of legal proceedings, some of which have been pending for several years. We cannot be certain that these claims will be resolved in our favor, and responding to the demands of litigation may divert our management’s time and attention and our financial resourcesand unfavorable decisions may have a material adverse effect on our financial position and results of operations. See “Item 8. Legal Proceedings.”

We may be unable to collect all or a portion of our claim against RDSA or Aseguradores de Cauciones, which could in turn have a material adverse effect on our financial position and results of operations

In connection with the purchase and construction of real estate property from Ribera Desarrollos S.A. (the “Seller” or “RDSA”) for a total of U.S.$46 million (equivalent to Ps.439.3 million using the effective exchange rate at the time of the execution of the purchase agreement), we have initiated an arbitration process as a result of a breach of contract claim filed against RDSA for damages, and were involved in a mandatory conciliation proceeding (mediación obligatoria) with Aseguradores de Cauciones S.A (the “Insurer” or “Aseguradores de Cauciones”), in order to collect the mentioned amount plus interest under the surety bond issued by the Insurer, which guaranteed RDSA’s obligations, which proceeding ended in failure. Under Argentine law, such conciliation proceeding is a condition to pursuing collection proceedings in a court of law. As of the date of this annual report, RDSA had filed a voluntary petition for reorganization (similar to a Chapter 11 proceeding in the United States) and certain regulatory action of the Insurance Regulatory Agency (Superintendencia de Seguros de la Nación) had imposed a restriction on the Insurer’s ability to make dispositions over its assets until a certain liquidity deficiency is solved; it is therefore uncertain if we will be able to collect the claimed amounts in full or at all (See “Item 4—Information on the Company—Property, Plant and Equipment—Termination of agreement on real estate property”). In the event we are unable to collect from RSDA or Aseguradores de Cauciones, such situation may have a material adverse effect on our financial position 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, 2018, our physical assets were insured for up to U.S.$1,603.9 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 financial condition and results of operations and the market value of our Class B common shares and 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 in aid of 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.

The loss of exclusivity 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 electric energy within our service area, this exclusivity may be revoked in whole or in part if technological developments would make it possible for the energy distribution industry to evolve from its present condition as a natural monopoly into a competitive business. In no case does the complete or partial revocation of our exclusive distribution rights entitle us to claim or to obtain reimbursement or indemnity. Although, to our knowledge, there are no current projects to introduce new technologies in the medium or long-term which may 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 theexclusivity 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 Class B common shares and ADSs.

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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 owned shares representing 26.8%of our capital stock and appointed five Class B directors in our last shareholders’ meeting. The remaining directors were appointed by the Class A shares.

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, 2018, we owed approximately Ps.11.9 billion to CAMMESA (including interest accrued as of December 31, 2018).This commercial 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 necessary 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.

On April 26, 2017, we were notified through Note No 2016-01193748 that the ME&M decided that the SEE with the support of the Under-Secretariat for Tariff Policy Coordination and the ENRE, would be responsible for determining (within a period of 120 days) whether any pending obligations under the Adjustment Agreement remained outstanding as of the effective date of the applicable electricity tariff schedules resulting from the implementation of the RTI process. If any such obligations remained outstanding, the treatment to be given to those obligations was also to be determined by the SEE as described above. The Company has submitted the information requested by the ME&M as part of its efforts to comply with these requirements. However, as of the date of this annual report, due to the fact that a definitive decision on the treatment of these obligations is still pending, the Company started negotiations with the SEE thereon.

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, U.S.$161.6 million of our financial debt was represented by our Senior Notes due 2022 (the “Senior Notes due 2022”). Under the indenture for the Senior Notes due 2022, certain expropriation and condemnation events with respect to us may constitute an event of default, which, if declared, could trigger the 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 voluntaryconcurso preventivo. If we are not able to comply with certain payment obligations as a result of our current 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 voluntaryconcurso preventivo. In addition, all of our outstanding financial indebtedness also contains cross-default provisions or cross-acceleration provisions that could cause all of our debt to be accelerated if the debt containing expropriation or bankruptcy and/orreorganization 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 such potential situation, but in case those waivers are not timely obtained and immediate repayment is 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.

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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 2022

As of the date of this annual report, U.S.$161.6 million of our financial debt is represented by the Senior Notes due 2022. Under the indenture for the Senior Notes due 2022, if a change of control occurs, we must offer to repurchase 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 2022 upon a change of control. If we fail to repurchase such notes in circumstances that may constitute an event of default under the indenture, 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.

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/or the Buenos Aires Stock Exchange (“BASE”) may suspend and/or cancel the listing of our ADSs and Class B common shares, respectively, 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 the BASE will not commence any suspension or delisting procedures in light of our 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 NYSE and/or the 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.

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—Quality Standards–Edenor’s Concession”. Furthermore, any such disruptions in the provision of our services could expose us to fines and orders to compensate those users affected by any such power cuts, as has occurred in the past (see “Item 4. Information on the Company—Business Overview—QualityStandards—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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Cybersecurity events, such as a cyber-attack could adversely affect our business, financial condition, results of operations and cash flows

We depend on the efficient and uninterrupted operation of internet-based data processing communication and information exchange platforms and networks , including administrative and business related systems (such as Supervisory Control and Data Acquisition (“SCADA”) and DCS Software, Inc. (“DCS”)). Cybersecurity risks have generally increased in recent years as a result of the proliferation of new technologies and the increased sophistication and activities of cyber-attacks. Through part of our grid and other initiatives, we have increasingly connected equipment and systems to the internet. Due to the critical nature of our infrastructure and the increased accessibility enabled through connection to the internet, we may face a heightened risk of cybersecurity incidents such as computer break-ins, phishing, identity theft and other disruptions that could negatively affect the security of information stored in and transmitted through our computer systems and network infrastructure. In the event of a cyber-attack, we could have our business operations disrupted, property damaged and user 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. In addition, while we have not experienced any loss related to cybersecurity events, contingency plans in place may not be sufficient to cover liabilities associated with any such events and therefore, applicable insurance coverage may be deemed inadequate, preventing us from receiving full compensation for the losses sustained as a result of such a disruption. Although we intend to continue to implement security technology devices and establish operational procedures to prevent disruption resulting from, and counteract the negative effects of cybersecurity incidents within the next three years, it is possible that not all of our current and future systems are or will be entirely free from vulnerability and these security measures will not be successful. Accordingly, cybersecurity is a material risk for us and a cyber-attack could adversely affect our business, results of operations and financial condition.

Risks relating to our ADSs Class B common shares

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

The Argentine Government may impose restrictions on the conversion of Argentine currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Argentina. Argentine law currently permits the Argentine Government to impose this kind of restrictions temporarily in circumstances where a serious imbalance develops in Argentina’s balance of payments or where there are reasons to foresee such an imbalance. Beginning in December 2001, the Argentine Government implemented an unexpected number of monetary and foreign exchange control measures that included restrictions on the free disposition of funds deposited with banks and on the transfer of funds abroad, including dividends, without prior approval by the Central Bank, some of which could be reinstated in the future.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, future 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. Also, certain of our indebtedness includes covenants limiting the payment of dividends. 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, any future 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 Class B common shares and ADSs.

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

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

Our corporate affairs are governed by our by-laws and by Argentine corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the States of Delaware or New York, or in other jurisdictions outside Argentina. In addition, the rights of holders of the ADSs or the rights of holders of our Class B 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 Class B 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 one of our shareholders and, therefore, holders of ADSs will not have shareholder rights. The depositary will be the holder of the Class B 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 Class B 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 BASE, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, by comparison, do not receive notice directly from us. Instead, in accordance with the deposit agreement, we provide the notice to the depositary. If we ask it to do so, the depositary will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the depositary as to voting the Class B common shares represented by their ADSs. Due to these procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of Class B common shares and Class B common shares represented by ADSs may not be voted as the holders of ADSs desire. Class B common shares represented by ADSs for which the depositary fails to receive timely voting instructions may, if requested by us, be voted at the corresponding meeting either in favor of the proposal of the board of directors or, in the absence of such a proposal, in accordance with the majority.

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

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

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

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

Item 4.       Information on the Company

History and Development of the Company

Empresa Distribuidora y Comercializadora Norte S.A.(Distribution and Marketing Company of the North 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 (the “Concession Agreement”). On September 1, 1992, EASA acquired our Class A common shares and became our controlling shareholder. See “Item 7. Major Shareholders and Related Party Transactions - Acquisition by Central Térmica Loma de la Lata S.A”.

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, 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”, “PESA” or “Pampa”) acquired all the outstanding capital stock of Dolphin Energía and IEASA from the then current shareholders of these companies, inexchange for common stock of Pampa Energía. As a result of severalacquisitions made by Pampa since 2006, it is currently the largest independent energy integrated company in Argentina and, directly and/or through its subsidiaries and joint controlled companies, Pampa participates in the electricity and gas value chains.

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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 NYSE under the symbol “EDN,” and our Class B common shares are listed on the 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, Pampa continues to hold 51% of our common shares, and approximately 19% 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 this 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 26.81% of our capital stock.

Parent Company Merger Process

The merger by absorption between Central Térmica Loma de la Lata S.A. (“CTLL”), as merging and surviving company, and EASA, or parent company, and IEASA S.A. (“IEASA”) - EASA’s majority shareholder – as the merged/absorbed companies, began in March 2017. On January 19, 2018, CTLL’s shareholders approved the merger and CTLL’s board of directors became responsible for the management of EASA and IEASA, in accordance with the provisions of Section 84 of the Argentine Corporations Law.

On September 22, 2017, PESA’s board of directors approved the merger of Bodega Loma la Lata S.A. (“BLL”), Central Térmica Güemes S.A (“CTG”), CTLL (the acquiring company of EASA), Eg3 Red S.A. (“EG3 Red”), Inversora Diamante S.A. (“INDISA”), Inversora Nihuiles S.A (“INNISA”), Inversora Piedra Buena S.A. (“IPB”), Pampa Participaciones II S.A (“PPII”), Transelec, and Petrolera Pampa S.A. (“PEPASA”), as the acquired or absorbed companies, into PESA, as the acquiring or absorbing company, under the terms of tax neutrality (tax-free reorganization) pursuant to Section 77 and following sections of the Income Tax Law. The effective date of the merger was established as October 1, 2017, as from which date the transfer to the acquiring company of the totality of the acquired companies’ equity took effect, with all the latter’s rights and obligations, assets and liabilities were incorporated into the acquiring company’s equity; subject to the corporate approvals required under the applicable regulations and the registration with the Public Registry of Commerce of both the merger and the dissolution without liquidation of the acquired companies.

On August 24, 2018, the Company was notified of the registration by the IGJ of: (i) the merger of EASA (the parent company of Edenor) and IEASA. (the parent company of EASA), with and into CTLL, as the absorbing and surviving company of both; and (ii) the merger with and into Pampa, as the absorbing and surviving company, of CTLL, BLL, CTG, Eg3 Red, INNISA, INDISA, IPB, PPII and PEPASA, as the absorbed companies. As a result thereof, Pampa became the direct controlling company of Edenor.

 

 

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Business Overview

We believe we are the largest electricity distribution company in Argentina and one of the largest in Latin America in terms of number of users and electricity sold (both in GWh and in Pesos) in 2018. 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, comprising an area of 4,637 square kilometers and a population of approximately 8.5 million people. As of December 31, 2018, Edenor served 3.04 million users. 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

 

Edenor demand

 

Edenor´s demand as % of total demand

2016

 

133,111

 

26,838

 

20.2%

2017

 

132,426

 

25,950

 

19.6%

2018

 

132,925

 

25,906

 

19.5%

 

Source: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 users.

 

Edenor Concession

Edenor’s concession currently expires on August 31, 2087, for a term of 95 years, and may be extended for one additional 10-year period if Edenor requests the extension at least 18 months before expiration. The term of the concession is divided into management periods: a first period of 15 years and subsequent periods of ten years each. At the end of each management period, the Class “A” shares representing 51% of the share capital of Edenor, currently held by Pampa, must be offered for sale through a public bidding. If Pampa makes the highest bid, it will continue to hold the Class “A” shares, and no further disbursements will be necessary. On the contrary, if Pampa is not the highest bidder, then the bidder who makes the highest bid shall pay Pampa the amount of the bid in accordance with the conditions of the public bidding. The proceeds from the sale of the Class “A” shares will be delivered to Pampa after deducting any amounts receivable to which the grantor of the concession may be entitled. The first management period commenced on February 1, 2017 and is estimated to end on March 1, 2022.

The Company has the exclusive right to render electric power distribution and sales services within the concession area to all the users who are not authorized to obtain their power supply from the WEM, thus being obliged to supply all the electric power that may be required in a timely manner and in accordance with the established quality levels. In addition, the Company must allow free access to its facilities to any WEM agents whenever required, under the terms of the Concession.

No specific fee must be paid by the Company under the Concession Agreement during the term of the concession.

On January 6, 2002, the Argentine Government enacted Law No. 25,561 pursuant to which U.S. Dollar adjustment clauses, as well as any other indexation mechanism stipulated in the contracts entered into by the Argentine Government, including those related to public utilities, were declared null and void as from such date. The applicable prices and rates were converted into Argentine Pesos at a rate of Ps.1 to U.S.$1.

The Company is subject to the terms of its Concession Agreement and the provisions of the regulatory framework comprised Laws Nos. 14,772, 15,336 and 24,065, resolutions and regulatory and supplementary standards issued by certain authorities. Thus, the Company is responsible for the distribution and sale of electricity as a public service with a satisfactory quality level pursuant to the requirements set forth in the aforementioned Concession Agreement and regulatory framework.

Failure to comply with the established guidelines may result in the application of fines, based on the economic damage suffered by the user at the time service was provided in an unsatisfactory manner, which will be determined in accordance with the methodology stipulated in the Concession Agreement. The ENRE is the regulatory authority responsible for enforcing the pre-established guidelines.

 

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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 Agreement. This geographic exclusivity may be terminated in whole or in part by the Argentine Government 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 Argentine or the Provincial Government may only exercise its right to alter or terminate 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 corresponding management period.

The electricity distribution and sale service is provided exclusively to all the users connected to the network within the area comprised the following:

Region I: City of Buenos Aires, the area encompassing Dock "D", “unnamed street”, path of the future Autopista Costera (coastline highway), extension of Pueyrredón Ave., Córdoba Ave., Ferrocarril San Martín railway tracks, General San Martín Ave., Zamudio, Tinogasta, General Paz Ave. and Río de La Plata river, and Province of Buenos Aires, the districts of San Martín, Tres de Febrero, San Isidro and Vicente López.

 Region II: Province of Buenos Aires, the districts of Morón, Ituzaingó, Hurlingham, Merlo, Marcos Paz, Las Heras and La Matanza.

 Region III: Province of Buenos Aires, the districts of San Fernando, Tigre, Escobar, Malvinas Argentinas, San Miguel, José C. Paz, Pilar, Moreno and General Rodríguez.  

Our Obligations

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

·       the time required to connect new users;

·       voltage fluctuations;

·       interruptions or reductions in service; and

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

Our concession requires us to make the necessary investments to establish and maintain the quality of service standards and to comply with the 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.

Pursuant to Law No. 27,467, which enacted the 2019 Federal Budget of Expenditures and Resources, the Executive Branch was instructed to promote the transfer of Edenor’s jurisdiction to the jurisdiction of the Province of Buenos Aires and the City of Buenos Aires as from January 1, 2019 and the creation of a new oversight body.

On February 28, 2019, the Argentine Government, the Province of Buenos Aires and the City of Buenos Aires entered into an agreement for the transfer of the public service of electricity distribution, duly awarded under the Concession Agreement by the Argentine Government to Edenor, from the jurisdiction of the Argentine Government to the Province of Buenos Aires and the City of Buenos Aires. The Company was not a party to such agreement, and, is analyzing the scope and implications thereof.

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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.

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

In addition, Clause 22.1 of the Adjustment Agreement required us, 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 were related to measures adopted with respect to the Concession Agreement, derived from the emergency situation declared by the Public Emergency Law. After the completion of the RTI, we and our shareholders and former shareholders were also obligated to completely waive and desist from all of the above-mentioned claims and legal proceedings. All proceedings related to circumstances supervening the above described situations, or that were not related to the consequences of the Public Emergency Law, were expressly excluded. If our shareholders or former shareholders had not desisted from these claims, the Argentine Government would have the right to foreclose on the pledge of our Class A common shares and sell these shares to a third-party buyer. If the Company or any shareholder or former shareholder re-established or initiated a new claim, we would have the obligation to hold the Argentine Government harmless in respect of amounts it could be required to pay pursuant to such claims. EDFI and Pampa 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 agreed to withdraw its claims against the Argentine Government before the ICSID at the request of Dolphin Energía S.A.

On February 1, 2017, the ENRE issued Resolution No. 63/17 which established the new tariff scheme as a result of the completion of the RTI process, which will apply to the following five-year period. Pursuant to the provisions of the Adjustment Agreement, Pampa (See “Item 7. Major Shareholders and Related Party Transactions—Parent Company Merger Process”)and EDFI withdrew their ICSID claim, and on March 28, 2017, the ICSID acknowledged the discontinuance of the proceedings.

In accordance with our concession, our controlling shareholder, Pampa, has pledged its 51% stake in the Company to the Argentine Government to secure obligations under our concession. The Adjustment Agreement required that the pledge be extended to secure our obligations under such agreement. The Argentine Government may foreclose on its pledge over the Class A shares and sell them in a public bidding process if certain situations occur. See “Item 4. Information on the Company—Business Overview—Foreclosure on the Pledge of Our Class A common shares or Revocation of Our Concession”.

Quality Standards

Service quality

Pursuant to our concession, we are required to meet specified quality standards with respect to the technical quality of the product delivered (electricity) and the technical quality of the service provided. The quality standards relating to the technical product refer to the electricity’s voltage levels. Edenor’s concession requires that the voltage level that we deliver be 3x380/220 V; 13.2 kV; 33kV; 132 kV; 220 kV. Edenor’s concession provides that admissible disruptions gaps in the voltage level may not exceed the following:

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 disruption gaps in voltage levels that exceed the such limits for 3.0% or more of the total amount of time that electricity is provided. The amount of the fine depends on the magnitude of the gaps. As the gaps’ percentage increases (or decreases) from thenominal contracted tension level, the rate of the fine per KWh increases. These fines are credited to the affected user’s bill.

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The quality standards 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 user during the current management period:

Category of user

Frequency of interruptions (maximum number of interruptions per six month period)

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.

 

Furthermore, pursuant to the Adjustment Agreement, we agreed to comply with a medium delivery standard (System Average Interruption Duration Index (“SAIDI”) and System Average Interruption Frequency Index (“SAIFI”)) that reflected our actual average delivery standards during the period from 2001 through 2003. This medium delivery standard required us to comply with a maximum number of interruptions per semester, on average, of 2,761 and a maximum duration of interruption, on average, of 5,386 hours. If we do not meet the delivery standards required by our concession, as set forth in the table above, but are otherwise in compliance with the medium delivery standard under the Adjustment Agreement, we may withhold payment of any fines that may be imposed under our concession for this failure and use this amount of unpaid fines for our capital expenditures. If we fail to comply with this measure, we will be required to pay the fines to the affected users.

In addition to establishing district and community-based service quality controls, a quality improvement track with additional requirements was implemented, including interruption frequency limits, an admissible interruption duration as well as the cost of non-delivered energy. Additionally, an automatic penalty mechanism was implemented to have the discounts resulting from deviations from the established limits credited to users within a term of 60 days as from the end of the six-month control period. As for the amounts of the definitive penalties, the ENRE’s decision concerning the information submitted for each six-month period is required. In accordance with the provisions of Sub-Appendix XVI to ENRE Resolution No. 63/17, the Company is required to submit, in a term of 60 calendar days, the calculation of global indicators, interruptions for which force majeure was alleged, the calculation of individual indicators, and will determine the related discounts, crediting the amounts thereof within 10 business days. In turn, the ENRE will examine the information submitted by the Company, and in the event that the crediting of such discounts were not verified, will impose a fine payable to the Argentine Government, equivalent to twice the value that should have been recorded. As of the date annual report, the Company has complied with the provisions of the aforementioned resolution in relation to the six-month period ended August 31, 2018.

