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Section 1: F-1/A (F-1/A)

F-1/A
Table of Contents

As filed with the Securities and Exchange Commission on January 18, 2018

Registration No. 333-222402

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Amendment No. 3 to

FORM F-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Central Puerto S.A.

(Exact name of Registrant as specified in its charter)

 

 

Port Central S.A.

(Translation of Registrant’s name into English)

 

 

 

Republic of Argentina   4911   Not Applicable

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

Central Puerto S.A.

Avenida Thomas Edison 2701

C1104BAB Buenos Aires

Republic of Argentina

+54 (11) 4317-5000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Puglisi & Associates

850 Library Avenue, Suite 204

Newark, Delaware 19711

(302) 738-6680

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Andrés de la Cruz, Esq.

Emilio Minvielle, Esq.

Cleary Gottlieb Steen & Hamilton LLP

One Liberty Plaza

New York, New York 10006

 

Juan Francisco Mendez, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933. 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 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of

securities to be registered

 

Amount to be
Registered(1)(2)

  Proposed maximum
aggregate offering
price per share
  Proposed maximum
aggregate offering
price(3)
  Amount of
registration fee(4)

Common shares, par value Ps.1.00 per share

  408,095,678   US$2.15   US$877,405,708   US$109,238

 

 

 

(1) Includes common shares that the international underwriters may purchase solely pursuant to their option to purchase additional shares. See “Underwriting.”
(2) The common shares may, at the option of the international underwriters named in the prospectus, initially be represented by the registrant’s American depositary shares, each of which represents ten common shares, which may be evidenced by American depositary receipts, issuable upon deposit of the common shares registered hereby, and that will be registered under a separate registration statement on Form F-6.
(3) Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(a) under the Securities Act.
(4) Filing fees in the amount of US$12,450 were previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until this Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting offers to buy these securities, in any jurisdiction where the offer or sale is not permitted.

 

SUBJECT TO COMPLETION, DATED JANUARY 18, 2018

PRELIMINARY PROSPECTUS

354,865,808

Common Shares

 

LOGO

Central Puerto S.A.

which may be represented by American depositary shares

 

 

This is a public offering of our shares of common stock, par value Ps.1.00 per share and one vote per share (the “common shares”), by the selling shareholders identified in this prospectus, who we refer to as the “selling shareholders.” The selling shareholders are offering 354,865,808 common shares in a global offering, which consists of: (i) an international offering in the United States and other countries outside Argentina and (ii) a concurrent offering in Argentina. The international offering of                  common shares is being underwritten by the international underwriters named in this prospectus (the “international underwriters”), and such common shares, at the option of the international underwriters, may be represented by American depositary shares (“ADSs”). Each ADS represents ten common shares. In the Argentine offering,                  common shares are being offered by the selling shareholders to investors in Argentina through the Argentine placement agents named in this prospectus. The closings of the international and Argentine offerings are conditioned upon each other. We will not receive any proceeds from the sale of common shares by the selling shareholders.

Our common shares are listed on the Bolsas y Mercados Argentinos S.A. (the “BYMA”) under the symbol “CEPU.” On January 17, 2018, the last reported sales price of our common shares on the BYMA was Ps.45.50 per common share (equivalent to approximately US$24.14 per ADS based on the exchange rate on such date). Prior to this offering, no public market existed for the ADSs. The initial public offering price of the ADSs in the international offering is expected to be between US$17.50 and US$21.50 per ADS. After the pricing of this offering, we expect the ADSs to trade on the New York Stock Exchange (the “NYSE”) under the symbol “CEPU.”

Our common shares are publicly offered in Argentina and are registered with the Argentine securities regulator (the Comisión Nacional de Valores). Neither the U.S. Securities and Exchange Commission (the “Commission”) nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

 

Investing in the common shares and ADSs involves risks. See “Risk Factors” beginning on page 36 of this prospectus.

 

     Per
ADS
     Per
common
share
     Total  

Public offering price

   US$               US$               US$           

Underwriting discounts and commissions

   US$      US$      US$  

Proceeds, before expenses, from the sale of common shares, and, if applicable, ADSs, to the selling shareholders

   US$      US$      US$  

As part of the offering, one of the selling shareholders, Guillermo Pablo Reca, has granted the international underwriters the option for a period of 30 days from the date of this prospectus to purchase up to an additional 53,229,870 common shares from the selling shareholders at the initial public offering price paid by investors minus any applicable discounts and commissions, which common shares, at the option of the international underwriters, may be represented by ADSs.

The common shares and ADSs will be ready for delivery on or about                        , 2018.

 

 

 

Global Coordinators and Joint Bookrunners
BofA Merrill Lynch    JP Morgan
Joint Bookrunner
Morgan Stanley

The date of this prospectus is                , 2018.


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TABLE OF CONTENTS

 

     Page  

FORWARD-LOOKING STATEMENTS

     iii  

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

     v  

CERTAIN DEFINITIONS

     ix  

SUMMARY

     1  

THE GLOBAL OFFERING

     29  

SUMMARY FINANCIAL AND OTHER INFORMATION

     32  

RISK FACTORS

     36  

USE OF PROCEEDS

     68  

EXCHANGE RATES

     69  

EXCHANGE CONTROLS

     71  

MARKET INFORMATION

     72  

CAPITALIZATION

     75  

DILUTION

     76  

SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION

     77  

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

     81  

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     87  

BUSINESS

     136  

THE ARGENTINE ELECTRIC POWER SECTOR

     189  

MANAGEMENT AND CORPORATE GOVERNANCE

     238  

PRINCIPAL AND SELLING SHAREHOLDERS

     258  

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

     262  

DESCRIPTION OF BYLAWS AND CAPITAL STOCK

     264  

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

     271  

DIVIDENDS AND DIVIDEND POLICY

     282  

TAXATION

     283  

UNDERWRITING

     292  

ANTI-MONEY LAUNDERING

     301  

GLOBAL OFFERING EXPENSES

     305  

VALIDITY OF THE SECURITIES

     306  

EXPERTS

     307  

ENFORCEMENT OF JUDGMENTS AGAINST FOREIGN PERSONS

     308  

WHERE YOU CAN FIND MORE INFORMATION

     309  

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

     F-1  

 

 

In this prospectus, we use the terms “Central Puerto,” the “Company,” “we,” “us” and “our” to refer to Central Puerto S.A. and its consolidated subsidiaries, unless otherwise indicated. Unless otherwise indicated, references to “CPSA” mean Central Puerto S.A.

References to “common shares” refer to shares of our common stock, par value Ps.1.00 per share and one vote per share, and references to “ADSs” are to American depositary shares, each representing ten common shares, except where the context requires otherwise.

The term “Argentina” refers to the Republic of Argentina. The terms “Argentine government” or the “government” refers to the federal government of Argentina, the term “Central Bank” refers to the Banco Central de la República Argentina, or the Argentine Central Bank, and the term “CNV” refers to the Argentine Comisión Nacional de Valores, or the Argentine securities regulator. “Argentine GAAP” refers to generally accepted

 

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accounting principles in Argentina. The term “GDP” refers to gross domestic product and all references in this prospectus to “GDP growth” are to real GDP growth. The term “CPI” refers to the consumer price index, and the term “WPI” refers to the wholesale price index.

Accounting terms have the definitions set forth under International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board (“IASB”).

 

 

We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. Neither we, the selling shareholders, the international underwriters, the Argentine placement agents nor any of our or their affiliates have authorized any other person to provide you with different or additional information. Neither we, the selling shareholders, the international underwriters, the Argentine placement agents, nor any of our or their affiliates are making an offer to sell the ADSs or common shares in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the ADSs or common shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

 

 

The distribution of this prospectus and the global offering and sale of the common shares and the ADSs in certain jurisdictions may be restricted by law. We, the selling shareholders and the international underwriters require persons into whose possession this prospectus comes to inform themselves about and to observe any such restrictions. This prospectus does not constitute an offer of, or an invitation to purchase, any of the common shares or ADSs in any jurisdiction in which such offer or invitation would be unlawful.

The offering of ADSs is being made in the United States and elsewhere outside Argentina solely on the basis of the information contained in this prospectus. The selling shareholders are also offering common shares in Argentina using a Spanish-language informational filing that will be filed with the CNV. The Argentine informational filing is in a different format than this prospectus in accordance with CNV regulations but contains substantially the same information included in this prospectus.

The common shares are publicly offered in Argentina and are registered with the CNV.

No offer or sale of ADSs may be made to the public in Argentina except in circumstances that do not constitute a public offer or distribution under Argentine laws and regulations.

This prospectus has been prepared on the basis that all offers of common shares and ADSs will be made pursuant to an exemption under the Prospectus Directive (Directive 2003/71/EC, as amended), as implemented in member states of the European Economic Area, or “EEA”, from the requirement to produce a prospectus for offers of the common shares and ADSs. Accordingly any person making or intending to make any offer within the EEA of common shares and ADSs which are the subject of the global offering contemplated in this prospectus should only do so in circumstances in which no obligation arises for the selling shareholders or any of the international underwriters or the Argentine placement agents to produce a prospectus for such offer. Neither the selling shareholders nor the international underwriters or Argentine placement agents have authorized, nor do they authorize, the making of any offer of common shares and ADSs through any financial intermediary, other than offers made by the international underwriters or the Argentine placement agents which constitute the global offering of common shares and ADSs contemplated in this prospectus.

 

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FORWARD-LOOKING STATEMENTS

This prospectus contains estimates and forward-looking statements, principally in “Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.”

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

Many important factors, in addition to those discussed elsewhere in this prospectus, could cause our actual results to differ substantially from those anticipated in our forward-looking statements, including, among other things:

 

    changes in general economic, financial, business, political, legal, social or other conditions in Argentina;

 

    changes in conditions elsewhere in Latin America or in either developed or emerging markets;

 

    changes in capital markets in general that may affect policies or attitudes toward lending to or investing in Argentina or Argentine companies, including volatility in domestic and international financial markets;

 

    increased inflation;

 

    fluctuations in exchange rates, including a significant devaluation of the Argentine peso;

 

    changes in the law, norms and regulations applicable to the Argentine electric power and energy sector, including changes to the current regulatory frameworks, changes to programs established to incentivize investments in new generation capacity and reductions in government subsidies to consumers;

 

    our ability to develop our expansion projects and to win awards for new potential projects;

 

    increases in financing costs or the inability to obtain additional debt or equity financing on attractive terms, which may limit our ability to fund new activities;

 

    government intervention, including measures that result in changes to the Argentine labor market, exchange market or tax system;

 

    adverse legal or regulatory disputes or proceedings;

 

    changes in the price of energy, power and other related services;

 

    changes in the prices and supply of natural gas or liquid fuels;

 

    changes in the amount of rainfall and accumulated water;

 

    changes in environmental regulations, including exposure to risks associated with our business activities;

 

    risks inherent to the demand for and sale of energy;

 

    the operational risks related to the generation, as well as the transmission and distribution, of electric power;

 

    ability to implement our business strategy, including the ability to complete our construction and expansion plans in a timely manner and according to our budget;

 

    competition in the energy sector, including as a result of the construction of new generation capacity;

 

    exposure to credit risk due to credit arrangements with CAMMESA;

 

    our ability to retain key members of our senior management and key technical employees;

 

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    our relationship with our employees; and

 

    other factors discussed under “Risk Factors” in this prospectus.

The words “believe,” “may,” “will,” “aim,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “forecast” and similar words are intended to identify forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, industry environment, potential growth opportunities, the effects of future regulation and the effects of competition. Forward-looking statements speak only as of the date they were made, and we do not undertake any obligation to update publicly or to revise any forward-looking statements after we distribute this prospectus because of new information, future events or other factors, except as required by applicable law. In light of the risks and uncertainties described above, the forward-looking events and circumstances discussed in this prospectus might not occur and do not constitute guarantees of future performance. Because of these uncertainties, you should not make any investment decisions based on these estimates and forward-looking statements.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

Financial Statements

We maintain our financial books and records and publish our consolidated financial statements (as defined below) in Argentine pesos, which is our functional currency. This prospectus contains our audited consolidated financial statements as of December 31, 2016 and 2015 and for the years then ended (our “audited consolidated financial statements”).

We prepare our financial statements in Argentine pesos and in conformity with the accounting rules established by the CNV, which as of the date hereof are in accordance with the IFRS as issued by the IASB.

The audited consolidated financial statements included herein were approved by our board of directors (our “Board of Directors”) on September 26, 2017 for purposes of inclusion in this prospectus. These financial statements give retroactive effect to the 2016 Merger (as defined below), which was a merger of companies under common control, accounted for at historical cost similar to a pooling of interest, to reflect the combination as if it had occurred from the beginning of the earliest period presented in the financial statements. For more information on the 2016 Merger, see “Business—History and Development of the Company.”

Because we qualify as an emerging growth company (an “EGC”) as defined in Section 2(a)(19) of the U.S. Securities Act of 1933, as amended (the “Securities Act”), we have elected to provide in this prospectus more limited disclosures than an issuer that would not qualify as an EGC would be required to provide by presenting two years of audited financial information instead of three years. Despite our election to present two years of audited financial information in this prospectus, we remind investors that we are required to file financial statements and other periodic reports with the CNV because we are a public company in Argentina. Investors can access our historical financial statements published in Spanish on the CNV’s website at www.cnv.gob.ar. The information found on the CNV’s website is not a part of this prospectus. Investors are cautioned not to place undue reliance on our financial statements not included in this prospectus.

Our unaudited interim condensed consolidated financial statements as of September 30, 2017 and for the nine-month periods ended September 30, 2017 and 2016 (our “interim condensed consolidated financial statements” and, together with our audited consolidated financial statements, our “consolidated financial statements”), in the opinion of management, include all adjustments (consisting of normal recurring adjustments) necessary to present fairly the information set forth in the interim condensed consolidated financial statements on a basis consistent with our audited annual financial statements included herein and in compliance with International Accounting Standard (“IAS”) 34, Interim Financial Reporting.

Our unaudited pro forma financial information presented in this prospectus has been derived by the application of pro forma adjustments to the historical consolidated financial statements included elsewhere in this prospectus. The unaudited pro forma consolidated statement of financial position as of September 30, 2017 gives effect to the La Plata Plant Sale (as defined below) as if it had occurred on September 30, 2017. The unaudited pro forma consolidated statements of income for the nine-month period ended September 30, 2017 and for the years ended December 31, 2016 and 2015 give effect to the La Plata Plant Sale as if it had occurred on January 1, 2015. See “Unaudited Pro Forma Consolidated Financial Information” for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.

We have determined that, as of the date of this prospectus, the Argentine peso does not qualify as a currency of a hyperinflationary economy according to the guidelines IAS 29, Financial Reporting in Hyperinflationary Economies, whereby financial information recorded in a hyperinflationary currency is adjusted by applying a general price index and expressed in the measuring unit (the hyperinflationary currency) current at the end of the reporting period. Therefore, the consolidated financial statements included herein were not restated in constant currency. For more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results of Operations—Inflation.” Notwithstanding the above, in recent

 

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years, certain macroeconomic variables affecting our business, such as the cost of labor, the exchange rate of the Argentine peso to the U.S. dollar and costs of sales associated with inputs necessary to run our business that are denominated in pesos, have experienced significant annual changes, which, although they may not surpass the levels established in IAS 29 are significant and should be considered in the assessment and interpretation of our financial performance reported in this prospectus. See “Risk Factors—Risks Relating to Argentina—If the current levels of inflation do not decrease, the Argentine economy could be adversely affected.” Argentine inflation could therefore affect the comparability of the different periods presented herein.

Currency and Rounding

All references herein to “pesos,” “Argentine pesos” or “Ps.” are to Argentine pesos, the legal currency of Argentina. All references to “U.S. dollars,” “dollars” or “US$” are to U.S. dollars. All references to “SEK$” are to Swedish krona. A “billion” is a thousand million.

Certain figures included in this prospectus and in the consolidated financial statements contained herein have been rounded for ease of presentation. Percentage figures included in this prospectus have in some cases been calculated on the basis of such figures prior to rounding. For this reason, certain percentage amounts in this prospectus may vary from those obtained by performing the same calculations using the figures in this prospectus and in the consolidated financial statements contained herein. Certain other amounts that appear in this prospectus may not sum due to rounding.

Exchange Rates

Solely for the convenience of the reader, we have translated certain amounts included in this prospectus from pesos into U.S. dollars, unless otherwise indicated, using the seller rate for U.S. dollars quoted by the Banco de la Nación Argentina for wire transfers (divisas) as of September 29, 2017, of Ps.17.31 per US$1.00.

The Federal Reserve Bank of New York does not report a noon buying rate for pesos. The U.S. dollar equivalent information presented in this prospectus is provided solely for the convenience of the reader and should not be construed to represent that the peso amounts have been, or could have been or could be, converted into U.S. dollars at such rates or at any other rate.

The exchange rate for U.S. dollars quoted by the Banco de la Nación Argentina for wire transfers (divisas) on January 17, 2018 was Ps.18.85 to US$1.00. See “Exchange Rates” for information regarding exchange rates for pesos into U.S. dollars since 2012.

Adjusted EBITDA

In this prospectus, we define Adjusted EBITDA as net income for the year, plus finance expenses, minus finance income, minus share of the profit of associates, plus income tax expense, plus depreciation and amortization.

We believe that Adjusted EBITDA, a non-IFRS financial measure, provides useful supplemental information to investors about us and our results. Adjusted EBITDA is among the measures used by our management team to evaluate our financial and operating performance and make day-to-day financial and operating decisions. In addition, Adjusted EBITDA is frequently used by securities analysts, investors and other parties to evaluate companies in our industry. We also believe that Adjusted EBITDA is helpful to investors because it provides additional information about trends in our core operating performance prior to considering the impact of capital structure, depreciation, amortization and taxation on our results.

Adjusted EBITDA should not be considered in isolation or as a substitute for other measures of financial performance reported in accordance with IFRS. Adjusted EBITDA has limitations as an analytical tool, including:

 

    Adjusted EBITDA does not reflect changes in, including cash requirements for, our working capital needs or contractual commitments;

 

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    Adjusted EBITDA does not reflect our finance expenses, or the cash requirements to service interest or principal payments on our indebtedness, or interest income or other finance income;

 

    Adjusted EBITDA does not reflect our income tax expense or the cash requirements to pay our income taxes;

 

    although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements;

 

    although share of the profit of associates is a non-cash charge, Adjusted EBITDA does not consider the potential collection of dividends; and

 

    other companies may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our consolidated financial statements in accordance with IFRS and reconciliation of Adjusted EBITDA to the most directly comparable IFRS measure, net income.

For a reconciliation of our net income to Adjusted EBITDA, see “Summary Financial and Operating Information.”

Market Share and Other Information

The information set forth in this prospectus with respect to the market environment, market developments, growth rates and trends in the markets in which we operate are based on information published by the Argentine federal and local governments through the Instituto Nacional de Estadísiticas y Censos (the National Statistics and Census Institute, or “INDEC”), the Ministry of Interior, the Ministry of Energy, the Central Bank, Compañía Administradora del Mercado Mayorista Eléctrico S.A. (“CAMMESA”), the Dirección General de Estadística y Censos de la Ciudad de Buenos Aires (General Directorate of Statistics and Census of the City of Buenos Aires) and the Dirección Provincial de Estadística y Censos de la Provincia de San Luis (Provincial Directorate of Statistics and Census of the Province of San Luis), as well as on independent third-party data, statistical information and reports produced by unaffiliated entities, such as well as on our own internal estimates. In addition, this prospectus contains information from (i) an industry report commissioned by us and prepared by Daniel G. Gerold of G&G Energy Consultants, an independent research firm, to provide information regarding our industry and the Argentine market and (ii) Vaisala, Inc. (“Vaisala - 3 Tier”), a company that develops, manufactures and markets products and services for environmental and industrial measurement.

This prospectus also contains estimates that we have made based on third-party market data. Market studies are frequently based on information and assumptions that may not be exact or appropriate.

Although we have no reason to believe any of this information or these sources are inaccurate in any material respect, neither we or the selling shareholders nor the international underwriters or Argentine placement agents have verified the figures, market data or other information on which third parties have based their studies, nor have we or they confirmed that such third parties have verified the external sources on which such estimates are based. Therefore, neither we or the selling shareholders nor the international underwriters or Argentine placement agents guarantee, nor do we or the selling shareholders or the international underwriters or Argentine placement agents assume responsibility for, the accuracy of the information from third-party studies presented in this prospectus.

This prospectus also contains estimates of market data and information derived therefrom which cannot be gathered from publications by market research institutions or any other independent sources. Such information is based on our internal estimates. In many cases there is no publicly available information on such market data, for example from industry associations, public authorities or other organizations and institutions. We believe that

 

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these internal estimates of market data and information derived therefrom are helpful in order to give investors a better understanding of the industry in which we operate as well as our position within this industry. Although we believe that our internal market observations are reliable, our estimates are not reviewed or verified by any external sources. These may deviate from estimates made by our competitors or future statistics provided by market research institutes or other independent sources. We cannot assure you that our estimates or the assumptions are accurate or correctly reflect the state and development of, or our position in, the industry.

 

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CERTAIN DEFINITIONS

In this registration statement, except where otherwise indicated or where the context otherwise requires:

 

    “CAMMESA” refers to Compañía Administradora del Mercado Mayorista Eléctrico Sociedad Anónima. See “The Argentine Electric Power Sector—General Overview of Legal Framework—CAMMESA;”

 

    “CTM” refers to Centrales Térmicas Mendoza S.A.;

 

    “CVOSA” refers to Central Vuelta de Obligado S.A.;

 

    “Ecogas” refers collectively to Distribuidora de Gas Cuyana (“DGCU”) and Distribuidora de Gas del Centro (“DGCE”);

 

    “Energía Base” refers to the regulatory framework established under Resolution SE No. 95/13, as amended, and, since February 2017, regulated by Resolution SEE No. 19/17. See “The Argentine Electric Power Sector;”

 

    “Energía Plus” refers to the regulatory framework established under Resolution SE No. 1281/06, as amended. See “The Argentine Electric Power Sector—Structure of the Industry—Energía Plus;”

 

    “FONINVEMEM” refers to the Fondo para Inversiones Necesarias que Permitan Incrementar la Oferta de Energía Eléctrica en el Mercado Eléctrico Mayorista (the Fund for Investments Required to Increase the Electric Power Supply). See “The Argentine Electric Power Sector—Structure of the Industry—The FONINVEMEM and Similar Programs” and “Business—FONINVEMEM and Similar Programs;”

 

    “HPDA” refers Hidroeléctrica Piedra del Águila S.A., the corporation that previously owned the Piedra del Aguila plant;

 

    “La Plata Plant Sale” refers to the sale, subject to certain conditions, of the La Plata plant to YPF EE. For further information on the La Plata Plant Sale, see “Summary—Recent Developments—La Plata Plant Sale;”

 

    “La Plata Plant Sale Effective Date” refers to the date on which the La Plata plant will effectively transfer to YPF EE, which will be the second business day after the conditions under the offer to YPF EE, dated as of December 15, 2017, are met. For more information on the La Plata Plant Sale Effective Date, see “Summary—Recent Developments—La Plata Plant Sale;”

 

    “LPC” refers to La Plata Cogeneración S.A., the corporation that previously owned the La Plata plant;

 

    “LVFVD” refers to liquidaciones de venta con fecha de vencimientos a definir, or receivables from CAMMESA without a fixed due date. See “Business—FONINVEMEM and Similar Programs;”

 

    “MULC” refers to the foreign exchange market;

 

    “sales under contracts” refers collectively to (i) term market sales of energy under contracts with private sector counterparties and (ii) sales of energy sold under the Energía Plus;

 

    the “spot market” refers to energy sold by generators to the WEM and remunerated by CAMMESA pursuant to the framework in place prior to the Energía Base. See “The Argentine Electric Power Sector—Structure of the Industry—Electricity Dispatch and Spot Market Pricing prior to Resolution SE No. 95/13;”

 

    “PPA” refers to capacity and energy supply agreements with customers;

 

    “YPF” refers to YPF S.A., Argentina’s state-owned oil and gas company;

 

    “YPF EE” refers to YPF Energía Eléctrica S.A., a subsidiary of YPF; and

 

    “WEM” refers to the Argentine Mercado Eléctrico Mayorista, the wholesale electric power market. See “The Argentine Electric Power Sector—General Overview of Legal Framework—CAMMESA.”

 

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SUMMARY

This summary highlights material information appearing elsewhere in this prospectus. While this summary highlights what we consider to be the most important information about us, before investing in our common shares or ADSs, you should carefully read this prospectus and the registration statement of which this prospectus is a part in their entirety for a more complete understanding of our business and the global offering, including “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Consolidated Financial Information” and the related notes and our consolidated financial statements and related notes beginning on page F-1.

Overview

We are the largest private sector power generation company in Argentina, as measured by generated power, according to data from CAMMESA. In the nine-month period ended September 30, 2017, we generated a total of 12,239 net GWh of power, and in the year ended December 31, 2016, we generated a total of 15,544 net GWh of power, representing approximately 20% of the power generated by private sector generation companies in the country during each of these periods, according to data from CAMMESA. We had an installed generating capacity of 3,791 MW as of September 30, 2017.

We have a generation asset portfolio that is geographically and technologically diversified. Our facilities are distributed across the City of Buenos Aires and the provinces of Buenos Aires, Mendoza, Neuquén and Río Negro. We use conventional technologies (including hydro power) to generate power, and our power generation assets include combined cycle, gas turbine, steam turbine, hydroelectric and co-generation.

The following table presents a brief description of the power plants we own and operate as of the date of this prospectus.

 

Power plant

 

Location

  Installed
capacity
(MW)
   

Technology

Puerto Nuevo(1)

  City of Buenos Aires     589     Steam turbines

Nuevo Puerto(1)

  City of Buenos Aires     360     Steam turbines

Puerto combined cycle(1)

  City of Buenos Aires     765     Combined cycle

Luján de Cuyo plant

  Province of Mendoza     509     Steam turbines, gas turbines, two cycles and mini-hydro turbine generator, producing electric power and steam

La Plata plant(2)

  La Plata, Province of Buenos Aires     128     Co-generation plant producing electric power and steam

Piedra del Aguila plant

 

Piedra del Aguila

(Limay River, bordering the provinces of Neuquén and Río Negro)

    1,440     Hydroelectric plant
   

 

 

   

Total

      3,791 MW    

 

(1) Part of the “Puerto Complex” as defined in “Business.”
(2) On December 20, 2017, YPF EE accepted our offer to sell the La Plata plant, subject to certain conditions. For further information on the La Plata Plant Sale, see “—Recent Developments—La Plata Plant Sale.”

 



 

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In addition, we participate in an arrangement known as the FONINVEMEM, which is managed by CAMMESA at the instruction of the Ministry of Energy. The prior Argentine government’s administration created the FONINVEMEM with the purpose of repaying power generation companies, like us, the existing receivables for electric power sales between 2004 and 2011 and funding the expansion and development of new power capacity.