Through Resolution No. 198/18, the ENRE established supplementary penalties of 300 or 600 KWh per consumer based on the Feeder Six-month Period Track Factor(Factor de Sendero Semestral del Alimentador - FSSA) and the Consumer Six-month Period Track Factor(Factor de Sendero Semestral del Usuario - FSSU) as from the fourth six-month period of the RTI’s five-year period, which commenced in September 2018. The penalties that may eventually be applied will have to be calculated and reported to the ENRE by Edenor in a term of 120 calendar days as from the end of the six-month control period and deposited in an escrow account.

Regulatory requirements in terms of both product quality and service quality have been implemented for the five-year period 2017-2021, as set forth in ENRE Resolution No 63/17. The most relevant changes relating to product quality consist of: (1) the unification of the levels of voltage including an admissible disruption gap of 5% for high voltage and 8% for medium and low voltage; (2) the update of the cost of energy supplied under bad conditions (“CESMC”), which will increase to reflect the registered voltage offset (the CESMC will be updated depending on the VAD increases that may occur); (3) the calculation of a factor to be applied over the CESMC to establish the discounts to be allocated to each affected user, with semi-annual increases in such five-year period; and (4) thedetermination of an increase mechanism for user compensation in the case of a continued event or incident.

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In connection with the technical service quality, the most relevant changes pursuant to ENRE Resolution No. 63/17 consist of: (1) the update of the cost of energy not supplied in conditions (“CENS”) according to the user’s category, which simultaneously will be subject to any VAD increases that may occur; (2) the exclusion of penalties application in the event of electrical outages caused by severe climate events that affect between 100,000 and 400,000 users within 24 hours, provided that the service is reestablished within the terms pursuant to ENRE Resolution No. 63/17; (3) the incorporation of quality tracks that set expected values for the SAIDI and SAIFI indicators, which satisfaction will determine the application of factors to be applied over the CENS to establish discounts to be allocated to users. These factors are related to the duration of the electrical outage and increase in subsequent semi-annual periods of the five-year period; and, (4) the determination of adjustment rates differentiated by district/commune over the mentioned factors. In all cases, the evolution of these quality tracks drive the SAIDI/SAIFI indexes to the values defined as medium grade quality reference in the concession contract at the end of the five-year period.

 

Pursuant to our concession, the ENRE may fine us if one of our users 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 users in their electricity bills within a 60-day period after the ending of the six-month control period. Fines are calculated at a rate per KWh that varies depending on the particular tariff or price schedule that is applicable to the user.

The following table sets forth the frequency and duration (SAIDI and SAIFI) of interruptions our service in the periods indicated

 

Year ended December 31,

Per customers

2018

 

2017

 

2016

Average frequency of interruptions(times)

6.94

 

9.02

 

8.67

Average duration of interruption (hours) 

22.65

 

27.55

 

25.84

 

In addition, to meet quality levels, we must comply with certain operational requirements related to the quality of our commercial services, safety in the public highways, data gathering and processing (including through reports that must be submitted to ENRE for supervision and control) and other contractual requirements related to our environmental management plan and the claims filed with ENRE by users which have been resolved after the established period.

Product quality

As of December 31, 2018,product quality regulations that established a quality track for the RTI’s five-year period (2017-2021) remain effective, and establish voltage deviation limits for Medium Voltage (“MV”) and Low Voltage (“LV”) supplies at a unified value of 8%, 5% exclusively for High Voltage (“HV”), and the cost of energy delivered in bad conditions at incremental values throughout the track for both voltage levels and disturbances.

Furthermore, pursuant to certain regulations, all measurements in points selected by the ENRE and in network disturbances that have shown deviations for which penalties had been imposed at the beginning of the RTI’s five-year period were remeasured within the maximum period of two years as from that date the RTI was completed.

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 users to offset a portion of their electricity charges. Since 1996, we have operated a central information system that allows us to directly credit users 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 users are owed to the ENRE, including fines imposed on us by the ENRE for any network installations found to create a safety or security hazard in a public space, such as streets and sidewalks. In addition, the ENRE may fine us for furnishing it inconsistent required technical information. 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 at which point, with the ENRE’s authorization, the amount is proportionally distributed among our 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:

 

Year ended December 31,

 

(in millions of Pesos)

 

2018

 

2017

 

2016

Accruals at beginning of year 

  6,163.2

 

   6,511.2

 

   2,646.0

ENRE Fines and Penalties

   3,681.2

 

   1,169.3

 

   5,046.1

Quality of Technical Service

  1,506.1

 

  356.2

 

  2,815.7

Quality of Technical Product

  222.6

 

  (0.8)

 

  756.1

Quality of Commercial Service

  958.0

 

  178.5

 

  81.9

Public Safety

  630.9

 

  361.7

 

  1,114.5

Transport Technical Function

  (1.5)

 

2.7

 

0.2

Reporting Violations

  142.8

 

  228.3

 

  201.1

Non-compliance with the investment plan

 138.7

 

  -

 

  -

Others

  83.6

 

  42.7

 

  76.6

 Payments of the year

(524.5)

 

(161.6)

 

(178.7)

Quality of Technical Service

(401.2)

 

(107.0)

 

(166.2)

Quality of Technical Product

   (13.9)

 

  (6.4)

 

  -

Quality of Commercial Service

   (32.1)

 

   (48.2)

 

   (12.5)

Public Safety

   (77.3)

 

  -

 

  -

Result from exposure to inflation for the year

(2,386.9)

 

(1,355.7)

 

(1,002.2)

Accruals at year-end

   6,933.0

 

   6,163.2

 

   6,511.2

 

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.

 

Our fines and penalties imposed on us by the ENRE amounted to Ps.3,116.5 million and Ps.856.7 million as of December 31, 2018 and 2017, respectively.

As of December 31, 2018, total accrued fines and penalties imposed on us amounted to Ps.6,933.0 million, of which Ps.4,311.4 million (including accrued interest) corresponded to penalties accrued but not yet imposed on us and Ps.2,621.6 million (including accrued interest) correspond to penalties imposed on us but not yet paid.

 

Additionally, pursuant to Note No. 125,248 dated March 29, 2017, the ENRE set the new penalty determination and adjustment mechanisms in relation to the control procedures, the service quality assessment methodologies, and the penalty system applicable as from February 1, 2017 for the 2017 – 2021 period established by ENRE Resolution No. 63/17, providing for the following:

i)      Penalty values shall be determined on the basis of the KWh value, the average electricity rate, the cost of energy not supplied or other economic parameter at the value in effect at the first day of the control period or the value effective on the date of the penalizable event for penalties arising from specific events.

ii)    For all penalizable events that occurred during the transition period (the period between the signing of the Adjustment Agreement and the effective date of the RTI) for which a penalty has not been imposed, penalties shall be adjusted by the CPI used by the Central Bank to produce the multilateral real exchange rate index (“ITCRM”) for the month prior to the end of the control period or for the month prior to the date of occurrence of the penalizable event for penalties arising from specific events, until the date on which the penalty is imposed. This mechanism is also applicable to the events penalized after April 15, 2016(ENRE Note No. 120,151) and until the effective date of the RTI. This adjustment will be part of the penalty’s principal amount.

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iii)  Unpaid penalties will accrue interest at the Banco Nación lending rate for thirty-day discount transactions from the date of the resolution to the date of actual payment, as interest on late payment. In the case of penalties relating to customer service, the calculated amount shall be increased by 50%.

iv)   Penalties imposed after February 1, 2017 will be valued at the KWh value or the cost of energy not supplied on the first day of the control period or on the day on which the penalty is imposed for penalties arising from specific events. Those penalties will not be adjusted by the CPI, applying the interest on late payment. Moreover, an additional fine equivalent to twice the amount of the penalty will be determined if payment is not made in a timely manner and proper form.

 

Pursuant to ENRE regulations, many of the penalties imposed in KWh must be valued at the date the penalizable event occurred; the effects of these modifications have been quantified by the Company and recognized as of December 31, 2018.

 

In accordance with the provisions of Sub-Appendix XVI to ENRE Resolution No. 63/17, the Company is required to submit, within a term of 60 calendar days, the calculation of global indicators, interruptions for which force majeure was alleged, the calculation of individual indicators and will determine the related discounts, crediting the amounts thereof within ten business days. In turn, the ENRE will examine the information submitted by the Company, and in the event that the crediting of such discounts was not verified, will impose a fine, payable to the Argentine Government, for an amount equivalent to twice the value of the original amount that should have been recorded. As of the date of this annual report, the Company has complied with the provisions of ENRE Resolution No. 63/17 in relation to the six-month period ended August 31, 2018 and we are preparing the information in relation to the six-month period ended February 28, 2019, which we will be presented before its expiration date.

 

               Furthermore, through certain resolutions concerning penalties relating to the quality of the commercial and technical service, the ENRE has provided for the application of increases and adjustments, applying for such purpose a criterion different from the one applied by the Company. In this regard, the ENRE implemented an automatic penalty mechanism so that the discounts on account of deviations from the established limits may be credited to users within a term of 60 days as from the end of the six-month control period.

              

In fiscal year 2018, the ENRE regulated and/or issued several new penalty procedures, including:

ü ENRE Resolution No. 118/18: Regulating the compensation for extraordinary service provision interruptions.

ü ENRE Resolution No. 170/18: Regulating the penalty system for deviations from the investment plan, a procedure whereby real investments are compared to the annual investment plan submitted by the Company, and the investment plan carried out for the 5-year rate period is assessed against the Five-year period plan proposed in the RTI.

ü ENRE Resolution No. 198/18: New supplementary penalty system of technical service quality, which penalizes deviations from quality parameters at the feeder level.

ü ENRE Resolution No. 91/18: Through the filing of charges against Edenor, the ENRE informs Edenor about the penalty system to be applied for failure to comply with meter-reading and billing time periods.

 

Disruptions

Due to the disruption in the provision of service in our concession area resulting from a power outage during a heat-wave that occurred between December 20 and December 31, 2010, the ENRE issued Resolution No. 32/11 in February 2011 pursuant to which we were fined for Ps.1.1 million in nominal currency, equivalent to Ps.5.9 million in current currency and ordered to compensate users who had been affected by power cuts for approximately Ps.21.2 million in nominal currency, equivalent to Ps.113.3 in current currency. We 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.

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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 result, 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 considered jointly. As of December 31, 2018, due to ENRE Resolution No. 32/11 Edenor registered a provision of Ps.66.4 million in its financial statements. Given that framework of the “Agreement” with the ENRE is no longer in effect, the procedure is “suspended” and the Company cannot estimate the date on which the litigation will end.

On November 15, 2012, the Company was notified of ENRE Resolution No. 336/12, pursuant to which the Area of Application and Administration of Standards in charge of enforcing the ENRE’s regulations  was instructed to immediately initiate a sanction proceeding whereby the distribution companies Edenor and Edesur S.A. (“Edesur’’) were required to: (a) determine the users affected by the power cuts which occurred as a consequence of failures between October 29 and November 14, 2012; (b) determine the discounts to be recognized for each of the affected users; and (c) credit such discounts towards the final discounts that would result from the evaluation of the technical service quality relating to the six-month control period. As of December 31, 2018, pursuant to Resolution No. 336/12 of the ENRE, the Company registered a provision of Ps.44.1 million in its financial statements.

Consequently, we then filed an appeal (“Recurso de queja por apelación denegada”) requesting that both appeals be considered jointly. As of December 31, 2018, due to ENRE Resolution No. 32/11 Edenor registered a provision of Ps.66.4 million in its financial statements. Given that framework of the agreement with the ENRE is no longer in effect, the procedure is “suspended” and the Company cannot estimate the date on which the litigation will end.

Foreclosure on the Pledge of Our Class A common shares or Revocation of Our Concession

Pursuant to the terms of the Adjustment Agreement, the Argentine Government may foreclose on the pledge of Edenor Class A common shares and sell them in a public bidding process if any of the following events 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;

·     Pampa, 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;

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

·     Pampa 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.

On February 1, 2017, the ENRE issued Resolution No. 63/17 establishing the new tariff scheme which resulted from the completion of the RTI process, applicable to the following five-year period. Pursuant to the provisions of the Adjustment Agreement, EASA and EDFI withdrew their ICSID claim, and on March 28, 2017, the ICSID recognized the discontinuance of the procedure. See “Item 7. Major Shareholders and Related Party Transactions”.

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Upon the occurrence of any of these events, the Argentine Government will have the right to foreclose on the pledge of our Class A common shares and exercise the voting rights of the Class A common shares until the transfer of such shares to a new purchaser occurs, at which time Pampa 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 Pampa acquired its stake. Pampa (or its successor) will be entitled to participate in the bid. The person or group offering the highest price will acquire the stock and will pay the offered price to Pampa. If Pampa is the highest bidder or if Pampa’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 Pampa will have no further obligation with respect to its bid. There is no restriction as to the amount Pampa may bid. In the event Pampa 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 Pampa. See “Item 7. Major Shareholders and Related Party Transactions—Parent Company Merger Process.”

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. 467/07 of the ENRE, agreed to extend the initial management period for an additional five years from the date that the new tariff structure was adopted under the RTI. The remaining 10-year periods will run from the expiration of the extension of the initial management period.The first management period is estimated to end on March 1, 2022.

Default of the Argentine Government

If the Argentine Government breaches its obligations in such a way that we cannot comply with our obligations 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, 2018, the system through which the Company supplies electricity comprises 79 HV/HV, HV/HV/MV and HV/MV transformer substations, which represents 17,783 MVA of installed power and 1,527 kilometers of 220 kV, 132 kV and 27.5 kV high-voltage networks. The MV/LV and MV/MV distribution system comprises 18,024 MV/LV transformers, which represents 8,404 MVA of installed power, 11,054 kilometers of 33 and 13.2 kV medium-voltage lines, and 27,118 kilometers of 380/220 V low-voltage lines.        


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The table below shows the most significant data related to the transmission and distribution system for the last five years:

 

 

Electricity is conveyed from points of interconnection with the Argentine Interconnection System (“SADI”), 500 kV-220 kV Rodríguez Substation, 220 kV Ezeiza Substation, and from the local power plants, mainly Puerto and Costanera. In turn, the transmission network links these nodes with Casanova, Colegiales, Malaver, Matheu, Morón, Rodríguez, Talar and Zappalorto 220 kV head substations, and with Matanza, Ramos Mejía, Agronomía, Puerto Nuevo, Edison, Pilar, and Malvinas 132 kV head substations. Additionally, other local thermal-generation power plants are linked to Pilar, Zappalorto and Matheu Substations.

The transmission and distribution system, together with Edesur S.A. and Edelap S.A.’s systems, form the Greater Buenos Aires system that is operated by SACME, a company jointly controlled by the Company and Edesur S.A. SACME is responsible for the management of the high-voltage regional distribution in the Buenos Aires metropolitan area, coordinating, controlling and supervising the operation of the generation, transmission and distribution network in the CABA and the Buenos Aires metropolitan area, including coordination with the SADI in the Company’s and Edesur’s concession areas.

The Company distributes energy from the high/medium voltage substations through the primary 13.2kV and 33kV system to a secondary 380/220 V low-voltage system, distributing the electricity to final users with varied voltage levels depending on their requirements. In exceptional cases, certain users are supplied with power at higher voltages.

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The following main works were performed in 2018:

 

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Transmission structure:

Our transmission network’s structure comprises high voltage (HV: 500, 220 and 132 kV) lines and/or cables that link non-radial operation substations, the interconnection points and the generation. The main development criterion of this network is its adaptability in order to meet the planned demand according to its geographical distribution, considering the various possible generation scenarios and the eventual unavailability of facilities comprising the network. The Company’s HV transmission network takes power mainly from the SADI through the Rodríguez Substation, Ezeiza Substation, Puerto Nuevo and Nuevo Puerto thermal power plants, and Costanera Substation; additionally, it exchanges power with other companies at transmission and distribution level.

In 2018, to improve service quality and meet the growth in demand, the following significant works were carried out in the HV network, among others:

·

Putting into service the expanded 220/132 kV Ezeiza Substation with a 300 MVA transformer and two new 132 kV cable output fields, and two new 132 kV electrical transmission lines that link this substation with the El Pino Substation.

·

Putting into service a new 132 kV electrical transmission line that links the Casanova and the San Justo Substations.

·

Replacement of a 5 km-long section of the 132 kV three-phase oil-paper cable with the 132 kV XLPE-type dry cable from the electrical transmission lines that link the Puerto Nuevo, Melo and Colegiales Substations.

·

Continuation of expansion works of the 500/220 kV Rodríguez Substation to increase its capacity by 800 MVA. The expanded substation is expected to be put into service in 2019.

·

Continuation of works on the new 220 kV electrical transmission line that will link Malaver and Edison Substations and of the latter’s expansion through the installation of a 220/132 kV - 300 MVA transformer.

·

Commencement of works to link the José C. Paz Substation with the Morón – Matheu Substations’ 132 kV electrical transmission lines.

·

Commencement of works on two new 132 kV electrical transmission lines that will link the Malaver and the Munro Substations, replacing a 17 km-long section of a three-phase oil-paper cable.

     

Subtransmission Structure

Our substransmission network is the link between HV (HV/HV) head substations and the substations where voltage is transformed from high to medium (HV/MV), adopting generally the 132 kV voltage level. The overhead network (double radial deviation or double loop deviation) and the underground network (in “simple circuit” loops or double loop deviation) are considered as the basic structure of the subtransmission network.

In 2018, some of the main works performed were:

·

Completion of the new Aguas and Pantanosa Substations.

·

Completion of the renovation and expansion works of the 132/13.2 kV 3 x 40 MVA Urquiza Substation.

·

Expansion of the 132/13.2 kV Benavidez Substation, replacing a 40 MVA transformer for a 80 MVA transformer.

·

Replacement of transformers in the Victoria, Colegiales, El Pino, Malaver and La Matanza Substations.

·

Continuation of works on the new Jose C. Paz and Aeroclub Substations.

·

Commencement of works on the new Ara San Juan and Libertad Substations and on the 33/13.2 kV Dique Luján and El Cruce Step-down Centers.

·

Acquisition of land to build the future Martínez, Garín and Trujui Substations. Additionally, a plot of land to build the future Oro Verde Substation was assigned to the

 

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Company by the National officein charge of the development, planning and conservation or routes (Vialidad Nacional).

Distribution Structure:

The distribution network comprises all the equipment, medium voltage (13.2 and 33 kV) lines and cables that link subtransmission substations with medium and medium/low-voltage transformer centers. The network’s basic structure consists of open normal operation feeders forming rings with other feeders of another busbar of the same substation or with neighboring substations.

In 2018, the following works were performed, among others:

·     Installation of 51 feeders in new and existing substations.

·     Installation of 513 new medium/low-voltage transformer centers and 507 power increases, which resulted in a net increase of installed power of 403 MVA.

Network improvement

The improvements made to the networks in 2019 comprised all voltage levels. The most significant improvements are:

 

·     High-voltage network: replacement of 132 kV and 220 kV disconnectors. Replacement of 132 and 220 kV line protection switchboards.

·     Medium-voltage network: replacement of circuit breakers in substations and installation of internal arc protections in switchboards. Putting into service a new switchboard in Migueletes substation and continuation of assembly works for a new switchboard in the Del Viso substation. Significant replacement of old technology in the underground network, change of medium and low-voltage transformers, and change of equipment in transformer centers.

·     Low-voltage network: replacement of the underground and overhead network. Reinforcement of the network with product quality problems.