As a result of our participation in this arrangement, we receive monthly payments for certain of our outstanding receivables with CAMMESA. In addition, we have an equity interest in the companies that operate the FONINVEMEM’s new combined cycle projects, which will be entitled to take ownership of the combined cycle projects on a date ten years from the date of their initial operation. Under this arrangement, we began collecting our outstanding receivables from electric power sales from January 2004 through December 2007 from CAMMESA, denominated in U.S. dollars, over the ten-year period once the Termoeléctrica José de San Martín S.A. (“TJSM”) and Termoeléctrica Manuel Belgrano S.A. (“TMB”) combined cycles became operational in March 2010. We also expect to begin to collect our outstanding receivables from electric power sales from January 2008 through December 2011 from CAMMESA, denominated in U.S. dollars, over the ten-year period once the CVOSA combined cycle plant becomes operational, which we expect will occur in the first quarter of 2018. See “Business—FONINVEMEM and Similar Programs” and “—Our Competitive Strengths—Strong cash flow generation, supported by U.S. dollar denominated cash flows” for more information on FONINVEMEM.

We hold equity interests in the companies that operate the following FONINVEMEM thermal power plants:

 

Power plant

 

Location

  Installed
capacity
(MW)
   

Technology

  % Interest in the
operating company(1)
 

San Martín

  Timbues, Province of
Santa Fe
    865     Combined cycle plant, which
became operational in 2010
    30.8752

Manuel Belgrano

  Campana, Province of
Buenos Aires
    873     Combined cycle plant, which
became operational in 2010
    30.9464

Vuelta de Obligado

  Timbues, Province of
Santa Fe
    816     Combined cycle plant expected to be operational during 1st quarter 2018     56.1900

 

(1) In each case, we are the private sector generator with the largest ownership stake. After ten years operating each company, if all governmental entities that financed the constructions of such plants are incorporated as shareholders of TJSM, TMB and CVOSA, our interests in TJSM, TMB and CVOSA may be diluted. See “Risk Factors—Risks Relating to Our Business—Our interests in TJSM, TMB and CVOSA may be significantly diluted.”

The following set of graphs shows our total assets under the FONINVEMEM program:

 

LOGO

 

1 Enel includes Enel Generación Costanera S.A., Central Dock Sud S.A. and Enel Generación El Chocón S.A.

Source: TJSM, TMB and CVOSA

 



 

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The following map breaks down where our plants and power investments are located in Argentina and their installed capacity:

 

LOGO

 

(1) “Plants under construction” refers to (a) the wind farms Achiras and La Castellana, both of which are under construction and are expected to be finished in the second quarter of 2018; (b) the Luján de Cuyo co-generation unit, which is under construction and is expected to be finished in the fourth quarter of 2019; (c) the Terminal 6 Plant, which is under construction and is expected to be finished in the second quarter of 2020; and (d) the wind farm Genoveva I, which is expected to be finished in the second quarter of 2020.
(2) “FONINVEMEM Plants” refers to the plants José de San Martín, Manuel Belgrano and Vuelta de Obligado that we expect to be transferred from FONINVEMEM trusts to the operating companies, TJSM, TMB and CVOSA, respectively, after the first ten years of operation as a result of the FONINVEMEM program and other similar programs. For a description of when we expect this transfer to occur and other information, see “Business—FONINVEMEM and Similar Programs.”

In the nine-month period ended September 30, 2017, we had revenues of Ps.5.72 billion (or US$0.33 billion), while in the year ended December 31, 2016, we had revenues of Ps.5.32 billion (or US$0.31 billion).

In the nine-month period ended September 30, 2017, we sold approximately 93.25% of our electric power sales (in MWh) under the Energía Base, while in the year ended December 31, 2016, we sold approximately 93.83% of our electric power sales (in MWh) under the Energía Base. In the year ended December 31, 2016,

 



 

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tariffs under the Energía Base were paid by CAMMESA based on a fixed and variable costs system which was determined by the former Secretariat of Electric Energy pursuant to Resolution SE No. 95/13, as amended. These tariffs were adjusted annually, denominated in pesos, and remained unchanged throughout the year. Sales under the Energía Base accounted for 62.05% of our revenues in the nine-month period ended September 30, 2017 and 58.54% of our revenues for the year ended December 31, 2016. Since February 2017, the Energía Base has been regulated by Resolution SEE No. 19/17, which replaced Resolution SE No. 95/13, as amended. Resolution SEE No. 19/17 increased the Energía Base’s tariffs and denominated them in U.S. dollars. Under the Energía Base, the fuel required to produce the energy we generate is supplied by CAMMESA free of charge, and the price we receive as generators is determined by the Secretariat of Electric Energy without accounting for the fuel CAMMESA supplies. Our compensation under the Energía Base depends to a large extent on the availability and energy output of our plants.

Additionally, we have sales under contracts, including (i) term market sales under contract and (ii) Energía Plus sales under contract. Term market sales under contract include sales of electric power under negotiated contracts with private sector counterparties such as YPF. Sales under contracts generally involve PPAs with customers and are contracted in U.S. dollars. The prices in these contracts include the price of fuel used for generation, the cost of which is assumed by the generator. For terms longer than one year, these contracts typically include electric power price updating mechanisms in the case of fuel price variations or the generator being required to use liquid fuels in the event of a shortage of natural gas. For more information regarding our main clients for term market sales under contract, see “Business—Our Customers.” Term market sales under contract accounted for 4.32% and 4.55% of our electric power sales (in MWh) and 11.36% and 13.81% of our revenues for the nine-month period ended September 30, 2017 and the year ended December 31, 2016, respectively. In our Luján de Cuyo plant, we are also permitted to sell a minor portion (up to 16 MW) of our generation capacity and electric power under negotiated contracts with private sector counterparties under the Energía Plus, to encourage private sector investments in new generation facilities. Energía Plus sales under contracts accounted for 0.57% and 0.35% of our electric power sales (in MWh) and 1.72% and 1.49% of our revenues for the nine-month period ended September 30, 2017 and the year ended December 31, 2016, respectively. These contracts typically have one- to two- year terms, are denominated in U.S. dollars and are paid in pesos at the exchange rate as of the date of payment. Under the rules and regulations of the Energía Plus, the generator buys the fuel to cover the committed demand of electric power and supplies the electric power to large electric power consumers at market prices, denominated in U.S. dollars, previously agreed between the generator and its clients. See “The Argentine Electric Power Sector.”

This year, we continued to sell a portion of electric power in the spot market under the regulatory framework in place prior to Resolution SE No. 95/13. The La Plata plant sells the energy in excess of the demand of its business partner, YPF, on the spot market through the Argentine Interconnection System (“SADI”) pursuant to such prior framework, and we are paid for such sales in pesos. Electric power sold on the spot market accounted for 1.86% and 1.97% of our electric power sold (in MWh) and 12.10% and 11.76% of our revenues for the nine-month period ended September 30, 2017 and the year ended December 31, 2016, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Electric Power Sold on the Spot Market.”

We also receive remuneration under Resolution No. 724/2008, relating to agreements with CAMMESA to improve existing power generation capacity, which is denominated in U.S. dollars and is paid in pesos at the exchange rate as of the date of payment. Revenues under Resolution No. 724/2008, accounted for 4.40% and 4.37% of our revenues for the nine-month period ended September 30, 2017 and the year ended December 31, 2016, respectively. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Electric Power Sold on the Spot Market.”

We also produce steam and have an installed capacity of 390 tons per hour. Steam sales accounted for 8.38% and 9.99% of our revenues for the nine-month period ended September 30, 2017 and the year ended

 



 

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December 31, 2016, respectively. Our production of steam for the nine-month period ended September 30, 2017 was 2,141,365 metric tons. For the year ended December 31, 2016 our steam production was 2,823,373 metric tons. Our Luján de Cuyo plant and La Plata plant, which YPF EE agreed to purchase from us subject to certain conditions, supply steam under negotiated contracts with YPF.

Our Luján de Cuyo plant has a combined heat and power (CHP) unit in place, which supplies 150 metric tons per hour of steam to YPF’s refinery in Luján de Cuyo under a steam supply agreement. This contract is denominated and invoiced in U.S. dollars, but can be adjusted in the event of variations in U.S. dollar-denominated prices for fuel necessary for power generation. In January 2018, we expect to sign an agreement to extend our steam supply agreement with YPF at our Luján de Cuyo plant for a period of up to 24 months from January 1, 2019 under the same terms as our existing steam supply agreement. On December 15, 2017, we also executed a new steam supply contract with YPF for a period of 15 years that will replace our existing contract with YPF and will begin when the new co-generation unit at our Luján de Cuyo plant begins operation, which is expected to occur in December 2018. For further information on the recent steam supply agreements with YPF for the Luján de Cuyo plant, see “—Recent Developments— Contracts with YPF for Steam Supply and CAMMESA for the Luján de Cuyo project.”

The La Plata plant, which YPF EE agreed to purchase from us subject to certain conditions, has a steam-generating capacity of 240 metric tons per hour and supplies steam to YPF’s refinery in La Plata. Under our contract with YPF related to the La Plata plant, YPF (i) must purchase electric power and all the steam produced by the La Plata plant until the contract, with respect to the supply of steam to YPF, has been extended for a period of five months from October 31, 2017, is terminated on the first of either the current contract termination date or the La Plata Plant Sale Effective Date, and (ii) is responsible for supplying us with all the necessary gas oil and natural gas for the operation of the plant and the water in the conditions required to be converted into steam. This contract is denominated and invoiced in U.S. dollars, but can be adjusted in the event of variations in U.S. dollar-denominated fuel prices for fuel necessary for power generation.

On December 20, 2017, YPF EE accepted our offer to sell the La Plata plant, subject to certain conditions. For further information on the La Plata Plant Sale, see “—Recent Developments—La Plata Plant Sale” and “Unaudited Pro Forma Consolidated Financial Information.”

 



 

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The following graphs break down our revenues in the nine-month period ended September 30, 2017 and the year ended December 31, 2016 by regulatory framework:

 

LOGO

Source: Central Puerto

 

LOGO

Source: Central Puerto

 



 

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The following graphs break down our electric energy sales in the nine-month period ended September 30, 2017 and the year ended December 31, 2016 by regulatory framework:

 

LOGO

Source: Central Puerto

 

LOGO

Source: Central Puerto

As of the date of this prospectus, we have significant plans underway to expand our generating capacity through renewable energy projects, including our first three wind energy projects with expected generating capacity of 99 MW, 48MW and 86.8 MW. In 2016, we formed a subsidiary, CP Renovables S.A. (“CP Renovables”), to develop, construct and operate renewable energy generation projects. As of the date of this prospectus, we own a 70.19 % interest in CP Renovables. The remaining 29.81% interest is owned by Guillermo Pablo Reca.

 



 

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In 2015 and 2016, we acquired four heavy-duty, highly efficient gas turbines: (i) one GE gas turbine with a capacity of 373 MW; (ii) two Siemens gas turbines, each with a capacity of 298 MW; and (iii) one Siemens gas turbine with a capacity of 286 MW. Additionally, we have also acquired 130 hectares of land in the north of the Province of Buenos Aires, in a location that provides excellent conditions for fuel delivery and access to power transmission lines.

We also own long-term significant non-controlling investments in companies that have utility licenses to distribute natural gas through their networks in the provinces of Mendoza, San Juan, San Luis, Córdoba, Catamarca and La Rioja. Taking into account direct and indirect interests, we hold (i) a 22.49% equity stake in DGCU and (ii) a 39.69% equity stake in DGCE (which we refer to together as Ecogas). Ecogas had a gas distribution network covering 30,976 km and served approximately 1,309,997 customers as of September 30, 2017. In the first nine months of 2017, Ecogas distributed an average of 14.89 million cubic meters of natural gas per day; and in 2016, Ecogas distributed an average of 14.45 million cubic meters of natural gas per day. This volume of distribution represented approximately 11.75% and 11.85% of the gas distributed in Argentina in the first nine months of 2017 and in the year ended December 31, 2016, respectively, according to data from Ente Nacional Regulador de Gas (“ENARGAS”). In the first nine months of 2017, our interest in Ecogas produced Ps.193.89 million in share of profit of an associate, which represented 9.33% of our net income for such period. In the year ended December 31, 2016, our interest in Ecogas produced Ps.110.66 million in share of profit of an associate, which represented 6.26% of our net income for the year. At a meeting of our shareholders on December 16, 2016, in accordance with the strategic objective of focusing on assets within the energy industry, the shareholders considered a potential sale of our equity interests in Ecogas to Magna Energía S.A., but voted to postpone the decision. We are currently assessing various strategic opportunities regarding DGCU and DGCE, including a possible sale of our equity interest in them.

Argentine Power Sector

Argentina is in the process of significant political change, with the Macri administration, which assumed office on December 10, 2015, developing a series of measures designed to improve macroeconomic conditions and encourage new domestic and foreign investment. The Argentine government has taken several concrete actions, such as to: (i) facilitate access to international financing (including through agreements with hold-out creditors), (ii) limit the use of the Central Bank’s foreign reserves to finance the government’s debt repayments, (iii) substantially reduce foreign exchange controls and liberalize the exchange rate, (iv) implement a gradual fiscal deficit reduction plan, primarily through lowering public services subsidies, (v) focus on monetary policy to attempt to curb inflation with the aim of meeting certain progressive inflation reduction goals and (vi) substantially improve the legal and regulatory environment to facilitate business.

The Argentine power and energy sectors, in particular, must grow to cover unsatisfied demand at peak times, and significant investments are needed in order to meet that challenge. The power market in Argentina is characterized by increasing demand for electric power, coupled with aging, inefficient generating capacity and high operating costs, which has created a very narrow supply and demand gap at peak times. In recent years, energy shortages have resulted in significant imports of power from neighboring countries. According to data from CAMMESA, during the historical peak demand experienced on February 24, 2017 (25.63 GW), imports of energy totaled 0.93 GW.

 



 

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The chart below illustrates the demand for power capacity (net of shortages) versus the available supply of power capacity during five peak moments for each year between 2007 and 2017:

 

LOGO

Source: CAMMESA

In 2003, the average annual available capacity totaled 21.07 GW, 46.7% higher than the peak demand of 14.36 GW for the year, while in 2016 the average annual available capacity was 27.35 GW (from total installed capacity of 33.9 GW largely as a result of aging, obsolete and unavailable machinery), 7.68% higher than the peak demand of 25.4 GW for such year, when consumption was limited by imposed restrictions. However, according to data from CAMMESA, during the peak demand of that year, experienced on February 12, 2016 (25.3 GW), imports of energy totaled 1.8 GW. This demand/supply gap is made more noteworthy considering that demand in 2015 and 2016 was affected by regulations requiring reduction of energy consumption. Without such regulations, we believe the peak demand would have exceeded the average available capacity by a larger margin. Additionally, during 2016, Argentina imported 1,470 GWh from neighboring countries.

 



 

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In the nine-month period ended September 30, 2017, the total power generation in Argentina was 102,654 GWh and the composition was 67.19% thermal, 27.11% hydroelectric, 3.84% nuclear and 1.86% wind and solar:

 

LOGO

Source: CAMMESA

In 2016, the total power generation in Argentina was 136,599 GWh and the composition was 65.94% thermal, 26.50% hydroelectric, 5.62% nuclear and 1.95% wind and solar:

 

LOGO

Source: CAMMESA

 



 

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In the nine-month period ended September 30, 2017, the composition of installed generation capacity in Argentina, by technology, was as follows:

 

LOGO

Source: CAMMESA

In 2016, the composition of installed generation capacity in Argentina, by technology, was as follows:

 

LOGO

Source: CAMMESA

 



 

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Increasing power supply to meet demand in Argentina is a key objective for the Argentine government. The country’s installed capacity must increase considerably in order to replace the aging, obsolete generating units in the sector. The Minister of Energy has publicly noted the need for new energy-generating capacity, which he has stated should be addressed by new projects developed by the private sector. In this respect, the Minister of Energy has stated that the country needs to incorporate 20 GW of generating capacity, including 10 GW from conventional energy sources and 10 GW from renewable sources, in order to meet current and increasing demand over the next ten years.

To address the Argentine economic crisis of 2001 and 2002, the former Argentine government adopted regulations that had significant effects on power generation, distribution and transmission companies and included the effective freezing of tariffs, the revocation of adjustment and inflation indexation mechanisms for tariffs, a limitation on the ability of electric power distribution companies to pass on to the consumer increases in costs and the introduction of a new price-setting mechanism in the WEM, which had a significant impact on electric power generators and caused substantial price differences within the market. Such strict regulation and government intervention represented an obstacle to the development of the electric power sector.

The current Argentine government has begun implementing fundamental reforms that we believe will improve the long-term sustainability of the power sector, including the reduction of certain government subsidies affecting public utilities. On December 16, 2015, the Argentine government declared a state of emergency with respect to the national electric power system which remained in effect until December 31, 2017. The state of emergency allowed the Argentine government to take actions designed to guarantee the supply of electric power in Argentina, such as instructing the Ministry of Energy to elaborate and implement a coordinated program to guarantee the quality and security of the electric power system and rationalize public entities’ consumption of energy.

Additionally, in March 2016, the Secretariat of Electric Energy enacted Resolution SEE No. 22/16, through which it increased the electric power prices for the sale of energy by generation companies under the Energía Base. Following the tariff increases, preliminary injunctions suspending such increases were requested by customers, politicians and non-governmental organizations and were granted by Argentine courts, but subsequently denied by the Supreme Court, arguing formal objections and procedural defects. As of the date of this prospectus, increases of the electric power end-users tariffs are not suspended. For further details, see “The Argentine Electric Power Sector— Remuneration Scheme—The Previous Remuneration Scheme,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Operations—The Energía Base” and “Risk Factors—Risks Relating to the Electric Power Sector in Argentina—The Argentine government has intervened in the electric power sector in the past, and is likely to continue intervening.”

On January 27, 2017, the Secretariat of Electric Energy enacted Resolution SEE No. 19/17, substantially amending the tariff scheme applicable to the Energía Base, which was previously governed by Resolution SEE No. 22/16. Among its most significant provisions, such resolution established: (i) that generation companies would receive a remuneration of electric power generated and available capacity; (ii) gradual increases in tariffs to become effective as of February, May and November 2017; (iii) that the new tariffs would be denominated in U.S. dollars, instead of Argentine pesos, thus protecting generation companies from potential fluctuations in the value of the Argentine peso; and (iv) that 100% of the energy sales would be collected in cash by generators, eliminating the creation of additional LVFVD receivables. For further details, see “The Argentine Electric Power Sector—Remuneration Scheme—The Current Remuneration Scheme” and “Risk Factors—Risks Relating to the Electric Power Sector in Argentina—The Argentine government has intervened in the electric power sector in the past, and is likely to continue intervening.”

 



 

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Furthermore, the current administration has established public bidding processes for the development of new generation projects from both thermal and renewable sources:

 

    Thermal bidding processes

 

    Pursuant to Resolution SEE No. 21/16, the Secretariat of Electric Energy called for bids to install new thermal generation units to become operational between Summer 2016/2017 (some of which are now operational) and Summer 2017/2018. The power generation companies awarded the bids entered into a PPA with CAMMESA, denominated in U.S. dollars, and electric power and capacity from these units will be remunerated at the price indicated in the bid and under the terms established in Resolution SEE No. 21/16.

 

    Pursuant to Resolution SEE No. 287-E/17, the Argentine government called for proposals for the supply of electric power to be generated through existing units, the conversion of open combined cycle units into closed combined cycle units or the installation of co-generation units. The main objectives behind this process were to (i) increase the supply of electric power generation from thermal generation units and (ii) strengthen the reliability of the Argentine electric power system with efficient generation units that have their own permanent and guaranteed fuel supply thus reducing the need for electric transportation and lowering the costs of the Argentine government and the WEM.

 

    Renewable sources bidding process

 

    RenovAR Programs Rounds 1 and 1.5: The Secretariat of Electric Energy also called for bids to install 1,600 MW of new renewable power capacity (the “RenovAR Program”). This bid process is governed by Law No. 27,191 and Decree No. 531/16, which encouraged the increase of power generation from renewable sources by providing, among other things, significant tax benefits. These benefits include, for example, accelerated depreciation of fixed assets for income tax purposes, early refund of value added tax (“VAT”), extended compensation regime of loss carry forwards, temporary reduction of the tax base in the minimum presumed income tax, deduction of expenses, tax exemptions on the distribution of dividends or profits and the granting of certain fiscal certificates to be applied to the payment of federal taxes. Additionally, until December 31, 2017, with respect to the import of new capital assets, special equipment and related parts and components that are necessary for the implementation of the projects developed under this regime, Law No. 27,191 establishes an exemption for the payment of import and export duties. In July 2016, the public auction process for submitting bids for Round 1 of the RenovAR Program was launched. In October 2016, the Ministry of Energy and Mining, pursuant to Resolution No. 252/16, launched Round 1.5 of the RenovAR Program as a continuation of Round 1. This follow-up round allowed participants to re-submit their bids with a new price.

 

    RenovAR Program Round 2: Following Rounds 1 and 1.5 of the RenovAR Program, the Ministry of Energy and Mining, pursuant to Resolution No. 275/17, launched Round 2 of the program on August 17, 2017 and granted awards in the amount of 2,043 MW of renewable power capacity.

Law No. 27,191, provides that Large Users (users who, due to their consumption levels, purchase electric power directly from the WEM, and referred to in this prospectus as “Large Users”), whose demand exceeds 300 KW of average annual power, should comply with the obligation to purchase renewable energy by entering into a contract with a generating company or through self-generation. The Ministry of Energy and Mining through Resolution 281-E/ 2017, established the regulatory framework that allows Large Users to purchase renewable energy from private generating companies and the conditions for granting the “dispatch priority” that allows such transactions to take place and ensures that the private generating companies will not be restricted in the future in its generation dispatch (see “The Argentine Electric Power Sector—Resolution No. 281-E/17: The Renewable Energy Term Market in Argentina”).

 



 

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We believe that, if the Argentine government’s energy reforms are implemented as expected, generators should be able to attain higher profitability from their existing power assets, and new investment opportunities in the power sector should arise. Furthermore, we believe that we are well-positioned to benefit from the Argentine government’s new initiatives, particularly those measures to reform the power sector, expand generation capacity and widen the supply and demand gap.

Our Competitive Strengths

We believe that we have achieved a strong competitive position in the Argentine power generation sector primarily as a result of the following strengths:

 

    Largest private sector power company in Argentina. We are the largest private sector power generation company in Argentina, as measured by power generated, according to data from CAMMESA. In the nine-month period ended September 30, 2017, we generated a total of 12,239 net GWh of power, and in the year ended December 31, 2016, we generated a total of 15,544 GWh. As of September 30, 2017, we had an installed generating capacity of 3,791 MW. Our leading position allows us to develop a range of sales and marketing strategies, without depending on any one market in particular. Additionally, our size within the Argentine market positions us well to take advantage of future developments as investments are made in the electric power generation sector. Our ample installed capacity is also an advantage, as we have sufficient capacity to support large, negotiated contracts.

The following graphs shows the SADI’s total power generation by private companies and market share for 2016 (grouped by related companies and subsidiaries):

 

LOGO

Source: CAMMESA. (i) Enel includes Enel Generación Costanera S.A., Central Dock Sud S.A. and Enel Generación El Chocón S.A.; (ii) Pampa Energía includes Central Térmica Güemes S.A., Central Térmica Loma la Lata S.A., Inversora Piedra Buena S.A., Inversora Diamante S.A., CTG and Inversora Nihuiles, and Petrobras Argentina S.A.; and (iii) AES Argentina Generación includes Central Térmica San Nicolás S.A. and Hidroeléctrica Alicurá S.A.

 



 

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    High quality assets with strong operational performance. We have a variety of high quality power generation assets, including combined cycle turbines, gas turbines, steam turbines, hydroelectric technology and steam and power co-generation technology, with a combined installed generating capacity of 3,791 MW. Our efficiency levels compare favorably to those of our competitors due to our efficient technologies. The following chart shows the efficiency level for the period between November 2016 and April 2017 of each of our generating units compared to our main competitors based on heat rate, which is the amount of energy used by an electric power generator or power plant to generate one kWh of electric power when operating with natural gas.

 

LOGO

Source: CAMMESA.

The following chart shows the availability ratio of our thermal assets as compared to the market average.

 

LOGO

Source: Central Puerto, CAMMESA. 1 Average market availability for thermal unit

We have long-term maintenance contracts with the manufacturers of our combined cycle units and co-generation plants with the largest capacity, namely the Puerto combined cycle unit (CEPUCC), the LDCUDCC25 combined cycle unit at the Luján de Cuyo plant and the co-generation units at the Luján de Cuyo plant (LDCUTG23) and LDCUTG24) and the La Plata plant (ENSETG01), under which the manufacturers provide maintenance using best practices recommended for such units. Our remaining

 



 

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units receive maintenance through our highly trained and experienced personnel, who strictly follow the recommendations and best practice established by the manufacturers of such units. We are also capable of generating power from several sources of fuel, including natural gas, diesel oil and fuel oil. In addition, in recent years we have invested in adapting our facilities to be able to generate power from biofuels, and we have developed business relationships over the years with strategic companies from the oil and gas and the biofuel sectors. Our power generation units are also favorably positioned along the system’s power dispatch curve (the WEM marginal cost curve) as a result of our technologically diverse power generation assets and high level of efficiency in terms of fuel consumption, which ensures ample dispatch of energy to the system, even when taking into account new capacity additions expected in the coming years that were awarded pursuant to auctions to increase thermal generation capacity and capacity from renewable energy sources.

 

    Diversified and strategically located power sector assets. Our business is both geographically and technologically diverse. Our assets are critical to the Argentine electric power network due to the flexibility provided by the large fuel storage capacity, that allows us to store 32,000 tons of fuel oil (enough to cover 6.3 days of consumption) and 20,000 tons of gas oil (enough to cover 5.7 days of consumption) at our thermal generation plants, in addition to our access to deep water docks, our dam water capacity and our ability to store energy for 45 days operating at full capacity at Piedra del Águila. The prices for power transmission are regulated and based on the distance from the generating company to the user, among other factors. In this regard, our thermal power plants are strategically located in important city centers or near some of the system’s largest customers, which constitutes a significant competitive advantage. For example, approximately 39% of Argentine energy consumption was concentrated within the metropolitan area of Buenos Aires during 2016. Because the lack of capacity in SADI limits the efficient distribution of energy generated in other geographic areas, our generation plants in Buenos Aires and Mendoza are essential to the supply of energy to meet the high demand in these areas. In addition, this need to generate energy close to a high consumption area in Argentina means that our plants are less affected by the installation of new capacity in other regions.

The diversification of our fuel sources enables us to generate energy in different contexts, as shown in the following chart:

 

LOGO

Source: Central Puerto

 

   

Attractive growth pipeline. We have identified opportunities to improve our strategic position as a leader among conventional power generation technologies by expanding our thermal generation capacity and stepping into the renewable energy market as well. Given the narrowing gap between

 



 

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demand and supply, there is a critical need for the incorporation of new generating capacity in Argentina. As a result, the Argentine government has begun a bidding process for new generation projects, both from conventional and renewable sources. In this context, one of our objectives is to incorporate a significant amount of additional capacity into the system to widen the demand and supply gap in the near term.

Thermal Generation. In 2015 and 2016, we acquired four heavy-duty, highly efficient gas turbines: (i) one GE gas turbine with a capacity of 373 MW; (ii) two Siemens gas turbines, each with a capacity of 298 MW; and (iii) one Siemens gas turbine with a capacity of 286 MW. We also acquired 130 hectares of land in the north of the Province of Buenos Aires, which we believe will allow us to develop new projects that could add 1,255 MW to our total installed capacity under a simple cycle configuration or through combined cycle operations. For example, we will use a Siemens gas turbine, with a capacity of 286 MW, for the Terminal 6 San Lorenzo co-generation project described below. Our objective is to use the remaining three units and the aforementioned land, in which we have already invested US$134 million, to submit bids for new generation capacity, through one or more projects, in future bidding processes that may be called by the Argentine government. In addition, as of the date of this prospectus, we have already paid SEK$381.37 million (which, converted at the exchange rate quoted by the Central Bank as of the date of each payment, equals US$45.46 million) to purchase two additional Siemens gas turbines for our Luján de Cuyo project described below.