 

 

Information Technology and Telecommunications

The Company operates in a dynamic industry with many business challenges. To meet these challenges, the Company has continued to make progress through the strategic transformation of its Information Technology and Telecommunications function.

This function, in addition to leveraging the efficiency of the business’ processes, also aims to boost the deployment of the Company’s digital vision, which Edenor is currently developing, accompanied by Boston Consulting Group (BCG).

Faced with the challenges posed by the changes associated with the dynamic industry, the technological development and the digital transformation process, and the Information Technology and Telecommunications function’s strategic role, an in-depth review of the function’s operation model was conducted and a multi-year plan, which began implementation in 2019, was prepared with the consulting firm Bain & Company. The focus of the plan is the restructuring of the organization and its main processes; the incorporation and dissemination of new practices and working methodologies such as methods that increase agility; the incorporation and/or development of new digital capabilities/skills in the team; and moving towards a technological design that is sufficiently developed and flexible to address the Company’s current and future challenges.

Digital design, innovation and processes

The Company launched the design solution function with the aim of designing and implementing models that not only accelerate implementation times of technological solutions but also increase the system’s availability and sustainability.

In this regard, the Company began to implement the new Red Hat Fuse distributed integrationplatform, which is projected to  enable improvements to the performance of the Company’s key processes, achieve a more flexible and secure integration with external agents, and lay the foundations for responding to the challenge posed to integration by the constant evolution of applications and the increasing frequency with which they are developed.

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Additionally, the potential of blockchain technology began to be explored, identifying various potential uses capable of contributing value to the Company, with the aim to continue development in 2019 so that the technology delivers more value.

Furthermore, the first approaches to incubators and startups were made with an aim to establish a line of communication with the innovation ecosystem, which will contribute to having a map of solutions potentially integrable to the Company’s business.

Moreover, the process transformation function, a key role for building the digital vision, began to be developed. Such function will seek to develop and promote the business process management (BPM) practice in order to optimize business processes and promote their transverse management, using methodologies such as Lean and Six Sigma, among others, and technological tools, such as process mining and robotic process automation (RPA).

With the aim of ensuring that the quality requirements of applications are met, the quality of solutions practice was expanded. Methodologies, processes and tools were incorporated, facilitating the performance of tests and detecting failures at an early stage to reduce to a minimum the number of defects in delivered products. Additionally, software testing tasks and repetitive production tasks were automated, saving more than 20,000 hours of manual work.

In 2017, the Visión 360 program was launched consisting of a series of projects that incorporate new user relationship technologies that aim to have a unique vision of the user, regardless of the channel of contact, under the omnichannel concept. Consistent with such projects, a project was launched to technologically upgrade the Oracle CC&B billing and commercial management platform. At the same time, in order to minimize waiting times, automatic take-a-turn ticket dispensers were installed in our commercial offices. As part of the Visión 360 program, the Company continued developing projects under an omnichannel strategy of a single view with multiple contact channels.

To improve user experience, the new Avaya omnichannel platform contact center was deployed in 2018. This technology enables the integration of all communication channels with a complete view of our user.

During 2018, a complete technological upgrade of the Oracle CC&B commercial and billing platform was carried out, which contributed to the optimization of customer response times, the reduction of staff manual tasks and the improvement of interaction with external entities. This new platform, which includes a meter data management module, is projected to properly address the management of smart meters in the near future.

Technical and operating processes

To improve the quality of its technical service, in 2018, certain functionalities of the Company’s system were extended and optimized to improve both the management of interruptions and the life cycle of distribution transformers.

Additionally, in 2018,new functionalities were implemented in the ArcGis geographical information platform, extending the geo-visualization capabilities of the operation. In 2019, the platform’s potential will continue to be developed with the incorporation of management functionalities.

Support processes

During 2018, to improve the efficiency of the Company’s support processes, different market-leading technologies were incorporated.

In 2018, one of the efficiency improvement initiatives consisted of the digitalization of the interaction process with suppliers through the implementation of SAP Ariba, which enables suppliers to register and enter their information themselves. It is expected that other functionalities of this modulewill be incorporated for the improvement of this process.

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Additionally, in 2018, the SAP Warehouse Management was reinforced to optimize the traceability of supplies to improve planning of operational work.

In 2018, new technological components that promote interaction and collaboration of the work force were implemented and includ the installation of self-management devices in the Company’s different operating areas as well as the implementation of an enterprise social network (SAP Jam) that facilitates collaboration at all levels and across all areas of the CompanyData management

Data management continued to be strengthened through the development of analytical tools and practices to obtain important information, with a view to the deployment of information models that allow for self-management and promote the development of analytical skills in business areas.

The implementation of the data map and governance model continued, deepening the understanding of the relationships and the systems where they are located, in addition to their life cycle’s responsibilities.

In this regard, progress was made with the analysis and selection of a master data management (MDM) platform that will enable the setting of responsibilities for the updating of master data and the establishment of quality metrics and criteria, to ensure the reliability of information.

Additionally, in the analytical field, a use discovery methodology was employed, which promoted the cross-business vision through the data. One of the cases developed was related to the analysis of the impact works have on the quality of the service, with an aim to correlate different variables to detect scenario analysis.

Another use was related to the development of a predictive model, which, based on a combination of predictor data, artificial intelligence and machine learning, enables increased accuracy of energy fraud detection and loss appropriation.

Cybersecurity

Following the guidelines defined in 2017 related to the multi-year cybersecurity plan in critical infrastructure, in 2018 the implementation of cybersecurity-related projects escalated, achieving a network segmentation design that is aligned with best market practices (ISA-99).

Additionally, the Company interacted with different domestic and international companies and civil and governmental institutions related to the electric power market, presenting its experiences in addressing these issues and learning from the experiences of other Latin-American countries. These interactions led the Company to promote the development of a common cybersecurity regulatory framework for electric power generation, transmission and distribution companies. Such initiative is currently being promoted in conjunction with other companies and institutions of the electricity sector.

Furthermore, with the aim of improving the level of compliance with SOX requirements, we have implemented a new tool that enables us to assign approval management and privileges through pre-designed workflows.

Infrastructure

To prepare for the development of a future smart grid, in 2018 the Company increased both the capacity and the extension of its optical fiber network, reaching a total of nearly 1,300 Km in service. This initiative impacted the communication of substations, buildings and commercial offices, enhancing the performance of the network as a whole.

To increase productivity, development began of advanced monitoring practices incorporating Splunk and Knoa technologies in the first stage. By monitoring the infrastructure and the activity of the 1,500 users that perform works on the street and a significant number of desk users, we project to increase the availability of applications, optimize performance and proactively detect future failures and improvement opportunities.

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With the aim to keeping the processing technologies that support our applications updated and to achieving a faster response to changes and better performance, the consolidation of critical applications to a new private cloud architecture and the migration of the Company’s remaining applications to a public cloud began.

               Users

The following graph shows the evolution of our user base over the last five years:

 

 

As of December 31, 2018, Edenor served 3,040,339 users. We define a “user” as one meter.

 

Edenor Tariff Categories

Edenor classifies its users pursuant to the following tariff categories:

·     Residential (T1-R1 to T1-R9): residential users whose peak capacity demand is less than 10kW. In 2018, this category accounted for approximately 42.3% of our electricity sales.

·     Small commercial (T1-G1 to T1-G3): commercial users whose peak capacity demand is less than 10kW. In 2018, this category accounted for approximately 8.5% of our electricity sales.

·     Medium commercial (T2): commercial users whose peak capacity demand is equal to or greater than 10kW but less than 50kW. In 2018, this category accounted for approximately 7.9% of our electricity sales.

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·

Industrial (T3): industrial users whose peak capacity demand is equal to or greater than 50kW. This category is applied to high-demand users according to the voltage at which each user 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 2018, this category accounted for approximately 17.2% of our electricity sales. This category does not include users who purchase their electricity directly through the WEM under the wheeling system.

·

 Wheeling System: large users who purchase their electricity directly from generation or broker companies through the WEM. These tariffs follow the same structure as those applied under the Industrial category described above. As of December 31, 2018, the total number of such large users was 699, and this category represented approximately 26.1% of our electricity sales.

·

Others: public lighting (T1-PL) and shantytown users whose peak capacity demand is less than 10kW. In 2018, this category accounted for approximately 6% of our electricity sales. See “Framework Agreement (Shantytowns)”.

We aim to maintain an accurate categorization of our users to charge the appropriate tariff to each user. In particular, we focus on our residential tariff categorizations to both minimize the number ofcommercial and industrial users who are classified as residential users and identify residential users whose peak capacity demand exceeds 10 kW and therefore do not qualify as residential users.

 

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

·     reporting carried out by our employees tasked with reading meter information to identify observed commercial activities which are being performed by residential users,

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

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

                                                            

Reading, Billing and Collecting

The Company bills its users based on their tariff categories. Residential users and small business users are billed a fixed monthly charge and a variable charge based on each unit of energy consumed. The savings in energy consumption obtained by users are calculated by comparing the current consumption with the consumption of the registered user during the same period in 2015.

On January 29, 2016, pursuant to Resolution No. 1/16, the ENRE established a monthly billing scheme providing for bimonthly consumption reading. On February 1, 2017, the ENRE issued Resolution No. 63/17, which established a new tariff scheme that maintains the billing methodology of Resolution No. 1/16.

In 2017, the implementation of the remote meter reading system for the tariff 3 (high demand) and tariff 2 (medium demand) user segments gradually began.

As part of the measures aimed at the restructuring of the electricity sector after the RTI became effective, a system was implemented for the monthly billing of the consumption measured every two months, dividing for such purpose the bimonthly consumption into two similar monthly periods with a view to providing T1 (small demand) users with more timely information regarding their consumption and facilitating payment.

Additionally, to measure the amount of actual readings for which service is billed, limits of estimated readings have been established in order to maximize user billing on actual readings. The Concession Agreement initially stipulated that the maximum limit of estimates was 8% of the total bills issued. As from the effective date of the RTI, a maximum of 2% of estimated bills over the total number of bills issued for each electricity rate category has been set as a global indicator. The Company complied with this indicator and improved it to an average of less than 1% in 2017.

With more than 17 million annual readings, our meter reading process has an effectiveness percentage in which 98.26 % of the meter readings are billed in first instance, which subsequently directly impacts the quality of the billing: less than 0.09 % of the readings have given rise to a complaint and approximately 1 in 11,128 readings has an error that must be corrected in the billing process.

As a result of our meter reading and billing processes, other commercial processes have become more regularized; bill distribution tasks have become more organized, due dates and cash flows have become more predictable. Technological adaptations, such as remote meter readings, the changes to meter reading procedures, and the opening of new contact channels to coordinate meter readings have contributed to an improvement in the number of the meter readings that could not be billed in first instance, avoiding estimated consumption.

In 2018, estimated consumption cases accounted for only 0.46% of total consumption billed.

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

Residential (Tariff 1-R or T1-R):

·     Tariff 1-R1: monthly energy consumption less than or equal to 300 KWh;

·     Tariff 1-R2: monthly energy consumption greater than 301 KWh and less than or equal to 650 KWh;

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·     Tariff 1-R3: monthly energy consumption greater than 651 KWh and less than or equal to 800 KWh;

·     Tariff 1-R4: monthly energy consumption greater than 801 KWh and less than or equal to 900 KWh;

·     Tariff 1-R5: monthly energy consumption greater than 901 KWh and less than or equal to 1000 KWh;

·     Tariff 1-R6: monthly energy consumption greater than 1001 KWh and less than or equal to 1200 KWh;

·     Tariff 1-R7: monthly energy consumption greater than 1201 KWh and less than or equal to 1400 KWh;

·     Tariff 1-R8: monthly energy consumption greater than 1401 KWh and less than or equal to 2800 KWh; and

·     Tariff 1-R9: monthly energy consumption greater than 2800 KWh.

Social Tariff

The social tariff applies to the same subcategories of residential rates, for which there is no variable charge for the first 150 KWh of monthly consumption until November 2017. Since December 2017, mechanisms for discounts based on consumption (150 KWh/month at the price) of Stabilized Energy Price (“PEE”) energy, and the second 150 KWh/month at 50% of the PEE) and are differentiated according to whether they generate savings over the same period of 2015, provided for in Resolution of the ENRE No. 603/17. However, since the beginning of 2019, bonuses for savings have been eliminated.

To qualify for the social tariff, users must comply with one of the following characteristics:

·     retirees or pensioners who receive two gross minimum wages or less;

·     workers in employment relationships that earn two gross minimum wages or less;

·     self-employed individuals falling in categories that correspond to annual income which monthly break out reaches two minimum gross wages or less;

·     grantees of social programs;

·     registered in the self-employed (monotributista) social category;

·     grantees of non-contributory pensions with gross income equal to or less than two minimum wages;

·     grantees of unemployment insurance;

·     domestic service incorporated into the relevant special social security scheme;

·     holders of the Lifetime Pension for Veterans of the South Atlantic War;

·     persons with a disability certificate issued by a competent authority; and

·     persons suffering or living with another person suffering from an illness whose treatment involves electrodependence (in this case, the variable charge for the first 600 KWh monthly consumption is free).

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; and

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

Medium Commercial (Tariff 2):

Medium commercial users (demand greater than 10 kW but less than 50 kW - Tariff T2) are billed on a monthly basis, as follows: (1) a fixed charge per invoiced issued; (2) a fixed charge per each“scope of supply” of kW capacity agreed; (3) a fixed charge based on a maximum kW capacity (applicable to the maximum capacity registered during the billing period); (4) a variable charge based on each unit of energy consumed, without hour discrimination; and, (5) if applicable, a cos phi surcharge.

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Industrial (Tariff 3):

Industrial users (demand equal or greater than 50 kW - Tariff T3) are billed on a monthly basis, as follows: (1) a fixed charge per invoice issued; (2) a fixed charge per each “scope of supply” of kW capacity agreed for low, medium or high voltage, with or without electricity consumption; (3) a fixed charge based on a maximum kW capacity registered, in low, medium or high voltage, applicable to the maximum capacity registered during the billing period; (4) a charge resulting from the electricity supplied in the voltage corresponding to the provision, in accordance with the consumption registered in each of the tariff timetables: “peak”, “night-time” and “remaining hours”; (5) if the supply is carried out in continuous current, a surcharge equivalent to a percentage of the price of the rectified electricity; and (6), if it is applicable, a cos phi surcharge.

Public Lighting (AP):

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

The table below shows the number of Edenor users per tariff category as of December 31, for the years 2018, 2017 and 2016, respectively:

 

As of December 31,

 

2018

 

2017

 

2016

T1R

2,677,693

 

2,580,003

 

2,497,386

T1G

322,479

 

328,715

 

327,198

T2

31,993

 

33,426

 

34,662

T3

   6,876

 

   6,874

 

   6,856

Wheeling system

   679

 

   706

 

   714

Other*

   619

 

   605

 

   434

Total

3,040,339

 

2,950,329

 

2,867,250

* Represents public lighting and shantytown users.

 

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 T2, T3 and certain T1users). The systems validate the readings, and any inconsistent reading is checked and/or corrected before billing. Estimates of user 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

Pursuant to the Concession Agreement, certain procedures were established to reduce delinquency and enable collection, overseen with strict observance by the Commercial Department.

Municipal accounts make up a significant number of our arrear’s 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 from the public by us on behalf of the municipalities and using such taxes to offset any past due amounts owed to us by such municipalities. Another method of collection is to enter into refinancing agreements with the municipalities. Such methods significantly reduce the number of arrears accounts.

Our past due receivables increased from Ps.1,536.4 million as of December 31, 2017 to Ps.1,971.1 million as of December 31, 2018 in nominal currency. This increase was mainly due to the tariff increase established by ENRE Resolution No. 63/17. The tariff increase directly affected the amounts owed by users with debtor behavior, as their unpaid charges are calculated based on the tariff inforce as of the date of the infringement. Likewise, past due receivables could be measured as an equivalent of billing days, and taking into consideration this measure, an increase from 11.36 to 11.64 days is observed.

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Throughout 2018, several actions were performed to reduce the past due receivables, including:

·       suspension of the electricity supply service to users with significant outstanding balances;

·       special notices prompting payment;

·       personalized calls to negotiate and prompt payment;

·       management and follow-up plans;

·       more flexible payment plans; and

·       management of inactive accounts.

 

The following graph shows Edenor´s delinquent balances as of December 31, of each year:

We also supply energy to low-income areas pursuant to the framework agreement with the Argentine Government and the Province of Buenos Aires, for which certain payments are still owed to us. See “Framework Agreement (Shantytowns).”

               Energy Losses

Energy losses are equivalent to the difference between energy purchased and energy sold, and may be classified as technical and non-technical losses. Technical losses represent the energy that is lost during transmission and network distribution as a consequence of natural heating of the transformers and conductors that transmit the electricity from the generating plants to the users. 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 users typically consume more electricity than the average level of consumption for their category. We are unable to recover from users 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 26.54%. At that time, our non-technical losses were estimated at 17%, of the energy purchased; with over half of that amount due to fraud and illegal use of our service. In response to the high level of losses, we implemented a loss reduction plan in 1992, which emphasized accurate measurement of energy consumption through periodic inspections, reduction of administrative errors, regularization of shantytowns, reduction of illegal direct connections, provision of services to shantytowns and reduction of technical losses.However, from time to time, the Company hasexperienced an increase in non-technical losses as economic crises have impaired the ability of its users to pay their bills, and an increase in technical losses relative to the increase in the volume of energy that the Company supplied during such periods.

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Our goal is to maintain our energy losses at an optimal level, while also considering 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 users 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 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 testing other programs including teaching low-income users how to ration their consumption, providing them with the option of paying in installments and the installation of 48,560 integrated meters (MIDEs) in 2017, allowing the user to purchase fractional energy. In 2018, the plan aimed at normalizing clandestine consumers, inactive users and chronic delinquent users remained in force, substantially increasing the installation of MIDE energy integrated meters by 92,902 out of a total 142,728 meters.

In Regions II and III, new shantytowns were formed while existing shantytowns continued to grow. In 2018, the increase in total losses was mainly due to the theft of energy in these areas.

Additionally, in 2018 a new type of multiple concentric network (“MULCON”) was designed to leverage the MIDE meter’s functionalities increasing damage resistance. Due to positive results, it is being implemented in neighborhoods with high fraud rates.

The following table illustrates our estimates of the approximate breakdown between technical and non-technical energy losses experienced in our concession area for the periods indicated:

 

Year ended December 31,

 

2018

 

2017

 

2016

 

2015

 

2014

Technical losses

8.4%

 

8.8%

 

9.6%

 

11.1%

 

10.8%

Non technical losses

9.8%

 

8.3%

 

7.4%

 

3.8%

 

3.5%

Total losses

18.2%

 

17.1%

 

17.0%

 

14.9%

 

14.3%

 

Framework Agreement (Shantytowns)

On January 10, 1994, the Company, among Edesur S.A., the Argentine Government and the Government of the Province of Buenos Aires entered into a Framework Agreement, whose purpose was to establish the guidelines under which the Company was to supply electricity to low-income areas and shantytowns (the “Framework Agreement”).

In accordance with the terms of our concession and given the nature of public service that the law grants for 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 users 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. The Amended 2003 Framework Agreement expired on December 31, 2010.

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On July 22, 2011, the Company, together with Edesur and Edelap, entered into an addendum (the “Addendum”) with the Argentine Government and the Government of the Province of Buenos Aires, to extend the Amended 2003 Framework Agreement for an additional term of four years (from January 1, 2011, to December 31, 2014). 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. On December 31, 2014 the Amended 2003 Framework Agreement expired.

On August 3, 2017, the extension of the Framework Agreement until September 30, 2017 was signed, which represents the recognition of revenue relating to the distribution of electricity to low-income areas and shantytowns for the January 1, 2015 - September 30, 2017 period for an amount of Ps.497.2 million.

As of December 31, 2018, the Company and the Argentine Government were negotiating a new extension for the period elapsed from October 1, 2017 through December 31, 2018, and the payment of the electricity supplied during such period. Therefore, no revenue for this concept has been recognized.

Additionally, and as a result of the transfer of jurisdiction over the public service of electricity distribution from the Argentine Government to the Province of Buenos Aires and the City of Buenos Aires pursuant to Law No. 27,467, the Company will be required to undertake a review of the treatment to be given to low-income areas and shantytowns’ consumption of electricity as from January 1, 2019 with the new “Grantors” of the Concession, once the transfer has been completed. In this matter, the Government of the Province of Buenos Aires enacted the General Budget Law No. 15,078 which established that the Province shall pay the aforementioned expenses up to the amount paid in 2018 and any amount in excess shall be borne by the relevant Municipalities, such consumptions to be previously approved by the regulatory entities or local authorities having jurisdiction in each area.

              Insurance

As of December 31, 2018, we are insured for the property loss and damage, including damage due to floods, fires and acts of nature covering up to U.S.$1,603.9 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 safe-deposit boxes and cash/valuables-in-transit for a maximum amount of U.S.$150,000 and U.S.$5,000, respectively, with a deductible of U.S.$250.

In addition, we maintain the following insurances, subject to customary deductibles and the conditions established for each coverage:

•  Directors and Officers Liability;

•  General Liability;

•  Vehicles;

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

•  Optional life insurances for all our employees.

As of the date of this annual report, the Company is analyzing different coverage options offered by market participants for insurance related to cybersecurity events.

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 eventnot covered by our insurance, we could face significant losses that could materially adversely affect our business and results of operations”.

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Environmental Management

In Argentina, the Argentine Government, the provincial Governments and the Government of the City of Buenos Aires are empowered 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 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 was formulated by the former 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 use of PCB in our transformers before January 1, 2011.

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.

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. To the best of our knowledge, we are in compliance in all material respects with all applicable environmental standards, rules and regulations established by the ENRE, the former 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 user 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 performed. 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 14001/15, which relates specifically to environmental management systems. This certification is reaffirmed on an annual basis, most recently as of November 2018.

Section 22 of Law No. 25,675 requires all persons whose activities maintain an Environmental Complexity Level (ECL) that implies a risk of damage to the environment, such as any activity of the Company, to obtain environmental insurance for a certain minimum coverage

Seasonality

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

New Brand and Institutional Image

In 2017, the Company launched its new brand and institutional image. The goal of this change is to reflect a modern company, with an emphasis on technology, innovation and user service quality, aswell as portray the Company as a model public utility company, with a focus on two pillars: efficiency and proximity.

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The new brand and institutional image continued during 2018 and was visible throughout the different levels of the Company’s operations, including the corporate buildings, our commercial offices, corporate vehicles, invoices, among others. The principal actions were:

·

Industrial safety: in November 2018, the Company successfully passed the annual audit conducted by the Argentine Institute for Standardization and Certification (“IRAM”) on the management of Industrial Safety, which allowed it to maintain the OHSAS 18001 certification it had obtained in 2005. In order to comply with these guidelines related to Occupational Health and Safety, the Company performed several activities, resulting in improved accident indicators from 2016 to 2018.

·

Public safety: in 2018 the Company successfully passed the annual audit conducted by the IRAM on the Public Safety System (PSS) according to ENRE Resolution No. 421/11, thus maintaining the related certification. Additionally, the Company successfully passed the audit conducted by the ENRE on the processing of public safety-related claims in accordance with the PSS.

·

Quality: the Company successfully passed the external maintenance audit of the Integrated Management System (IMS), which was conducted in November 2018. The certifying entity IRAM noted the implementation of the “Proximity” Program as a strength, due to the Company’s improved focus on both the external user and internal user. Furthermore, the development and implementation of the medical service’s proactive actions to improve its performance was also noted.

·

Environmental management: in 2018, the Provincial Agency for Sustainable Development of the Province of Buenos Aires granted Edenor the environmental clearance certificate, for certain works projects developed in such province.

·

Community actions: as the case for many years, Edenor continues to implement the “Solidarity campaigns” program, whose objective is to support the dissemination of the work performed by different health, environment protection, and education-related organizations, publishing for such purpose information about the campaigns on the Company’s website, www.edenor.com.

·

Sustainable energy: in March 2018, Edenor became the first company to acquire the first 100% electric vehicle that was sold in Argentina. In 2018, Edenor began to carry out distributed generation pilot tests in Tariff 2 users, that makes it possible to inject into the network the electricity generated through eight solar panels. These pilot tests allow Edenor to make the controls and gather the information necessary to continue with the process of network innovation and proximity and efficiency with the user, in the future, when the law on distributed generation can be applied.

 

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, theArgentine 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 Congress adopted Law No. 24,065 (the “Regulatory Framework Law”), 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 the owner or a majority shareholder of a transmitter company or the controlling entity of a transmitter company; and

·

Under Section 9 of Decree No. 1398/92, 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,

 

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either as shareholders of the generator or through any other entity created with the purpose of owning or controlling distribution units.

Transmitters

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

·     Under Section 9 of Decree No. 1398/92, 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 the Regulatory Framework Law (which establishes vertical restrictions) is not defined in such law. 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 132 kW and below 140 kW, 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 220 KW, the company must render the service on an exclusive basis and is entitled to render the service throughout Argentina, without territorial limitations.

Distributors

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

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

2001 Economic Crisis

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

The Argentine Government has repeatedly intervened in and modified the rules of the WEM 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 WEM. The Argentine Government has made some attempts to correct these problems, including proposing new rules to structure the WEM 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 former 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 sought to create incentives for energy generation plants in order to meet increasing energy needs. The resolution’s principal objective was to ensure that energy available in the market was used primarily to service residential users and those industrial and commercial users whose energy demand was at or below 300 kW and who lacked access to other viable energy alternatives. 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 the construction and began the 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 Secretaria de Gobierno de Energia (“SGE”), which assumed certain responsibilities of the former SE (the “SEE”);

(2)    the ENRE; and

(3)    CAMMESA.

The SEE 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 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.”

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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 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.

On December 22, 2015, through Decree No 231/15 the ME&M was created, as a result of the rise in hierarchy of the old SE, which had been part of the Ministry of Federal Planning, Public Investment and Services of the Nation, with the objective of elaborating, proposing and executing the national energy policy. On March 5, 2018, through Decree No 174/18 the structure of the ME&M was modified, amongst other offices of the Argentine Government. The older structure of the ME&M, created through Decree No 231/15, comprised four secretaries and fourteen undersecretaries, whilst the new structure was reduced to three secretaries and ten undersecretaries. However, on September 6, 2018, through Decree No. 801/18, the Argentine Government strategically reorganized the ministries, dissolving the ME&M and transforming it into the SEE, which remains within the orbit of control of the Ministry of Finance.

Although CAMMESA is not a state-owned company, it usually receives funds from the Argentine Government, has a public purpose and makes decisions pursuant to SEE instructions.

CAMMESA is responsible for:

·     managing the SADI 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 SADI;

·     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 from time to time established by the SE,

·     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 WEM participants;

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

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·     providing consulting and other services related to these activities;

·     supplying fuel pursuant to Resolution No. 95/13 of the former 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 WEM participants. CAMMESA’s annual budget is subject to a mandatory cap equivalent to 0.85% of the aggregate amount of transactions in the WEM projected for that year.

Pursuant to Law No. 27,467, which enacted the 2019 Federal Budget of Expenditures and Resources, the Executive Branch was instructed to promote such actions that may be necessary in order for the electricity distribution companies Edenor and Edesur S.A. to become subject to the joint jurisdiction of the Province of Buenos Aires as of and the City of Buenos Aires on January 1st, 2019.

Once the transfer of jurisdiction is completed, the ENRE will continue to exercise its functions and regulatory and control powers over the public service of electric power transmission.  Furthermore, the ENRE will continue to intervene in the issues and circumstances related to generation activity that affect the public interest in order to ensure its proper functioning primarily through, technical, environmental and economic regulations concerning the WEM’s operation.

In this regard, on February 28, 2019, the Federal Argentine Government, the Province of Buenos Aires and the City of Buenos Aires entered into an agreement for the transfer of the public service of electricity distribution, duly awarded to Edenor under the Concession Agreement by the Argentine Government, from the jurisdiction of the Argentine Government to the Province of Buenos Aires and the City of Buenos Aires.Such agreement provides for the creation of a new supervisory entity which will replace the existing ENRE, to be in charge of controlling and regulating the distribution service.

The Wholesale Electricity Market

Overview

The former SE established the WEM 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 WEM 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 No. 95/13 of the former SE, all large users have to buy their backup energy from CAMMESA seasonally.

·     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.

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Operation of the Wholesale Electricity Market

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

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

 

 

Wholesale Electricity Market Participants

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

Generators

According to a recent report issued by CAMMESA, as of December 31, 2018, there were more than a hundred generation companies, afewer auto-generation companies, and just a few co-generation companies, most of which operate more than one generation plant in Argentina. As of December 31, 2018, Argentina’s installed power capacity was 38,538 MW, 63% of which derived from thermal generation, 28% from hydraulic generation, 5% from nuclear generation and 4% 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.

On December 27, 2017, Law No. 27,424 was enacted and is related to the generation of electric power from renewable energy sources. Such law provides the legal and contractual conditions for the generation of renewable energy by the users of the distribution network for self-consumption and eventual injection of excess electricity into the grid. Additionally, the law created a public fiduciary fund, called Fund for the Distributed Generation of Renewable Energy (“FODIS”), which aims to finance the implementation of distributed generation systems of renewable energy. Also, the law created the promotion regime for the National Manufacturing Systems, Equipment and Supplies for the Distributed Generation of Renewable Energy (“FANSIGED”), whose main activities comprise research, design, development, investment in capital goods, production, certification and installation services for the distributed generation of energy from renewable sources.

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 ME&M.

In Argentina, transmission is carried at 500 kV, 300 kV, 220 kV and 132 kV through SADI. The SADI consists primarily of overhead lines and transformation stations (i.e., assemblies of equipmentthrough which electricity delivered through transmission circuits passes and is converted into voltages suitable for use by end users) and covers approximately 90% of the country. The majority of the SADI, including almost all of the 500 kV transmission lines, has been privatized and is owned by Transener S.A., which is indirectly co-controlled by Pampa Energía, our controlling shareholder and the largest integrated electricity company in Argentina (See “Item 7. Major Shareholders and Related Party Transactions—Parent Company Merger Process”). Regional transmission companies, most of which have been privatized, own the remaining portion of the SADI. Supply points link the SADI 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”).

In 2017, pursuant to Resolution No. 1,085/17, the SEE significantly modified the allocation of costs of the HV and extra high voltage transmission systems. The changes implemented, applicable as from December 1, 2017 are: (1) WEM generators no longer pay for the use of the transmission networks, except for the connection equipment entirely destined for each generator; and (2) the total cost of each transmitter is distributed among the users in its network, in proportion to their demand for energy, no longer applying the calculation methodology based on equipment use.

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).

We and Edesur are the largest distribution companies and, together with Edelap, originally comprised SEGBA, which was divided into three distribution companies at the time of its privatization in 1992.

Large Users

The WEM 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 WEM, known as the spot market, and the requirement that all spot pricesbe 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.

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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 WEM on an hourly basis. The spot price reflected supply and demand in the WEM at any given time, which CAMMESA determined using different supply and demand scenarios that dispatched the optimum amount of available supply, taking into account the restrictions of the transmission grid, in such a way as to meet demand requirements while seeking to minimize the production cost and the cost associated with reducing risk of system failure.

The spot price set by CAMMESA compensated generators according to the cost of the last unit to be dispatched for the next unit as measured at the Ezeiza 500 kV substation, which is the system’s load center and is in close proximity of the City of Buenos Aires. Dispatch order was determined by plant efficiency and the marginal cost of providing energy. In determining the spot price, CAMMESA also would consider the different costs incurred by generators not in the vicinity of Buenos Aires.

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

Seasonal Prices

The emergency regulations also made significant changes to the seasonal prices charged to distributors in the WEM, including the implementation of a pricing ladder organized by level of user consumption (which varies depending on the category of users) charged by CAMMESA to distributors at a price significantly below the spot price charged by generators. 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 former 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 former 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, Resolution No. 2,016/12 was applied without any price reduction andresidential users with consumption levels above 1,000 KWh did not receive subsidies equivalent to those received in 2013.

On January 25, 2016, the ME&M issued Resolution No. 6/16, approving the seasonal WEM prices for each category of user, pursuant to the Regulatory Framework Law, for the period of February 2016 through April 2016, in force through January 2017. These WEM prices resulted in the elimination of certain energy subsidies and a substantial increase in electricity rates for users. Such resolution also contemplated a differentiated tariff for residential users who achieved energy consumption savings between 10% and 20%, or greater than 20%, compared to the same period in the year 2015 (Stimulus Plan), and a social tariff for residential users who comply with certain consumption requirements, which includes a full exemption for monthly consumptions below or equal to 150 KWh and tariff benefits for users 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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Beginning in May 2016, we were notified by several courts of the Province of Buenos Aires of injunctions granted to individual and collective users against Resolution No. 6/16 and Resolution No. 1/16 issued by the ENRE (which authorized our new tariff schedule as from February 2016). Consequently, the then applicable tariff schedule, which includes the WEM prices established by Resolution No. 6/16, were not applied during certain periods in 2016 to the entire concerned area as a result of the injunctions issued in the above-mentioned case and to the districts of “Pilar” and “La Matanza” where provisional remedies were in effect until October 24 and November 11, 2016, respectively, when they expired. Therefore, as of those dates, no provisional remedy has been in effect and the new tariff scheme has been applied to all users.

 

On February 1, 2017, the SEE published Resolution No 20-E/17, pursuant to which it approved the Summer Seasonal Schedule for the WEM corresponding to the period held between February 1 and April 30, 2017.

In this regard, the SEE established the power and electricity reference prices for the different categories of users, which has been in force since March 1, 2017, and recognized a discount for the reference prices, exclusively for the month of February 2017. The SEE also ratified the social tariff determined by Resolution No. 6/16, and included the category of electricity dependent users, which establishes a full exemption for monthly consumptions below or equal to 600 KWh and tariff benefits for those users who exceed such consumption level but achieve a monthly consumption lower than that of the same period in the immediately preceding year.

 

As of December 1, 2017, in accordance with ME&M Resolution No. 1091/17, the new stabilized price of energy and the power output reference price were defined. Additionally, the new stabilized price of transport was settled, which became more significant in the purchase price of energy.

 

On November 30, 2017, through Resolution No. 1,085-E/17, the SEE established a new methodology for the allocation of high-voltage transportation costs, which will be evenly distributed among all the energy demand of the WEM with a uniform rate, assigning them to the users accordingly to their energy demand.

 

On December 27, 2018, Resolution No. 366/18 issued by the SGE approved the Summer Seasonal Schedule for the WEM submitted by CAMMESA, which determined new prices for power capacity, energy and transmission for the period from February 2019 through October 2019. Furthermore, the social tariff and savings bonuses for the residential tariff were eliminated, as beneficiaries have been transferred to the provincial jurisdictions.  As of the date of issuance of this document, theProvince of Buenos Aires and the City of Buenos Aires are complying with the payment of the social rate on a regular basis.

 

On January 31, 2019, pursuant to ENRE Resolution No. 25/19 the ENRE approved the values of Edenor’s tariff scheme as from February 1, 2019 and incorporated the new power capacity reference prices and stabilized prices for Energy determined by the SGE through April 30, 2019. In turn, the ENRE informed that under the transfer of jurisdiction from the Argentine Government to the Province of Buenos Aires and the City of Buenos Aires, the guidelines for the social tariff regime which became effective on December 31, 2018. As of the date, theProvince of Buenos Aires and the City of Buenos Aires are assuming the payment of the social rate regularly.

 

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 WEM 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.

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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, 2018, the stabilization fund balance was approximately Ps.52.5 billion, resulting from the stabilization fund plus the over expenses of dispatch net of the Argentine treasury contributions. However, 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. 1,281/06 of the SE, WEM, over expense contracts, etc.), this balance is increased to approximately Ps.111.4 billion. In this regard, the deficit has been financed by the Argentine Government through nonrefundable loans to CAMMESA over a ten year period, and the same methodology continues to be applied, although the deficit tends to be reduced as a result of the policies implemented by the ME&M.

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 Resolution No. 95/13, all large users are required to purchase their backup energy from CAMMESA at any relevant contractual maturity date.

According to Law No. 27,191, users whose average demand in the previous year of each transaction, is less than or equal to 300 kW, must meet the applicable percentages of renewable energy participation imposed by such law through either of the following two mechanisms: joint purchases or supply contracts.

During 2017, pursuant to Resolution No 281-E/17 (amended by Disposition 1-E/18 issued by the Susbsecretaría de Energías Renovables) the ME&M created the Term Market Regime for Electric Power from Renewable Sources, which established the percentages of renewable energy that large users are obliged to consume within their demand of energy. The resolution also determined the commercialization and administration charges for large users that opt for the joint purchase of renewable energy that CAMMESA commercializes. Additionally, large users can agree to supply contracts directly with the generators, without incurring charges for joint purchases.

Plus Energy

In September 2006, the former 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 WEM and large users 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 WEM and large users 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 auto-generators that are not agents of the electricity market or who as of the date of the resolution were not part of the WEM. Large users in the WEM and large users 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 which as of the date of this annual report were Ps.550 per MWh for GUDIs and Ps.450 per 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 Ps./MWh for GUMAs and GUMEs and 455 Ps./MWh for GUDIs;

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

·   pursuant to the former SE Resolution No. 95/13 from March 22, 2013, as opposed to the backup contracts where a unique energy supplier is authorized by CAMMESA, thePlus Energy contracts are available to the large users and generators previously authorized by the Argentine National Planning, Public Investment and Services Ministry. The users under the GUDI category, whoseEnergy Plus contracts mature, have the option of rehiringEnergy Plus, reclassifying themselves under the GUME category; or continue buying the total amount of their energy from the distributors, paying in case needed. Base Surplus Demand pursuant to Resolution SE No. 1,281/06;

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

·   based on the guidelines set forth in Resolution No. 6 of the ME&M, the median incremental charge for excess demand was set at 650 Ps./MWh for GUMAs and GUMES, while GUDIs stopped paying this charge.

 

ORGANIZATIONALSTRUCTURE

Edenor is a subsidiary of Pampa Energía, which is the largest independent integrated energycompany in Argentina.As of December 31, 2018,Pampa Energía and its subsidiaries were engaged in the generation, distribution and transmission of electricity in Argentina, oil and gas exploration and production, refining and distribution, petrochemicals and hydrocarbon commercialization and transportation in Argentina and, to a lesser extent, in Ecuador and Venezuela.

As of December 31, 2018:

·       the generation installed capacity reached approximately 3,871 MW, with a market share in Argentina of approximately 10%. In addition, Pampa Energía committed to develop projects that it expects will increase its installed capacity by 504 MW, for a total installed capacity of 4,354 MW.

·       the distribution of energy operations supplied electricity to approximately 3 million users throughout the northern region of the City of Buenos Aires and the Northwestern Greater Buenos Aires area, making us the largest electricity distribution company in Argentina;

·       the combined oil and gas production in Argentina where Pampa Energía averaged 44.8 thousand barrels of oil equivalent per day, considering continuing operations. Crude oil accounted for approximately 5.1 thousand barrels of oil equivalent per day, while natural gas accounted for approximately 238.4 million standard cubic feet per day, or 39.7 thousand barrels of oil equivalent per day based on a measure of conversion of 6,000 cubic feet of gas per barrel of oil equivalent.Additionally, Pampa Energía has a 2.1% direct interest in Oleoductos del Valle S.A. (“Oldelval”),which has 1,756 km of oil pipeline;

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·      the refining and distribution operations based in Argentina, where Pampa Energía operated one storage plant with a capacity of approximately 1.4 million barrels.In addition, Pampa Energía has a 28.5% interest in Refinería del Norte S.A. (“Refinor”), which has a commercial network of 81 gas stations located in the Argentine Provinces of Tucumán, Salta, Santiago del Estero, La Rioja, Jujuy, Catamarca and Chaco; and

 

·       the petrochemicals operations were entirely based in Argentina, where Pampa Energía operated three high-complexity plants producing petrochemical products, such as styrene (100% market share), synthetic rubber (80% market share) and polystyrene (92% market share), among others.