For example, on November 16, 2016, the Secretariat of Electric Energy, pursuant to Resolution SEE No. 420-E/16, called for companies interested in developing or expanding thermal generation units to submit their preliminary proposals for new projects. The objective of the aforementioned resolution was to identify the possible terms of projects that could contribute to cost reduction in the WEM and an increase in the reliability of the Argentine electric power system. In response, on January 13, 2017, we presented a series of non-binding preliminary projects. As a result, we expect the Argentine government to call for additional bids during 2018 under one or several bidding processes embracing the categories established by Resolution SEE No. 420-E/16: (a) new combined cycles; (b) supply and storage facilities for generation companies; and (c) ducts reducing or minimizing costs associated with electric power generation.

The Secretariat of Electric Energy, pursuant to Resolution SEE No. 287-E/17, called for proposals for supply of electric power to be generated through existing units, the conversion of open combined cycle units into closed combined cycle units or the installation of co-generation units.

We submitted bids on August 9, 2017, and, on September 25, 2017, we were awarded the two co-generation projects with the characteristics set forth in the table below. Our newly awarded Terminal 6 San Lorenzo and Luján de Cuyo projects have the following two potential sources of income: (i) electric power sales to CAMMESA through PPAs with a 15-year term which are priced in U.S. dollars; and (ii) steam sales pursuant to separate steam supply agreements negotiated with private offtakers, which are expected to be priced in U.S. dollars. We executed the PPAs with CAMMESA on January 4, 2018. We executed the steam supply agreements with T6 Industrial S.A. and YPF on December 27, 2017 and December 15, 2017, respectively.

 

   

Terminal 6 San Lorenzo

 

Luján de Cuyo

Location

  San Lorenzo, Province of Santa Fé (within the Terminal 6 agroindustrial complex)   Luján de Cuyo, Province of Mendoza
(within our Luján de Cuyo plant)

Expected commercial operation date

  May 2020  

November 2019

 



 

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Terminal 6 San Lorenzo

 

Luján de Cuyo

Estimated total capital expenditure (excluding VAT)

  US$284 million   US$91 million

Awarded electric capacity

 

330 MW (for the winter)

317 MW (for the summer)

 

93 MW (for the winter)

89 MW (for the summer)

Technical configuration

  Co-generation system with one gas turbine and one steam turbine   Co-generation system with two gas turbines

Electric energy segment:

   

Awarded electric capacity price per MW of installed capacity

  US$17,000 per month   US$17,100 per month

Awarded generated energy price (without fuel cost recognition)

  US$8.00 per MWh for natural gas operation and US$10.00 per MWh for gas oil operation   US$8.00 per MWh

Contract length

  15 years   15 years

PPA signing date

  January 4, 2018   January 4, 2018

Steam segment:

   

Steam production capacity

  350 tons per hour   125 tons per hour

Steam buyer

 

T6 Industrial S.A.

  YPF

Contract length

  15 years   15 years

 

We are evaluating additional projects for future bidding processes the Argentine government may launch in connection with the other categories set forth in Resolution SEE No. 420-E/16. According to public reports, as of April 2016, the Ministry of Energy noted that the Argentine government plans to add 20 GW of new electric capacity, of which 10 GW should be provided by conventional sources. After the previous two bidding processes of Resolution SEE 21/16 and Resolution SEE 287/17, the government approved two projects with an awarded electric capacity of 2.9 GW and 1.8 GW, respectively.

Renewable Generation. We are developing two wind energy projects in Argentina with the following characteristics:

 

     La Castellana    Achiras

Location

   Province of Buenos
Aires
   Province of Córdoba

Expected commercial operation date

   April 2018    April 2018

Estimated total capital expenditure (including VAT)

   US$148 million    US$74 million

Awarded electric capacity

   99 MW    48 MW

Awarded price per MWh

   US$61.50    US$59.38

Contract length

   20 years, starting from
commercial operation
   20 years, starting from
commercial operation

PPA signing date

   January 2017    May 2017

Number of generators

   32    15

Capacity per unit

   3.15 MW    3.2 MW

Wind turbine provider

   Acciona Windpower—Nordex    Acciona Windpower—Nordex

 



 

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In connection with both the La Castellana wind energy project (the “La Castellana Project”) and the Achiras wind energy project (the “Achiras Project”), we have already obtained energy production assessments prepared by an independent expert, regulatory approvals of the environmental impact studies, relevant municipal qualifications and regulatory approvals of the electrical studies in connection with access to the transmission network. In addition, we have a usufruct over the land until May 9, 2041, in the Province of Buenos Aires to be used for our La Castellana Project, and we own the necessary land in the Province of Córdoba to be used for our Achiras Project. We have begun construction of the facilities and have executed contracts with suppliers to acquire and maintain the wind turbines for both projects.

Following Rounds 1 and 1.5 of the RenovAR Program, the Ministry of Energy and Mining, pursuant to Resolution No. 275/17, launched Round 2 of the program on August 17, 2017 and granted awards in the amount of 2,043 MW of renewable power capacity.

We submitted bids for Round 2 of the RenovAR Program on October 19, 2017 and on November 29, 2017, we were awarded a wind energy project called, “La Genoveva I,” which will allow us to add an additional capacity of 86.6 MW and continue to build a presence in the renewable energies sector.

The main characteristics of the awarded project are summarized below:

 

    

La Genoveva I

Location

   Province of Buenos Aires

Expected commercial operation date

   May 2020

Estimated PPA signing date

   May 2018

Estimated total capital expenditure (including VAT)

   US$105 million

Awarded electric capacity

   86.6 MW

Awarded electric capacity price per MWh of installed capacity

   US$ 40.90 per MWh

Expected contract length

   20 years, starting from commercial operation

Number of generators

   25

Capacity per unit

   3.46 MW

We expect to submit bids in future rounds of the RenovAr Program and/or to develop in order to supply Large Users in the renewable energy term market (see “The Argentine Electric Power Sector—Resolution No. 281-E/17: The Renewable Energy Term Market in Argentina”), including the projects listed below:

 

Potential Project
Name

   Renewable Source    Location    Potential Power in MW

La Castellana II(1)

   Wind    Bahía Blanca, Buenos Aires Province    15.75

Achiras II(1)

   Wind    Achiras, Córdoba Province    81.90

La Genoveva II(1)

   Wind    Bahía Blanca, Buenos Aires Province    97.02

Cerro Senillosa(2)

   Wind    Senillosa, Neuquén Province    100.00

Picún Leufú(2)

   Wind    Picún Leufú, Neuquén Province    100.00

 

(1) Projects are potential projects in renewable energy for which we have already requested the energy dispatch priority to the renewable term market, pursuant to Resolution No. 281-E/17 (see “The Argentine Electric Power Sector—Resolution No. 281-E/17: The Renewable Energy Term Market in Argentina”). CAMMESA has not granted the priority to dispatch energy yet.

 



 

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(2) Potential projects of renewable energy with respect to which we expect to submit bids in future rounds of RenovAR Program.

However, we cannot assure you that the Argentine government will open new auction processes or that our bids will be successful or that we will be able to enter into PPAs in the future. Moreover, we cannot assure you that we will be able to benefit as expected from the Argentine government’s energy reforms. See “Risk Factors—Risks Relating to our Business—Factors beyond our control may affect our ability to win public bids for new generation capacity, or affect or delay the completion of new power plants once we have been awarded projects.”

 

    Strong cash flow generation, supported by U.S. dollar denominated cash flows. We have strong, stable cash flows, mainly through payments we receive from CAMMESA, primarily as a result of the power generation remuneration structure in Argentina. Such payments principally depend on two factors: (i) the availability of power capacity and (ii) the amount of power generated. Both variables have been relatively stable in recent years, as a result of the diversified technology and high efficiency of our power generation units. Certain of these cash flows were previously denominated and paid by CAMMESA in Argentine pesos. However, after February 2017, under Resolution SEE No. 19/17, payments under the Energía Base are denominated in U.S. dollars but paid in pesos and subject to certain tariff increases. In addition, our cash flows have little exposure to fuel price changes as the fuel needed to produce the energy under the Energía Base is supplied by CAMMESA without charge or offset in the revenues we receive, and our term market sales under contracts typically include price adjustment mechanisms based on fuel price variations. In addition to these payments, our cash flow is supported by the U.S. dollar-denominated payments we receive from CAMMESA, related to our credits pursuant to the San Martín and Manuel Belgrano FONINVEMEM arrangements, which began in March 2010 and are expected to continue until March 2020. During the nine-month period ended September 30, 2017, we received Ps.238.17 million (US$14.86 million in U.S. dollar-denominated payments) in principal and Ps.19.83 million (US$1.24 million in U.S. dollar-denominated payments) in interest for these receivables (including VAT); from these amounts, Ps. 16.08 million (US$1.00 million in U.S. dollar-denominated payments) was retained as tax withholdings that are used as tax credits. During the twelve-month period ended September 30, 2017, we received Ps.313.02 million (US$19.81 million in U.S. dollar-denominated payments) in principal and Ps.26.77 million (US$1.70 million in U.S. dollar-denominated payments) in interest for these receivables (including VAT); from these amounts, Ps. 16.08 million (US$1.00 million in U.S. dollar-denominated payments) was retained as tax withholdings that are used as tax credits. During the year ended December 31, 2016 we received Ps.281.19 million (US$19.81 million in U.S. dollar-denominated payments) in principal and Ps.26.02 million (US$1.83 million in U.S. dollar-denominated payments) in interest for these receivables (including VAT). In addition, we expect to receive new monthly U.S. dollar denominated payments from CAMMESA relating to our credits included in the Vuelta de Obligado thermal power plant arrangement, beginning when combined-cycle operations commence, which is expected to occur during the first quarter of 2018.

 

    Strong financial position and ample room for additional leverage. We benefit from a strong financial position, operating efficiency and a low level of indebtedness, allowing us to deliver on our business growth strategy and create value for our shareholders. In terms of our financial position, our total cash and cash equivalents and current other financial assets was Ps.1.01 billion (US$0.06 billion) as of September 30, 2017 and Ps.1.83 billion (US$0.11 billion) as of December 31, 2016. As of the date of this prospectus, we also have uncommitted lines of credit with commercial banks, totaling approximately Ps.3.20 billion.

 

   

Solid and experienced management team with a successful track record in delivering growth. Our executive officers have vast experience and a long track record in corporate management with, on average, 18 years of experience in the industry. Our management has diverse experience navigating

 



 

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different business cycles, markets and sectors, as evidenced by the growth and expansion we have undergone since the early 1990s. They also have a proven track record in acquisitions and accessing financial markets. For example, in 2007, HPDA successfully issued bonds in an aggregate principal amount of US$100 million, which were paid in full in 2016. In addition, in 2015, jointly with an investment consortium, we acquired non-controlling equity interests in Ecogas, which distributes natural gas through its network covering 30,976 km and serving approximately 1,309,997 customers, further diversifying our interest in the sector. We believe that our management team has been successful in identifying attractive investment opportunities, structuring innovative business plans and completing complex transactions efficiently.

Our management has significant in-country know-how, with professionals who have taken an active role in project development and construction, developing private and public investment plans with both Argentine and international partners. In addition, our management team has business experience at the international and national level, are familiar with the operation of our assets in a constantly-changing business environment and are strongly committed to our day-to-day decision-making process.

Finally, our executive officers have a solid understanding of Argentina’s historically volatile business environment. They have built and maintained mutually beneficial and long lasting relationships with a diversified group of suppliers and customers, and have cultivated relationships with regulatory authorities.

 

    Strong corporate governance. We have adopted a corporate governance code to put into effect corporate governance best practices, which are based on strict standards regarding transparency, efficiency, ethics, investor protection and equal treatment of investors. The corporate governance code follows the guidelines established by the CNV. We have also adopted a code of ethics and an internal conduct code designed to establish guidelines with respect to professional conduct, morals and employee performance. In addition, the majority of our Board of Directors qualifies as “independent” in accordance with the criteria established by the CNV, which may differ from the independence criteria of the NYSE and NASDAQ. See “Risk Factors—As a foreign private issuer, we are not subject to certain NYSE corporate governance rules applicable to U.S. listed companies.

Our Business Strategy

We seek to consolidate and grow our position in the Argentine energy industry by maintaining our existing asset base, which we expect will benefit from tariff increases planned by the Argentine government, and by acquiring and developing new assets related to the sector. The key components of our strategy are as follows:

 

   

Capitalizing on expected growth initiatives while leveraging opportunities in an improved regulatory environment. Historically, Argentine regulations in the energy generation sector have hindered growth in the sector. Investment in the Argentine power and energy sector has been low since the 2001-2002 economic crisis in Argentina and the resulting regulatory changes in 2002 wherein the Argentine government set power generation tariffs in pesos and capped energy generation, transportation and distribution tariffs, which resulted in a steady decrease of the U.S. dollar value of these tariffs in subsequent years. Since the Macri administration assumed office, it has significantly curtailed currency controls and import-export taxes, and demonstrated a willingness to adjust tariffs applicable to power distributors, generators and transporters. As a response to the current electric power shortage, the Argentine government has declared a state of emergency for the national power system, has opened auction processes for the acquisition of power from renewable energy and the increase thermal generation capacity. In addition, the Argentine government has set forth overall guidelines for the development of energy projects, the procedures for compliance with energy goals and bids for thermal generation capacity and associated power generation to meet energy demand requirements in Argentina through 2018. For information about the call for bids, see the discussion of Resolution SEE No. 21/16,

 



 

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Resolution SEE No. 71/16 (complemented by Resolution No. 136/16 of the Ministry of Energy) and Resolution SEE No. 287-E/17 in “The Argentine Electric Power Sector.” We expect investment in the power generation sector to grow as a result of these reforms. We believe we are well-positioned to capitalize on the Argentine government’s focus on expanding generation capacity, given our strong track record and competitive advantages, including our low level of indebtedness and technologically diverse and highly efficient power generation assets. In this respect, we plan to expand our generation capacity from thermal and renewable sources. As an example, we have acquired 130 hectares of land in the north of the Province of Buenos Aires near the Parana River and have purchased four thermal generation units with the intention of expanding our current generating capacity. We intend to present a bid for new thermal generation capacity, through one or more projects, in future bidding processes, and we continue to analyze other project and investment opportunities in the sector.

 

    Consolidating our leading position in the energy sector. We seek to consolidate our position in the energy sector by analyzing value-generating alternatives through investments with a balanced approach to profitability and risk exposure. We are committed to maintaining our high operating standards and availability levels. To this end, we follow a strict maintenance strategy for our units based on recommendations from their manufacturers, and we perform periodic preventative and predictive maintenance tasks. We plan to focus our efforts on optimizing our current resources from a business, administrative and technological perspective, in addition to capitalizing on operating synergies from future businesses that rely on similar systems, know-how, customers and suppliers.

 

    Becoming a leading company in renewable energy in Argentina. Several research studies from organizations such as the Cámara Argentina de Energías Renovables suggest that Argentina has a significant potential in renewable energy (mainly in wind and solar energy). We also believe that renewable energy will become a larger part of the installed capacity in Argentina. The Ministry of Energy and Mining, through Law No. 27,191, has established a target for renewable energy sources to account for 20% of Argentina’s electric power consumption by December 31, 2025. We intend to capitalize on this opportunity by expanding our investments into renewable energy generation. In order to achieve this goal, we are strengthening our renewable energy portfolio, in particular with our first three wind energy projects (La Castellana, Achiras and La Genoveva I) that are expected to increase our generating capacity by 99 MW, 48 MW and 86.6 MW, respectively, and exploring several other options to diversify our generation assets to include sustainable power generation sources. In 2016, we formed our subsidiary, CP Renovables, to develop, construct and operate renewable energy generation projects.

 

    Maintaining a strong financial position and sound cash flow levels. We have a low level of debt, which reflects our strong financial position and additional debt capacity. We believe our strong financial position is the result of our responsible financial policies and stable cash flows. We seek to preserve our current cash flow levels in the coming years by, among other things, keeping a rigorous maintenance program for our production units, which we expect will help us continue the positive operational results we have experienced, particularly with regard to our electric power dispatch availability. We intend to fund our expansion plans primarily with loan arrangements, such as credit facilities and project financing in the case of our renewable energy projects. CP La Castellana S.A.U. (“CP La Castellana”) recently entered into loans to fund the development of renewable energy projects they were awarded and to purchase wind turbines. Additionally, we hope that the expected new capacity from these projects will allow us to further increase our cash flow, while enhancing our financial position.

 



 

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Risk Factors

We are subject to certain risks related to our industry and our business, and there are risks associated with investing in the ADSs. Some of these risks include:

 

    substantially all of our revenues are generated in Argentina and thus are highly dependent on economic and political conditions in Argentina;

 

    the Argentine economy remains vulnerable and any significant decline could adversely affect our results of operations;

 

    if the current levels of inflation do not decrease, the Argentine economy could be adversely affected;

 

    fluctuations in the value of the peso could adversely affect the Argentine economy and, in turn, adversely affect our results of operations;

 

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

 

    the Argentine government has intervened in the electric power sector in the past, and is likely to continue intervening;

 

    electricity generators, distributors and transmitters have been materially and adversely affected by emergency measures adopted in response to Argentina’s economic crisis of 2001 and 2002, many of which remain in effect;

 

    we have, in the recent past, been unable to collect payments, or to collect them in a timely manner, from CAMMESA and other customers in the electric power sector;

 

    our results depend largely on the compensation established by the Secretariat of Electric Energy and received from CAMMESA for our electric power generation delivered to the transmission system;

 

    factors beyond our control may affect our ability to win public bids for new generation capacity, or affect or delay the completion of new power plants once we have been awarded projects;

 

    factors beyond our control may delay the completion of CVOSA’s combined cycle plant;

 

    our business may require substantial capital expenditures for ongoing maintenance requirements and the expansion of our installed generation capacity;

 

    the non-renewal or early termination of the HPDA Concession Agreement (as defined below) would adversely affect our results of operations; and

 

    if the conditions for the La Plata Plant Sale are not met, our results of operations could be adversely affected.

See “Risk Factors” and “Forward-Looking Statements” for a discussion of these and other risks and uncertainties associated with our business and investing in the ADSs.

Recent Developments

Loans from the IIC—IFC Facilities

CP La Castellana

On October 20, 2017, CP La Castellana entered into a common terms agreement with (i) the Inter-American Investment Corporation, (ii) the Inter-American Investment Corporation, acting as agent for the Inter-American Development Bank, (iii) the Inter-American Investment Corporation, as agent of the Inter-American Development Bank, in its capacity as administrator of the Canadian Climate Fund for the Private Sector of the Americas, and (iv) the International Finance Corporation (collectively, the “senior lenders”) to provide loans for a total amount of up to US$100,050,000 (the “IIC—IFC Facility I”), from which US$5 million will accrue interest at an annual rate equal to LIBOR plus 3.5% and the rest at LIBOR plus 5.25%, and shall be repaid in 52

 



 

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quarterly equal installments. Several other agreements and related documents, such as the guarantee and sponsor support agreement, where we will fully, unconditionally and irrevocably guarantee, as primary obligor, all payment obligations assumed and/or to be assumed by CP La Castellana until the project reaches the commercial operation date (the “Guarantee and Sponsor Support Agreement”), hedge agreements, guarantee trust agreements, a share pledge agreement, an asset pledge agreement over the wind turbines, direct agreements and promissory notes have been executed. On January 9, 2018, CP La Castellana received the first disbursement from the IIC—IFC Facility I for a total amount of US$80,000,000.

Pursuant to the Guarantee and Sponsor Support Agreement, among other customary covenants for this type of facilities, we committed, until the La Castellana project completion date, to maintain (i) a leverage ratio of (a) until (and including) December 31, 2018, not more than 4.00:1.00; and (b) thereafter, not more than 3.5:1.00; and (ii) an interest coverage ratio of not less than 2.00:1.00. In addition, our subsidiary, CP Renovables, and we, upon certain conditions, agreed to make certain equity contributions to CP La Castellana.

We also agreed to maintain, unless otherwise consented to in writing by each senior lender, ownership and control of the CP La Castellana as follows: (i) until the La Castellana project completion date, (a) we shall maintain (x) directly or indirectly, at least seventy percent (70%) beneficial ownership of CP La Castellana; and (y) control of the CP La Castellana; and (b) CP Renovables shall maintain (x) directly, ninety-five percent (95%) beneficial ownership of CP La Castellana; and (y) control of CP La Castellana. In addition, (ii) after La Castellana project completion date, (a) we shall maintain (x) directly or indirectly, at least fifty and one tenth percent (50.1%) beneficial ownership of each of CP La Castellana and CP Renovables; and (y) control of each of CP La Castellana and CP Renovables; and (b) CP Renovables shall maintain control of the CP La Castellana.

La Castellana “project completion date” is defined in the common terms agreement as the date in which the commercial operation date has occurred and certain other conditions have been met, which is expected to occur in the first quarter of 2019. For further information on La Castellana project see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Proposed Expansion of Our Generating Capacity.”

CP Achiras

On January 17, 2018, CP Achiras entered into a common terms agreement with (i) the Inter-American Investment Corporation, (ii) the Inter-American Investment Corporation, acting as agent for the Inter-American Development Bank, (iii) the Inter-American Investment Corporation, as agent of the Inter-American Development Bank, in its capacity as administrator of the Canadian Climate Fund for the Private Sector of the Americas, and (iv) the International Finance Corporation (collectively, the “senior lenders”) to provide loans for a total amount of up to US$50,700,000 (the “IIC—IFC Facility II” and together with the IIC—IFC Facility I, the “IIC—IFC Facilities”), from which US$10,000,000 will accrue interest at an annual rate equal to LIBOR plus 4.0%, US$20,000,000 will accrue interest at an annual rate equal to LIBOR plus 5.25% and the remaining amount at a rate reflecting the cost at which the International Finance Corporation can provide U.S. dollar funding at a fixed interest rate plus 5.25%, and shall be repaid in 52 quarterly installments. CP Achiras has not received any disbursement at the date of this prospectus.

The Achiras “project completion date” is expected to occur in the first quarter of 2019 and is defined in the common terms agreement as the date in which the commercial operation date has occurred and certain other conditions have been met. For further information on the Achiras project see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Proposed Expansion of Our Generating Capacity.”

Loans from Banco de Galicia y Buenos Aires S.A. to CP La Castellana and CP Achiras S.A.U.

On October 26, 2017 and October 30, 2017, CP La Castellana and CP Achiras S.A.U. (“CP Achiras”) entered into loans with Banco de Galicia y Buenos Aires S.A. in the amount of Ps.330 million (US$18.7 million,



 

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using the exchange rate as of the date of the disbursement) and Ps.175 million (US$9.9 million, using the exchange rate as of the date of the disbursement), respectively, for the development of renewable energy projects that were awarded by the Secretary of Electric Energy (the “Castellana and Achiras Loans”). The Castellana and Achiras Loans accrue interest at an interest rate equal to BADLAR private banks plus a 3.10% margin and shall mature on the dates that are two years from the execution and disbursement. The proceeds from these loans will be used to finance the Achiras Project and the La Castellana Project. We have fully, unconditionally and irrevocably guaranteed, as primary obligor, all payment obligations assumed and/or to be assumed by CP La Castellana and CP Achiras under these loans and any other ancillary document related to them. On November 10, 2017, CP La Castellana and CP Achiras entered into two short-term bridge loans with Banco de Galicia y Buenos Aires S.A. in the amount of US$35 million and US$18 million, respectively, for the acquisition of wind turbines. These loans accrue interest at an annual interest rate of 3.6% and mature on January 9, 2018. On December 21, 2017, CP La Castellana and CP Achiras entered into two short-term bridge loans with Banco de Galicia y Buenos Aires S.A. in the amount of US$9 million and US$5.8 million, respectively, for the acquisition of wind turbines. These loans accrue interest at an annual interest rate of 3.6% and mature on February 19, 2018. On December 22, 2017, CP La Castellana and CP Achiras entered into two short-term bridge loans with Banco de Galicia y Buenos Aires S.A. in the amount of US$6.5 million and US$3.2 million, respectively, for the acquisition of wind turbines. These loans accrue interest at an annual interest rate of 3.6% and mature on February 20, 2018. On January 15, 2018, CP Achiras entered into a short-term bridge loan with Banco de Galicia y Buenos Aires S.A. in the amount of US$7 million, for the acquisition of wind turbines. This loan accrues interest at an annual interest rate of 3.1% and matures on March 18, 2018.

On January 9, 2018, CP La Castellana applied the funds from the IIC—IFC Facility I to prepay all of its outstanding short-term bridge loans with Banco de Galicia y Buenos Aires S.A.

The Argentine government has authorized the Ministry of Energy and Mining to proceed with the sale of their shareholdings in power plants, including their participation in us.

By means of Decree No. 882/17, signed on October 31, 2017 and published in the Official Gazette on November 1, 2017, the Argentine government authorized the Ministry of Energy and Mining to promote the measures necessary to proceed with the sale, assignment or transfer of the equity interest owned by the Argentine government in (i) our Company (representing 8.25% of our outstanding shares); (ii) several unaffiliated companies, including (a) Central Dique Sociedad Anónima; (b) Central Térmica Güemes Sociedad Anónima, (c) Centrales Térmicas Patagonicas Sociedad Anónima, (d) Empresa de Transporte de Energía Eléctrica por Distribución Troncal de la Patagonia Sociedad Anónima, (e) Dioxitek Sociedad Anónima; and (iii) the interest of the national government in the FONINVEMEM thermal power plants (TMB, TJSM, CVOSA and Central Guillermo Brown). The Argentine government has authorized the Ministry of Energy and Mining to accept LVFVD in consideration for the sale, assignment or transfer of the above mentioned assets, granting generators, like us, the opportunity to increase capacity or participation in thermal power plants, including the FONINVEMEM. In the case of FONINVEMEM thermal plants operated by TMB and TJSM, we and the other shareholders may exercise our right of first refusal for the sales of these assets.

New remuneration scheme for Energía Base

Resolution SEE No. 19/17, enacted by the Secretariat of Electric Energy on January 27, 2017 and published in the Official Gazette on February 2, 2017, created a new remuneration scheme for the Energía Base. Pursuant to this resolution, generators, co-generators and self-generators can make guaranteed availability offers (ofertas de disponibilidad garantizada) in the WEM and, through those offers, generation companies commit a specific and limited output of electric power for their generation units. The offers must be accepted by CAMMESA (acting on behalf of the WEM agents demanding electric power), who will be the purchaser of the power in the guaranteed availability agreement. Resolution SEE No. 19/17 establishes that such agreements can be assigned to electricity distribution companies and Large Users of the WEM once the state of emergency of the electric power system in Argentina, declared pursuant to Decree No. 134/2015 has expired (such state of emergency expired on December 31, 2017). Remuneration in favor of the generation company is calculated in U.S. dollars in



 

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accordance with the formulas and values set forth in this resolution, and, comprised of (i) a price for the monthly capacity availability and (ii) a price for the electric power generated and operated.