 

In addition, Pampa Energía holds interests in companies engaged in other businesses, including Transener (as defined below), which is engaged in electricity transmission and TGS (as defined below), which is engaged in gas transportation. For more information, see “Item 7. Major Shareholders and Related Party Transactions—Parent Company Merger Process.”

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

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.62,474.8 million, Ps.57,060.2 million and Ps.50,894.8 million as of December 31, 2018, 2017 and 2016, 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 Pampa 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 doesnot 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. The total value of property, plant and equipment suffered the effects of the application of IAS 29, as discussed in our audited financial statements, included in Item 18 of this annual report and in the “Selected Financial Data,” included in Item 3; The non-monetary items carried at historical cost were restated using coefficients that reflect the variation recorded in the general level of prices from the date of acquisition or revaluation to the closing date of the reporting period. Depreciation charges of property, plant and equipment and amortization charges of intangible assets recognized in profit or loss for the period, as well as any other consumption of non-monetary assets were determined on the basis of the new restated amounts. 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).”

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Termination of agreement on real estate property

In November 2015, the Company entered into an agreement with (“RDSA”) for the purchase and construction of real estate property for a total of U.S.$46 million,(equivalent to Ps.439.3 million according to the effective exchange rateat thetime of execution of the purchase agreement). The Company purchased the real estate property to centralize its functions, reduce rental costs and to mitigate the risk of potential rent increases. In addition, the Company obtained a surety bond from Aseguradores de Cauciones for U.S.$46 million, plus the private banks’ Badlar rate in dollars + 2%, to guarantee payment of liquidated damages in the event of the Seller’s default.

Pursuant to the agreement, RDSA was obligated to deliver the property on June 1, 2018, and failed to perform. As a result, the Company declared the RDSA in breach, notified Aseguradores de Cauciones of such breach and subsequently collected U.S.$502.8 thousand in fines accrued during the term of the agreement and duly deposited as bond by the Seller for failing to meet the construction project milestones of the agreement.

On August 27, 2018, the Company notified RDSA of the termination of the agreement as a result of RDSA’s breach after the lapse of the legal time periods set forth in the agreement, demanding payment of liquidated damages comprising a refund of the purchase price, 15% interest in U.S. dollars accrued from the purchase price payment date until the day of default, less the construction project delay penalty amounts.

Furthermore, on September 3, 2018, the Company filed a claim on the surety bond with Aseguradores de Cauciones, and subsequently provided all required information and documentation.

In November 2018, the Company initiated an arbitration proceeding against RDSA before the Arbitral Tribunal of the Buenos Aires Stock Exchange to obtain an order compelling RDSA to pay the liquidated damages pursuant to the purchase and sale agreement, which, as of December 31, 2018 amounted to Ps.3 billion. As of the date of this annual report, such arbitration proceeding is pending. Additionally, the Company initiated a collection proceeding on the surety bond that guaranteed RDSA’s obligation for U.S.$50.3 million according to the terms of the issuance policy, which covers over 60% of the amount claimed against RDSA.

OnFebruary 1, 2019, RDSA filed a voluntary petition for reorganization,( similar to a Chapter 11 proceeding in the United States), and, pursuant to Resolution No. 207/19 of the National Insurance Superintendency enacted on February 28, 2019, Aseguradora de Cauciones was prohibited fromdisposingof property until  certain liquidity deficiency of Aseguradora de Cauciones issolved. The Company has recorded an allowance of Ps.765.6 million in non-current other receivables to partially cover the amount of the receivable, considering the possibility of its recovery, based on the financial position of its debtors, RDSA and Aseguradora de Cauciones.

 

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Item 4A.     Unresolved Staff Comments

None.

Item 5.       Operating and Financial Review and Prospects

The following discussion should be read in conjunction with our audited financial statements as of and for the years ended December 31, 2018, and 2017, 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.”

One of the milestone events of 2017 was the normalization of the regulatory framework, which included the adoption of the RTI and the new electricity rate schedules that have been  entirely implemented as of February 2018.

In that context, the Company’s board of directors expects that the effects resulting from the application of the aforementioned RTI will enable the gradual restoration of the Company’s economic and financial position. The Company’s board of directors expects that the new electricity rates will improve the Company’s operations under a regulatory framework with clear rules, which we expect will make it possible to cover the operation costs, afford the investment plans and meet debt interest payments and to manage the impact of different variables that affect the Company’s business.

As of December 31, 2018, the Company’s comprehensive income totals a profit of Ps.4.2 billion, whereas the working capital deficit totals Ps.7.3 billion, which includes the amount owed to CAMMESA for Ps.11.9 billion (principal plus interest accrued as of December 31, 2018).

The Company’s equity and negative working capital reflect the deteriorated financial and cash position of the Company as a result of the Argentine Government’s delay in the compliance with certain obligations under the Adjustment Agreement, which are subject to specific negotiations and regulatory changes carried out by certain governmental bodies. Additionally, the increase in operating costs during 2018, due to Argentina’s macroeconomic condition, led the Company to strengthen its efforts to absorb operating costs and comply with the execution of the investment plan and the performance of essential operations and maintenance works necessary to maintain the provision of the public service, pursuant to the Concession Agreement, in a satisfactory manner in terms of quality and safety.

As of the date of this annual report, the following issues are pending resolution, among others:

·       the treatment to be given to the funds received from the Argentine Government through the loans for consumption (mutuums) agreements entered into with CAMMESA for the fulfillment of the Extraordinary Investment Plan, granted to cover the insufficiency of the FOCEDE’s funds;

·       the conditions for the settlement of the outstanding balance with CAMMESA at the date of issuance of SEE Resolution No. 32/15; and

·       the treatment to be given to the penalties and discounts determined by the ENRE under the terms of the Adjustment Agreement not complied with by the Argentine Government, which payment/crediting is pending.

In this regard, the Company and the SGE are negotiating an agreement for the regularization of the such pending issues under ENRE Resolution No. 25 which provides for the transfer of the Concession from the jurisdiction of the Argentine Government to the Province and the City of Buenos Aires.

Overview of IAS 29

Pursuant to IAS 29, the financial statements of an entity whose functional currency is that of a highly inflationary economy should be measured in terms of the measuring unit current as of the date of the financial statements. All the amounts included in the statement of financial position which are not stated in terms of the measuring unit current as of the date of the financial statements should be adjusted applying the general price index. All items in the statement of income should be stated in terms of the measuring unit current as of the date of the financial statements, applying the changes in the general price index occurred from the date on which the revenues and expenses were originally recognized in the financial statements.

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Adjustment for inflation in the initial balances has been calculated considering the indexes reported by the FACPCE based on the price indexes published by the INDEC.

The principal inflation adjustment procedures are the following:

·       Monetary assets and liabilities that are recorded in the current currency as of the balance sheet’s closing date are not restated because they are already stated in terms of the currency unit current as of the date of the financial statements.

·       Non-monetary assets and liabilities are recorded at cost as of the balance sheet date, and equity components are restated applying the relevant adjustment ratios.

·       All items in the statement of income are restated applying the relevant conversion factors.

·       The effect of inflation in the Company’s net monetary position is included in the statement of income under financial results, net, in the item “Inflation adjustment.”

·       Comparative figures have been adjusted for inflation following the procedure explained in the previous paragraphs, established in IAS 29.

·       Upon initially applying inflation adjustment, the equity accounts were restated as follows:

·       Capital was restated as from the date of subscription or the date of the most recent inflation adjustment for accounting purposes, whichever is later.

·       The resulting amount was included in the “Capital adjustment” account.

·       Other comprehensive income/(loss) was restated as from each accounting allocation.

·       The other reserves are restated by applying the variation of the general price index from the date of contribution, or from the moment they arose by any other means

 

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 eight million people. Pursuant to our concession, we have the exclusive right to distribute electricity to all users within our concession area, including to WEM participants. As of December 31, 2018, we had 3,040,339 users.

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

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 users (which include our energy purchase costs). In addition, our net sales include connection and reconnection charges and leases of poles and other network equipment.

Regulatory changes impact our results of operations as they set tariffs paid to us for our services. The following ENRE resolutions, among others, have a direct impact on the tariffs we charge:  

·       On January 31, 2017, the ENRE issued Resolution No. 63/17, pursuant to which it determined electricity rate schedules, the mechanism for costs review, the required quality levels and all other rights and obligations that are applicable to the Company as from February 1, 2017. On February 1, 2017, pursuant to Resolution No. 63/17 and as instructed by the ME&M, the ENRE limited VAD increases from the RTI process to a maximum of 42% vis-á-vis the prior VAD, with the VAD remainder being applied in November 2017 and February 2018

 

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·       On November 30, 2017, the ENRE issued Resolution No. 603/17, pursuant to which it approved the CPD values, applicable as of December 1, 2017, and retroactively applied to consumption in August through November 2017, which was billed in two installments, of December 2017 and January 2018. In addition, the electricity rate schedule’s values to be applied as of December 1, 2017, were approved.

 

·       On January 31, 2018, the ENRE issued Resolution No. 33/18, pursuant to which it approved the CPD values for July 2017 through December 2017 of which 11.99% was applied to the 48 monthly installments established in ENRE Resolution No. 329/17 that had been deferred in 2017 and the electricity rate schedule to be applied to consumption as of February 1, 2018 became effective. In addition, such resolution notified the average electricity rate value which amounted to Ps.2.4627/KWh.

 

·       On July 31, 2018, the ENRE issued Resolution No. 208/18, pursuant to which it approved, the CPD for January 2018 through June 2018 of which 7.93% was applied as of August 1, 2018, and 6.51% in six consecutive monthly installments as of February 1, 2019. The CPD amounted to 15.85%. In addition, such resolution established a social tariff cap system and required discount values for users affected by deficiencies in the quality of the technical product and/or the quality of the technical and commercial service from 2018 to February 2019. Furthermore, Resolution No. 208/18 notified the average electricity rate value which amounted to Ps.2.9871/KWh.

 

·       On December 27, 2018, The SGE enacted Resolution No. 366/18, which repealed SEE Resolution 1,091/17, consequently eliminating the energy-savings discount for the residential tariff charged to users under the social tariff as from January 1, 2019. The social tariff discounts will be assumed by the Governments of the Province of Buenos Aires and the City of Buenos Aires in accordance with the provisions of the 2019 Federal Budget Law.

If, in the future, we are not able to recover the incremental cost increases and have them reflected in our tariffs, and/or there is a significant lag of time between when we incur the incremental costs and when we receive increased income, we may be unable to comply with our financial and commercial obligations, suffer liquidity shortfalls and 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

 

 

2018

 

2017

 

2016

 

 

(Figures in millions)

Sales of Electricity

 

55,689.6

 

39,329.7

 

25,577.1

Right of use of poles

 

190.4

 

212.3

 

213.4

Connection Charges

 

51.1

 

49.4

 

30.9

Reconnection Charges

 

22.5

 

11.5

 

5.4

Net sales

 

55,953.6

 

39,602.9

 

25,826.8

 

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

 

 

Year ended December 31,

 

 

2018

 

2017

 

2016

Residential

 

8,948

42%

 

9,143

42%

 

9,709

44%

Small Commercial

 

1,810

9%

 

1,850

9%

 

1,819

8%

Medium Commercial

 

1,668

8%

 

1,745

8%

 

1,821

8%

Industrial

 

3,646

17%

 

3,687

17%

 

3,677

17%

Wheeling System(1)

 

3,823

18%

 

3,968

18%

 

4,013

18%

Public Lighting

 

724

3%

 

709

3%

 

704

3%

Shantytowns

 

553

3%

 

483

2%

 

511

2%

Total

 

21,172

100%

 

21,584

100%

 

22,253

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.

 

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 Resolution No. 63/17, which may lead us to incur fines and penalties imposed by the ENRE.

 

Argentine Economic Conditions and Inflation

Because all of our operations, facilities and users are located in Argentina, we are affected by general economic conditions in the country. In particular, the general performance of the Argentine economy affects the demand for electricity, and inflation and fluctuations in currency exchange rates which affect our costs and our margins. Inflation primarily affects our business by increasing operating costs, while 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 the Argentine Government’s 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 recovered significantly from the crisis, and the business and political environment was 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.

In 2016, under the Macri administration the methodology used for the calculation of the economic indicators at the INDEC was updated. As a consequence, all the official economic data since 2004 was revised.

Following years of hyperinflation and economic recession, in 1991 the Argentine Government adopted an economic program that sought to liberalize the economy and impose monetary discipline. The economic program, which came to be known as the Convertibility Regime, was centered on the Convertibility Law of 1991(the “Convertibility Law”) 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.

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

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

2001 Economic Crisis

Beginning in December 2001, the Argentine Government implemented an unexpected number of monetary and foreign exchange control measures that included restrictions on the free disposition of funds deposited with banks and on the transfer of funds abroad without prior approval by the Central Bank, some of which are still in effect. On December 21, 2001, the Central Bank decided to close the foreign exchange market, which amounted to 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 Convertibility Regime, including the fixed parity of the U.S. Dollar and the Peso. Following the adoption of the Public Emergency Law, the Peso devalued dramatically, reaching its lowest level on June 25, 2002, at which time it had devalued from Ps.1.00 to Ps.3.90 per U.S. Dollar according to Banco Nación. The devaluation of the Peso had a substantial negative effect on the Argentine economy and on the financial condition of individuals and businesses. The devaluation caused many Argentine businesses (including us) to default on their foreign currency debt obligations, significantly reduced real wages and crippled businesses that depended on domestic demand, such as public utilities and the financial services industry. The devaluation of the Peso created pressure on the domestic pricing system and triggered very high rates of inflation. According to INDEC, during 2002 the Argentine WPI increased by approximately 118% and the Argentine CPI rose approximately 41%.

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

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

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

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

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

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

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

Economic Recovery and Outlook

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

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.

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.

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.

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%.

According to official indicators, in 2011, real GDP in Argentina grew by approximately 8.4%, furthering the growth trend showed in 2010.

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In 2012, according to the official information created and disseminated by the INDEC, the economy expanded 0.8%.

According to official indicators, Argentina’s real GDP grew around 2.9% in 2013, compared to 0.8% in 2012. In 2014, the economic activity grew by approximately 0.2%, compared to 2.9% in 2013.

 

In January 2014, the Peso lost approximately 19% of its value with respect to the U.S Dollar.

 

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

 

In terms of supply, industrial production continued showing a poor performance, the exchange rate lagged, restrictions to import intermediate goods continued and, 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 pressures, 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 2015, retail prices relatively picked up although the average growth rate was lower than that of the previous year.

 

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 by the Macri administration, which caused the Peso to U.S. Dollar exchange rate to reach Ps.13.40 to U.S.$1.00.

 

In 2016, the Argentine economy contracted by 2.2%. Although the economic activity showed a slight improvement during the last months of the year, 2016 is considered to be a recessive year.

The negative results may be explained by the deepening contraction in certain sectors that performed poorly in terms of activity. In this sense, during the second quarter of 2016, lower levels of agricultural production were exacerbated by a lower than expected harvest (affected by unusual rains), in addition to a large decline in construction activity and a decrease in retail sector activity. Industrial production also showed a weak performance.

In terms of inflation, the pace of growth of domestic prices accelerated during the first half of 2016 as a result of the increase in the value of the U.S. Dollar relative to the Peso in the official market. In addition, monthly price increases in the first half of 2016 were mainly related to an update of some regulated prices such as public utility tariffs (gas and electricity prices) and urban transport, mainly in the Buenos Aires metropolitan region. As of the third quarter of 2016, price increases began to decelerate as a result of the absence of new tariff increases, the stagnation of economic activity, the relative low price of the U.S. Dollar in the local market and the restrictive monetary policy, through high interest rates that sought to contain the currency pressure, drove the deceleration in inflation, which slowed to a monthly average of 1.1% in the July to September 2016 period. During the last quarter of 2016, the monthly inflation average was 1.7%, and the annual rate of increase in consumer prices ended the year slightly below 40%. The Macri administration announced the adoption of an inflation targeting regime to apply in parallel with the floating exchange rate regime and established inflation targets for the next four years. The Central Bank has increased intervention efforts in the foreign exchange market to reduce excess monetary imbalances and raised Peso interest rates to offset inflationary pressure. Since January 2017, the Central Bank started to use the seven-day repo reference rate as the anchor of its inflation targeting regime. LEBACs are used to manage liquidity.

After the currency devaluation at the beginning of the Macri administration, the Central Bank changed to a flexible exchange market regime, which resulted in a unified foreign exchange system. In 2016, some modest depreciation pressure following Brexit in June and the U.S. election on November 8, 2016, caused the Peso to weaken, ending at Ps.16.10 to U.S.$1.00 on December 31, 2016. By the end of the year, the Peso depreciated by approximately 20% against the U.S. Dollar.

Argentina’s economy grew by 2.8% during 2017, driven by an increase in private consumption, public spending and investment which counteracted the 2.2% contraction in 2016. The Argentine economy’s recovery is attributed to both external and domestic factors. The external factors included,among others, an overall improvement of the Brazilian economy, which led to an increase in Argentina exports to Brazil. The domestic factors included, among others, the growth in average wages, an increase in welfare and public works spending by the Argentine government and the increase in bank lending activity to the private sector, which stimulated consumption and private investment. However, the performance of the various sectors of the economy was varied. Sectors buoyed by the change in relative prices, by public works spending or by specific trade agreements, such as agriculture, construction and the automotive industry, respectively, recorded high growth rates during 2017. By contrast, those affected by the relaxation of import controls and the Peso’s appreciation, such as the textiles and electronics industries, continued their contraction.

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Inflation, measured by its general level, declined by approximately 15%, from 40.5% in December 2016 to 24.8% in December 2017, having achieved the disinflation process simultaneously with the updating of some public services tariffs.

On the monetary policy front, the Central Bank formally instituted an inflation targeting regime, and established a new policy interest rate (the 7-day interbank repo rate). With a view to bringing inflation within the target band (between 12% and 17% for 2017), the monetary authority maintained a policy of high interest rates, which led to increased absorption of pesos through the placement of central bank bills (LEBAC) and repos; the policy interest rate followed an upward trend during the year, from 24.75% in January 2017 to 28.75% in December 2017.

The Central Bank maintained the free floating exchange rate and intervened in the foreign exchange market only at times of rapid rises. In this context, the nominal Ps./U.S.$ exchange rate increased by 17% during the year 2017. Although during the last days of 2017, the price of the US currency in the domestic exchange market was rising, the dollar closed December at levels around Ps./U.S.$18.00 (monthly average).

In 2017, there was a real increase in public spending. As a result of stronger growth in revenues as compared to expenditures, the primary deficit decreased to 3.9% of GDP in 2017 as compared to 4.3% in 2016); after payment of interest on the debt, the fiscal outturn stood at 6.1% of GDP, above the 5.9% recorded in 2016. The fiscal deficit remained high, notwithstanding the policy of reducing subsidies for public services, the extraordinary revenues from the special tax under the capital legalization (or repatriation) program, and the increase in tax receipts associated with greater economic activity.

The fiscal deficit and the current account deficit were financed by a marked increase in external borrowing in 2017, which also underpinned an increase in international reserves. The current account deficit widened in 2017, standing at 5.5% of GDP, as a result of higher imports of goods and services (reflecting the economic recovery and the reduction in import controls and tariff rates), as well as an increase in debt service payment obligations with respect to interest due on Argentina’s public external debt.

After a slight recovery in 2017, the first quarter of 2018 showed a similar positive growth trend, although, a lower than expected harvest and the lower number of international creditors willing to finance the Argentine state highlighted the macroeconomic weaknesses facing Argentina. In addition, the US dollar denominated external debt assumed by the Argentine Government and the lack of US dollars to deal with maturities relating to such debt, Argentina has to resort to the IMF to obtain the foreign currency that could not be obtained by agriculture, exports, or external financing. On May 8, 2018, the current administration announced that the Argentine Government would initiate negotiations with the IMF with a view to entering into a stand-by credit facility that would give Argentina access to financing by the IMF. On June 20, 2018, the executive board of the IMF approved the terms of the stand-by arrangement, consisting of a stand-by credit facility for U.S.$50.0 billion, subject to adjustments and compliance with certain political and fiscal performance guidelines by the Argentine Government. On October 26, 2018, a first review of the SBA concluded with the enlargement of the arrangement for U.S.$5.7 billion.

The lack of predictability generated by the agreement with the IMF generated volatility in the exchange market. By the end of June 2018, the Peso has lost 54% of its value against the US dollar, as compared to exchange rate of December 2017. At the end of August, 2018, the exchange rate recorded, a then-historical maximum Ps. 40 per U.S. 1. The rise in the exchange rate and the winding down of the Lebac program, which strongly increased the monetary base, generated an increase in inflation in 2018.

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Given the new inflationary context, the BCRA applied a restrictive monetary policy, strongly increasing the reference interest rates. Such policy, generated a significant retraction in economic activity.

In September 2018, following the last change in the BCRA, the objective of monetary policy was modified aiming at monetary aggregate goals, keeping the monetary base constant until mid-2019. This implies directly attacking inflation despite the impact on the level of activity. In this context, the most affected sectors were trade, the manufacturing industry and construction.

Pursuant to IAS 29 “Financial Reporting in Hyperinflationary Economies”, the financial statements of entities whose functional currency is that of a hyperinflationary economy must be restated for the effects of changes in a suitable general price index. IAS 29 does not prescribe when hyperinflation arises, but includes several characteristics of hyperinflation. The IASB does not identify specific hyperinflationary jurisdictions. However, in June 2018, the International Practices Task Force of the Centre for Quality (“IPTF”), which monitors “highly inflationary countries”, categorized Argentina as a country with projected three-year cumulative inflation rate greater than 100%. Additionally, some of the other qualitative factors of IAS 29 were present, providing prima facie evidence that the Argentine economy is hyperinflationary for the purposes of IAS 29. Therefore, Argentine companies using IFRS are required to apply IAS 29 to their financial statements for periods ending on and after July 1, 2018.

2018 Macroeconomic Conditions

Economic Activity

In 2018, cumulative economic activity decreased approximately 2.6%, as compared to 2017. Public consumption decreased by approximately 3.0%, while exports, net of imports, decreased by approximately 7.5%, compared to 2017. The contraction in economic activity negatively impacted 13 of the 16 economic sectors, with decreases in manufacturing (14.2%), wholesale and retail sales and repairs (15.7%) and construction (12.7%). However, such economic activity decreases were partially offset by increases in the agriculture, livestock, hunting and forestry (4.7%), Education (1%) and Health and social services (0.4%) sectors.

Price Trends

In 2018, the Cost-of-Living Index published by the INDEC showed a variation of 47.6%. The greatest variations in the index were increases in the following sectors: transportation (66.8%), communications (55.3%), and basic goods and services (53.2%). The least affected sectors were alcoholic beverages and tobacco (28.3%), clothing and footwear (33.1%) and education (32.1%).

Wages measured by the registry of the Permanent Workers’ Average Taxable Remuneration (Remuneración Imponible Promedio de los Trabajadores Estables or “RIPTE”), increased by 30.7% between December 2017 and December 2018.

Trade Balance

According to the INDEC, the estimated current account deficit in December 2018 totaled U.S.$.3.8 billion (which represented 4.7% of the GDP). In 2018, FOB value estimated exports totaled U.S.$.61.6 billion, whereas the CIF value of estimated imports amounted to U.S.$. 65.4 billion. In December 2018, exports of primary products increased approximately 36.9%, whereas exports of agricultural manufacturing and industrial manufacturing increased by approximately 11.8% and 9.9% respectively. Fuel and energy exports recorded an estimated decrease of 13.5%, amounting to U.S.$.4 billion. As for imports, capital goods decreased approximately 38% comprising fuel and lubricants 33.9%, parts and accessories for capital goods 22.9%, consumer goods 33.7%, passenger motor vehicles 62.8%. Imports of intermediate goods increased approximately 0.2%.

Fiscal Situation

Central Bank’s U.S.$ wholesale exchange rate (Resolution A3500) was Ps.37.81/U.S.$ as of December 31, 2018, showing a cumulative 101.4% increase compared to the end of 2017 and a 69.6% average year-on-year variation. Central Bank’s international reserves stock amounted to U.S.$ 65.8 billion at closing, which represents a U.S.$ 10.7 billion increase compared to the previous year. Moreover, the monetary base reached Ps.1,409 billion, showing a 40.7% increase at the closing of 2018compared to the previous year. Furthermore, Central Bank’s debt stock in issued bonds amounted to U.S.$19.4 billion as of the closing of 2018, which represents a 69% year-on-year contraction.

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Tariffs

Our revenues and margins are substantially dependent on the composition of our tariffs and on the tariff setting and adjustment process contemplated by our concession.

The following chart shows the variation in Edenor’s average tariffs, including taxes, in Pesos per MWh for the periods indicated:

 

Under the terms of our concession, our tariffs for all of our users (other than users in the wheeling system) are composed of:

·     the cost of electric power purchases, which we pass on to our users, and a fixed charge (which varies depending on the category and level of consumption of each user 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

·     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 users) are eligible to purchase their energy needs directly from generators in the WEM and only acquire from us the service of electricity delivery. Therefore, our tariffs for these large users (known as wheeling charges) do not include, 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 users are relatively lower than those billed to other large users, namely industrial users, the distribution margin on sales to wheeling system users 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 users 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 Eléctricaor National Electricity Energy Fund).

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On January 25, 2016, the ME&M 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 WEM on an hourly basis. The WEM prices result 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 users. Such resolution also contemplated a social tariff for residential users who comply with certain consumption requirements, which included a full exemption for monthly consumptions below or equal to 150 KWh and tariffs benefits for users who exceed such consumption level but achieve a monthly consumption lower than that of the same period in the immediately preceding year.

 

On February 1, 2017, Resolution No. 20 – E/17 dated January 27, 2017, of the SEE pursuant to which the summer seasonal rescheduling for the WEM was approved corresponding to the period held between February 1 and April 30, 2017.

 

Resolution No. 20 – E/17 incorporated a new category of consumer denominated “electricity-dependent user”. An electricity dependent user is a person who registers an extraordinary consumption of electrical energy due to special equipment and / or infrastructure for a disease diagnosed by a physician or a stable and permanent electrical service to address medical needs within their home. The resolution established the provision of 600 KWh per month free of charge and an electricity reference price that varies according to the level of savings and demands registered compared to the previous month. In addition, it stipulates that as from February 2017, the maximum spot price for the approval of the WEM is Ps.240 Ps./MWh and fixes the charge value corresponding to the National Fund for Electric Energy at Ps.15.50 Ps./MWh.

 

In May 2017, Law No. 27,351 was enacted, which guarantees the permanent and free of charge supply of electricity to those individuals who qualify as dependent on power for reasons of health to avoid risks in their lives or health. The law states that the account holder of the service or someone who lives with a person that is registered at the “Registry of Electricity Dependent for Reasons of Health” will be exempt from the payment of any and all connection fees and will benefit from a special free of charge tariff treatment for the electric power supply service.

 

In July 2017, the ENRE issued Resolution No. 292 stating that those discounts are to be made as from the effective date of the aforementioned law, and instructed CAMMESA to implement those discounts in its billing to the distribution companies.

 

According to Executive Order 740 of the Executive Branch, dated September 20, 2017, the ME&M will be the Authority of Application of Law No. 27,351, whereas the Ministry of Health will be responsible for determining the minimum conditions necessary for eligibility for the “Registry of Electricity Dependent for Reasons of Health.”

 

On September 2017, the Ministry of Health issued Resolution No. 1,538-E/17, which creates the Registry of Electricity Dependent for Reasons of Health (“RECS”), under the jurisdiction of the Ministry of Health, operating under the authority of the Under Secretariat for the Management of Health Care Services.

 

On October 31, 2017, the ENRE informed pursuant to Note No 128,399, through the proceedings carried out by the ME&M, the decision to postpone the application of the CPD increase in the RTI for November 1, 2017 to December 1st, 2017, as well as the application of the CPD update which was made in August 2017.

 

Due to the deferring of the CPD increases, the ENRE notified a new tariff schedule to be applied in the December 2017- January 2018 period pursuant to Resolution No. 603/17, which was offset due to a retroactive adjustment, CPD’s updates that were not granted and the previously mentioned application.  

 

In addition, such tariff schedule included the modification of seasonal prices, costs of transport and saving billings and bonuses according to the incentive plan established pursuant to SEE Resolution No. 1091/17. By way of this resolution, the prices to be applied for the WEM for the period between December 1st and January 31st 2018, by keeping in Ps.3,157/Mw per month the power output reference price and by differentiating the stabilized reference energy prices applied to users with output power requirements over 300 kW in approximately (off-peak prices) Ps.1,329/MWh, and for the remaining usersin Ps.839/MWh. The saving billing of the incentive plan was modified, by establishing a 10% discount to the stabilized energy price for those residential users who reduce the consumption in at least a 20% compared to the consumption registered on the same month in 2015, having removed saving categories between 10% and 20%. Moreover, a new application methodology for the social tariff was introduced.

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Also, by means resolution ENRE No. 1091/17, it was evidenced an increase in the transport prices of electric energy which were transferred to tariffs in Ps.45.1/MWh.

 

On January 31, 2018, the ENRE issued Resolution No. 33/18, whereby it approved the CPD values for July 2017 through December 2017, which were in the order of 11.99%, the values of the 48 monthly installment to be applied in accordance with the provisions of ENRE Resolution No. 329/17 which were deferred in the year 2017, and the electricity rate schedule to be applied to consumption recorded as from February 1, 2018. Additionally, it is informed that the average electricity rate value amounts to Ps.2.4627/KWh.

 

On July 31, 2018, the ENRE issued Resolution No. 208/18, pursuant to which it approved, the CPD for January 2018 through June 2018 of which 7.93% was applied as of August 1, 2018, and 6.51% in six consecutive monthly installments as of February 1, 2019. The CPD amounted to 15.85%. Moreover, Resolution No. 208/18 established a system of caps for the social tariff as well as the values that the Company had to apply to determine and credit discounts in the electricity bills of the users affected by deficiencies in the quality of the technical product and/or the quality of the technical and commercial service from 2018 to February 2019. Additionally, the informed average electricity rate value amounted to Ps. 2.9871/KWh.

 

On December 27, 2018, the SGE issued Resolution No. 366/18, pursuant to which approved the summer seasonal programming for the WEM submitted by CAMMESA, thus determining new prices for power capacity, energy and transmission from February 2019 to October 2019. Furthermore, the social tariff and savings bonuses for the residential tariff were eliminated, as beneficiaries have been transferred to the provincial jurisdictions, which will bear their cost and implementation.

 

On January 31, 2019, ENRE Resolution No. 25 approved the values of Edenor’s tariff scheme as from February 1, 2019, incorporated the new power capacity reference prices and stabilized prices for energy determined by the SGE until April 30, 2019. In turn, the ENRE informed that under the transfer of jurisdiction from the Argentine Government to the Province of Buenos Aires and the City of Buenos Aires, the guidelines for the social tariff regime effective as of December 31, 2018.  As of the date, the Province of Buenos Aires and the City of Buenos Aires are assuming the payment of the social rate regularly.

 

Moreover, on January 31, 2019, pursuant to Resolution No. 27/19, the ENRE approved the VAD updates for the second six-month period of 2018 and the pending update corresponding to the first six-month period of 2019, totaling a 32.0% increase applicable as from March 1, 2019. Additionally, the application of the new -1.59% “E”-factor adjustment will be deducted from cumulative inflation updates.

 

Furthermore, the cost of deferrals for August 2018 through February 2019 and for the month of February 2019, totaled Ps.1,005 million and Ps.841 million respectively, and will be paid in 5 installments as from March 2019. Additionally, Ps.51 million will be collected under the same method due to the partial recognition of the appeal filed by Edenor to Resolution No. 208/18, which acknowledged additional costs not that had not been calculated as part of prior tariffs.

 

We purchased a total of 25,906 GWh in 2018, 25,950 GWh in 2017 and 26,838 GWh in 2015. Following the adoption of certain amendments to the pricing rules applicable to the WEM pursuant to the Public Emergency Law, we have purchased all of our energy supply in the WEM at the spot price. We have not purchased any energy under long-term supply contracts since 2004.

 

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 users. 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 tosatisfy demand and our concession allows us to recover from our users 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% 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 users to pay their bills, and in our technical losses in proportion to the increased volume of energy we supplied during those periods.

The following table sets forth our estimated breakdown between technical and non-technical energy losses experienced in our concession area for the periods indicated.

 

 

Year ended December 31,

 

 

2018

 

2017

 

2016

Technical losses

 

8.4%

 

8.8%

 

9.6%

Non‑technical losses

 

9.8%

 

8.3%

 

7.4%

Total losses

 

18.2%

 

17.1%

 

17.0%

 

The rolling annual rate of total losses for 2018 increased to 18.2%, compared to 17.1% of the previous year. In Regions II and III, new shantytowns were formed while existing shantytowns continued to grow. In 2018, the increase in total losses is mainly due to the theft of energy in these areas.

 

In 2018, the plan aimed at normalizing clandestine consumers, inactive users and chronic delinquent users remained in force, substantially increasing the installation of MIDE energy integrated meters by 92,902 out of a total 142,728 meters.

 

Additionally, in 2018 a new type of multiple concentric network (“MULCON”) was designed to leverage the MIDE meter’s functionalities increasing damage resistance. Due to positive results, it is being implemented in neighborhoods with high fraud rates. Furthermore, 103,729 tariff 1 (small demand) meter inspections were carried out with 51.64% effectiveness. As part of the initiative to diminish energy losses, the Company normalized MIDEs users as well as 3,123 clandestine consumers with conventional meters.

 

However, the higher level of activity undertaken did not allow us to reach the level of losses set in 2018, which was also affected by a winter season with lower than average temperatures and a decrease in the consumption of large users. For more information, 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 Pesosestablished in 2002, without any type of currency or inflation adjustment. These measures, coupled with the effect of accumulated inflation since 2002 and the devaluation of the Peso, have had a material adverse effect on our financial condition, results of operation and cash flows, leading us to record net losses.

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Adjustment Agreement.On September 21, 2005, we entered into theActa Acuerdo sobre la Adecuación del Contrato de Concesión del Servicio Público de Distribución y Comercialización de Energía Eléctrica (Adjustment Agreement), an agreement with the Argentine Government relating to the adjustment and renegotiation of the terms of our concession. Because a new Minister of Economy took office thereafter, we formally re-executed the Adjustment Agreement with the Argentine Government on February 13, 2006 under the same terms and conditions originally agreed. The ratification of the Adjustment Agreement by the Argentine Government was completed in January 2007. Pursuant to the Adjustment Agreement, the Argentine Government granted us an increase of 28% in our distribution margin, which includes a 5% increase to fund specified capital expenditures we are required to make under the Adjustment Agreement. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Edenor’s Capital expenditures.” The increase was effective retroactively from November 1, 2005 and remained in effect until the approval of the new tariff scheme under the RTI, in February 2017.

The Adjustment Agreement also contemplated a cost adjustment mechanism for the transitional period during which the RTI process was being conducted. This mechanism, known as the Cost Monitoring Mechanism, or CMM, took into consideration, among other factors, the wholesale and consumer price indexes, 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.

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 users 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.

Between 2007 and 2016, we requested several CMM adjustments, which were recognized by the ENRE through different resolutions and notes (Resolution No. 1,037/07, Note No. 81,399, Resolution No. 250/13 and Resolution No. 32/15). Only two adjustments were recognized in a timely manner and were incorporated into the tariff structure, while the rest of them were recognized belatedly and not incorporated into our tariff structure.

On November 23, 2012, the ENRE issued Resolution No. 347/12, pursuant to which it established a fixed and variable charge differentiated by category of users, 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 were clearly identified in the bills sent to users, were deposited in a special account to be managed by a Trustee. Such amounts were used exclusively to finance infrastructure and corrective maintenance of the facilities.

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. 347/12. 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 up to January 31, 2016, including the application of interest that could correspond to both concepts.

88


 
 

In January 2016, the ME&M 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 took all the necessary actions to conclude the RTI process by February 2017.

In addition, such resolution: (i) abrogated the PUREE; (ii) repealed SE Resolution No. 32/15 as from the date the ENRE resolution implementing the new tariff schedule that became 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 ENRE Resolution No. 347/12. Resolution No. 2/16 of the ENRE partially repealed Resolution No. 347/12, discontinuing the FOCEDE and ordered the Company to open a special bank account with a Central Bank authorized entity where the funds received pursuant to Resolution No. 347/12 were deposited. Pursuant to ME&M Resolution No. 7/16, the ENRE issued Resolution No. 1/16 establishing a new tariff structure.

Integral Tariff Revision. During the year 2016, the Company, guided by the ENRE, complied with all the procedural obligations required to complete the RTI process set forth in the Adjustment Agreement. The RTI process was completed on February 1, 2017, on which date the ENRE issued Resolution No. 63/17. Such resolution established a new tariff schedule which included a VAD maximum increase of 42% for February 2017, as well as two additional phase increases for the months of November 2017 and February 2018. On January 31, 2019, ENRE Resolution No. 25 approved the values of Edenor’s tariff scheme as from February 1, 2019. Moreover, on January 31, 2019, pursuant to Resolution No. 27/19, the ENRE approved the VAD updates for the second six-month period of 2018 and the pending update corresponding to the first six-month period of 2019, totaling a 32.0% increase applicable as from March 1, 2019.