The following chart shows the average unitary (monomic) price per MWh received by Central Puerto in each period under the Energía Base, calculated as the Sales under Energía Base for the period, divided by the energy generated under the Energía Base for the year:

 

LOGO

La Plata Plant Sale

On December 20, 2017, YPF EE accepted our offer to sell the La Plata plant, subject to certain conditions, for a total sum of US$31.5 million (without VAT), subject to certain conditions (the “La Plata Plant Sale”). The effective transfer of the La Plata plant is subject to the following conditions: (i) the termination of a due diligence process during which YPF can, at its own discretion, terminate the La Plata Plant Sale; (ii) the payment by YPF EE of the purchase price for the La Plata Plant; (iii) the extension of our steam supply agreement with YPF at our Luján de Cuyo plant for a period of up to 24 months from January 1, 2019 under the same terms as our existing steam supply agreement, which we expect to sign in January 2018; (iv) we and YPF EE shall have complied with the regulation in force in connection with the resale of the aggregate transportation capacity under a firm transportation capacity (“FTC”) contract to YPF EE, and MEGSA (Mercado Eléctrico de Gas) shall have awarded such aggregate transportation capacity under the FTC contract to YPF EE; (v) the renewal of two contracts between us and certain third parties and the acceptance by such third parties of the assignment of such contracts to YPF EE; and (vi) other formal conditions. We will effectively transfer the La Plata plant to YPF EE on the second business day after each of the aforementioned conditions are met (the “La Plata Plant Sale Effective Date”). See “Risk Factors—Risks Relating to Our Business—If the conditions for the La Plata Plant Sale are not met, our results of operations could be adversely affected” and “Unaudited Pro Forma Consolidated Financial Information.”

Contracts with YPF for Steam Supply and CAMMESA for the Luján de Cuyo project

In January 2018, we expect to sign an agreement to extend our steam supply agreement with YPF at our Luján de Cuyo plant for a period of up to 24 months from January 1, 2019 under the same terms as our existing



 

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steam supply agreement. On December 15, 2017, we also executed a new steam supply contract with YPF for a period of 15 years that will replace our existing contract with YPF and will begin when the new co-generation unit at our Luján de Cuyo plant begins operations.

Additionally, we entered into a PPA with CAMMESA in January 4, 2018, in connection with the new co-generation unit at our Luján de Cuyo plant. As of the date of this prospectus, the new co-generation unit at our Luján de Cuyo plant is in the pre-construction phase. Construction is projected to begin in January 2018. The plant is expected to start commercial operations 24 months after November 22, 2017.

The execution of the contracts with YPF for steam supply and the PPA with CAMMESA for the Luján de Cuyo project referred to herein are both conditions to the La Plata Plant Sale. For further information, see “Summary—Recent Developments—La Plata Plant Sale.”

Agreement between Transportadora de Gas del Mercosur S.A. and YPF

In 2009, Transportadora de Gas del Mercosur S.A. (“TGM”), in which CPSA holds a 20% interest, terminated its gas supply contract with YPF as a result of repeated breached by YPF. On December 22, 2017, YPF agreed to pay TGM, without recognizing any facts or rights, US$114 million in order to end TGM’s claim against YPF.

Social Security Reform Law

On December 19, 2017, the Argentine Congress approved the “Social Security Reform Law” which, among other things, modified the adjustment formula for the country’s then current pension system. The goal of the law is to resolve the shortage of necessary ANSES funds needed to guarantee the mobility formula for 82% of all retirees who receive minimum pension. The social benefits will be subject to updating a formula that will be applied in March, June, September and December of each year, and which will be calculated as 70% of the variation of the Consumer Price Index (IPC) indicated by INDEC, and 30% remaining due to the variation of the Remuneración Imponible Promedio de los Trabajadores Estables (RIPTE), an indicator of the Ministry of Labor that measures the evolution of the salary of the state employees. In addition, instead of semiannual increases, an update will be applied each quarter. After the approval of the social security reform, on December 20, 2017, Decree No. 1058 was issued to avoid the gap that occurred between the application of the previous mobility formula and the one recently passed by Congress, establishing a compensatory bonus for retirees, pensioners and beneficiaries of the Universal Child Allowance (Asignación Universal por Hijo).

Project to Amend the Labor System

The Macri administration published a project to amend the labor system. The project’s main purpose is to improve the efficiency and productivity of different labor sectors, to increase the level of employment, to attract investments and to reduce employment costs. The project will be analyzed by both chambers of the Argentine Congress in 2018.

Reforma Tributaria (the “Tax Reform”)

On December 27, 2017, the Argentine Congress also approved the Tax Reform, which is intended to eliminate certain of the existing complexities and inefficiencies of the Argentine tax regime, diminish evasion, increase the coverage of income tax as applied to individuals and encourage investment while sustaining its medium and long term efforts aimed at restoring fiscal balance. The reforms will gradually come into effect over the next five years. The fiscal cost of the Tax Reform is estimated to be 0.3% of the gross national product. The reforms form part of a larger program announced by President Macri intended to increase the competitiveness of

 



 

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the Argentine economy (including by reducing the fiscal deficit) as well as employment, and diminish poverty on a sustainable basis. The Tax Reform was enacted on December 29, 2017 (Law No. 27,430) and has introduced many changes to the income tax treatment applicable to financial income. The main aspects of this reform may be summarized as follows:

 

    Income obtained from the sales of (i) shares by individuals residing in Argentina for tax purposes (“Argentine Individuals”) and (ii) shares and ADSs by non-Argentine residents, will be exempt from income tax on capital gains, subject to compliance with certain requirements. See “Taxation—Material Argentine Tax Considerations”.

 

    Taxation applicable to dividends distributed by Argentine companies would be as follows: (i) dividends originated from profits obtained before fiscal year 2018 are not subject to any income tax withholding (except for the Equalization Tax (as discussed in “Taxation—Material Argentine Tax Considerations”)); (ii) dividends originated from profits obtained during fiscal years 2018 and 2019 paid to Argentine Individuals and/or non-Argentine residents are subject to a 7% income tax withholding on the amount of such dividends; and (iii) for dividends originated from profits obtained during fiscal year 2020 onward, the tax rate is raised to 13%.

 

    Interest and capital gains derived from the sale or disposition of public notes, among other assets, obtained by Argentine resident individuals and undivided estates located in Argentina, would be subject to income tax at a rate of (a) 5% in the case of peso-denominated securities without a revaluation clause and (b) 15% in the case of peso-denominated securities with a revaluation clause or dollar-denominated securities; income obtained by Argentine resident individuals and undivided estates located in Argentina from the sale of shares made on a stock exchange will remain exempt, subject to compliance with certain requirements;

 

    Non-Argentine residents would be exempt from taxes on interest and capital gains derived from the public issuance of notes by the federal government, the provinces and municipalities of Argentina and the Autonomous City of Buenos Aires, to the extent said beneficiaries neither reside in nor channel their funds through non-cooperative jurisdictions. The non-cooperative jurisdictions list would be prepared and published by the executive branch. Short-term notes issued by the Central Bank (LEBACs) are outside the scope of these exemptions applicable to non-Argentine residents.

 

    The aforementioned amendments will be enforced beginning January 1, 2018.

 

    The corporate income tax of Argentine legal entities gradually would be reduced to 30% for fiscal periods commencing after January 1, 2018 through December 31, 2019, and to 25% for fiscal periods commencing after January 1, 2020, inclusive. Argentine legal entities will have to apply an additional withholding tax on dividends or distributed profits to complete the aggregate tax burden of 35%.

The Tax Reform contemplates other amendments regarding the following matters: social security contributions, tax administrative procedures law, criminal tax law, tax on liquid fuels, and excise taxes, among others.

Holders of our common shares or the ADSs are encouraged to consult their tax advisors as to the particular Argentine income tax consequences of owning our common shares or the ADSs. For more information, see “Taxation—Material Argentine Tax Considerations.”

Corporate Information

Our principal executive offices are located at Avda. Thomas Edison 2701, City of Buenos Aires. Our phone number is (+54 11) 4317-5000; our fax number is (+54 11) 4317-5099; our website is www.centralpuerto.com; and the e-mail address of our main offices is info@centralpuerto.com. Information contained or accessible through our website is not incorporated by reference in, and should not be considered part of, this prospectus.

 



 

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THE GLOBAL OFFERING

The following is a brief summary of the terms of the global offering. For a more complete description of our common shares and the ADSs, see “Description of our Bylaws and Capital Stock” and “Description of the American Depositary Shares” in this prospectus.

 

Issuer

  

Central Puerto S.A.

Selling shareholders

  

Cristina Teresa Miguens, Cantomi Uruguay S.A., Polinter S.A., Facundo de la Fuente, María Inés Fitte, María Luisa Barbara Miguens, Gonzalo Tanoira, Mark Patrick Dunfoy, Christopher Mary Masterson, Christopher Jason Gatenby, Vincent Gerald O’Brien, Eduardo José Escasany, Cinco Vientos Uruguay S.A. and Guillermo Pablo Reca.

Common shares offered in the global offering    The selling shareholders are offering 354,865,808 common shares in the international offering and the Argentine offering, which common shares, at the option of the international underwriters, may be represented by ADSs. We refer to the offering in the United States and other jurisdictions outside of Argentina as the “international offering” and to the offering in Argentina as the “Argentine offering.” We refer to the international offering together with the Argentine offering as the “global offering.” The closings of the international and Argentine offerings are conditioned upon each other.
Common shares offered in the international offering    The selling shareholders are offering             common shares through the international underwriters in the United States and in other countries outside Argentina (or common shares if the international underwriters exercise their option to purchase additional common shares in full). The common shares may, at the option of the international underwriters, be represented by ADSs.
Common shares offered in the Argentine offering    Concurrently with the international offering,             common shares are being offered by the selling shareholders in a public offering in Argentina through Argentine placement agents pursuant to a Spanish-language informational prospectus with the same date as this prospectus. The informational prospectus for the Argentine offering, although in a different format in accordance with CNV regulations, contains substantially the same information as contained in this prospectus.
Over-allotment option    As part of the offering, one of the selling shareholders, Guillermo Pablo Reca, has granted the international underwriters the option for a period of 30 days from the date of this prospectus to purchase up to an additional 53,229,870 common shares from the selling shareholders at the initial public offering price paid by investors, less underwriting discounts and commissions, to cover over-allotments, if any. The common shares may, at the option of the international underwriters, be represented by ADSs.
Offering price    We expect that the offering price for the global offering will be between US$1.75 and US$2.15 per common share (equivalent to Ps.32.99 and Ps.40.53 per common share, based on a wire transfer (divisas) exchange rate of Ps.18.85: US$1.00 reported by the Banco de la Nación Argentina on January 17, 2018).

 



 

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Issuer

  

Central Puerto S.A.

Listing

   We have applied to have the ADSs approved for listing on the NYSE under the symbol “CEPU.” Our common shares are listed on the BYMA under the symbol “CEPU.”

Use of proceeds

   We will not receive any proceeds from the sale of common shares by the selling shareholders.
American Depositary Shares offered    Each ADS represents ten common shares and may be evidenced by American Depositary Receipts, or ADRs. The ADSs will be issued under a deposit agreement among us, Citibank, N.A. (the “ADS Depositary”) and the holders and beneficial owners from time to time of ADSs issued thereunder.
Voting rights    Holders of our common shares are entitled to one vote for each common share at any of our shareholders’ meetings. See “Description of our Bylaws and Capital Stock.” Pursuant to the deposit agreement and subject to Argentine law and our bylaws, holders of ADSs are entitled to instruct the ADS Depositary to vote or cause to be voted the number of common shares represented by such ADSs. See “Description of the American Depositary Shares.”
Dividends    Under Argentine law, the declaration, payment and amount of dividends on common shares are subject to the approval of shareholders and certain other requirements. Subject to the deposit agreement, holders of ADSs will be entitled to receive dividends, if any, declared on the common shares represented by such ADSs to the same extent as the holders of the common shares. Cash dividends will be paid in pesos and will be converted by the ADS Depositary into U.S. dollars at an exchange rate determined by it on the date of conversion and paid to the holders of ADSs, net of any dividend distribution fees, currency conversion expenses, taxes or governmental charges. See “Dividends and Dividend Policy,” “Description of our Bylaws and Capital Stock” and “Description of the American Depositary Shares.”
Lock-up agreements    We, our directors, certain of our significant shareholders, including the selling shareholders, and members of senior management listed in “Management and Corporate Governance—Senior Officers”, who own in aggregate 53.29% of our outstanding common shares prior to the global offering, have agreed with the international underwriters, subject to certain exceptions, not to sell or dispose of any ordinary shares or securities convertible into or exchangeable or exercisable for any ordinary shares of our capital stock or ADSs during the period commencing on the date of this prospectus until 180 days after the completion of the global offering.
ADS Depositary    Citibank, N.A.
Taxation    For a discussion of certain U.S. and Argentine federal tax considerations relating to an investment in the ADSs or our common shares, see “Taxation.”
Jurisdiction and arbitration    Pursuant to Article 46 of Law No. 26,831, as amended (the “Capital Markets Law”), companies whose shares are listed on any authorized

 



 

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Issuer

  

Central Puerto S.A.

   market (including the BYMA), such as our common shares, are subject to the jurisdiction of the arbitration court of such authorized market for all matters concerning such companies’ relationship with shareholders and investors, without prejudice to the right of shareholders and investors to submit their claims to the courts of the City of Buenos Aires. For all matters relating to the deposit agreement and the ADSs, we will submit to the jurisdiction of the state and federal courts located in the state of New York.
Risk Factors    Investing in our common shares involves risks. See “Risk Factors” beginning on page 36 for a discussion of certain significant risks you should consider before making an investment decision.

Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the over-allotment option granted to the international underwriters.



 

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SUMMARY FINANCIAL AND OTHER INFORMATION

The following tables present a summary of our financial data for each of the periods indicated. You should read this information in conjunction with our consolidated financial statements and related notes beginning on page F-1, and the information under “Presentation of Financial and Other Information”, “Unaudited Pro Forma Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

We have derived our summary audited consolidated financial data as of December 31, 2016 and 2015 and for each of the years then ended from our audited consolidated financial statements included in this prospectus. We have derived our summary unaudited interim consolidated financial data as of September 30, 2017 and for the nine-month periods ended September 30, 2017 and 2016 from our interim condensed consolidated financial statements included in this prospectus. We have prepared the interim condensed consolidated financial statements on a basis consistent with our audited financial statements. Our interim condensed consolidated financial statements include all adjustments, consisting only of normal and recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for these periods. The results of operations for the nine-month period ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.

Solely for convenience, peso amounts as of and for the nine-month period ended September 30, 2017 have been translated into U.S. dollars. The rate used to translate such amounts was Ps.17.31 to U.S.$1.00, which was the exchange rate quoted by the Banco de la Nación Argentina for U.S. dollars as of September 29, 2017.

Summary Consolidated Statement of Comprehensive Income

 

     Nine-month Period Ended
September 30,
    Year Ended
December 31,
 
     (in thousands  of
US$)(1)
    (in thousands of Ps.)     (in thousands of Ps.)  
     2017
(unaudited)
    2017
(unaudited)
    2016
(unaudited)
    2016     2015  

Revenues

   US$ 330,345       Ps. 5,718,278       Ps. 3,905,310       Ps. 5,320,413       Ps. 3,234,775  

Cost of sales

     (172,337     (2,983,155     (2,287,369     (3,151,731     (1,750,209
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross income

     158,008       2,735,123       1,617,941       2,168,682       1,484,566  

Administrative and selling expenses

     (26,179     (453,154     (339,329     (460,633     (379,409

Other operating income

     18,000       311,588       986,703       1,165,506       741,687  

Other operating expenses

     (2,055     (35,575     (105,740     (84,845     (53,961
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     147,774       2,557,982       2,159,575       2,788,710       1,792,883  

Finance income

     48,284       835,800       496,088       420,988       362,363  

Finance expenses

     (28,072     (485,927     (639,052     (634,903     (160,186

Share of the profit of associates

     12,878       222,915       85,967       147,513       43,390  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax

     180,864       3,130,770       2,102,578       2,722,308       2,038,450  

Income tax for the period/year

     (60,756     (1,051,681     (699,432     (953,472     (696,452
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income for the period/year

     120,109       2,079,089       1,403,146       1,768,836       1,341,998  

Other comprehensive income, net

     (16,998     (294,241     141,273       199,075       132,953  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the period/year

     103,111       1,784,848       1,544,419       1,967,911       1,474,951  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Solely for the convenience of the reader, peso amounts as of September 29, 2017 have been translated into U.S. dollars at the exchange rate as of September 30, 2017 of Ps.17.31 to US$1.00. See “Exchange Rates” and “Presentation of Financial and Other Information” for further information on recent fluctuations in exchange rates.


 

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Summary Consolidated Statement of Financial Position

 

     As of
September 30, 2017
     As of
December 31,
 
     (in thousands  of
US$)(1)
     (in thousands of Ps.)      (in thousands of Ps.)  
     (unaudited)      (unaudited)      2016      2015  

Non-current assets

           

Property, plant and equipment

   US$ 284,024        Ps. 4,916,450        Ps.2,811,539        Ps.1,968,148  

Intangible assets

     11,954        206,916        236,530        276,691  

Investment in associates

     28,513        493,560        307,012        210,529  

Trade and other receivables(2)

     162,136        2,806,567        3,553,129        2,780,635  

Other non-financial assets

     12,099        209,428        1,466,547        487,429  

Inventories

     1,781        30,830        30,830        29,619  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current assets

     500,507        8,663,751        8,405,587        5,753,051  
  

 

 

    

 

 

    

 

 

    

 

 

 

Current assets

           

Inventories

     9,744        168,671        137,965        82,672  

Other non-financial assets

     8,426        145,859        137,110        135,012  

Trade and other receivables(2)

     197,598        3,420,413        2,215,535        1,267,032  

Other financial assets

     57,310        992,044        1,796,756        1,912,016  

Cash and cash equivalents

     1,321        22,875        30,008        292,489  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     274,399        4,749,862        4,317,374        3,689,221  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     774,906        13,413,613        12,722,961        9,442,272  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity and liabilities

           

Equity

           

Capital stock

     87,465        1,514,022        1,514,022        199,742  

Adjustment to capital stock

     38,416        664,988        664,988        664,988  

Merger premium

     21,755        376,571        376,571        366,082  

Legal and other reserves

     29,994        519,189        431,007        363,289  

Voluntary reserve

     26,047        450,865        68,913        1,507,513  

Retained earnings

     121,040        2,095,209        1,757,051        1,347,763  

Accumulated other comprehensive income

     2,340        40,506        334,747        122,286  

Non-controlling interests

     15,311        265,034        6,717        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     342,368        5,926,384        5,154,016        4,571,663  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-current liabilities

           

Other non-financial liabilities

     29,232        506,008        635,162        596,632  

Other loans and borrowings

     —          —          —          318,410  

Borrowings from CAMMESA

     68,997        1,194,341        1,284,783        542,858  

Compensation and employee benefits liabilities

     4,959        85,842        87,705        56,112  

Deferred income tax liabilities

     51,765        896,059        1,136,481        770,737  

Provisions

     —          —          125,201        133,284  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities

     154,954        2,682,250        3,269,332        2,418,033  
  

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

           

Trade and other payables

     48,486        839,286        655,598        381,128  

Other non-financial liabilities

     36,752        636,170        476,785        177,664  

Other loans and borrowings

     7,117        123,203        1,293,178        511,555  

Borrowings from CAMMESA

     94,885        1,642,451        1,047,722        661,086  

Compensation and employee benefits liabilities

     14,497        250,942        205,923        147,770  

Income tax payable

     46,436        803,804        278,922        330,496  

Provisions

     29,412        509,123        341,485        242,877  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     277,585        4,804,979        4,299,613        2,452,576  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     432,538        7,487,229        7,568,945        4,870,609  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity and liabilities

     774,906        13,413,613        12,722,961        9,442,272  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Solely for the convenience of the reader, peso amounts as of September 30, 2017 have been translated into U.S. dollars at the exchange rate as of September 29, 2017 of Ps.17.31 to US$1.00. See “Exchange Rates” and “Presentation of Financial and Other Information” for further information on recent fluctuations in exchange rates.

 



 

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(2) Trade and other receivables include receivables from CAMMESA. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Receivables from CAMMESA,” and “—Liquidity and Capital Resources.”

Adjusted EBITDA

In this prospectus, we define Adjusted EBITDA as net income for the year, plus finance expenses, minus finance income, minus share of the profit of associates, plus income tax expense, plus depreciation and amortization.

We believe that Adjusted EBITDA, a non-IFRS financial measure, provides useful supplemental information to investors about us and our results. Adjusted EBITDA is among the measures used by our management team to evaluate our financial and operating performance and make day-to-day financial and operating decisions. In addition, Adjusted EBITDA is frequently used by securities analysts, investors and other parties to evaluate companies in our industry. We also believe that Adjusted EBITDA is helpful to investors because it provides additional information about trends in our core operating performance prior to considering the impact of capital structure, depreciation, amortization and taxation on our results.

Adjusted EBITDA should not be considered in isolation or as a substitute for other measures of financial performance reported in accordance with IFRS. Adjusted EBITDA has limitations as an analytical tool, including:

 

    Adjusted EBITDA does not reflect changes in, including cash requirements for, our working capital needs or contractual commitments;

 

    Adjusted EBITDA does not reflect our finance expenses, or the cash requirements to service interest or principal payments on our indebtedness, or interest income or other finance income;

 

    Adjusted EBITDA does not reflect our income tax expense or the cash requirements to pay our income taxes;

 

    although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements;

 

    although share of the profit of associates is a non-cash charge, Adjusted EBITDA does not consider the potential collection of dividends; and

 

    other companies may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our consolidated financial statements in accordance with IFRS and reconciliation of Adjusted EBITDA to the most directly comparable IFRS measure, net income.

 



 

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The following table sets forth a reconciliation of our net income to Adjusted EBITDA:

 

     Nine-month period ended
September 30,
    Year ended
December 31,
 
     2017     2017     2016     2016     2015  
    

(in thousands of

US$)(1)

    (in thousands of Ps.)  

Net income for the period/year

   US$ 120,109       Ps.2,079,089       Ps.1,403,146       Ps.1,768,836       Ps.1,341,998  

Finance expenses

     28,072       485,927       639,052       634,903       160,186  

Finance income

     (48,284     (835,800     (496,088     (420,988     (362,363

Share of the profit of associates

     (12,878     (222,915     (85,967     (147,513     (43,390

Income tax expense

     60,756       1,051,681       699,432       953,472       696,452  

Depreciation and amortization

     12,194       211,082       179,236       242,026       194,460  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     159,969       2,769,064       2,338,811       3,030,736       1,987,343  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Solely for the convenience of the reader, peso amounts as of September 30, 2017 have been translated into U.S. dollars at the exchange rate as of September 29, 2017 of Ps.17.31 to US$1.00. See “Exchange Rates” and “Presentation of Financial and Other Information” for further information on recent fluctuations in exchange rates.

Other Data

 

    As of and for the nine-month period
ended September 30,
    As of and for the year ended
December 31,
 
    2017     2016     2016     2015  

Financial debt to Adjusted EBITDA

    0.04 (1)      0.31 (1)      0.43       0.42  

Profitability ratio (net income for the period/ average equity(2))

    0.38       0.26       0.36       0.34  

Adjusted EBITDA margin (Adjusted EBITDA/revenues)

    48.42     59.89     56.96     61.44

Outstanding shares (basic and diluted)(3)

    1,505,695,134       1,505,695,134       1,505,695,134       1,505,695,134  

Net income per share (basic and diluted) (Ps.)

    1.38       0.93       1.17       0.89  

Cash dividend per share (Ps.)

    0.85       —         0.925       0.226  

 

(1) For the purposes of this ratio, Adjusted EBITDA is calculated for the last twelve months (LTM) at the period end.
(2) “Average equity” means the average value of our equity measured at the beginning and at the end of the period.
(3) Adjusted to give retroactive effect to the 2016 stock split (dividend) and the capital stock decrease relating to the 2016 Merger (as defined below). See “Business—History and Development of the Company—The 2016 Merger.”


 

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RISK FACTORS

You should carefully consider the risks described below, as well as the other information in this prospectus before deciding to purchase any common shares or ADSs. Our business, results of operations, financial condition or prospects could be materially and adversely affected if any of these risks occurs, and as a result, the market price of our common shares and ADSs could decline and you could lose all or part of your investment. In general, investors take more risk when they invest in the securities of issuers in emerging markets such as Argentina than when they invest in the securities of issuers in the United States and other more developed markets. The risks described below are those known to us and that we currently believe may materially affect us.

Risks Relating to Argentina

Substantially all of our revenues are generated in Argentina and thus are highly dependent on economic and political conditions in Argentina

Central Puerto is an Argentine corporation (sociedad anónima). All of our assets and operations are located in Argentina. Accordingly, our financial condition and results of operations depend to a significant extent on macroeconomic, regulatory, social and political conditions prevailing in Argentina, including the level of growth, inflation rates, foreign exchange rates, interest rates and international developments and conditions that may affect Argentina. Between 2007 and 2015, the Fernández de Kirchner administrations increased direct intervention in the Argentine economy, including the implementation of expropriation measures, price controls, exchange controls and changes in laws and regulations affecting foreign trade and investment. These measures had a material adverse effect on private sector entities, including us. It is possible that similar measures could be adopted by the current or future Argentine government or that economic, social and political developments in Argentina, over which we have no control, could have a material adverse effect on the Argentine economy and, in turn, adversely affect our financial condition and results of operations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting our Results of Operations—Argentine Economic Conditions.”

The Argentine economy remains vulnerable and any significant decline could adversely affect our results of operations

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, a stable rate of inflation, national employment levels and the circumstances of Argentina’s regional trade partners.

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

 

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

 

    according to the revised calculation of the 2004 GDP published by the INDEC in March 2017, which forms the basis for the real GDP calculation for every year after 2004, GDP decreased by 2.3% in 2016 (as compared to 2015) and increased by 2.6% in 2015, as compared to a decline of 2.5% in 2014 and growth of 2.4% in 2013. According to preliminary data published by the INDEC on September 21, 2017, GDP for the first quarter of 2017 increased by 1.1% compared to the last quarter of 2016, and 0.3% with respect to the same period in 2016, while according to the same source GDP for the second quarter of 2017 increased by 0.7% compared to the first quarter of 2017, and 2.7% with respect to the same period in 2016. Argentina’s GDP 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 private sector;

 

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    Argentina’s public debt as a percentage of GDP remains high;

 

    the discretionary increase in public expenditures has resulted, and could continue to result, in a fiscal deficit;

 

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

 

    a significant number of protests or strikes could take place, as has occurred in the past, which could adversely affect various sectors of the Argentine economy;

 

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

 

    unemployment and informal employment remain high; and

 

    in the climate created by the above mentioned conditions, demand for foreign currency could grow, generating a capital flight effect as in recent years.

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.

Any decline in economic growth, increased economic instability or expansion of economic policies and measures taken by the Argentine government to control inflation or address other macroeconomic developments that affect private sector entities such as us, all developments over which we have no control, could have an adverse effect on our financial condition or results of operations.

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

Presidential and congressional elections in Argentina took place on October 25, 2015, and a runoff election (ballotage) between the two leading presidential candidates was held on November 22, 2015, which resulted in Mr. Mauricio Macri being elected President of Argentina. The Macri administration assumed office on December 10, 2015.

On October 22, 2017, mid-term legislative elections were held at the federal and provincial government levels. Macri’s Cambiemos alliance obtained the most votes in the City of Buenos Aires, as well as in the provinces of Buenos Aires, Chaco, Córdoba, Corrientes, Entre Ríos, Jujuy, La Rioja, Mendoza, Neuquén, Salta, Santa Cruz and Santa Fe. As a result, as of December 10, 2017, Cambiemos increased its representation in the Argentine Congress by nine senators (holding in the aggregate 24 of a total of 72 seats in the Senate) and by 21 members of the Chamber of Deputies (holding in the aggregate 107 of a total of 257 seats in such Chamber).

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

 

    INDEC reforms. On January 8, 2016, based on its determination that the INDEC had failed to produce reliable statistical information, particularly with respect to the CPI, GDP, poverty and foreign trade data, the Macri administration declared the national statistical system and the INDEC in a state of administrative emergency through December 31, 2016, which was not renewed. The INDEC implemented certain methodological reforms and adjusted certain macroeconomic statistics on the basis of these reforms. See “—The credibility of several Argentine economic indices has been called into question, which has led to a lack of confidence in the Argentine economy and could affect your evaluation of this offering and/or the market value of the ADSs.” As of the date of this prospectus, the INDEC has begun publishing certain revised data, including GDP, poverty, foreign trade and balance of payment statistics.

 

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    Agreement with holdout creditors. The Macri administration has reached agreements with a large majority of holdout creditors (in terms of claims) and regained access to the international financial markets for the country. For more information on these agreements, see “—A lack of financing for Argentine companies due to the unresolved litigation with holdout bondholders may negatively impact our financial condition or cash flows.”

 

    Foreign exchange reforms. The Macri administration implemented a series of reforms related to the foreign exchange restrictions, including certain currency controls, that were imposed under the Fernández de Kirchner administration in order to provide greater flexibility and easier access to the MULC. Following the implementation of certain initial measures, on May 19, 2017, the Central Bank issued Communication “A” 6244, which substantially modified the applicable foreign exchange regulations and eliminated the set of restrictions for accessing the MULC. See “Exchange Controls.”

 

    Foreign trade reforms. The Kirchner and Fernández de Kirchner administrations imposed export duties and other restrictions on several sectors, particularly the agricultural sector. The Macri administration eliminated export duties on wheat, corn, beef, mining and regional products, and reduced the duty on soybean exports by 5%, from 35% to 30%. Further, a 5% export duty on most industrial exports was eliminated. With respect to payments for imports of goods and services, the Macri administration announced the elimination of amount limitations for access to the MULC.

 

    Fiscal policy. The Macri administration took steps to anchor the fiscal accounts, reducing the primary fiscal deficit by approximately 1.3% of GDP in December 2015 through a series of taxation and other measures and announced its intention to reduce the primary fiscal deficit in 2016 and 2017 from approximately 5.8% of GDP in 2015, in part by eliminating public services subsidies that were in place, such as those applying to electric power and gas services. For 2017, the Argentine government set a fiscal deficit target of 4.2% of GDP. For the first nine-month of 2017, the aggregate primary fiscal deficit was reported to be 2.2% of GDP. The Macri administration’s ultimate aim is to achieve a balanced primary budget by 2019 with a primary fiscal deficit of 2.2% GDP.

 

    Correction of monetary imbalances. The Macri administration announced the adoption of an inflation targeting regime in parallel with the floating exchange rate regime and set inflation targets for the next three years, including a band of 12-17% for 2017. The Central Bank has increased its efforts to reduce excess monetary imbalances and also raised peso interest rates to counterbalance inflationary pressure. On December 28, 2017, the Central Bank announced its inflation targets for 2018, 2019 and 2020. The inflation target for 2018 is 15%, an increase from the Central Bank’s previous target range of 8%-12% for the same year. Inflation targets for 2019 and 2020 are 10% and 5%, respectively.

 

   

National electric power state of emergency and reforms. Following years of very limited investment in the energy sector, as well as the continued freeze on electric power and natural gas tariffs since the 2001-2002 economic crisis, Argentina began to experience energy shortages in 2011. In response to the growing energy crisis. In December 2015 the Macri administration declared a state of emergency with respect to the national electric power system, which remained in effect until December 31, 2017. The state of emergency allowed the Argentine government to take actions designed to ensure the supply of electric power to the country, such as instructing the Ministry of Energy and Mining to design and implement, with the cooperation of all federal public entities, a coordinated program to guarantee the quality and security of the electric power system. In addition, the Macri administration announced the elimination of certain energy subsidies and a substantial increase in electric power rates. By correcting tariffs and subsidies and modifying the regulatory framework, the Macri administration aims to correct distortions in the energy sector and stimulate investment. Following tariff increases, preliminary injunctions suspending such increases were requested by customers, politicians and non-governmental organizations that defend customers’ rights, which preliminary injunctions were granted by Argentine courts. Among the different rulings in this respect, two separate rulings led to the suspension of end-users tariff increases of electric power in the Province of Buenos Aires and in the whole territory of Argentina. However, on September 6, 2016, the Supreme Court denied these injunctions that suspended end-users

 

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electric power tariff increases, arguing formal objections and procedural defects and therefore, as of the date of this prospectus, increases of the electric power end-users tariffs are not suspended.

Pursuant to Resolution No. 522/16, the ENRE ordered a public hearing to be held to evaluate the proposals for the full tariff review filed by EDENOR and EDESUR for the period beginning January 1, 2017 to December 31, 2021. The hearing was held on October 28, 2016 and, following such hearing, on January 31, 2017, the ENRE issued Resolution No. 63/17, by virtue of which such administrative authority approved the tariffs to be applied by EDENOR. Similarly, Resolution No. 64/17 approved EDESUR’s tariffs. With regards to transmission tariffs, seven public hearings were held pursuant to Resolutions Nos. 601/16, 602/16, 603/16, 604/16, 605/16, 606/16, 607/16 of the ENRE. In such public hearings the tariff proposals filed by transmission companies Transener S.A, Distrocuyo S.A., Transcomahue S.A., Ente Provincial de Energía de Neuquén, Transba S.A., Transnea S.A., Transnoa S.A., and Transpa S.A. for the period beginning January 1, 2017 to December 31, 2021 were evaluated. Pursuant to Resolutions Nos. 66/17, 68/17, 69/17, 71/17, 73/17, 75/17, 77/17 and 79/17, the ENRE approved the new applicable tariffs of such companies.

The Macri administration does not have a majority of seats in the Argentine Congress and, therefore, it may be difficult to adopt some of those measures unless he obtains support from the opposition, creating uncertainty as to the ability of the Macri administration to pass any measure that it expects to implement. In addition, recent judicial decisions substantially limiting the Macri administration’s efforts to raise tariffs and protests throughout Argentina in respect of such efforts have added to political uncertainty. This political uncertainty in respect of economic measures could lead to volatility in the market prices of securities of Argentine companies.

The fiscal, monetary and currency adjustments undertaken by the Macri administration may subdue growth in the short-term. For example, immediately after the foreign exchange controls were lifted on December 16, 2015, the dismantling of the multiple exchange regime resulted in the official peso exchange rate (available only for certain types of transactions) falling in value by 40.1%, as the peso-U.S. dollar exchange rate reached Ps.13.76 to US$1.00 on December 17, 2015. The Central Bank has since allowed the peso to float with limited intervention intended to ensure the orderly operation of the MULC. On January 17, 2018, the exchange rate was Ps.18.85 to US$1.00, as quoted by the Banco de la Nación Argentina for wire transfers (divisas).

As of the date of this prospectus, the impact that these measures and any future measures taken by the current administration will have on the Argentine economy as a whole and the electric power industry in particular cannot be predicted. The proposed economic liberalization could be disruptive to the economy and fail to benefit, or harm, our business. There remains uncertainty as to which additional measures announced during the presidential campaign will be taken by the Macri administration and when these will be implemented, if ever. In particular, we have no control over the implementation of the reforms to the regulatory framework that governs our operations and cannot guarantee that these reforms will be implemented or implemented in a manner that will benefit our business. The failure of these measures to achieve their intended goals could adversely affect the Argentine economy, which, in turn may have an adverse effect on our financial condition and results of operations.

If the current levels of inflation do not decrease, the Argentine economy could be adversely affected

Historically, inflation has materially undermined the Argentine economy and the Argentine government’s ability to create conditions that permit growth. In recent years, Argentina has experienced high inflation rates. See “—The credibility of several Argentine economic indices has been called into question, which has led to a lack of confidence in the Argentine economy and could affect your evaluation of this offering and/or the market value of the ADSs” below.

During 2016, the City of Buenos Aires CPI inflation rate was 41.05%, while according to the Province of San Luis CPI, the inflation rate was 31.53%. The new INDEC IPC inflation rates for January, February, March,

 

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April, May, June, July, August and September 2017 were 1.3%, 2.5%, 2.4%, 2.6%, 1.3%, 1.2%, 1.7%, 1.4% and 1.9%, respectively. In the past, and particularly throughout the Fernández de Kirchner administration, the Argentine government has implemented programs to control inflation and monitor prices for essential goods and services, including attempts to freeze the price of certain supermarket products and price support arrangements agreed between the Argentine government and private sector companies in several industries and markets, that did not address the structural causes of inflation and failed to reduce inflation.

High inflation rates affect Argentina’s foreign competitiveness, social and economic inequality, negatively impacts employment, consumption and the level of economic activity and undermines confidence in Argentina’s banking system, which could further limit the availability of and access by local companies to domestic and international credit.

Inflation remains a challenge for Argentina given its persistent nature in recent years. The Argentine government has announced its intention to reduce the primary fiscal deficit as a percentage of GDP over time and also reduce the Argentine government’s reliance on Central Bank financing. If, despite the measures adopted by the Argentine government, these measures fail to address Argentina’s structural inflationary imbalances, the current levels of inflation may continue and have an adverse effect on Argentina’s economy and can also lead to an increase in Argentina’s debt. Moreover, certain objectives of the Argentine government, such as the increase in tariffs to incentivize investment in the energy sector, may create inflationary pressures. Inflation in Argentina has contributed to a material increase in our costs of operation, in particular labor costs, and negatively impacted our financial condition.

Inflation rates could escalate in the future, and there is uncertainty regarding the effects that the measures adopted, or that may be adopted in the future, by the Argentine government to control inflation may have. See “—Government intervention may adversely affect the Argentine economy and, as a result, our business and results of operations.” Increased inflation could adversely affect the Argentine economy, which in turn may have an adverse effect on our financial condition and results of operations.

The IAS 29, Financial Reporting in Hyperinflationary Economies, requires that financial statements of any entity whose functional currency is the currency of a hyperinflationary economy, whether based on the historical cost method or on the current cost method, be stated in terms of the measuring unit current at the end of the reporting period. Although the current rate of inflation does not rise to the level required for Argentina to be considered a hyperinflationary economy under IAS 29, if inflation rates continue to escalate in the future, the Argentine peso may qualify as a currency of a hyperinflationary economy according to the guidelines in IAS 29, in which case our financial statements and other financial information may need to be adjusted by applying a general price index and expressed in the measuring unit (the hyperinflationary currency) current at the end of each reporting period. We cannot determine at this time the impact this would have on our financial condition. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Inflation.”

The credibility of several Argentine economic indices has been called into question, which has led to a lack of confidence in the Argentine economy and could affect your evaluation of this offering and/or the market value of the ADSs

During the administrations of Kirchner and Fernández de Kirchner, the INDEC, the Argentine government’s principal statistical agency, underwent institutional and methodological reforms that gave rise to controversy regarding the reliability of the information that it produced. Reports published by the IMF have stated that their staff uses alternative measures of inflation for macroeconomic surveillance, including data produced by private sources, which have shown inflation rates considerably higher than those published by the INDEC between 2007 and 2015. The IMF also censured Argentina for failing to make sufficient progress, as required under the Articles of Agreement of the IMF, in adopting remedial measures to address the quality of official data, including inflation and GDP data.

 

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On January 8, 2016, based on its determination that the INDEC had failed to produce reliable statistical information, particularly with respect to its CPI, GDP, foreign trade and poverty data, the Macri administration declared the national statistical system and the INDEC in a state of administrative emergency through December 31, 2016, which was not renewed. The INDEC suspended publication of certain statistical data until it completed reorganization of its technical and administrative structure to recover its ability to produce sufficient and reliable statistical information. During the first six months of this reorganization period, the INDEC published official CPI figures published by the City of Buenos Aires and the Province of San Luis for reference. On June 29, 2016, the INDEC published a report that included revised GDP data for the years 2004 through 2015. Among other adjustments, in calculating GDP for 2004, the INDEC made changes to the composition of GDP that resulted in a downward adjustment of approximately 12% for that year. In calculating real GDP for subsequent years based on the revised 2004 GDP, the INDEC used deflators that are consistent with its revised methodology to calculate inflation. By understating inflation in the past, the INDEC had overstated growth in real terms. The adjustments made by the INDEC resulted in a determination of real GDP growth for the period 2004-2014 of 44.8%, as opposed to a 63% growth in real terms for the same period resulting from the information used prior to June 29, 2016.

Following the publication of revised data and a new inflation index, on November 9, 2016, the IMF lifted the censorship against Argentina, stating that the country had resumed the publication of data in a manner consistent with its obligations under the Articles of Agreement of the IMF.

The Argentine government’s reforms seek to produce official data that meets international standards. In order to be effective, however, reforms require certain implementation steps and the timely collection of data, the success of which may be outside of the Argentine government’s control. If these reforms cannot be successfully implemented, such failure may adversely affect the Argentine economy, in particular by undermining consumer and investor confidence. The INDEC’s past or future data may be materially revised to reveal a different economic or financial situation in Argentina, which could affect investors’ perception of Argentina, including the market value of the ADSs. In addition, the failure or delays in implementing the expected changes may impair other measures taken by the Central Bank to tackle inflation. This, in turn, could have a negative impact on Argentina’s economy and, as a result, could have an adverse effect on our ability to access international capital markets to finance our operations and growth, adversely affecting our results of operations and financial condition.

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

The devaluation of the peso may have a negative impact on the ability of certain Argentine businesses to service their foreign currency-denominated debt, lead to inflation, significantly reduce real wages and jeopardize the stability of businesses, such as ours, whose success depends on domestic market demand and adversely affect the Argentine government’s ability to honor its foreign debt obligations. After several years of moderate variations in the nominal exchange rate, the peso lost more than 30% of its value with respect to the U.S. dollar in each of 2013 and 2014. In 2015, the peso lost approximately 52% of its value with respect to the U.S. dollar, including a 10% devaluation from January 1, 2015 to September 30, 2015 and a 38% devaluation during the last quarter of the year, mainly concentrated after December 16, 2015 once the Macri administration eliminated exchange controls imposed by the prior administration. From January 1, 2016 to December 31, 2016 the peso lost approximately 21.86% of its value with respect to the U.S. dollar. During the first nine months of 2017, the peso lost approximately 8.93% of its value with respect to the U.S. dollar. On January 17, 2018, the exchange rate was Ps.18.85 to US$1.00, as quoted by the Banco de la Nación Argentina for wire transfers (divisas).

Persistent high inflation during 2013, 2014, 2015, and 2016, together with formal and de facto exchange controls, resulted in an increasingly overvalued official exchange rate. Compounded by the effects of foreign exchange controls and restrictions on foreign trade, these highly distorted relative prices resulted in the loss of competitiveness of Argentine production, impeded investment and caused economic stagnation. A significant

 

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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 appreciation could also have a negative effect on economic growth and employment and reduce tax revenues in real terms.

From time to time, the Central Bank may intervene in the MULC in order to maintain the currency. Additional volatility, appreciation or depreciation of the peso or reduction of the Central Bank’s reserves as a result of currency intervention could adversely affect the Argentine economy, which in turn may have an adverse effect on our financial condition and results of operations.

If the peso devalues further, the negative effects on the Argentine economy could have adverse consequences for our financial condition.

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

The two administrations of President Fernández de Kirchner, who governed from 2007 through December 9, 2015, increased state intervention in the Argentine economy, including through expropriation and nationalization measures, price controls and pervasive exchange controls.

In 2008, the Fernández de Kirchner administration absorbed and replaced the former private pension system for a public “pay as you go” pension system. As a result, all resources administered by the private pension funds, including significant equity interests in a wide range of listed companies, were transferred to a separate fund (Fondo de Garantía de Sustentabilidad, or the “FGS”) to be administered by the National Social Security Administration (Administración Nacional de la Seguridad Social, or the “ANSES”). The dissolution of the private pension funds and the transfer of their financial assets to the FGS have had important repercussions on the financing of private sector companies. Debt and equity instruments that previously could be placed with pension fund administrators are now entirely subject to the discretion of the ANSES. Since acquiring equity interests in privately owned companies, through the process of replacing the pension system, the ANSES is entitled to designate representatives of the Argentine government to the boards of directors of those entities. Pursuant to Decree No. 1,278/12, issued by the executive branch on July 25, 2012, the ANSES’s representatives must report directly to the Ministry of Economy and are subject to a mandatory information-sharing regime, under which, among other obligations, the representatives must immediately inform the Ministry of Economy of the agenda for each board of directors’ meeting and provide related documentation.

In April 2012, the Fernández de Kirchner administration decreed the removal of directors and senior officers of YPF, the country’s largest oil and gas company, which was controlled by the Spanish group Repsol, and submitted a bill to the Argentine Congress to expropriate shares held by Repsol representing 51% of the shares of YPF. The Argentine Congress approved the bill in May 2012 through the passage of Law No. 26,741, which declared the production, industrialization, transportation and marketing of hydrocarbons to be activities of public interest and fundamental policies of Argentina and empowered the Argentine government to adopt any measures necessary to achieve self-sufficiency in hydrocarbon supply. In February 2014, the Argentine government and Repsol announced that they had reached an agreement on the terms of the compensation payable to Repsol for the expropriation of the YPF shares. Such compensation totaled US$5 billion payable by delivery of Argentine sovereign bonds with various maturities. The agreement, which was ratified by Law No. 26,932, settled the claim filed by Repsol with the ICSID.

It is widely reported by private sector economists that expropriations, price controls, exchange controls and other direct involvement by the Fernández de Kirchner administration in the economy had an adverse impact on the level of investment in Argentina, the access of Argentine companies to the international capital markets and Argentina’s commercial and diplomatic relations with other countries. Further actions taken by the Argentine government concerning the economy, including decisions with respect to interest rates, taxes, price controls,

 

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salary increases, provision of additional employee benefits and foreign exchange controls could continue to have a material adverse effect on Argentina’s economic growth and in turn affect our financial condition and results of operations. Moreover, any additional Argentine government policies established to preempt, or in response to, social unrest could adversely and materially affect the economy, and therefore our business, results of operations and financial condition.

Government measures, as well as pressure from labor unions, could require salary increases or added benefits, all of which could increase companies’ operating costs

In the past, the Argentine government has passed laws and regulations forcing privately owned companies to maintain certain wage levels and provide added benefits for their employees. Additionally, both public and private sector employers have been subject to strong pressure from the workforce and trade unions to grant salary increases and certain benefits. See “—Risks Relating to Our Business—We could be affected by material actions taken by the trade unions.”

Labor relations in Argentina are governed by specific legislation, such as labor Law No. 20,744 and Collective Bargaining Law No. 14,250, which, among other things, dictate how salary and other labor negotiations are to be conducted. Every industrial or commercial activity is regulated by a specific collective bargaining agreement (“CBA”) that groups companies together according to industry sector and trade union. Although the process of negotiation is standardized, each chamber of industrial or commercial activity separately negotiates the increases of salaries and labor benefits with the relevant trade union of such commercial or industrial activity.

Argentine employers, both in the public and private sectors, have experienced significant pressure from their employees and labor organizations to increase wages and to provide additional employee benefits. In August 2012, the Argentine government established a 25% increase in minimum monthly salary to Ps.2,875, effective as of February 2013. The Argentine government increased the minimum salary to Ps.3,300 in August 2013, to Ps.3,600 in January 2014, to Ps.4,400 in September 2014 and to Ps.5,588 in August 2015. It further decreed an increase of the minimum salary applicable to Ps.6,060 in January 2016, to Ps.6,810 in June 2016, to Ps.7,560 in September 2016 and to Ps.8,060 in January 2017. In June 2017, the Ministry of Labor raised the minimum salary to Ps.10,000, effective in three tranches: Ps.8,860 as of July 2017, Ps.9,500 as of January 2018 and Ps.10,000 as of July 2018. Due to high levels of inflation, both public and private sector employers are experiencing significant pressure from unions and their employees to further increase salaries. In 2015, the INDEC published the Coeficiente de Variación Salarial (Salary Variation Index, or the “CVS”), an index that shows the evolution of salaries. The Salaries Index showed an increase of approximately 33.00% in registered private sector salaries in 2016, and 22.46% for the nine-month period ended September 30, 2017.

In the future, the Argentine government could take new measures requiring salary increases or additional benefits for workers, and the labor force and labor unions may apply pressure for such measures. Any such increase in wage or worker benefit could result in added costs and reduced results of operations for Argentine companies, including us. Such added costs could adversely affect our business, financial condition and result of operations.

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

In 2001 and 2002, Argentina imposed exchange controls and transfer restrictions, substantially limiting the ability of companies to retain foreign currency or make payments abroad. After 2002, these restrictions, including those requiring the Central Bank’s prior authorization for the transfer of funds abroad to pay principal and interest on debt obligations, were substantially eased through 2007. In addition to the foreign exchange restrictions applicable to outflows, in June 2005 the Argentine government adopted various rules and regulations that established restrictive controls on capital inflows into Argentina, including a requirement that, for certain

 

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funds remitted into Argentina, an amount equal to 30% of the funds must be deposited into an account with a local financial institution as a U.S. dollar deposit for a one-year period without any accrual of interest, benefit or other use as collateral for any transaction.

From 2011 and until President Macri assumed office, the Argentine government increased controls on the sale of foreign currency and the acquisition of foreign assets by local residents, limiting the possibility of transferring funds abroad. Furthermore, under regulations issued since 2012 certain foreign exchange transactions were subject to prior approval by the Federal Administration of Public Income (“AFIP”). Through a combination of foreign exchange and tax regulations, the Fernández de Kirchner administration significantly curtailed access to the MULC by individuals and private-sector entities. In addition, during the last few years under the Fernández de Kirchner administration, the Central Bank exercised a de facto prior approval power for certain foreign exchange transactions otherwise authorized to be carried out under the applicable regulations, such as dividend payments or repayment of principal of intercompany loans as well as the import of goods, by means of regulating the amount of foreign currency available to companies to conduct such transactions. The number of exchange controls introduced in the past and in particular after 2011 during the Fernández de Kirchner administration gave rise to an unofficial U.S. dollar trading market, and the peso/U.S. dollar exchange rate in such market substantially differed from the official peso/U.S. dollar exchange rate. See “Exchange Controls.”

Additionally, the level of international reserves deposited with the Central Bank significantly decreased from US$47.4 billion as of November 1, 2011 to US$25.6 billion as of December 31, 2015, resulting in a reduced capacity of the Argentine government to intervene in the MULC and to provide access to such markets to private sector entities like us. The Macri administration announced a program intended to increase the level of international reserves deposited with the Central Bank through the execution of certain agreements with several Argentine and foreign entities. As a result of the measures taken under such program and due to the issuance by the Argentine government of US$16.5 billion and US$2.75 billion of new debt securities in the international capital markets on April 22, 2016 and July 6, 2016, respectively, the level of international reserves increased to US$38.8 billion as of December 31, 2016. As of November 24, 2017, the level of international reserves of the Central Bank totaled US$55.0 billion, an increase from US$38.8 billion as of December 31, 2016.

Since assuming office, the Macri administration gradually implemented a series of reforms related to the foreign exchange restrictions, including certain currency controls, which had been imposed under the Fernández de Kirchner administration, in order to provide greater flexibility and access to the MULC. On August 8, 2016 the Central Bank issued Communication “A” 6037, which substantially modified the applicable foreign exchange regulations and eliminated the set of restrictions for accessing the MULC. Effective as of July 1, 2017, pursuant to Communication “A” 6244, all regulations that restricted access to the MULC were repealed, leaving in place only the obligation to comply with a reporting regime. Pursuant to Communication “A” 6401, dated December 26, 2017, a new reporting regime was created, pursuant to which the “Survey on the issuance of foreign notes and liabilities by the financial and private non-financial sector,” established by Communication “A” 3602, and the “Survey on direct investments,” established by Communication “A” 4237, were replaced by a unified report on direct investments and debt. Argentine residents must comply with the reporting regime, even when the funds have not been sold in the MULC and/or there is no expectation to access the MULC in the future in relation to the funds that must be reported. For further information, see “Exchange Controls.”

Notwithstanding the measures adopted by the Argentine government, in the future the Argentine government could impose further exchange controls, transfer restrictions or restrictions on the movement of capital and/or take other measures in response to capital flight or a significant depreciation of the peso, which could limit our ability to access the international capital markets and impair our ability to make interest, principal or dividend payments abroad. Such measures could lead to renewed political and social tensions and undermine the Argentine government’s public finances, which could adversely affect Argentina’s economy and prospects for economic growth and, consequently, adversely affect our business and results of operations.

 

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A lack of financing for Argentine companies due to the unresolved litigation with holdout bondholders may negatively impact our financial condition or cash flows

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

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

In 2012, plaintiffs in New York obtained a U.S. district court order enjoining Argentina from making interest payments in full on the bonds issued pursuant to the 2005 and 2010 exchange offers unless Argentina paid the plaintiffs in full, under the theory that the former payments violated the pari passu clause in the 1994 Fiscal Agency Agreement (the “FAA”) governing those non-performing bonds. The Second Circuit Court of Appeals affirmed the so-called pari passu injunctions, and on June 16, 2014 the U.S. Supreme Court denied Argentina’s petition for a writ of certiorari and the pari passu injunctions became effective on June 18 of that year.

In 2014, the Argentine government took a number of steps intended to continue servicing the bonds issued in the 2005 and 2010 exchange offers, which had limited success.

The Argentine government engaged in negotiations with holders of defaulted bonds in December 2015 with a view to bringing closure to fifteen years of litigation. In February 2016, the Argentine government entered into an agreement in principle to settle with certain holders of defaulted debt and put forward a proposal to other holders of defaulted debt, including those with pending claims in U.S. courts, subject to two conditions: (i) obtaining approval by the Argentine Congress and the lifting of the pari passu injunctions. On March 2, 2016, the U.S. district court agreed to vacate the pari passu injunctions, subject to two conditions: first, the repeal of all legislative obstacles to settlement with holders of defaulted debt securities issued under the FAA; and (ii) full payment to holders of pari passu injunctions with whom the Argentine government had entered into an agreement in principle on or before February 29, 2016. The U.S. district court’s order was affirmed by the Second Circuit Court of Appeals on April 13, 2016. On June 30, 2016, the Argentine Congress repealed the legislative obstacles to the settlement and approved the settlement proposal. On April 22, 2016, Argentina issued US$16.5 billion of new debt securities in the international capital markets, and applied US$9.3 billion of these proceeds to satisfy settlement payments on agreements with holders with claims amounting to approximately US$4.2 billion. The District Court ordered the vacatur of all pari passu injunctions upon confirmation of such payments.

As of the date of this prospectus, litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in several jurisdictions, although the size of the claims involved has decreased significantly.