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

 

 

VAD

Tariff(1)

 

November

 

January

 

February

 

October 2008

 

Res.1301

 

Res. 1

 

Res. 92/17

 

Res. 92/17

 

Res. 603/17

 

Res. 33/18

 

Res. 208/18

 

Res. 25/19

 

Res. 27/19

 

2001

 

2005

 

2007

 

 

2011(2)

 

2016

 

Feb. 2017

 

Mar. 2017

 

Dic. 2017

 

Dic. 2017

 

Feb. 2018

 

Feb. 2019

 

Mar. 2019

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TIRI (0-300)

 

49.40%

 

44.50%

 

44.50%

 

44.69%

 

11.26%

 

30.63%

 

26.60%

 

19.07%

 

18.10%

 

18.23%

 

15.24%

 

11.46%

 

14.41%

TIRI2 (301-650)

 

36.20%

 

33.00%

 

33.00%

 

30.81%

 

4.80%

 

15.40%

 

23.49%

 

16.54%

 

15.20%

 

15.31%

 

12.69%

 

9.44%

 

12.03%

TIR# (651-800)

 

 

 

 

 

 

 

32.08%

 

4.55%

 

14.48%

 

26.66%

 

19.15%

 

17.74%

 

17.73%

 

14.81%

 

11.12%

 

14.02%

TIR4 (801-900)

 

 

 

 

 

 

 

31.63%

 

4.32%

 

13.91%

 

29.46%

 

21.55%

 

20.08%

 

19.98%

 

16.81%

 

12.74%

 

15.95%

TIR5 (90-1000)

 

 

 

 

 

 

 

32.75%

 

4.35%

 

14.04%

 

33.25%

 

24.91%

 

23.42%

 

23.20%

 

19.72%

 

15.14%

 

18.78%

TIR6 (1001-1200)

 

 

 

 

 

 

 

26.29%

 

4.19%

 

15.98%

 

37.51%

 

28.95%

 

27.52%

 

27.09%

 

23.31%

 

18.20%

 

22.31%

TIR 7 (1201-1400)

 

 

 

 

 

 

 

27.18%

 

3.98%

 

15.25%

 

41.21%

 

32.64%

 

32.80%

 

34.80%

 

30.69%

 

24.81%

 

30.91%

TIR8 (1401-2800)

 

 

 

 

 

 

 

25.94%

 

4.81%

 

17.83%

 

45.69%

 

37.36%

 

40.50%

 

42.35%

 

38.30%

 

32.13%

 

36.57%

TIR9 (> 2800)

 

 

 

 

 

 

 

22.50%

 

3.84%

 

14.81%

 

46.83%

 

38.62%

 

39.94%

 

40.79%

 

36.69%

 

30.53%

 

35.18%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial - small demands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TIG1

 

55.10%

 

40.00%

 

47.80%

 

48.76%

 

21.91%

 

53.18%

 

53.79%

 

45.89%

 

48.82%

 

47.19%

 

43.14%

 

37.48%

 

42.91%

TIG2

 

53.60%

 

31.10%

 

43.60%

 

42.39%

 

15.97%

 

41.52%

 

52.94%

 

44.89%

 

47.86%

 

46.18%

 

42.08%

 

36.38%

 

41.77%

TIG3

 

 

 

 

 

 

 

37.40%

 

9.13%

 

24.24%

 

52.74%

 

44.65%

 

47.54%

 

45.92%

 

41.81%

 

36.11%

 

41.32%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial - medium demand

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

T2

 

43.30%

 

27.90%

 

35.50%

 

38.03%

 

16.03%

 

44.80%

 

74.36%

 

74.36%

 

43.55%

 

43.41%

 

39.03%

 

31.83%

 

37.30%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

T3 low voltage below 300kw

 

44.20%

 

26.50%

 

34.30%

 

37.86%

 

15.37%

 

43.74%

 

46.90%

 

37.97%

 

39.76%

 

39.59%

 

35.14%

 

27.96%

 

33.33%

T3 low voltage over 300kw

 

42.60%

 

24.50%

 

32.10%

 

27.09%

 

11.99%

 

22.80%

 

23.80%

 

23.52%

 

27.24%

 

29.40%

 

22.50%

 

18.29%

 

22.82%

T3 medium voltage below 300kw

 

29.30%

 

14.10%

 

19.70%

 

25.25%

 

8.46%

 

30.72%

 

30.38%

 

22.08%

 

23.59%

 

23.43%

 

19.76%

 

14.58%

 

18.37%

T3 medium volgate over 300kw

 

27.30%

 

12.30%

 

17.50%

 

17.71%

 

7.09%

 

14.50%

 

13.19%

 

13.00%

 

15.44%

 

17.13%

 

12.31%

 

9.59%

 

12.43%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Tariff

 

41.20%

 

28.50%

 

33.90%

 

33.16%

 

9.57%

 

28.33%

 

39.08%

 

32.46%

 

32.18%

 

32.41%

 

27.75%

 

22.09%

 

26.83%

 

89


 
 

 

 

Average Taxes

Tariff(1)

 

November

 

January

 

February

 

October 2008

 

Res.1301

 

Res. 1

 

Res. 92/17

 

Res. 92/17

 

Res. 603/17

 

Res. 33/18

 

Res. 208/18

 

Res. 25/19

 

Res. 27/19

 

2001

 

2005

 

2007

 

 

2011(2)

 

2016

 

Feb. 2017

 

Mar. 2017

 

Dic. 2017

 

Dic. 2017

 

Feb. 2018

 

Feb. 2019

 

Mar. 2019

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TIRI (0-300)

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

 

28.70%

TIRI2 (301-650)

 

29.20%

 

29.20%

 

29.20%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

TIR# (651-800)

 

 

 

 

 

 

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

TIR4 (801-900)

 

 

 

 

 

 

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

TIR5 (90-1000)

 

 

 

 

 

 

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

TIR6 (1001-1200)

 

 

 

 

 

 

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

TIR 7 (1201-1400)

 

 

 

 

 

 

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

TIR8 (1401-2800)

 

 

 

 

 

 

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

TIR9 (> 2800)

 

 

 

 

 

 

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

29.23%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial - small demands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TIG1

 

25.70%

 

25.70%

 

25.70%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

TIG2

 

25.60%

 

25.60%

 

25.60%

 

25.64%

 

25.64%

 

25.64%

 

25.64%

 

25.64%

 

25.64%

 

25.64%

 

25.64%

 

25.64%

 

25.64%

TIG3

 

 

 

 

 

 

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial - medium demand

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

T2

 

25.60%

 

25.60%

 

25.60%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

25.63%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

T3 low voltage below 300kw

 

25.70%

 

25.70%

 

25.70%

 

25.66%

 

25.66%

 

25.66%

 

25.66%

 

25.66%

 

25.66%

 

25.66%

 

25.66%

 

25.66%

 

25.66%

T3 low voltage over 300kw

 

25.60%

 

25.60%

 

25.60%

 

25.62%

 

25.62%

 

25.62%

 

25.62%

 

25.62%

 

25.62%

 

25.62%

 

25.62%

 

25.62%

 

25.62%

T3 medium voltage below 300kw

 

25.70%

 

25.70%

 

25.70%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

 

25.68%

T3 medium volgate over 300kw

 

25.70%

 

25.70%

 

25.70%

 

25.69%

 

25.69%

 

25.69%

 

25.69%

 

25.69%

 

25.69%

 

25.69%

 

25.69%

 

25.69%

 

25.69%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Tariff

 

27.20%

 

27.20%

 

27.20%

 

27.24%

 

27.24%

 

27.24%

 

27.24%

 

27.24%

 

27.24%

 

27.24%

 

27.24%

 

27.24%

 

27.24%

 

 

 

Electric Power Purchases

Tariff(1)

 

November

 

January

 

February

 

October 2008

 

Res.1301

 

Res. 1

 

Res. 92/17

 

Res. 92/17

 

Res. 603/17

 

Res. 33/18

 

Res. 208/18

 

Res. 25/19

 

Res. 27/19

 

2001

 

2005

 

2007

 

 

2011(2)

 

2016

 

Feb. 2017

 

Mar. 2017

 

Dic. 2017

 

Dic. 2017

 

Feb. 2018

 

Feb. 2019

 

Mar. 2019

Residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TIRI (0-300)

 

21.90%

 

26.80%

 

26.80%

 

26.61%

 

60.00%

 

40.65%

 

44.71%

 

52.23%

 

53.20%

 

53.07%

 

56.06%

 

59.84%

 

56.89%

TIRI2 (301-650)

 

34.60%

 

37.80%

 

37.80%

 

39.95%

 

65.91%

 

55.33%

 

47.28%

 

54.23%

 

55.57%

 

55.45%

 

58.08%

 

61.32%

 

58.74%

TIR# (651-800)

 

 

 

 

 

 

 

38.68%

 

66.15%

 

56.23%

 

44.11%

 

51.61%

 

53.02%

 

53.04%

 

55.96%

 

59.64%

 

56.74%

TIR4 (801-900)

 

 

 

 

 

 

 

39.13%

 

66.39%

 

56.81%

 

41.30%

 

49.22%

 

50.68%

 

50.78%

 

53.96%

 

58.03%

 

54.81%

TIR5 (90-1000)

 

 

 

 

 

 

 

38.02%

 

66.37%

 

56.69%

 

37.51%

 

45.86%

 

47.34%

 

47.56%

 

51.05%

 

55.62%

 

51.99%

TIR6 (1001-1200)

 

 

 

 

 

 

 

44.48%

 

66.51%

 

54.73%

 

33.26%

 

41.81%

 

43.25%

 

43.67%

 

47.46%

 

52.57%

 

48.45%

TIR 7 (1201-1400)

 

 

 

 

 

 

 

43.59%

 

66.73%

 

55.47%

 

29.55%

 

38.13%

 

37.96%

 

35.96%

 

40.08%

 

45.95%

 

39.86%

TIR8 (1401-2800)

 

 

 

 

 

 

 

44.83%

 

65.89%

 

52.88%

 

25.08%

 

33.40%

 

30.27%

 

28.41%

 

32.47%

 

38.63%

 

34.20%

TIR9 (> 2800)

 

 

 

 

 

 

 

48.26%

 

66.88%

 

55.92%

 

23.93%

 

32.15%

 

30.83%

 

29.98%

 

34.08%

 

40.24%

 

35.58%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial - small demands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TIG1

 

19.20%

 

34.30%

 

26.50%

 

25.55%

 

52.34%

 

21.11%

 

20.53%

 

28.43%

 

25.50%

 

27.13%

 

31.18%

 

36.84%

 

31.40%

TIG2

 

20.70%

 

43.20%

 

30.70%

 

31.97%

 

58.29%

 

32.79%

 

21.42%

 

29.47%

 

26.50%

 

28.19%

 

32.28%

 

37.98%

 

32.60%

TIG3

 

 

 

 

 

 

 

37.57%

 

65.12%

 

48.04%

 

21.63%

 

29.71%

 

26.82%

 

28.44%

 

32.56%

 

38.25%

 

33.05%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial - medium demand

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

T2

 

31.00%

 

46.40%

 

38.90%

 

36.34%

 

58.15%

 

29.47%

 

0.18%

 

0.29%

 

30.81%

 

30.95%

 

35.34%

 

42.54%

 

37.07%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

T3 low voltage below 300kw

 

30.10%

 

47.80%

 

40.10%

 

36.48%

 

58.84

 

30.53%

 

27.44%

 

36.36%

 

34.58%

 

34.75%

 

39.20%

 

46.38%

 

41.01%

T3 low voltage over 300kw

 

31.80%

 

49.90%

 

42.30%

 

47.29%

 

62.29

 

51.55%

 

50.58%

 

50.86%

 

47.14%

 

44.99%

 

51.88%

 

56.10%

 

51.56%

T3 medium voltage below 300kw

 

45.00%

 

60.30%

 

54.60%

 

49.06%

 

65.73

 

43.51%

 

43.94%

 

52.24%

 

50.73%

 

50.88%

 

54.55%

 

59.73%

 

55.94%

T3 medium volgate over 300kw

 

47.00%

 

62.00%

 

56.80%

 

56.60%

 

67.11

 

59.77%

 

61.11%

 

61.31%

 

58.87%

 

57.18%

 

61.99%

 

64.72%

 

61.87%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Tariff

 

31.50%

 

44.20%

 

38.90%

 

39.60%

 

63.10%

 

44.38%

 

33.69%

 

40.30%

 

40.58%

 

40.35%

 

45.01%

 

50.68%

 

45.93%

 

(1)      T1R1 refers to residential users 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 users 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 users 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 users 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 users 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 users 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 users 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 users 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 users whose peak capacity demand is less than 10 kW and whose bimonthly energy demand is greater than 2,800KWh. T1G1 refers to commercial users 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 users 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 users whose peak capacity demand is greater than 4,000 KWh. T2 refers to commercial users whose peak capacity demand is greater than 10 kW but less than 50 KW. T3 refers to users whose peak capacity demand is equal to or greater than 50 kW. The T3 category is applied to high-demand users according to the voltage (tension) at which each user 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 Argentine 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 Argentine Government grants has been extended to residential users, 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 almost unchanged.

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 users (such astaxes 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.

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On April 1, 2016, pursuant to Resolution No. 55/16 issued by ENRE, the RTI process was approved, which set the criteria and methodology to be applied throughout the RTI process, as well as the corresponding working plan.

On September 5, 2016, we submitted our electricity rate schedule proposal for the next five year period. For purposes of the rate proposal, we: determined the capital base using the depreciated NRV method; submitted the 2017-2021 investment plan; submitted a detail of the operating expenses; and submitted all other data requested by the ENRE.

On February 1, 2017, the ENRE issued Resolution No. 63/17 pursuant to which, the ENRE approved a new tariff scheme which set our VAD for the following five-year period. Such income was established by applying the NRV methodology, but over a slightly lower base capital than the one we had submitted in our proposal.

Our operating expenses were determined based on a model that values the resources required for our operations, in line with a “model company” with competent operation costs, including some corrections resulting from the current inefficiencies detected in the Company. In this regard, expenses were calculated annually based on the real network, by incorporating in each year the facilities needed to achieve the quality service required throughout the tariff period, with improvements in the facilities by increasing prevention related maintenance and projected investments. In this regard, the income requirements needed to cover the costs calculated for the 2017-2021 tariff period were established.

In relation to the new tariff schedule and tariff charges, the ENRE established a VAD increase in three stages, including an initial maximum increase of 42% to be applied as from February 1, 2017, and two subsequent increases in November 2017 (19%) and February 2018 (17%). In addition, the ENRE should acknowledge to the Company the difference in VAD resulting from the application of the gradual tariff increase recognized by the RTI in 48 installments as from February 1, 2018,which was incorporated to the VAD value on such date. Furthermore, the fixed charge billing corresponding to Resolution No. 347/12 was set aside.

The ENRE also established a non-automatic mechanism to adjust our tariff, as it had done in the original Concession Contract and the Adjustment Agreement, in order to preserve the economic and financial sustainability of the concession in the event of prices variations in the economy. This mechanism has a six-month basis and includes a combined formula of wholesale and consumer price indexes (WPI, CPI and salaries increases) which trigger the adjustment of tariff when the result is above 5%. In connection with quality standards, the ENRE approved new parameters with the purpose of achieving, by the end of the five-year period an acceptable quality. In this regard, it established a penalties regime to be applied in the event of noncompliance with the quality rates.

Despite the progress achieved with regard to the completion of the RTI process, as of this annual report, the definitive treatment to be given by the ME&M to all the issues resulting from the non-compliance with the Adjustment Agreement, including the remaining balances and other accounting effects caused by the partial measures adopted under the RTI process, has yet to be defined. These issues, include, among others:

·       the treatment to be given to the funds received from the Argentine Government through the loans for consumption (mutuums) agreements entered into with CAMMESA for the fulfillment of the Extraordinary Investment Plan, granted to cover the insufficiency of the FOCEDE’s funds;

·       the conditions for the settlement of the outstanding balance with CAMMESA at the date of issuance of SEE Resolution No. 32/15; and

·       the treatment to be given to the penalties and discounts determined by the ENRE, which payment/crediting is pending.

 

 On April 26, 2017, we were notified by Note No 2016-01193748 that the ME&M decided that the SEE, with the support of the Under-Secretariat for Tariff Policy Coordination and the ENRE, would be responsible for determining (within a period of 120 days) whether any pending obligations under theAdjustment Agreement remained outstanding as of the effective date of the applicable electricity tariff schedules resulting from the implementation of the RTI process. If any such obligations remained outstanding, the treatment to be given to those obligations was also to be determined by the SEE as described above. The Company has submitted the information requested by the ME&M as part of its efforts to comply with these requirements. However, as of the date of this annual report, due to the fact that a definitive decision on the treatment of these obligations is still pending, the Company started negotiations with the SEE thereon.

91


 
 

During the second half of 2017 in several presentations made to the ENRE, the Company submitted for approval purposes, the electricity rate schedules to be applied from August 1, 2017 and from November 1, 2017, related to the variation recorded in the CPD for the January-June 2017 period, and to the second stage increase set forth in Resolution No. 63/17, respectively.

On October 31, 2017, the ENRE, as instructed by the ME&M, postponed to December 1, 2017 the application of the CPD increases abovementioned.

On November 30, 2017, through Resolution No. 603/17 the ENRE established the output power reference prices and the stabilized prices for energy and transport, as well as the new social tariff methodology and the new incentive schedule for savings, by determining the tariff schedule as of December 1, 2017.

On November 30, 2017, pursuant to Resolution No. 603/17, the ENRE approved the CPD values, applicable as from December 1, 2017, and retroactively to consumption recorded in the months of August through November 2017, which was billed in two installments, December 2017 and January 2018. Additionally, the resolution approved the Company’s electricity rate schedule applicable to consumption recorded as from December 1, 2017.

On January 31, 2018, the ENRE issued Resolution No. 33/18 whereby it approved the values of CPD, the values of the monthly installment to be applied in accordance with the provisions of ENRE Resolution No. 329/17, and the values of the Company’s electricity rate schedule applicable to consumption recorded as of February 1, 2018. Additionally, it provided that the average electricity rate value amounts to Ps.2.4627 Ps./KWh. Furthermore, such Resolution approved the new CPD adjustments (last stage of 17% according to Resolution No. 63/17, the inflation adjustment of 11.9% for the period July-December 2017 and stimulus factor “E” of -2.51%) and determined the deferred income to be recovered in 48 instalments for a total amount of Ps.8,094.2 million. Additionally, it reported that the value of the average tariff reached Ps.2.4627/KWh.

On July 31, 2018, the ENRE issued Resolution No. 208/18, pursuant to which it approved, the CPD for January 2018 through June 2018 of which 7.93% was applied as of August 1, 2018, and 6.51% in six consecutive monthly installments as of February 1, 2019. The CPD amounted to 15.85%. Moreover, Resolution No. 208/18 established a system of caps for the social tariff as well as the values that the Company had to apply to determine and credit discounts in the electricity bills of the users affected by deficiencies in the quality of the technical product and/or the quality of the technical and commercial service from 2018 to February 2019. Additionally, the informed average electricity rate value amounted to Ps. 2.9871/KWh.

On December 27, 2018, Resolution No. 366/18 issued by the SGE approved the summer seasonal programming for the WEM submitted by CAMMESA, thus determining new prices for power capacity, energy and transmission for February 2019 to October 2019 period. Furthermore, the social tariff and savings bonuses for the residential tariff were eliminated, as beneficiaries have been transferred to the provincial jurisdictions  As of the date of issuance of this document, theProvince of Buenos Aires and the City of Buenos Aires are complying with the payment of the social rate on a regular basis.

 

On January 31, 2019, ENRE Resolution No. 25 approved the values of Edenor’s tariff scheme as from February 1, 2019 and incorporated the new power capacity reference prices and stabilized prices for energy determined by the SGE until April 30, 2019. In turn, the ENRE informed that under the transfer of jurisdiction from the Argentine Government to the Province of Buenos Aires and the City of Buenos Aires, the guidelines for the social tariff regime effective as of December 31, 2018 will remain in effect. The Company is currently negotiating the implementation of this benefit in both jurisdictions.

 

Moreover, on January 31, 2019, pursuant to Resolution No. 27/19, the ENRE approved the VAD updates for the second six-month period of 2018 and the pending update corresponding to the first six-month period of 2019, totaling a 32.0% increase applicable as from March 1, 2019. Additionally, the application of the new -1.59% “E”-factor adjustment will be deducted from cumulative inflation updates.

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Furthermore, the cost of deferrals for August 2018 through February 2019 and for the month of February 2019, totaled Ps.1,005 million and Ps.841 million respectively, and will be paid in 5 installments as from March 2019. Additionally, Ps.51 million will be collected under the same modality due to the partial recognition of the appeal filed by Edenor to Resolution No. 208/18, which acknowledged additional costs not that had not been calculated as part of prior tariffs.

Social Tariff Regime. According to the Adjustment Agreement, we are 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 sectors of the community to be approved by the ENRE in the context of the RTI. The social tariff regime provides 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 limit established by the Argentine Government.

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

Pursuant to Resolution No. 63/17, the ENRE ratified this measure, maintaining the zero cost modality for monthly consumptions below or equal to 150 KWh and preferential tariffs for consumption that exceeds such level, updating the values in accordance with the new tariff scheme.