Although the vacatur of the pari passu injunctions removed a material obstacle to access to capital markets by the Argentine government, future transactions may be affected as litigation with holdout bondholders continues, which in turn could affect the Argentine government’s ability to access international credit markets, thus affecting our ability to finance our growth.

High public expenditures could result in long-lasting adverse consequences for the Argentine economy

In recent years, the Argentine government has substantially increased public expenditures. In 2016, national public sector expenditures increased by 37.0% year over year (measured in nominal Argentine pesos) and the

 

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government reported a primary fiscal deficit of 4.6% of GDP, according to the Argentine Ministry of Economy (which is, as of the date of this prospectus, divided into two parts—the Ministry of Treasury and the Ministry of Public Finance). During recent years, the Argentine government has resorted to the Central Bank and to the ANSES to alleviate part of its funding requirements. Moreover, the primary fiscal balance could be negatively affected in the future if public expenditures continue to increase at a rate higher than revenues due to, for example, social security benefits, financial assistance to provinces with financial problems and increased spending on public works and subsidies, including subsidies to the energy and transportation sectors. A further deterioration in fiscal accounts could negatively affect the government’s ability to access the long-term financial markets and could in turn result in more limited access to such markets by Argentine companies. Additionally, a further deterioration in fiscal accounts could affect the Argentine government’s ability to continue subsidies for consumers in the energy sector.

A decline in international prices for Argentina’s main commodity exports could have an adverse effect on Argentina’s economic growth

Argentina’s financial recovery from the 2001-2002 crisis occurred in a context of price increases for Argentina’s commodity exports, such as soy. High commodity prices contributed to the increase in Argentine exports since the third quarter of 2002 and to high government tax on revenues from export withholdings. However, the reliance on the export of certain commodities has caused the Argentine economy to be more vulnerable to fluctuations in their prices.

Commodity prices, including for soy, have declined significantly since peak prices due in part to slower growth in China. A continuing decline in the international prices for Argentina’s main commodity exports could have a negative impact on the levels of government revenues and the government’s ability to service its sovereign debt, and could either generate recessionary or inflationary pressures, depending on the government’s reaction. Either of these results would adversely impact Argentina’s economy and, therefore, our financial condition.

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

Weak, flat or negative economic growth of any of Argentina’s major trading partners, such as Brazil, could adversely affect Argentina’s balance of payments and, consequently, economic growth.

The economy of Brazil, Argentina’s largest export market and the principal source of imports, is currently experiencing heightened negative pressure due to the uncertainties stemming from ongoing political crisis, including the impeachment of Brazil’s president, Ms. Dilma Rousseff. The Brazilian economy contracted by 3.6% during 2016, mainly due to a 4.2% decrease in household consumption and a 10.2% decrease in gross fixed capital formation. A further deterioration of economic conditions in Brazil may reduce demand for Argentine exports and create advantages for Brazilian imports. While the impact of Brazil’s downturn on Argentina cannot be predicted, we cannot exclude the possibility that the Brazilian political and economic crisis could have a further negative impact on the Argentine economy.

The Argentine economy may be affected by “contagion” effects. International investors’ reactions to events occurring in one developing country sometimes appear to follow a “contagion” pattern, in which an entire region or investment class is disfavored by international investors. In the past, the Argentine economy has been adversely affected by such contagion effects on a number of occasions, including the 1994 Mexican financial crisis, the 1997 Asian financial crisis, the 1998 Russian financial crisis, the 1999 devaluation of the Brazilian real, the 2001 collapse of Turkey’s fixed exchange rate regime and the global financial crisis that began in 2008.

The Argentine economy may also be affected by conditions in developed economies, such as the United States, that are significant trading partners of Argentina or have influence over world economic cycles. If

 

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interest rates increase significantly in developed economies, including the United States, Argentina and its developing economy trading partners, such as Brazil, could find it more difficult and expensive to borrow capital and refinance existing debt, which could adversely affect economic growth in those countries. Decreased growth on the part of Argentina’s trading partners could have a material adverse effect on the markets for Argentina’s exports and, in turn, adversely affect economic growth. Any of these potential risks to the Argentine economy could have a material adverse effect on our business, financial condition and result of operations.

On June 23, 2016, the United Kingdom voted in favor of exiting the European Union. As of the date of this prospectus, 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 have caused, and are anticipated to continue causing, volatility in the financial markets, which may in turn have a material adverse effect on our business, financial condition and results of operations.

On November 8, 2016, Mr. Donald J. Trump was elected president of the United States. 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. These developments, or the perception that any of them could occur, may have a material adverse effect on global economic conditions and the stability of global financial markets. Any of these factors could depress economic activity and restrict our access to suppliers and have a material adverse effect on our business, financial condition and results of operations.

Risks Relating to the Electric Power Sector in Argentina

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

Historically, the Argentine government has played an active role in the electric power industry through the ownership and management of state-owned companies engaged in the generation, transmission and distribution of electric power. Since 1992 and the privatization of several state-owned companies, the Argentine government has reduced its control over the industry. However, as is the case in most other countries, the Argentine electric power industry remains subject to strict regulation and government intervention. Moreover, to address the Argentine economic crisis of 2001 and 2002, the Argentine government adopted Law No. 25,561 (the “Public Emergency Law”) and other regulations, which made a number of material changes to the regulatory framework applicable to the electric power sector. These changes have had significant adverse effects on electric power generation, distribution and transmission companies and included the freezing of distribution margins, the revocation of adjustment and inflation indexation mechanisms for tariffs, a limitation on the ability of electric power distribution companies to pass on to the consumer increases in costs due to regulatory charges and the introduction of a new price-setting mechanism in the WEM, all of which had a significant impact on electric power generators and caused substantial price differences within the market.

The Fernández de Kirchner administration continued to intervene in the electric power industry by, for example, granting temporary margin increases, proposing a new tariff regime for residents of poverty-stricken areas, increasing remunerations earned by generators for capacity, operation and maintenance services, creating specific charges to raise funds that are transferred to government-managed trust funds that finance investments in generation and distribution infrastructure and mandating investments for the construction of new generation plants and the expansion of existing transmission and distribution networks.

For example, in March 2013, pursuant to Resolution No. 95/13, issued by the former Secretariat of Energy, the Fernández de Kirchner administration suspended the renewal of sales contracts in the term market and execution of new agreements in the WEM, and ordered that any demand not satisfied by Argentine generators must be directly supplied by CAMMESA. As a result, Argentine generators are required to supply capacity and energy to CAMMESA at prices fixed by the former Secretariat of Energy.

 

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Since the Macri administration assumed office, the Argentine government has initiated significant reforms to the Argentine electric power industry. On December 16, 2015, the Macri administration declared a state of emergency with respect to the national electric power system that remained in effect until December 31, 2017. The state of emergency allowed the Argentine government to take actions designed to guarantee the supply of electric power in Argentina, such as instructing the Ministry of Energy and Mining to elaborate and implement, with the cooperation of all federal public entities, a coordinated program to guarantee the quality and security of the electric power system and rationalize public entities’ consumption of energy. In addition, the Argentine government and certain provincial governments have approved significant price adjustments and tariff increases applicable to certain generation and distribution companies. Following the tariff increases, preliminary injunctions suspending such increases were requested by customers, politicians and non-governmental organizations that defend customers’ rights, which preliminary injunctions were granted by Argentine courts. Among the different rulings in this respect, two recent rulings issued by the Second Division of the Federal Court of Appeals for the City of La Plata and a federal judge from the San Martín district court led to the suspension of end-users tariff increases of electric power in the Province of Buenos Aires and in the whole territory of Argentina, respectively. Pursuant to these injunctions, (i) the end-user tariff increases granted as of February 1, 2016 were suspended retroactively to that date, (ii) end-user bills sent to customers were not to include the increase and (iii) the amounts already collected from end-users as a consequence of consumption recorded before these rulings had to be reimbursed. However, on September 6, 2016, the Supreme Court denied these injunctions that suspended end-users electric power tariff increases, arguing formal objections and procedural defects and therefore, as of the date of this prospectus, increases of the electric power end-users tariffs are not suspended.

Pursuant to Resolution No. 522/16, the ENRE ordered a public hearing to be held to evaluate the proposals for the full tariff review filed by EDENOR and EDESUR for the period from January 1, 2017 to December 31, 2021. The hearing was held on October 28, 2016. A non-binding public hearing was conducted by the Ministry of Energy and Mining and the ENRE to discuss tariff proposals submitted by distribution companies covering the greater Buenos Aires area (with approximately 15 million inhabitants), including Edenor, for the 2017-2021 period within the framework of the RTI. Following such hearing, on January 31, 2017, the ENRE issued Resolution No. 63/17, pursuant to which such administrative authority approved the tariffs to be applied by EDENOR. In the same sense, Resolution No. 64/17 approved EDESUR’s tariffs.

On February 1, 2017, the ENRE enacted several resolutions, which, among other policy changes, implemented a reduction of electric power tariff subsidies and an increase in electric power tariffs for residential customers. Such increases ranged between 61% and 148%, depending on to the amount of the consumer’s electric power consumption.

Regarding transmission tariffs, seven public hearings were held pursuant to Resolutions Nos. 601/16, 602/16, 603/16, 604/16, 605/16, 606/16 and 607/16 of the ENRE. In such public hearings, the tariff proposals filed by transmission companies Transener S.A., Distrocuyo S.A., Transcomahue S.A., Ente Provincial de Energía de Neuquén, Transba S.A., Transnea S.A., Transnoa S.A. and Transpa S.A. for the period from January 1, 2017 to December 31, 2021 were evaluated. Pursuant to Resolutions Nos. 66/17, 68/17, 69/17, 71/17, 73/17, 75/17, 77/17 and 79/17, the ENRE approved the new applicable tariffs for such companies.

Additionally, in March 2016, the Secretariat of Electric Energy enacted Resolution SEE No. 22/16, through which it adjusted the electric power prices for the sale of energy by generation companies under the Energía Base. See “See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Our Revenues—The Energía Base.” The Secretariat of Electric Energy cited the fact that WEM prices have been distorted and discourage private sector investment in power generation and that it was necessary to raise tariffs to partially compensate for increasing operation and maintenance costs and to improve the cash flow generation capacity of these companies. On February 1, 2017, the tariff revision process was completed and the new tariff scheme for the following five-year period was enacted.

 

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The Argentine government has also established public bidding processes for the development of new generation projects from both thermal and renewable sources. These measures aim not only to satisfy domestic electric power demand, but also to promote investments in the electric power sector and improve the economic situation of the WEM, which, as discussed above, has faced challenges since 2001.

Notwithstanding the recent measures adopted by the Argentine government, we cannot guarantee that the expected changes to the electric power sector will happen as expected, within the anticipated timeframe or at all. It is possible that certain measures may be adopted by the Argentine government that could have a material adverse effect on our business and results of operations, or that the Argentine government may adopt emergency legislation similar to the Public Emergency Law or other similar resolutions in the future that could have a direct impact on the regulatory framework of the electric power industry and indirectly adversely affect the electric power generation industry, and therefore, our business, financial condition and results of operations.

Electricity generators, distributors and transmitters have been materially and adversely affected by emergency measures adopted in response to Argentina’s economic crisis of 2001 and 2002, many of which remain in effect

Since the Argentine economic crisis of 2001 and 2002, Argentina’s electric power sector has been characterized by government regulations and policies that have resulted in significant distortions in the electric power market, particularly with respect to prices, throughout the whole value chain of the sector (generation, transmission and distribution). Historically, Argentine electric power prices were calculated in U.S. dollars and margins were adjusted periodically to reflect variations in relation to costs. In January 2002, the Public Emergency Law authorized the Argentine government to renegotiate its public utility contracts. Under this law, the Argentine government revoked provisions in the public utility contracts related to the adjustment and inflation indexation mechanism. Instead, the tariffs on such contracts were frozen and converted from their original U.S. dollar values to Argentine pesos at a rate of Ps.1.00 per US$1.00. For further information on the changes to the legal framework of the Argentine electric power industry caused by the Public Emergency Law, see “The Argentine Electric Power Sector.”

These measures, coupled with the effect of high inflation and the devaluation of the peso in recent years, led to a significant decline in revenues and a significant increase of costs in real terms, which could no longer be recovered through margin adjustments or market price-setting mechanisms. This situation, in turn, led many public utility companies to suspend payments on their financial debt (which continued to be denominated in U.S. dollars despite the pesification of revenues), effectively preventing these companies from obtaining further financing in the domestic or international credit markets and making additional investments.

After declaring a state of emergency with respect to the national electrical system, the Argentine government increased electric power tariffs in the WEM under the Energía Base. Preliminary injunctions suspending such increases were requested by customers, politicians and non-governmental organizations, and recent rulings suspended the increases in the whole territory of Argentina. On September 6, 2016, the Supreme Court denied these injunctions that suspended end-users electric power tariff increases, and a public hearing to evaluate the proposals for a full tariff review filed by EDENOR and EDESUR was held on October 28, 2016. The tariff increases were approved on January 31, 2017. In addition, the Argentine government issued Resolution SE No. 21/16 calling for a public bid process for the installation of new generation capacity from both thermal and renewable sources, offering generators U.S. dollar-denominated rates linked to generation costs for newly available generation capacity. However, tariffs under the Energía Base remain well below historical levels, although there have been important increases and, they are now denominated in U.S. dollars which mitigates the effect of variations in the foreign exchange rate. These measures, or any future measures, may not be sufficient to address the structural problems created by the economic crisis of 2001 and 2002 and its aftermath, and measures similar to those adopted during the economic crisis may not be enacted in the future.

 

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We have, in the recent past, been unable to collect payments, or to collect them in a timely manner, from CAMMESA and other customers in the electric power sector

For the nine-month period ended September 30, 2017 and the year ended December 31, 2016, we derived approximately 78.54% and 74.66%, respectively, of our revenues from our sales to CAMMESA (under the Energía Base, the spot market and remuneration under Resolution No. 724/2008, relating to agreements with CAMMESA to improve existing power generation capacity). In addition, we receive significant cash flows from CAMMESA in connection with the FONINVEMEM and similar programs. Payments to us by CAMMESA, including installments in connection with returns from FONINVEMEM and similar programs, depend upon payments that CAMMESA in turn receives from other WEM agents such as electric power distributors as well as the Argentine government.

In recent years, due to regulatory conditions in Argentina’s electric power sector that affected the profitability and economic viability of power utilities, certain WEM agents defaulted on their payments to CAMMESA, which adversely affected CAMMESA’s ability to meet its payment obligations to electric power generators, including us. In the recent past, when CAMMESA experienced a lack of funds to pay to generators, a significant amount of unpaid balances were converted into LVFVD. See “Business—FONINVEMEM and Similar Programs.” As a consequence of delays in payments that CAMMESA received from other WEM agents in the past, we also saw delays in the payments we received under the Energía Base, receiving payments from CAMMESA within approximately 90 days of month-end, rather than the required 42 days after the date of billing. Such payment delays resulted in higher working capital requirements that we would typically finance with our own financing sources. Since September 2016, CAMMESA has paid without delays, in accordance with the Energía Base. However, CAMMESA may once again be unable to make payments to generators both in respect of energy dispatched and generation capacity availability on a timely basis or in full, which may substantially and adversely affect our financial position and the results of our operations.

Electricity demand may be affected by tariff increases, which could lead generation companies like us to record lower revenues

During the 2001 and 2002 economic crisis, electric power demand in Argentina decreased due to the decline in the overall level of economic activity and the deterioration in the ability of many consumers to pay their electric power bills. In the years following the 2001 and 2002 economic crisis, electric power demand experienced significant growth, increasing at an estimated average of approximately 3.86% per annum from 2002 through 2015 (despite a decline in 2009), due to its reduced cost as a result of certain energy subsidies, freezing of margins and elimination of inflation adjustment provisions in distribution concessions. In March 2016, the Argentine government unified and increased wholesale energy prices for all consumption in Argentina, eliminated certain energy subsidies and implemented an incentive plan (through discounts) for residential customers whose electric power consumption is at least 10.00% lower than their consumption for the same month of the previous year. These measures are currently in an early stage of implementation, and we cannot ascertain as of the date of this prospectus what the effect on our revenues could be. Any significant increase in energy prices to consumers (whether through a tariff increase or through a cut in consumer subsidies) could result in a decline in demand for the energy that we generate. Any material adverse effect on electric power demand, in turn, could lead electric power generation companies, like us, to record lower revenues and results of operations than currently anticipated.

Argentina has certain energy transmission and distribution limitations that adversely affect the capacity of electric power generators to deliver all of the energy they are able to produce, which results in reduced sales

The energy that generators are able to deliver to the transmission system for the further delivery to the distribution system at all times depends on the capacity of the transmission and distribution systems that connects them to it. The transmission and distribution system is currently operating at near full capacity and both transmission and distributors may not be able to guarantee an increased supply of electric power to their

 

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customers. In the past years, the increase in demand for electric power resulted in blackouts in Buenos Aires and other cities around Argentina, which results in excess capacity for generators. As a result, the amount of hydroelectric energy and thermal energy generated is larger than what the transmission and distribution systems are capable of transmitting or distributing. Any transmission or distribution limitation for generators could reduce the energy sold, which could adversely affect our financial condition.

Our equipment, facilities and operations are subject to environmental, health and safety regulations

Our generation business is subject to federal and provincial laws, as well as to the supervision of governmental agencies and regulatory authorities in charge of enforcing environmental laws and policies. We operate in compliance with applicable laws and in accordance with directives issued by the relevant authorities and CAMMESA; however, it is possible that we could be subject to controls, which could result in penalties to be imposed on us, such as the termination of the HPDA Concession Agreement. In addition, future environmental regulations could require us to make investments in order to comply with the requirements set by the authorities, instead of making other scheduled investments and, as a result, could have a material adverse effect on our financial condition and our results of operations.

We operate in a heavily regulated sector that imposes significant costs on our business, and we could be subject to fines and liabilities that could have a material adverse effect on our results of operations

We are subject to a wide range of federal, provincial and municipal regulations and supervision, including laws and regulations pertaining to tariffs, labor, social security, public health, consumer protection, the environment and competition. Furthermore, Argentina has 23 provinces and one autonomous city (the City of Buenos Aires), each of which, under the Argentine National Constitution, has power to enact legislation concerning taxes, environmental matters and the use of public space. Within each province, municipal governments can also have powers to regulate such matters. Although the generation of electric power is considered an activity of general interest (actividad de interés general) subject to federal legislation, due to the fact that our facilities are located throughout various provinces, we are also subject to provincial and municipal legislation. Future developments in the provinces and municipalities concerning taxes (including sales, security and health and general services taxes), environmental matters, the use of public space or other matters could have a material adverse effect on our business, results of operations and financial condition. Compliance with existing or future legislation and regulations could require us to make material expenditures and divert funds away from planned investments in a manner that could have a material adverse effect on our business, results of operations and financial condition.

In addition, our failure to comply with existing regulations and legislation, or reinterpretations of existing regulations and new legislation or regulations, such as those relating to fuel and other storage facilities, volatile materials, cyber security, emissions or air quality, hazardous and solid waste transportation and disposal and other environmental matters, or changes in the nature of the energy regulatory process may subject us to fines and penalties and have a significant adverse impact on our financial results.

Our power plants are subject to the risk of mechanical or electrical failures and any resulting unavailability may affect our ability to fulfill our contractual and other commitments and thus adversely affect our business and financial performance

Our power generation units are at risk of mechanical or electrical failure and may experience periods of unavailability affecting our ability to generate electric power. For example, certain of our turbogenerators at the Puerto Complex, including generators 5, 6, 7 and 8, began operating in the 1960s and are, therefore, over 50 years old. Because of their age, these generators may face a higher risk of mechanical or electrical failure. Any unplanned unavailability of our generation facilities may adversely affect our financial condition or results of operations.

 

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Risks arise for our business from technological change in the energy market

The energy market is subject to far-reaching technological change, both on the generation side and on the demand side. For example, with respect to energy generation, the development of energy storage devices (battery storage in the megawatt range) or facilities for the temporary storage of power through conversion to gas (so-called “power-to-gas-technology”), the increase in energy supply due to new technological applications such as fracking or the digitalization of generation and distribution networks should be mentioned.

New technologies to increase energy efficiency and improve heat insulation, for the direct generation of power at the consumer level, or that improve refeeding (for example, by using power storage for renewable generation) may, on the demand side, lead to structural market changes in favor of energy sources with low or zero carbon dioxide emissions or in favor of decentralized power generation, (for instance, via small-scale power plants within or close to residential areas or industrial facilities.)

If our business is unable to react to changes caused by new technological developments and the associated changes in market structure, our equity, financial or other position, or our results, operation and business, could be materially and adversely affected.

We may face competition

The power generation markets in which we operate are characterized by numerous strong and capable participants, many of which may have extensive and diversified developmental or operating experience (including both domestic and international) and financial resources similar to or significantly greater than ours. See “Business—Competition.” An increase in competition could cause reductions in prices and increase acquisition prices for fuel, raw materials and existing assets and, therefore, adversely affect our results of operations and financial condition.

We compete with other generation companies for the megawatt of capacity that are allocated through public auction processes. On October 7, 2016, the Ministry of Energy finalized the auction process for the installation of new renewable energy units and granted awards in the amount of 1,108.65 MW, including one biomass project, 12 wind energy projects and four solar energy projects. Of these, we were awarded one wind energy project for 99 MW of generating capacity at the price of US$61.50 per MWh. On October 31, 2016, the Ministry of Energy and Mining, pursuant to Resolution No. 252/16, launched Round 1.5 of the RenovAR Program as a continuation of Round 1 and on November 25, 2016, granted awards in the amount of 1281.5 MW, including 10 wind energy projects and 20 solar energy projects. Of these, we were awarded one wind energy project for 48 MW of generating capacity at the price of US$59.38 per MWh. Following Rounds 1 and 1.5 of the RenovAR Program, the Ministry of Energy and Mining pursuant to Resolution No. 275/17, which launched Round 2 of the program on August 17, 2017, granted awards in the amount of 2,043 MW of renewable power capacity. We submitted bids for Round 2 of the RenovAR Program on October 19, 2017 and, on November 29, 2017, we were awarded a wind energy project called, “La Genoveva I,” which will allow us to add an additional capacity of 86.6 MW to our portfolio and to continue to build a presence in the renewable energies sector.

The Secretariat of Electric Energy, pursuant to Resolution SEE No. 287-E/17, called for proposals for supply of electric power to be generated through existing units, the conversion of open combined cycle units into closed combined cycle units or the installation of co-generation units. We submitted bids on August 9, 2017, and, on September 25, 2017, we were awarded the two co-generation projects. Our newly awarded Terminal 6 San Lorenzo and Luján de Cuyo projects have the following two potential sources of income: (i) electric power sales to CAMMESA through PPAs with a 15-year term which are priced in U.S. dollars; and (ii) steam sales pursuant to separate steam supply agreements negotiated with private offtakers, which are expected to be priced in U.S. dollars.

In addition, we have acquired four heavy-duty, highly efficient gas turbines and 130 hectares of land in the north of the Province of Buenos Aires, that could potentially allow us to develop new power capacity that could

 

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add 1,255 MW to our total installed capacity through one or more projects working under a simple cycle configuration. For example, we will use a Siemens gas turbine, with a capacity of 286 MW, for the Terminal 6 San Lorenzo co-generation project described above. Our objective is to use the remaining three units and the aforementioned land, in which we have already invested US$134 million, to participate in one or more projects, in future bidding processes called by the Argentine government for new generation capacity. Because of the competition among generation companies in these auction processes, we cannot predict whether we will be awarded the projects and whether we will be able to utilize these assets as intended. In addition, as of the date of this prospectus, we have already paid SEK$381.37 million (which, converted at the exchange rate quoted by the Central Bank as of the date of each payment, equals US$45.46 million) to purchase two additional Siemens gas turbines for our Luján de Cuyo project.

We and our competitors are connected to the same electrical grid that has limited capacity for transportation, which, under certain circumstances, may reach its capacity limits. Therefore, new generators may connect, or existing generators may increase, their outputs and dispatch more electric power to the same grid that would prevent us from delivering our energy to our customers. In addition, the Argentine government (or any other entity on its behalf) might not make the necessary investments to increase the system’s capacity, which, in case there is an increase of energy output, would allow us and existing and new generators to efficiently dispatch our energy to the grid and to our customers. As a result, an increase in competition could affect our ability to deliver our product to our customers, which would adversely affect our business, results of operations and financial condition.

Our business is subject to risks arising from natural disasters, catastrophic accidents and terrorist attacks

Our generation facilities, or the third-party fuel transportation or electric power transmission 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 covered by 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.

We may be subject to expropriation or similar risks

All or substantially all of our assets are located in Argentina. We are engaged in the business of power generation and, as such, our business or our assets may be considered by the government to be a public service or essential for the provision of a public service. Therefore, our business is subject to political uncertainties, including expropriation or nationalization of our business or assets, loss of concessions, renegotiation or annulment of existing contracts, and other similar risks. For example, the HPDA Concession Agreement pursuant to which we are permitted to operate our Piedra del Águila plant expires on December 29, 2023.

In such an event, we may be entitled to receive compensation for the transfer of our assets. However, the price received may not be sufficient, and we may need to take legal actions to claim appropriate compensation. Our business, financial condition and results of our operations could be adversely affected by the occurrence of any these events.

Changes in regulatory frameworks under which we sell our electricity may affect our financial condition and results of operations

We currently sell our capacity availability and electricity under various regulatory frameworks, including the Energía Base and Energía Plus. See “Business—Our Customers” and “The Argentine Electric Power Sector.”

 

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On December 16, 2016, the Argentine government declared a state of emergency with respect to the national electrical system until December 31, 2017. We cannot assure you what further changes the Argentine government may make to the Energía Base or the other regulatory frameworks under which we sell power availability or electricity, including whether these changes future changes will not negatively impact our results of operations. Moreover, we cannot assure you under what regulatory framework we will be able to sell our generation capacity and electricity in the future.

We cannot assure you that changes in the current applicable laws and regulations, or adverse judicial or administrative interpretations of such laws and regulations, will not adversely affect our results of operations. In addition, some of the measures proposed by the new government may also generate political and social opposition, which may in turn prevent the new government from adopting such measures as proposed.

Risks Relating to Our Business

Our results depend largely on the compensation established by the Secretariat of Electric Energy and received from CAMMESA

Since the enactment of Resolution SE No. 95/13, issued by the former Secretariat of Electric Energy, as amended, our compensation has depended largely on the variable compensation determined by energy output and availability. This resolution was replaced in February 2017 by Resolution SEE No. 19/17, issued by Secretariat of Electric Energy. Except for sales under contracts, revenues from energy production are paid by CAMMESA under the Energía Base based on a fixed and variable costs system which was determined by the Secretariat of Electric Energy pursuant to the new Resolution SEE No. 19/17. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors Affecting Our Results of Operations—Our Revenues—The Energía Base” and “Risk Factors—Risks Relating to the Electric Power Sector in Argentina—We have, in the recent past, been unable to collect payments, or to collect them in a timely manner, from CAMMESA and other customers in the electric power sector.” These tariffs under the Energía Base, which were increased in February, May and November 2017, are denominated in U.S. dollars. The resulting sales are converted into Argentine pesos at the exchange rate as of the last day of the month of the transaction and are paid 42 days later.

As a result of this system, our revenues are highly dependent on actions taken by regulatory authorities. Any change in the current system could have a material adverse effect on our revenues and, as a result, our results of operations.

Factors beyond our control may affect our ability to win public bids for new generation capacity, or affect or delay the completion of new power plants once we have been awarded projects

Our business plan contemplates an investment in new energy generation projects in order to expand our generating capacity by more than 2,020.27 MW. This includes more than 628.27 MW from renewable sources, including wind energy projects, as well as the installation of new thermal generation units with an installed generating capacity of 1,392 MW.

On October 7, 2016, the Ministry of Energy finalized the auction process for the installation of new renewable energy units and granted awards in the amount of 1,108.65 MW. Of these, we were awarded one wind energy project for 99 MW of generating capacity at the price of US$61.50 per MWh. On October 31, 2016, the Ministry of Energy and Mining, pursuant to Resolution No. 252/16, launched Round 1.5 of the RenovAR Program as a continuation of Round 1 and on November 25, 2016, granted awards in the amount of 1281.5 MW. Of these, we were awarded one wind energy project for 48 MW of generating capacity at the price of US$59.38 per MWh. Following Rounds 1 and 1.5 of the RenovAR Program, the Ministry of Energy and Mining pursuant to Resolution No. 275/17, which launched Round 2 of the program on August 17, 2017 and granted awards in the amount of 2,043 MW of renewable power capacity. We submitted bids for Round 2 of the RenovAR Program on October 19, 2017 and, on November 29, 2017, we were awarded a wind energy project called, “La Genoveva I,” which will allow us to add an additional capacity of 86.6 MW to our portfolio and to continue to build a presence in the renewable energies sector.

 

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The Secretariat of Electric Energy, pursuant to Resolution SEE No. 287-E/17, called for proposals for supply of electric power to be generated through existing units, the conversion of open combined cycle units into closed combined cycle units or the installation of co-generation units. We submitted bids on August 9, 2017, and, on September 25, 2017, we were awarded the two co-generation projects with the characteristics set forth in the table below. Our newly awarded Terminal 6 San Lorenzo and Luján de Cuyo projects have the following two potential sources of income: (i) electric power sales to CAMMESA through PPAs with a 15-year term which are priced in U.S. dollars; and (ii) steam sales pursuant to separate steam supply agreements negotiated with private offtakers, which are expected to be priced in U.S. dollars.

In addition, we have acquired four heavy-duty, highly efficient gas turbines and 130 hectares of land in the north of the Province of Buenos Aires, that could potentially allow us to develop new power capacity that could add 1,255 MW to our total installed capacity through one or more projects working under a simple cycle configuration. For example, we will use a Siemens gas turbine, with a capacity of 286 MW, for the Terminal 6 San Lorenzo co-generation project described above. Our objective is to use the remaining three units and the aforementioned land, in which we have already invested US$134 million, to participate, through one or more projects, in future bidding processes called by the Argentine government for new generation capacity. Because of the competition among generation companies in these auction processes, we cannot predict whether we will be awarded the projects and whether we will be able to utilize these assets as intended. In addition, as of the date of this prospectus, we have already paid SEK$381.37 million (which, converted at the exchange rate quoted by the Central Bank as of the date of each payment, equals US$45.46 million) to purchase two additional Siemens gas turbines for our Luján de Cuyo project.

Delays in construction or commencement of operations of expanded capacity in our existing power plants or our new power plants could lead to an increase in our financial needs and also cause our financial returns on new investments to be lower than expected, which could materially adversely affect our financial condition and results of operations.

Factors that may impact our ability to commence operations at our existing power plants or build new power plants include: (i) the failure of contractors to complete or commission the facilities or auxiliary facilities by the agreed-upon date or within budget; (ii) the unexpected delays of third parties such as gas or electric power distributors in providing or agreeing to project milestones in the construction or development of necessary infrastructure linked to our generation business; (iii) the delays or failure by our turbine suppliers in providing fully operational turbines in a timely manner; (iv) difficulty or delays in obtaining the necessary financing in terms satisfactory to us or at all; (v) delays in obtaining regulatory approvals, including environmental permits; (vi) court rulings against governmental approvals already granted, such as environmental permits; (vii) shortages or increases in the price of equipment reflected through change orders, materials or labor; (viii) opposition by local and/or international political, environmental and ethnic groups; (ix) strikes; (x) adverse changes in the political and regulatory environment in Argentina; (xi) unforeseen engineering, environmental and geological problems; and (xii) adverse weather conditions, natural disasters, accidents or other unforeseen events. Any cost overruns could be material. In addition, any of these other factors may cause delays in the completion of expanded capacity at our existing power plants or the construction of our new power plant, which could have a material adverse effect on our business, financial condition and results of operations. These delays may also result in short-term sanctions by CAMMESA and, in extreme cases, sanctions for the duration of the contract.

Factors beyond our control may delay the completion of CVOSA’s combined cycle plant

We expect to receive cash flows from CVOSA’s combined cycle plant, which is expected to have 816 MW of installed generating capacity and to be operational during the first quarter of 2018.

Delays in the construction of CVOSA’s combined cycle plant or a delay in the commencement of its operations could delay the start of payments by CAMMESA of the monthly installments for our energy sales from 2008 to 2011. As of September 30, 2017, the receivables for sale of energy for the period of 2008 to 2011

 

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totaled Ps.1.29 billion. After the combined cycle plant becomes operational, the amount due will be converted into U.S. dollars at the exchange rate effective at the date of the agreement, which was Ps.3.97 per U.S. dollar. The U.S. denominated monthly payments under the CVO agreement are payable in pesos, converted at the applicable exchange rate in place at the time of each monthly payment. A delay in such payments could have a material adverse effect on our business, financial condition and results of operations. See “Business—FONINVEMEM and Similar Programs.”

Our business may require substantial capital expenditures for ongoing maintenance requirements and the expansion of our installed generation capacity

Incremental capital expenditures may be required to fund ongoing maintenance necessary to maintain our power generation and operating performance and improve the capabilities of our electric power generation facilities. Furthermore, capital expenditures will be required to finance the cost of our current and future expansion of our generation capacity. If we are unable to finance any such capital expenditures in terms satisfactory to us or at all, our business and the results of our operations and financial condition could be adversely affected. Our financing ability may be limited by market restrictions on financing availability for Argentine companies. See “—Risk Relating to Argentina— A lack of financing for Argentine companies due to the unresolved litigation with holdout bondholders, may negatively impact our financial condition or cash flows” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

If the conditions for the La Plata Plant Sale are not met, our results of operations could be adversely affected

On December 20, 2017, YPF EE accepted our offer to sell the La Plata plant, subject to certain conditions. The effective transfer of the La Plata plant is subject to the following conditions: (i) the termination of a due diligence process during which YPF can, at its own discretion, terminate the La Plata Plant Sale; (ii) the payment by YPF EE of the purchase price for the La Plata Plant; (iii) the extension of our steam supply agreement with YPF at our Luján de Cuyo plant for a period of up to 24 months from January 1, 2019 under the same terms as our existing steam supply agreement, which we expect to sign in January 2018; (iv) we and YPF EE shall have complied with the regulation in force in connection with the resale of the aggregate transportation capacity under a FTC contract to YPF EE, and MEGSA (Mercado Eléctrico de Gas) shall have awarded such aggregate transportation capacity under the FTC contract to YPF EE; (v) the renewal of two contracts between us and certain third parties and the acceptance by such third parties of the assignment of such contracts to YPF EE; and (vi) other formal conditions. We will effectively transfer the La Plata plant to YPF EE on the La Plata Plant Sale Effective Date.

If the La Plata Plant Sale does not occur, we will continue to be subject to certain obligations upon the termination of our agreement with YPF for energy and steam sales relating to the La Plata plant, which, with respect to the supply of steam to YPF, has been extended for a period of five months from October 31, 2017. Upon termination, unless the agreement is extended, we must dismantle all facilities, equipment, tools and any other assets making up the co-generation plant, including the civil works, within 180 days of the end of the agreement and without any notice requirements. We are solely responsible for the expenses arising from dismantling such goods and facilities, and we have made a provision at September 30, 2017 for such expenses in the amount of Ps.131 million. For more information, see “Unaudited Pro Forma Consolidated Financial Information.”

The non-renewal or early termination of the HPDA Concession Agreement would adversely affect our results of operations

The HPDA Concession Agreement executed between us and the Argentine government, pursuant to which we are permitted to operate our Piedra del Águila plant, expires on December 29, 2023. This plant has a total installed capacity of 1,440 MW, and it represented approximately 15.12% of our total generation and 12.46% of our revenues in 2016, and approximately 17.46% of our total generation and 13.90% of our revenues in the nine-month period

 

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ended September 30, 2017. We currently intend to renew the HPDA Concession Agreement prior to its expiration. If the HPDA Concession Agreement expires without renewal, we will be required to revert the assets to the Argentine government. The HPDA Concession Agreement also contains various requirements related to the operation of the hydroelectric plant and compliance with laws and regulations. The non-performance of the HPDA Concession Agreement could give rise to certain penalties and even the termination of the concession. If the concession were terminated, it would be granted to a new company organized by the Argentine government and a tender offer would be carried out for selling the new company’s shares of stock. The proceeds to be received by us in such tender offer would be calculated based on a formula in which the proceeds of the tender decrease as the expiration of the concession term comes closer. Any non-renewal or early termination of the HPDA Concession Agreement would materially and adversely affect our financial condition and results of operation.

Our interests in TJSM, TMB and CVOSA may be significantly diluted

As of the date of this prospectus, we have a 30.8752% interest in TJSM and a 30.9464% interest in TMB, both companies that are engaged in managing the purchase of equipment, building, operating and maintaining power plants constructed under the FONINVEMEM program. We have the right to name two out of nine directors on the board of directors of each company. As of the date of this prospectus, we also own 56.19% of CVOSA, the company that operates the thermal power plant in Timbues. After ten years of operations of each company (which will occur on February 2, 2020 for TJSM, January 7, 2020 for TMB and 10 years after the date on which CVOSA begins to operate in the future), each company is entitled to receive property rights to such power plants from the respective trusts currently holding such power plants. At such time, since the Argentine government financed part of the construction, it will be incorporated as a shareholder of TJSM, TMB and CVOSA, and our interests in TJSM, TMB and CVOSA may be diluted. In the case of TJSM and TMB, we cannot estimate the exact effects of such potential dilution due to the fact that the Argentine government’s stake in these companies depends on the funds provided by the Argentine government for the construction of each plant, which has not yet been defined. In the case of CVOSA, although the effect of the potential dilution has also not yet been defined for the same reasons, the Argentine government’s stake in CVOSA will be at least 70% pursuant to FONINVEMEM arrangements for CVOSA. Any dilution of our interest in TJSM, TMB or CVOSA could reduce our income, which could adversely affect our results of operations. See “Business—FONINVEMEM and Similar Programs.”

Future changes in the rainfall amounts in the Limay River basin could adversely affect the revenues from the Piedra del Águila concession and, therefore, our financial results

As a hydroelectric facility, Piedra del Águila depends on the availability of water resources in the Limay River basin for electric power generating purposes, which in turn depends on the rainfall amounts in the area. In 1996, 2007 and 2012, and in particular in 1998, 1999 and 2016, the area experienced record-low rainfall levels. Lack of water resulted in lower electric power generation and, therefore, lower revenue. However, rainfall levels, and therefore electric generation, were significantly higher than average during 1995, 2001, 2002, 2005 and 2006. For more information about Piedra del Águila’s seasonality, see “Business—Seasonality.”

In the event of critically low water levels, the Intergovernmental Basin Authority, which is in charge of managing the basin of the Limay, Neuquén and Negro rivers, is entitled to manage the water flows according to its flow control standards, which could result in lower water resources for us, which in turn, would result in decreased generation activities. Further, under the HPDA Concession Agreement, we are not entitled to receive any compensation for revenue losses as a result of such actions.

The Limay River basin’s flow may not be sufficient to maintain a regular generation level at Piedra del Águila and the enforcement authority may implement unfavorable measures for Piedra del Águila, and therefore, for us, which could adversely affect our financial condition and our results of operations.

 

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Our ability to operate wind farms profitably is highly dependent on suitable wind and associated weather conditions

The amount of energy generated by, and the profitability of, wind farms are highly dependent on climate conditions, particularly wind conditions, which can vary materially across locations, seasons and years. Variations in wind conditions at wind farm sites occur as a result of daily, monthly and seasonal fluctuations in wind currents and, over the longer term, as a result of more general climate changes and shifts. Because turbines will only operate when wind speeds fall within certain specific ranges that vary by turbine type and manufacturer, if wind speeds fall outside or towards the lower end of these ranges, energy output at our wind farms would decline.

If in the future the wind resource in the areas where our wind farms are located is lower than expected, electricity production at such wind farms would be lower than expected and consequently could materially adversely affect our results of operations.

Our insurance policies may not fully cover damage, and we may not be able to obtain insurance against certain risks

We maintain insurance policies intended to mitigate our losses due to customary risks. These policies cover our assets against loss for physical damage, loss of revenue and also third-party liability. However, we may not have sufficient insurance to cover 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, all of which could have a material adverse effect on our operations and financial position. In addition, an insufficiency in our insurance policies could have an adverse effect on us. In such case, our financial condition and our results of operations could be adversely affected. See “Business—Insurance.”

Our generation operations require us to handle hazardous elements such as fuels, which could potentially result in damage to our facilities or injuries to our personnel

Although we comply with all applicable environmental safety laws and best practices, any accident involving the fuels with which we operate could have adverse environmental consequences and could damage our industrial facilities or our personnel.

Any structural damage to the dam or any other structure located in any of our hydroelectric plants could compromise its electric power generating capacity. Any generation constraints resulting from structural damage could have a material adverse effect on our financial condition and results of operations.

We may be exposed to lawsuits and or administrative proceedings that could adversely affect our financial condition and results of operations

In the ordinary course of our business we enter into agreements with CAMMESA and other parties. Even though we do not currently have any material litigation or administrative proceeding, litigation and/or regulatory proceedings are inherently unpredictable, and excessive verdicts do occur. Adverse outcomes in lawsuits and investigations could result in significant monetary damages, including indemnification payments, or injunctive relief that could adversely affect our ability to conduct our business and may have a material adverse effect on our financial condition and results of operations.

Energy demand is seasonal, largely due to climate conditions

Energy demand fluctuates according to the season and climate conditions may materially and adversely impact energy demand. During the summer (December through March), energy demand may increase significantly due to the need for air conditioning and, during winter (June through August), energy demand may

 

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fluctuate according to the needs for lighting and heating. As a result, seasonal changes could materially and adversely affect the demand for energy and, consequently, affect our results of operations and financial condition (in particular sales derived from the Energía Plus regulatory framework, which is dependent on demand rather than on capacity committed under contract).

We may undertake acquisitions and investments to expand or complement our operations that could result in operating difficulties or otherwise adversely affect our financial conditions and results of operations

In order to expand our business, from time to time, we may carry out acquisitions and investments which offer added value and are consistent with or complementary to our business strategy.

For example, in 2015, we acquired: (i) a direct and indirect interest of 24.99% in DGCU’s stock capital; and (ii) a direct and indirect interest of 44.10% of DGCE’s stock capital, both of which operate in a highly regulated industry. The results of these companies’ operations are influenced by the applicable regulatory framework and the interpretation and enforcement of such regulatory framework by ENARGAS, the governmental authority created to regulate privatized natural gas transmission and distribution companies. Their licenses are subject to revocation under certain circumstances. If any of these events were to occur, it could have a material adverse effect on them and, as a result, on us.

In connection with potential acquisition and investment transactions, we may be exposed to various risks, including those arising from: (i) not having accurately assessed the value, future growth potential, strengths, weaknesses and potential profitability of potential acquisition targets; (ii) difficulties in successfully integrating, operating, maintaining or managing newly-acquired operations, including personnel; (iii) unexpected costs of such transactions; or (iv) unexpected contingent or other liabilities or claims that may arise from such transactions. If any of these risks were to materialize, it could adversely affect our financial condition and results of operations.

If we were to acquire another energy company in the future, such acquisition could be subject to the Argentine Antitrust Authority’s approval

The Antitrust Law provides that any transactions involving the acquisition, transfer or control of another company’s assets will be subject to the Comisión Nacional de Defensa de la Competencia (CNDC) (“Argentine Antitrust Authority”) prior consent and approval in the event that (i) the total revenues of the companies involved for the last fiscal year exceeds the sum of Ps.200 million in Argentina; and (ii) the transaction amount or the value of the transferred assets located in Argentina exceeds Ps.20 million.

The Argentine Antitrust Authority will determine whether any acquisition subject to its prior approval negatively impacts competitive conditions in the markets in which we compete or adversely affects consumers in these markets. Although we are not contemplating any business combination as of the date of this prospectus, if the Argentine Antitrust Authority were to reject any business combination or if such authority were to take any action to impose conditions or performance commitments on us as part of the approval process for any business combination, it could adversely affect our financial condition and results of operations and prevent us from achieving the anticipated benefits of such acquisition.

We depend on senior management and other key personnel for our current and future performance

Our current and future performance depends to a significant degree on our qualified senior management team, and on our ability to attract and retain qualified management. Our future operations could be harmed if any of our senior executives or other key personnel ceased working for us. Competition for senior management personnel is intense, and we may not be able to retain our personnel or attract additional qualified personnel. The loss of a member of senior management may require the remaining executive officers to divert immediate and substantial attention to fulfilling his or her duties and of seeking a replacement. Any inability to fill vacancies in our senior executive positions on a timely basis could harm our ability to implement our business strategy, which would harm our business and results of operations.

 

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We could be affected by material actions taken by the trade unions

Although we have stable relationships with our work force, in the past we experienced organized work stoppages and strikes, and we may face such work stoppages or strikes in the future. Labor claims are common in the Argentina energy sector, and in the past, unionized employees have blocked access and caused damages to the facilities of various companies in the industry. Moreover, we have no insurance coverage for business interruptions caused by workers’ actions, which could have an adverse effect on our results of operations.

We are subject to anticorruption, anti-bribery, anti-money laundering and other laws and regulations

We are subject to anti-corruption, anti-bribery, anti-money laundering and other laws and regulations. We may be subject to investigations and proceedings by authorities for alleged infringements of these laws. Although we perform compliance processes and maintain internal control systems, these proceedings may result in fines or other liabilities and could have a material adverse effect on our reputation, business, financial conditions and result of operations. If any such subsidiaries, employees or other persons engage in fraudulent, corrupt or other unfair business practices or otherwise violate applicable laws, regulations or internal controls, we could become subject to one or more enforcement actions or otherwise be found to be in violation of such laws, which may result in penalties, fines and sanctions and in turn adversely affect our reputation, business, financial condition and result of operations.

Our ability to generate electricity at our thermal generation plants partially depends on the availability of natural gas and, to a lesser extent, liquid fuel.

The supply and price of natural gas and liquid fuel used in our thermal generation plants has been in the past, and may in the future be, affected by, among other things, the availability of natural gas and liquid fuel in Argentina, given the current shortage of natural gas supply and declining reserves in Argentina. In particular, many oil and gas fields in Argentina are mature and in recent years have not been subject to significant investment into development and exploration activities and, therefore, reserves are likely to be depleted.

Pursuant to Resolution No. 95/2013, as amended, CAMMESA is in charge of managing and supplying all fuels required to run our thermal plants. If in the future we were to become required to purchase our own natural gas or liquid fuel from third parties, we cannot assure you that we will be able to purchase natural gas or liquid fuel at prices that are fully reimbursable by CAMMESA and, even if CAMMESA accepted to reimburse us for such amounts, it may be uncertain when such reimbursements would occur. In addition, natural gas delivery depends on the infrastructure (including barge facilities, roadways and natural gas pipelines) available to serve each generation facility. As a result, our thermal plants are subject to the risks of disruptions or curtailments in the fuel delivery chain and infrastructure. Any such disruption or curtailment may result in the unavailability, or higher prices, of natural gas or liquid fuel. Moreover, if in the future we are required to purchase our own natural gas or liquid fuel from third parties at prices that are not fully reimbursable by CAMMESA, such situation may have a material adverse effect on our financial condition and results of operations.

Risks Relating to our Shares and ADSs

It may be difficult for you to obtain or enforce judgments against us

We are incorporated in Argentina. All of our directors and executive officers reside outside the United States, and substantially all of our and their assets are located outside the United States. As a result, it may not be possible for you to effect service of process within the United States upon these persons or to enforce judgments against them or us in U.S. courts. We have been advised by our special Argentine counsel, Bruchou, Fernández Madero & Lombardi, that there is doubt as to the enforceability in original actions in Argentine courts of liabilities predicated solely on U.S. federal securities laws and as to the enforceability in Argentine courts of judgments of U.S. courts obtained in actions predicated upon the civil liability provisions of U.S. federal securities laws. The enforcement of such judgments will be subject to compliance with certain requirements

 

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under Argentine law, such as Articles 517 through 519 of the Argentine Code of Civil and Commercial Procedure, including the condition that such judgments do not violate the principles of public policy of Argentine Law, as determined by an Argentine court. In addition, an Argentine court will not order an attachment on property located in Argentina and determined by such court to be essential for the provision of a public service.

Future exchange controls and restrictions on the repatriation of capital from Argentina may impair the ability of holders of ADSs to receive dividends and distributions on, and the proceeds of any sale of, the shares underlying the ADSs, which could affect the market value of the ADSs

In 2001 and 2002 Argentina imposed exchange controls and transfer restrictions, substantially limiting the ability of companies to retain foreign currency or make payments abroad, including payments of dividends. In addition, new regulations were issued in the last quarter of 2011, which significantly curtailed access to the MULC by individuals and private sector entities. More recently, since December 2015 the new Argentine administration has lifted many of the foreign exchange restrictions imposed in 2011, including the lifting of certain restrictions for the repatriation of portfolio investment by non-resident investors. As a consequence, with respect to the proceeds of any sale of common shares underlying the ADSs, as of the date of this prospectus, the conversion from pesos into U.S. dollars and the remittance of such U.S. dollars abroad is not subject to prior approval of the Argentine Central Bank, provided that the foreign beneficiary is either a natural or legal person residing in or incorporated and established in jurisdictions, territories or associated states that are considered “cooperators for the purposes of fiscal transparency.”

Argentina may impose new stricter exchange controls and transfer restrictions in the future, among other things, in response to capital flight or a significant depreciation of the peso. In such a case, the ADS Depositary may be prevented from converting pesos it receives in Argentina for the account of the ADS holders. If this conversion is not possible, the deposit agreement allows the ADS 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 ADS Depositary cannot convert the foreign currency, holders of our ADSs may lose some or all of the value of the dividend distribution. Also, if payments cannot be made in U.S. dollars abroad, the repatriation of any funds collected by foreign investors in pesos in Argentina may be subject to restriction. In such event, the ability of our foreign shareholders and holders of ADSs to obtain the full value of their shares and ADSs and the market value of our shares and ADSs may be adversely affected.

We will be traded on more than one market and this may result in price variations; in addition, investors may not be able to easily move shares for trading between such markets

Prior to the date of this prospectus, our common shares were listed on the BYMA. We have applied to list the ADSs on the NYSE. Any markets that may develop for our common shares or for the ADSs may not have liquidity and the price at which the common shares or the ADSs may be sold is uncertain.

Trading in the ADSs or our common shares on these markets will take place in different currencies (U.S. dollars on the NYSE and pesos on the BYMA), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Argentina). The trading prices of the securities on these two markets may differ due to these and other factors. Any decrease in the price of our common shares on the BYMA could cause a decrease in the trading price of the ADSs on the NYSE. Investors could seek to sell or buy our shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the ADSs available for trading on the other exchange. In addition, holders of ADSs will not be immediately able to surrender their ADSs and withdraw the underlying common shares for trading on the other market without effecting necessary procedures with the ADS Depositary. This could result in time delays and additional cost for holders of ADSs.

 

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

Our corporate affairs are governed by our bylaws and by Argentine Law No. 19,550, as amended (the “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 Delaware or New York), or in other jurisdictions outside Argentina. Thus, the rights of holders of our ADSs or holders of our common shares under the Argentine Corporate Law to protect their interests relative to actions by our Board of Directors may be fewer and less well defined than under the laws of those other jurisdictions. Although insider trading and price manipulation are illegal under Argentine law, the Argentine securities markets may not be as highly regulated or supervised as the U.S. securities markets or markets in some of the 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, or other jurisdictions outside Argentina, putting holders of our common shares and the ADSs at a potential disadvantage.

Holders of our common shares and the ADSs located in the United States may not be able to exercise preemptive or accretion rights

Under the Argentine Corporate Law, if we issue new shares as part of a capital increase, our shareholders may have the right to subscribe to a proportional number of shares to maintain their existing ownership percentage. Rights to subscribe for shares in these circumstances are known as preemptive rights. In addition, shareholders are entitled to the right to subscribe for the unsubscribed shares remaining at the end of a preemptive rights offering on a pro rata basis, known as accretion rights. Upon the occurrence of any future increase in our capital stock, United States holders of common shares or ADSs will not be able to exercise the preemptive and related accretion rights for such common shares or ADSs unless a registration statement under the Securities Act is effective with respect to such common shares or ADSs or an exemption from the registration requirements of the Securities Act is available. We are not obligated to file a registration statement with respect to those common shares or ADSs. We may not file such a registration statement, or an exemption from registration may not be available. Unless those common shares or ADSs are registered or an exemption from registration applies, a U.S. holder of our common shares or ADSs may receive only the net proceeds from those preemptive rights and accretion rights if those rights can be sold by the ADS Depositary; if they cannot be sold, they will be allowed to lapse. Furthermore, the equity interest of holders of common shares or ADSs located in the United States may be diluted proportionately upon future capital increases.

Non-Argentine companies that own our common shares directly and not as ADSs may not be able to exercise their rights as shareholders unless they are registered in Argentina

Under Argentine law, foreign companies that own shares in an Argentine corporation are required to register with the Inspección General de Justicia (Superintendency of Legal Entities, or the “IGJ”), in order to exercise certain shareholder rights, including voting rights. Holders owning common shares directly (rather than ADSs) that are non-Argentine companies and are not registered with the IGJ may be limited in their ability to exercise their rights as holders of our common shares.

Voting rights, and other rights, with respect to the ADSs are limited by the terms of the deposit agreement

Holders may exercise voting rights with respect to the common shares underlying ADSs only in accordance with the provisions of the deposit agreement. There are no provisions under Argentine law or under our bylaws that limit ADS holders’ ability to exercise their voting rights through the ADS Depositary with respect to the underlying common shares, except if the ADS Depositary is a foreign entity and it is not registered with the IGJ. The ADS Depositary is registered with the IGJ. However, there are practical limitations upon the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with such holders. For example, Law No. 26,831 requires us to notify our shareholders by publications in certain official

 

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and private newspapers of at least 20 and no more than 45 days in advance of any shareholders’ meeting. ADS holders will not receive any notice of a shareholders’ meeting directly from us. In accordance with the deposit agreement, we will provide the notice to the ADS Depositary, which will in turn, if we so request, as soon as practicable thereafter provide to each ADS holder:

 

    the notice of such meeting;

 

    voting instruction forms; and

 

    a statement as to the manner in which instructions may be given by holders.

To exercise their voting rights, ADS holders must then provide instructions to the ADS Depositary how to vote the shares underlying ADSs. Because of the additional procedural step involving the ADS Depositary, the process for exercising voting rights will take longer for ADS holders than for holders of our common shares. Except as described in this prospectus, holders of the ADS will not be able to exercise voting rights attaching to the ADSs.