Resolution No 603/17 determined a new methodology for social tariff. It established: (1) a 100% discount in the stabilized price of energy for monthly consumptions below or equal to 150 KWh (base consumption); for the monthly consumption above the base consumption, (2) a 50% discount in the stabilized price of energy for the monthly consumptions below or equal 150 KWh; and (3) non-discount for the rest of the surplus consumption. Moreover, a scheme of maximum percentages was established in social tariff user’s invoices with respect to what would be paid, before taxes, by residential users of equal consumption.

On December 27, 2018, the social tariff and savings bonuses for the residential tariff were eliminated by Resolution No. 366/18 issued by the SGE.

 

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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.

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

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

 

126,421

 

24,860

 

19.7%

2015

 

131,998

 

26,322

 

19.9%

2016

 

133,111

 

26,838

 

20.2%

2017

 

132,426

 

25,950

 

19.6%

2018

 

132,925

 

25,906

 

19.5%

 

Source: 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 users.

 

 

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 users 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. However, the demand for electricity declined 2.5% in 2009 as a consequence of the global financial crisis. 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 2014, the demand decreased by 2% as a consequence of the devaluation that took place in the second semester of such year, while in 2016 a decrease of 1% was mainly due to the slight contraction in the economic activity of certain sectors, the implementation of rational use strategies by our larger commercial users and to the Industrial Production Index decrease in the case of industrial users, whose joint participation represents more than 50% of the electricity consumption in our concession area. In 2017, the decline in demand was more pronounced, decreasing by 3.6%, in line with the decrease in the demand of the WEMand can be explained by the combination of three factors: economic recession, elasticity to price (in accordance with the tariff increases settled by Resolution No 33/18) and warmer and more uniform average temperatures than in the prior five years. Nevertheless, industrial users, whose participation represents 38% of the electricity consumption, showed the lowest decline in demand, of around 0.4%, in accordance with the recovery of the Industrial Production Index.

In 2018, the demand of electricity amounted to 25,906 GWh, which represented a 0.17% decrease as compared to 2017, whereas the WEM’s demand amounted to 132,925 GWh, slightly above that of 2017. The fall in Edenor’s demand was mainly due to temperature, elasticity, the price and the level of the economic activity.

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 theelectricity distribution sector—Electricity demand may be affected by tariff increases, which may lead distribution companies, such as us, to record lower revenues.”

94


 
 

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 two thermal generation plants, no new generation plants have been built in Argentina. Despite the lack of new generation plants, the Argentine Government has implemented some economic incentives, such as those 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 users could be adversely affected, which could result in user 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 users 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 aims 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 pursuant to Resolution No. 1,875/05 of the SE permitted 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.

During January 2017, a new temporary 500/132 kV transformer of 300 MVA was installed in SE Rodríguez, which allowed the entry of more power from the WEM. This transformer was replaced by a definitive one of 500 MVA during 2018. In addition, during 2017 a new type of thermal generation (by means of transportable modules) has been directly connected to Edenor’s high voltage network, with an aim to decrease the saturation of these networks: CT Zappalorto (APR), CT Pilar (Pampa Energía S.A.), CT Matheu II (APR). In 2018, CT Matheu III (Araucaria) was began operating and a new 220/132 kV transformer of 300 MVA was installed in SE Ezeiza.

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 user categories. The seasonal changes in demand are attributable to the impact of various climatological factors, including weather and the amount of daylight time, on the usage of lights, heating systems and air conditioners.

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

95


 
 

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

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

 

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

 

 

96


 
 

The chart below shows seasonality of demand in Edenor’s industrial user 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 users 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 a series of framework agreements. For a discussion of these agreements and our ongoing negotiations to extend the most recent framework agreement, see “Item 4. Information on the Company—Framework Agreement (Shantytowns).”

Operating Expenses

Our most significant operating expenses are transmission and distribution expenses, which include depreciation charges, salaries and social security taxes, outsourcing, 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 4,922 employees and contracts with third-party services companies that count with 7,397 employees as of December 31, 2018. 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 of Historical Results of Operations

The following table provides a summary of our operations for the years ended December 31, 2018, 2017 and 2016.

 

97


 
 

Statement of comprehensive income (loss)

 

 

2018

 

2018

 

2017

 

2016

 

 

 US$

 

 Ps.

 

 Ps.

 

 Ps.

Continuing operations

 

 

 

 

 

 

 

 

Revenue from sales  (1)

 

1,484.2

 

  55,953.6

 

  39,602.9

 

  25,826.8

Electric power purchases

 

(845.5)

 

  (31,875.7)

 

  (20,820.3)

 

  (11,989.6)

Subtotal

 

638.7

 

  24,077.9

 

  18,782.6

 

  13,837.2

Transmission and distribution expenses

 

(289.5)

 

  (10,912.7)

 

(9,247.1)

 

  (13,263.9)

Gross income (Loss)

 

349.2

 

  13,165.2

 

9,535.5

 

573.3

 

 

 

 

 

 

 

 

 

Selling expenses

 

(133.5)

 

(5,032.7)

 

(3,567.8)

 

(3,379.3)

Administrative expenses

 

   (76.2)

 

(2,872.1)

 

(2,504.5)

 

(2,288.0)

Other operating income

 

   8.5

 

321.8

 

157.8

 

172.1

Other operating expense

 

   (43.6)

 

(1,642.6)

 

(1,260.5)

 

(1,085.2)

Gain from interest in joint ventures

 

-

 

   1.6

 

   10.1

 

-

Operating profit (loss) before income from provisional remedies higher costs recognition and SE Resolution 32/15

 

104.4

 

3,941.2

 

2,370.6

 

(6,007.1)

Recognition of income – provisional remedies – MEyM Note 2016-04484723

 

-

 

-

 

-

 

2,074.2

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

 

-

 

-

 

-

 

958.3

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

 

-

 

-

 

-

 

185.4

Operating profit (loss)

 

104.4

 

3,941.2

 

2,370.6

 

(2,789.2)

 

 

 

 

 

 

 

 

 

Financial income

 

   17.8

 

671.8

 

453.8

 

384.6

Financial expenses

 

(132.0)

 

(4,976.7)

 

(2,570.3)

 

(2,589.2)

Other financial results

 

   (52.1)

 

(1,965.3)

 

(168.5)

 

   (87.3)

Net financial expense

 

(166.3)

 

(6,270.2)

 

(2,285.0)

 

(2,291.9)

 

 

 

 

 

 

 

 

 

Gain on net monetary position

 

225.6

 

8,503.9

 

5,505.1

 

5,469.1

 

 

 

 

 

 

 

 

 

Profit (loss) before taxes

 

163.7

 

6,174.9

 

5,590.7

 

388.0

 

 

 

 

 

 

 

 

 

Income tax

 

   (49.8)

 

(1,877.4)

 

(510.1)

 

(147.3)

 

 

 

 

 

 

 

 

 

Profit (loss) for the year

 

113.9

 

4,297.5

 

5,080.6

 

240.7

 

 

 

 

 

 

 

 

 

Profit (loss) for the year attributable to:

 

 

 

 

 

 

 

 

Owners of the Company

 

113.9

 

4,297.5

 

5,080.6

 

240.7

Profit (loss) for the year

 

113.9

 

4,297.5

 

5,080.6

 

240.7

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

Items that will not be reclassified to profit or loss

 

 

 

 

 

 

 

 

Results related to benefit plans

 

  (0.1)

 

   (5.6)

 

   22.2

 

   14.4

Tax effect of actuarial result on benefit plans

 

-

 

   1.7

 

   (7.2)

 

   (5.0)

Total other comprehensive income (loss)

 

  (0.1)

 

   (3.9)

 

   15.0

 

   9.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income for the year attributable to:

 

 

 

 

 

 

 

 

Owners of the parent

 

113.9

 

4,293.6

 

5,095.6

 

250.1

Comprehensive profit for the year

 

113.9

 

4,293.6

 

5,095.6

 

250.1

 

 

 

 

 

 

 

 

 

Basic and diluted earnings profit per share:

 

 

 

 

 

 

 

 

Basic and diluted earnings profit per share

 

  0.13

 

   4.83

 

   5.66

 

   0.27

 

 

 

 

 

 

 

 

 

Basic and diluted earnings profit per ADS (2):

 

 

 

 

 

 

 

 

Basic and diluted earnings profit per ADS from continuing operations

 

  2.56

 

96.43

 

  113.45

 

   5.58

 

(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.

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

 

Year Ended December 31, 2018 compared with Year Ended December 31, 2017.

Revenue from sales

Revenue from sales increased by 41%, to Ps.55,953.6 million for the year ended December 31, 2018, from Ps.39,602.9 million for the year ended December 31, 2017, mainly due to the increase in the cost of energy purchases which represents 74% of the variation, and the remaining percentage of the variation is represented by the implementation of the VAD update pursuant to the RTI process, together with certain bi-annual CPD adjustments. During 2018, VAD updates for a total of 87.7% were applied, and the last update occurred during the first six months of 2018, which was partial as the remainder was deferred for March 2019. This revenue increase from sales was partially offset by a 2% decrease in the volume of energy sales.

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Electric Power Purchases

The amount of electric power purchases increased by 53%, to Ps.31,875.7 million for the year ended December 31, 2018, from Ps.20,820.3 million for the year ended December 31, 2017. This increase was mainly due to an increase in the average price of sales resulting from new reference seasonal prices for electricity in December 2017, February 2018 and August 2018 established by Resolution No. 1,091/17 and Provision No. 75/18 of the SEE. Despite this increase, the reference seasonal price for residential users remains partially subsidized by the Argentine Government, especially in the case of residential users.

Our volume of electric power purchases for the year ended December 31, 2018 amounted to 25,906 GWh, which represented a 0.2% decrease in demand as compared to 2017.

Energy losses increased to 18.2% for the year ended December 31, 2018, compared to 17.1% for the year ended December 31, 2017, and was mainly generated by increased fraud that may be associated with the economic recession and the impact of tariff increases. For more information, see “—Factors Affecting Our Results of Operations—Recognition of Cost of Energy Losses.”

Transmission and Distribution Expenses

Transmission and distribution expenses increased by 18% to Ps.10,912.7 million for the year ended December 31, 2018, compared to Ps.9,247.1 million for the year ended December 31, 2017. This increase was mainly due to a collection of fines and penalties of Ps.719.8 million in 2017, an increase in 2018, in penalties as a result of new penalties imposed by ENRE Resolution No. 91/18 for breaches in reading and billing terms, the change the calculation of the penalties methodology and an increase in fees for third-party services, mainly due to a higher number of market discipline works, such as an increase in street crew workers, associated with the losses reduction plan, higher expenses in preventive and corrective maintenance works such as pruning, changes of posts, the gathering of data on anomalies, the rental of generating units and the repair of sidewalks. Such increases in expenses were partially offset by a decrease in costs for salaries and social security taxes.

As a percentage of revenue from sales, transmission and distribution expenses decreased to 19.4% for the year ended December 31, 2018, compared to 23.3% for the year ended December 31, 2017.

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

 

Year ended December 31,

 

2018

 

 

 

% of 2018

 

2017

 

 

 

% of 2017

 

 

 

 

net sales

 

 

 

 

net sales

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and social security taxes

4,331.4

 

39.7%

 

7.7%

 

4,997.8

 

54.0%

 

12.6%

Supplies consumption

790.4

 

7.2%

 

1.4%

 

687.2

 

7.4%

 

1.7%

Fees and remuneration for services

1,411.8

 

12.9%

 

2.5%

 

1,082.0

 

11.7%

 

2.7%

Depreciation of property, plant and equipment

2,014.9

 

18.5%

 

3.6%

 

1,740.2

 

18.8%

 

4.4%

ENRE penalties

2,064.3

 

18.9%

 

3.7%

 

428.0

 

4.6%

 

1.1%

Others

299.9

 

2.8%

 

0.5%

 

311.9

 

3.4%

 

0.8%

Total

10,912.7

 

100%

 

19.4%

 

9,247.1

 

100%

 

23.3%

 

Gross profit

Our gross profit, including transmission and distribution expenses, increased by Ps.3,629.7 million, or 38%, to Ps.13,165.2 million for the year ended December 31, 2018, from Ps.9,535.5 million for the year ended December 31, 2017. This increase was mainly attributable to the application of the new RTI tariff schedules, partially offset by higher operating expenses.

Selling Expenses

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

99


 
 

Selling expenses increased by 41% to Ps.5,032.7 million for the year ended December 31, 2018, from Ps.3,567.8 million for the year ended December 31, 2017. This increase of Ps.1,464.9 million was mainly due to: (i) an increase in doubtful account charges driven by an increase of the delinquent balance, (ii)an increase in taxes paid driven by an expansion of our taxable income base that accompanied the tariff increase, (iii) an increase in fees for third-party services, mainly explained by a higher expenses associated with the distribution of bills. These increases were partially offset by a decrease in costs for salaries and social security taxes.

As a percentage of net sales, selling expenses remained stable at 8.5% of net sales in the years ended December 31, 2018 and 2017.

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

 

Year ended December 31,

 

2018

 

 

 

% of 2018

 

2017

 

 

 

% of 2017

 

 

 

 

net sales

 

 

 

 

net sales

Salaries and social security taxes

777.0

 

15.4%

 

1.4%

 

887.0

 

24.9%

 

2.2%

Allowance for the impairment of trade and other receivables

977.5

 

19.4%

 

1.7%

 

391.6

 

11.0%

 

1.0%

Communication expenses

269.7

 

5.4%

 

0.5%

 

289.4

 

8.1%

 

0.7%

Fees and remuneration for services

1,040.2

 

20.7%

 

1.9%

 

876.6

 

24.6%

 

2.2%

ENRE penalties

1,052.1

 

20.9%

 

1.9%

 

428.7

 

12.0%

 

1.1%

Taxes and charges

598.9

 

11.9%

 

1.1%

 

395.3

 

11.1%

 

1.0%

Others

317.3

 

6.3%

 

0.6%

 

299.2

 

8.4%

 

0.8%

Total

5,032.7

 

100%

 

9.1%

 

3,567.8

 

100%

 

9.0%

 

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 by 15%, to Ps.2,872.1 million for the year ended December 31, 2018, from Ps.2,504.5 million for the year ended December 31, 2017. This increase was mainly due to an increase in fees and remuneration for services.

As a percentage of revenue from sales, administrative expenses decreased to 5% for the year ended December 31, 2018, as compared to 6.4% for the year ended December 31, 2017.

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

 

Year ended December 31,

 

2018

 

 

 

% of 2018

 

2017

 

 

 

% of 2017

 

 

 

 

net sales

 

 

 

 

net sales

Salaries and social security taxes

914.5

 

31.8%

 

1.6%

 

917.2

 

36.6%

 

2.3%

Leases and insurance 

180.2

 

6.3%

 

0.3%

 

182.0

 

7.3%

 

0.5%

Fees and remuneration for services

1,007.2

 

35.1%

 

1.8%

 

820.2

 

32.7%

 

2.1%

Security Services

128.7

 

4.5%

 

0.2%

 

141.2

 

5.6%

 

0.4%

Depreciation of property, plants and equipments

246.4

 

8.6%

 

0.4%

 

132.7

 

5.3%

 

0.3%

Taxes and charges

162.5

 

5.7%

 

0.3%

 

32.0

 

1.3%

 

0.1%

Others

232.6

 

8.1%

 

0.4%

 

279.2

 

11.1%

 

0.7%

Total

2,872.1

 

100%

 

5.0%

 

2,504.5

 

100%

 

6.4%

 

Other operating (expenses) income

Other operating (expenses) income include mainly provision for contingencies and debit and credit tax. Other operating (expenses) income, increased by 20% for a net loss of Ps.1,320.8 million for the year ended December 31, 2018, compared to a net loss of Ps.1,102.7 million for the year ended December 31, 2017. The increase was mainly due to a growth in provisions for contingencies attributable to the existence of new cases and increase in interest rates, and in debit and credit taxes.

100


 
 

Operating profit

Our operating results increased by Ps.1,570.6 million, from a profit of Ps.2,370.6 million for the year ended December 31, 2017 to a gain of Ps.3,941.2million for the year ended December 31, 2018, mainly due to the increase in revenue from sales.

Net Financial Expense

Net financial expense totaled Ps.6,270.2 million for the year ended December 31, 2018, compared to Ps.2,285 million for the year ended December 31, 2017. This increase of Ps.3,985.2 million was mainly due to an increase in losses from exchange differences and in the commercial interest.

Income Tax

Our income tax charge was a loss of Ps.1,877.4 million in 2018, compared to a loss of Ps.510.1 million for 2017, mainly to the improvements in operating results arising from the application of the new tariff schedule in 2018.

Profit for the year

We recorded a profit of Ps.4,297.5 million for the year ended December 31, 2018, compared to a loss of Ps.5,080.6 million for the year ended December 31, 2017. In addition, during 2018 the profit for the year increased by Ps.8,503.9 million due to a gain on net monetary position, against Ps.5,505.1 million in 2017.

 

Year Ended December 31, 2017 compared with Year Ended December 31, 2016.

Revenue from sales

Revenue from sales increased by 53%, to Ps.39,602.9 million for the year ended December 31, 2017, from Ps.25,826.8 million for the year ended December 31, 2016, mainly due to: (i) the increase resulting from the application, as of February 2017, of the initial 42% VAD increase of the new tariff schedule resulting from the RTI pursuant to ENRE Resolution No. 63/17, as amended by ENRE Resolution No. 92/17, (ii) the application of the second VAD increase of 18% established in the RTI for November 1, that was subsequently implemented on December 1, 2017, after ENRE instructed us to postpone its implementation, (iii) the CPD values of 11,6% applicable as of December 1, 2017, and retroactively applied to consumption recorded from August to November 2017, and (iv) the extension of the Framework Agreement in 2017 for the period between January 1, 2015 and September 30, 2017 with the federal and provincial Governments. This increase was partially offset by lower electricity sales, which decreased by 3.4% GWh compared to the year ended December 31, 2016, mainly due to weather conditions, particularly a decrease of days with extremely high temperatures, and to a slight fall in the economic activity of certain specific sectors and a more rational use of energy.

Electric Power Purchases

The amount of electric power purchases increased by 74%, to Ps.20,820.3 million for the year ended December 31, 2017, from Ps.11,989.6 million for the year ended December 31, 2016. This increase was mainly due to tariff adjustments implemented as of February 1, 2017, to the tariffs paid by distributors to CAMMESA to account for seasonal demand. Subsequently, as of December 1, 2017, prices were adjusted in accordance with the provisions of Resolution No. 1,091/17 issued by the SEE, and a new stabilized reference value of energy and power was defined whose implementation led to an increase in the cost of transmission with respect to electric power purchases.

Our volume of electric power purchases for the year ended December 31, 2017 amounted to 25,950 GWh, which represents a 3% decrease in demand as compared to that of 2016.

Energy losses increased to 17.1% for the year ended December 31, 2017, compared to 17.0% for the year ended December 31, 2016, thus maintaining a similar level to that recorded in the previousyear. For more information, see “—Factors Affecting Our Results of Operations—Recognition of Cost of Energy Losses.”

101


 
 

Transmission and Distribution Expenses

Transmission and distribution expenses decreased by 30.3% to Ps.9,247.1 million for the year ended December 31, 2017, from Ps.13,263.9 million for the year ended December 31, 2016. This decrease was mainly due to a Ps.4,249.8 million decrease in fines and penalties which were calculated in accordance with Note No. 125,248 dated March 29, 2017, where the ENRE sets the new penalty calculation and adjustment mechanisms in relation to the control procedures, the service quality assessment methodologies and the penalty system applicable as from February 1, 2017 for the 2017 – 2021 period set by ENRE Resolution No. 63/17. This decrease was partially offset by an increase in costs for salaries and social security taxes and Fees and remuneration for services.

As a percentage of revenue from sales, transmission and distribution expenses decreased to 23.3% for the year ended December 31, 2017, from 51.4% for the year ended December 31, 2016.

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

 

Year ended December 31,

 

2017

 

 

 

% of 2017

 

2016

 

 

 

% of 2016

 

 

 

 

net sales

 

 

 

 

net sales