Also, section 7.6 of the deposit agreement provides that each of the parties to the deposit agreement (including, without limitation, each holder and beneficial owner) waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding against us and/ or the ADS Depositary. This provision may have the effect of limiting and discouraging lawsuits against us and/ or the ADS Depositary. Moreover, you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.

The relative volatility and illiquidity of the Argentine securities markets may substantially limit our ADS holders’ ability to sell common shares underlying the ADSs at the price and time they desire

Investing in securities that trade in emerging markets, such as Argentina, often involves greater risk than investing in securities of issuers in the United States. The Argentine securities market is substantially smaller, less liquid, more concentrated and can be more volatile than major securities markets in the United States, and is not as highly regulated or supervised as some of these other markets. There is also significantly greater concentration in the Argentine securities market than in major securities markets in the United States. During December 2017, the ten largest Argentine companies in terms of their weight in the MERVAL index represented approximately 63.19% of its composition. Accordingly, although holders of our ADSs are entitled to withdraw the common shares underlying the ADSs from the ADS Depositary at any time, their ability to sell such shares at a price and time at which they wish to do so may be substantially limited. Furthermore, new capital controls imposed by the Central Bank could have the effect of further impairing the liquidity of the BYMA by making it unattractive for non-Argentines to buy shares in the secondary market in Argentina. See “Exchange Controls.”

Substantial sales of our common shares or the ADSs after the global offering could cause the price of the common shares or of the ADSs to decrease

After the global offering, the existing shareholders will continue to hold a large number of shares. We, our directors, certain of our significant shareholders, including the selling shareholders, and members of senior management listed in “Management and Corporate Governance—Senior Officers”, who own in aggregate 53.29% of our outstanding common shares prior to the global offering, have agreed with the international underwriters, subject to certain exceptions, not to offer, sell, contract to sell or otherwise dispose of or hedge our shares of capital stock or ADSs or securities convertible into or exercisable or exchangeable for shares of capital stock or ADSs during the 180-day period following the date of this prospectus without the prior written consent of the representatives. See “Underwriting.” After these lock-up agreements expire, they will be able to sell their securities in the public market. Also, the Argentine government authorized the Ministry of Energy and Mining to promote the measures necessary to proceed with the sale, assignment or transfer of the equity interest owned by the Argentine government in power plants, including its interest in our Company (representing 8.25% of our

 

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outstanding shares). See “Summary—The Argentine government has authorized the Ministry of Energy and Mining to proceed with the sale of their shareholdings in power plants, including their participation in us.” The market price of our common shares or the ADSs could drop significantly if they sell our common shares or the ADSs or the market perceives that they intend to sell them.

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

Our shareholders are not liable for our obligations. Instead, 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 may be held 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 Argentine Corporate Law or our bylaws may be held jointly and severally liable for damages to us or to other third parties, including other shareholders.

We are an “emerging growth company” and are availing ourselves of reduced disclosure requirements applicable to emerging growth companies, which could make the ADSs or our common shares less attractive to investors

We are an EGC as defined in the U.S. Jumpstart Our Business Startups Act of 2012, and we intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act and reduced disclosure obligations regarding executive compensation.

We cannot predict if investors will find the ADSs or our common shares less attractive because we may rely on these exemptions. If some investors find the ADSs or our common shares less attractive as a result, there may be a less active trading market for the ADSs or our common shares and the price of the ADSs or our common shares may be more volatile. We may take advantage of these reporting exemptions until we are no longer an EGC.

We will cease to be an EGC upon the earliest of: (1) the last day of the fiscal year during which we have revenue of US$1.07 billion or more, (2) the last day of the fiscal year following the fifth anniversary of the date of this prospects, (3) the date on which we have issued more than US$1 billion in non-convertible debt during the previous three-year period or (4) when we become a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act.

As a foreign private issuer, we are exempt from a number of rules under the U.S. securities laws and are permitted to file less information with the Commission than a U.S. company. This may limit the information available to holders of our ADSs

We are a “foreign private issuer,” as defined in the SEC’s rules and regulations and, consequently, we are not subject to all of the disclosure requirements applicable to companies organized within the United States. For example, we are exempt from certain rules under the Exchange Act that regulate disclosure obligations and procedural requirements related to the solicitation of proxies, consents or authorizations applicable to a security registered under the Exchange Act. In addition, our officers and directors are exempt from the reporting and “short-swing” profit recovery provisions of Section 16 of the Exchange Act and related rules with respect to their purchases and sales of our securities. Moreover, while we expect to submit quarterly interim consolidated financial data to the Commission under cover of the Commission’s Form 6-K, we are not required to file periodic reports and financial statements with the Commission as frequently or as promptly as U.S. public companies. Accordingly, there may be less information concerning our company publicly available than there is for U.S. public companies.

 

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As a foreign private issuer, we are not subject to certain NYSE corporate governance rules applicable to U.S. listed companies

We rely on a provision in the NYSE Listed Company Manual that allows us to follow Argentine law with regard to certain aspects of corporate governance. This allows us to follow certain corporate governance practices that differ in significant respects from the corporate governance requirements applicable to U.S. companies listed on the NYSE.

For example, we are exempt from NYSE regulations that require a listed U.S. company, among other things, to:

 

    have a majority of our board of directors be independent;

 

    establish a nominating and compensation composed entirely of independent directors;

 

    adopt and disclose a code of business conduct and ethics for directors, officers and employees; and

 

    have an executive session of solely independent directors each year.

The market price for our common shares or ADSs could be highly volatile, and our common shares or ADSs could trade at prices below the initial offering price

The market price for our common shares or the ADSs after the global offering is likely to fluctuate significantly from time to time in response to factors including:

 

    fluctuations in our periodic operating results;

 

    changes in financial estimates, recommendations or projections by securities analysts;

 

    changes in conditions or trends in our industry;

 

    changes in the economic performance or market valuation of our competitors;

 

    announcements by our competitors of significant acquisitions, divestitures, strategic partnerships, joint ventures or capital commitments;

 

    events affecting equities markets in the countries in which we operate;

 

    legal or regulatory measures affecting our financial conditions;

 

    departures of management and key personnel; or

 

    potential litigation or the adverse resolution of pending litigation against us or our subsidiaries.

Volatility in the price of our common shares or the ADSs may be caused by factors outside of our control and may be unrelated or disproportionate to our operating results. In particular, announcements of potentially adverse developments, such as proposed regulatory changes, new government investigations or the commencement or threat of litigation against us, as well as announced changes in our business plans or those of competitors, could adversely affect the trading price of our common shares or the ADSs, regardless of the likely outcome of those developments or proceedings. Moreover, statements made about our Company, whether publicly or in private, may be misconstrued, particularly if read out of context. In a personal message in Spanish to an acquaintance in Argentina in December 2017, which was retransmitted without authorization, Mr. Pérès Moore, the Chairman of our Board of Directors, stated in effect that Central Puerto is a valuable company, that its stock has risen substantially, and that whether there could be upside remains to be discussed. Mr Pérès Moore did not intend to express any view about the future value of the shares, other than the uncertainty derived from factors such as the ones described in this risk factor.

Broad market and industry factors could adversely affect the market price of our common shares or ADSs, regardless of our actual operating performance. As a result, our common shares or ADSs may trade at prices significantly below the initial public offering price.

 

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Upon becoming a registered public company and as we continue to test our internal controls, we may identify internal control issues

Our internal controls over financial reporting are not yet required to meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and our common shares or the ADSs.

Because currently we do not have comprehensive documentation of our internal controls and have not yet tested our internal controls in accordance with Section 404, we cannot conclude in accordance with Section 404 that we do not have a material weakness in our internal controls or a combination of significant deficiencies that could result in the conclusion that we have a material weakness in our internal controls. We will be required to document, review and, if appropriate, improve our internal controls and procedures in anticipation of eventually being subject to the requirements of Section 404 of the Sarbanes-Oxley Act, which will require annual management assessments of the effectiveness of our internal controls over financial reporting beginning with the filing of our second annual report with the Commission and, when we cease to be an EGC, an attestation report by our independent auditors evaluating these assessments. During the course of our testing, we may identify deficiencies of which we are not currently aware.

Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC. There also could be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our consolidated financial statements. Confidence in the reliability of our consolidated financial statements also could suffer if we or our independent registered public accounting firm were to report a material weakness in our internal controls over financial reporting. This could in turn limit our access to capital markets and possibly, harm our results of operations, and lead to a decline in the trading price of our common shares or the ADSs.

The protections afforded to minority shareholders in Argentina are different from and more limited than those in the United States and may be more difficult to enforce

Under Argentine law, the protections afforded to minority shareholders are different from, and much more limited than, those in the United States. For example, the legal framework with respect to shareholder disputes, such as derivative lawsuits and class actions, is less developed under Argentine law than under U.S. law as a result of Argentina’s short history with these types of claims and few successful cases. In addition, there are different procedural requirements for bringing these types of shareholder lawsuits. As a result, it may be more difficult for our minority shareholders to enforce their rights against us or our directors or controlling shareholder than it would be for shareholders of a U.S. company.

Holders of our common shares may determine not to pay any dividends

In accordance with the Argentine General Corporate Law 19,550, as amended, which we refer to as the Argentine Corporate Law, after allocating at least 5% of our annual net earnings to constitute a mandatory legal reserve, we may pay dividends to shareholders out of net and realized profits, if any, as set forth in our consolidated financial statements prepared in accordance with IFRS. The approval, amount and payment of dividends are subject to the approval by our shareholders at our annual ordinary shareholders’ meeting. The approval of dividends requires the affirmative vote of a majority of the shareholders entitled to vote at the meeting. As a result, we cannot assure you that we will be able to generate enough net and realized profits so as to pay dividends or that our shareholders will decide that dividends will be paid.

We may be a passive foreign investment company for U.S. federal income tax purposes

A non-U.S. corporation will be considered a passive foreign investment company, which we refer to as a PFIC, for U.S. federal income tax purposes in any taxable year in which 75% or more of its gross income is

 

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“passive income” or 50% or more of its assets (determined based on a quarterly average) constitute “passive assets.” The determination as to whether a non-U.S. corporation is a PFIC is based upon the application of complex U.S. federal income tax rules (which are subject to differing interpretations), the composition of income and assets of the non-U.S. corporation from time to time and, in certain cases, the nature of the activities performed by its officers and employees.

Based upon our current and projected income, assets and activities, we do not expect to be considered a PFIC for our current taxable year or for future taxable years. However, because the determination of whether we are a PFIC will be based upon the composition of our income, assets and the nature of our business, as well as the income, assets and business of entities in which we hold at least a 25% interest, from time to time, and because there are uncertainties in the application of the relevant rules, there can be no assurance that we will not be considered a PFIC for any taxable year.

If we are a PFIC for any taxable year during which a U.S. Holder, as defined in “Taxation—Certain United States Federal Income Tax Considerations,” holds the ADSs or common shares, the U.S. Holder might be subject to increased U.S. federal income tax liability and to additional reporting obligations. See “Taxation—Certain United States Federal Income Tax Considerations—Passive Foreign Investment Company.” U.S. Holders are encouraged to consult their own tax advisors regarding the applicability of the PFIC rules to their purchase, ownership and disposition of the ADSs or common shares.

The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business

Following the completion of the global offering, we will be required to comply with various regulatory and reporting requirements, including those required by the Commission in addition to our existing reporting requirements by the CNV. Complying with these reporting and regulatory requirements will be time consuming, resulting in increased costs to us or other adverse consequences. As a public company, we will be subject to the reporting requirements of the Exchange Act, and the requirements of the Sarbanes-Oxley Act, as well as to the Argentine Capital Markets Law and CNV rules. These requirements may place a strain on our systems and resources. The Exchange Act applicable to us requires that we file annual and current reports with respect to our business and financial condition. Likewise, CNV rules require that we make annual and quarterly filings and that we comply with disclosure obligations including current reports. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. To maintain and improve the effectiveness of our disclosure controls and procedures, we will need to commit significant resources, hire additional staff and provide additional management oversight. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, results of operations and financial condition.

 

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USE OF PROCEEDS

We will not receive any proceeds from any part of this offering.

 

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EXCHANGE RATES

From April 1, 1991 until the end of 2001, Law No. 23,928 (the “Convertibility Law”) established a regime under which the Central Bank was obliged to sell U.S. dollars at a fixed rate of one peso per U.S. dollar. On January 6, 2002, the Argentine Congress enacted the Public Emergency Law, formally ending the regime of the Convertibility Law, abandoning over ten years of U.S. dollar-peso parity and eliminating the requirement that the Central Bank’s reserves in gold, foreign currency and foreign currency denominated debt be at all times equivalent to 100% of the monetary base.

The Public Emergency Law, which has been extended on an annual basis as is in effect until December 31, 2017, granted the Argentine government the power to set the exchange rate between the peso and foreign currencies and to issue regulations related to the MULC. Following a brief period during which the Argentine government established a temporary dual exchange rate system, pursuant to the Public Emergency Law, the peso has been allowed to float freely against other currencies since February 2002. However, the Argentine Central Bank has had the power to intervene in the exchange rate market by buying and selling foreign currency for its own account, a practice in which it engaged on a regular basis. In recent years and particularly since 2011, the Argentine government has increased controls on exchange rates and the transfer of funds into and out of Argentina.

With the tightening of exchange controls beginning in late 2011, in particular with the introduction of measures that allowed limited access to foreign currency by private sector companies and individuals (such as requiring an authorization of tax authorities to access the foreign currency exchange market), the implied exchange rate, as reflected in the quotations for Argentine securities that trade in foreign markets, compared to the corresponding quotations in the local market, increased significantly over the official exchange rate. Most of the foreign exchange restrictions were gradually lifted in since December 2015, and finally on May 19, 2017 the Central Bank issued Communication “A” 6244, which substantially modified the applicable foreign exchange regulations and eliminated the set of restrictions for accessing the MULC. As a result of the elimination of the limit amount for the purchase of foreign currency without specific allocation or need of prior approval the substantial spread between the official exchange rate and the implicit exchange rate derived from securities transactions has substantially decreased.

After several years of moderate variations in the nominal exchange rate, in 2012 the peso lost approximately 14% of its value with respect to the U.S. dollar. This was followed in 2013 and 2014 by a devaluation of the peso with respect to the U.S. dollar that exceeded 30%, including a loss of approximately 23% in January 2014. In 2015, the peso lost approximately 52% of its value with respect to the U.S. dollar, including, approximately, a 10% devaluation from January 1, 2015 to September 30, 2015 and a 38% devaluation during the last quarter of the year, mainly concentrated after December 16, 2015 when certain exchange controls were lifted. From January 1, 2016 to December 31, 2016, the peso lost approximately 21.86% of its value with respect to the U.S. dollar.

 

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The following table sets forth the annual high, low, average and period-end exchange rates for the periods indicated, expressed in pesos per U.S. dollar and not adjusted for inflation. There can be no assurance that the peso will not depreciate or appreciate again in the future. The Federal Reserve Bank of New York does not report a buying rate for pesos.

 

     Exchange Rates  
     High(1)      Low(1)      Average(1)(2)      Period-end(1)  

2012

     4.9180        4.3040        4.5775        4.9180  

2013

     6.5210        4.9250        5.5458        6.5210  

2014

     8.5570        6.5210        8.2267        8.5510  

2015

     13.4000        8.5550        9.4468        13.0400  

2016

     16.0300        13.2000        14.9916        15.8900  

2017

           

January

     16.0800        15.8100        15.8984        15.8970  

February

     15.8000        15.3600        15.5804        15.4800  

March

     15.6500        15.3900        15.5235        15.3900  

April

     15.4900        15.1900        15.3472        15.4000  

May

     15.2900        16.1850        15.7176        16.1000  

June

     16.6300        15.8800        16.1200        16.6300  

July

     17.7900        16.6300        17.1900        17.6400  

August

     17.7230        17.0700        17.4500        17.3100  

September

     17.5800        16.9750        17.2388        17.3100  

October

     17.7000        17.3350        17.4619        17.6550  

November

     17.6500        17.3050        17.4762        17.3050  

December

     19.2000        17.2300        17.7342        18.6490  

2018

           

January(3)

     19.0300        18.4100        18.7371        18.8500  

 

(1) Pesos to U.S. dollars exchange rate as quoted by the Banco de la Nación Argentina for wire transfers (divisas).
(2) For 2012-2016, average of the exchange rates on the last day of each month during the period. For 2017, based on working day’s averages for each month.
(3) Through January 17, 2018.

 

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EXCHANGE CONTROLS

In January 2002, with the approval of the Public Emergency Law, Argentina declared a public emergency situation in its social, economic, administrative, financial and foreign exchange matters and authorized the Argentine executive branch to establish a system to determine the foreign exchange rate between the Argentine peso and foreign currencies and to issue foreign exchange-related rules and regulations. Within this context, on February 8, 2002, through Decree No. 260/2002, the Argentine executive branch established (i) the MULC, through which all foreign exchange transactions in foreign currency must be conducted, and (ii) that foreign exchange transactions in foreign currency must be conducted at the foreign exchange rate to be freely agreed upon among contracting parties, subject to the requirements and regulations imposed by the Central Bank.

The following is a description of the main aspects of Central Bank regulations currently in place concerning inflows and outflows of funds in Argentina.

Pursuant to Communication “A” 6244 dated May 19, 2017, effective as of July 1, 2017

 

  1. Argentine residents, as well as non-Argentine residents, may freely access the MULC.

 

  2. Foreign exchange transactions have been simplified, requiring customers to provide only their CUIT, CUIL, CDI or CIE tax identification numbers or Documento Nacional Identidad (National Identification Document, or DNI). Transactions do not need to be formalized through a sales contract and do not need a concept code.

 

  3. Automatic accreditation in local accounts of funds received from abroad: when a beneficiary’s account is specified in a transfer from abroad, the financial institution must place the funds received directly and without intervention by the client, unless the client has previously and expressly instructed otherwise.

 

  4. Financial and foreign exchange entities may freely determine the level and use of their general foreign exchange positions.

 

  5. Time restrictions for carrying out foreign exchange transactions have been eliminated.

 

  6. Financial and foreign exchange entities may voluntarily provide information on retail exchange rates offered in the City of Buenos Aires, which will be posted on the Argentine Central Bank’s website.

 

  7. The mandatory inflow and settlement of export proceeds through the MULC within the term of ten years is still in effect.

 

  8. The types of financings that may be cancelled abroad through the direct use of export proceeds have been expanded.

Unified Report of Direct Investment and Debt

Pursuant to Communication “A” 6401, dated December 26, 2017, a new reporting regime was created by means of which the “Survey on the issuance of foreign notes and liabilities by the financial and private non-financial sector,” established by Communication “A” 3602, and the “Survey on direct investments,” established by Communication “A” 4237, were replaced by a unified report on direct investments and debt. Only Argentine residents (both legal entities or natural persons) whose flow of balance of foreign assets or debts during the previous calendar year reaches or exceeds the equivalent of US$1 million in Argentine pesos are required to report foreign holding of (i) shares and other capital participations; (ii) debt; (iii) financial derivatives; and (iv) real estate, on an annual basis. Argentine residents whose flow or balance of foreign assets or debts reaches or exceeds the equivalent of US$50 million in Argentine pesos, shall comply with the report on a quarterly basis.

 

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MARKET INFORMATION

Market Price of Our Shares

Our common shares are listed on the BYMA under the symbol “CEPU.” During 2016, the volume traded on the BYMA amounted to 38,216,208 shares. The total number of shares subscribed and integrated on December 31, 2016 was 1,514,022,256, of which 189,252,782 were listed and available to trade on the Buenos Ares Stock Exchange.

The table below shows, for the periods indicated, high and low closing prices in Argentine pesos on the Buenos Aires Stock Exchange:

 

     Buenos Aires
Stock Exchange
Ps. per share(1)(2)
 
     High      Low  

2012

     2.72        1.10  

2013

     2.69        0.94  

2014

     6.99        1.88  

2015

     12.25        5.63  

1st Quarter

     8.88        5.63  

2nd Quarter

     9.38        8.00  

3rd Quarter

     9.34        7.38  

4th Quarter

     12.25        7.25  

2016

     25.00        9.63  

1st Quarter

     13.88        9.63  

2nd Quarter

     13.23        11.00  

3rd Quarter

     24.88        12.81  

4th Quarter

     25.00        17.50  

2017

     

January

     25.00        22.63  

February

     28.50        24.63  

March

     27.70        23.80  

April

     26.85        23.50  

May

     25.10        21.50  

June

     24.95        24.00  

July

     25.00        21.00  

August

     26.20        20.50  

October

     32.75        28.35  

November

     32.50        28.60  

December

     32.75        27.55  

2018

     

January(3)

     48.35        31.90  

 

(1) Source: Buenos Aires Stock Exchange.
(2) For comparative purposes, the price per share in this chart reflects adjustments for changes in the amount of outstanding shares in the company. Price per share in each period is shown in this table as market capitalization during such period, divided by the current amount of outstanding shares.
(3) Through January 17, 2018.

Prior to this offering, no public market existed for the ADSs. We cannot assure you that an active trading market will develop for the ADSs, or that the ADSs will trade in the public market subsequent to the offering at or above the initial public offering price. Each ADS will represent common shares. After the pricing of this offering, we expect the ADSs to trade on the NYSE under the symbol “CEPU.”

 

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Trading in the Argentine Securities Market

The securities market in Argentina is comprised of 14 markets. Securities listed on these markets include, among others, corporate equity and bonds and government securities.

BYMA (as the continuing market of Mercado de Valores de Buenos Aires) and the Mercado Abierto Electrónico S.A. (MAE) are the principal markets in Argentina and are two of the largest markets in Latin America in terms of market capitalization. The BYMA handles approximately 95% of all equity trading in Argentina.

Although companies may list all of their capital stock on the BYMA, in most cases the controlling shareholders retain the majority of a company’s capital stock. This results in only a relatively small percentage of most companies’ stock being available for active trading by the public on the BYMA.

In order to control price volatility, the BYMA operates a system pursuant to which the negotiation of a particular stock or debt security is suspended for a 15-minute period when the price of the security registers a variation on its price between 10% and 15%. Any additional 5% variation on the price of the security after that results in additional 10-minute successive suspension periods.

In 2013, the shareholders of the Mercado de Valores de Buenos Aires (the “MERVAL”) and the Buenos Aires Stock Exchange entered into a framework agreement to create the BYMA for the purposes of operating a stock market in accordance with the requirements of Law No. 26,831. The BYMA was formed by a spin-off of certain assets of the MERVAL relating to its stock market operations, and the Buenos Aires Stock Exchange will make further capital contributions to such entity. In addition, the request to the CNV has been made for authorization of a public offering of the shares of such entity. The MERVAL and the Buenos Aires Stock Exchange also entered into memoranda of understanding with Mercado de Valores de Córdoba S.A. to integrate the stock market of Córdoba into a federal stock market managed by BYMA, and with several brokers of the City of Santa Fe, Province of Santa Fe, for them to act within such federal market.

CNV Resolution No. 17,501/2014, dated September 11, 2014, authorized the Buenos Aires Stock Exchange to act as a qualified entity for purposes of carrying out the activities referred to in paragraph b), f) and g) of Article 32 of the Law No. 26,831 on account of the delegation by the MERVAL pursuant to the “Agreement on Delegation of Functions”, dated February 26, 2014, between the Buenos Aires Stock Exchange and MERVAL. As a result, the Buenos Aires Stock Exchange is authorized to suspend and cancel the listing or trading of securities in the form prescribed by the applicable regulations. In this context, on January 8, 2015, the MERVAL set the terms on which the delegation to the Buenos Aires Stock Exchange is to be implemented to ensure the continuity of securities trading.

The authorization from the CNV with respect to the spin-off mentioned above was granted on December 29, 2016, and the CNV’s authorization for the public offering of the shares of BYMA was granted on March 16, 2017. As of April 17, 2017, agents, issuers, and all securities listed on the BYMA were automatically transferred and registered to the BYMA without any additional requirements or cost.

Regulation of the Argentine Securities Market

The CNV is a governmental entity that oversees the regulation of the Argentine securities markets and is responsible for authorizing public offerings of securities and supervising brokers, public companies, mutual funds and clearinghouses. Public offerings and the trading of futures and options are also under the jurisdiction of the CNV. Argentine insurance companies are regulated by the National Superintendency of Insurance, a separate government agency, while financial institutions are regulated mainly by the Central Bank. The Argentine securities markets are governed generally by Law No. 26,831, as amended, which regulates securities exchanges, stockbrokers, market operations and public offerings of securities.

 

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Most debt and equity securities traded on the exchanges and the over-the-counter market must, unless otherwise instructed by the shareholders, be deposited by shareholders with Caja de Valores S.A. (“Caja de Valores”), which is a corporation owned by the Buenos Aires Stock Exchange, the BYMA and certain provincial exchanges. Caja de Valores is the central securities depositary of Argentina, which provides central depository facilities for securities, acts as a clearinghouse for securities trading and acts as a transfer and paying agent. Caja de Valores also handles settlement of securities transactions carried out by the Buenos Aires Stock Exchange and operates the computerized exchange information system.

Although in the first half of the 1990s changes to the legal framework were introduced permitting the issuance and trading of new financial products in the Argentine capital markets, including commercial paper, new types of corporate bonds and futures and options, there was a relatively low level of regulation of the market for Argentine securities and investors’ activities in that market, and enforcement of existing regulatory provisions was extremely limited. However, with the enactment of Law No. 26,831 and its regulatory Decree No.1023, the CNV has been empowered to strengthen disclosure and regulatory standards for the Argentine securities market, which has been done through changes on the CNV Rules as implemented through Resolution No. 622/2013.

In order to offer securities to the public in Argentina, an issuer must meet certain requirements established by the CNV regarding assets, operating history, management and other matters, and only securities for which an application for a public offering has been approved by the CNV may be listed on the corresponding authorized market. This approval does not imply any kind of certification of assurance related to the merits of the quality of the securities or the solvency of the issuer. Issuers of listed securities are required to file unaudited quarterly financial statements and audited annual financial statements, as well as various other periodic reports, with the CNV and the corresponding authorized market.

CNV rules also provide that any individual or entity that, either directly or indirectly, purchases or sells securities, alters its direct or indirect participation in the share capital of a publicly traded company, converts debt-securities into stock or exercises purchase or sale options of any such securities must immediately report such purchase, sale, alteration, conversion or exercise to the CNV, provided that the securities involved represent at least 5% of the voting rights of the publicly traded company. Any additional variation in such voting rights must be reported to the CNV.

Consequently, the purchase of securities (including the ADSs) that represent at least 5% of our voting rights and, after that, any subsequent purchase, sale, alteration, conversion or exercise of rights) shall have to be reported to the CNV, as set forth above.

 

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CAPITALIZATION

The following table sets forth our capitalization in accordance with IFRS as of September 30, 2017, on an actual basis and as adjusted to account for indebtedness incurred after such date. As we will receive no proceeds from the global offering pursuant to this prospectus, there will be no change in our overall capitalization as a result of the offering.

You should read this table in conjunction with “Selected Financial and Other Information,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus.

 

     As of September 30, 2017  
     Actual      As adjusted      Actual      As adjusted  
     (in millions of Ps.)      (in thousands of US$)(1)  

Short-term debt:

           

Secured

     1,642,451        1,642,451        94,885        94,885  

Unsecured(2)

     123,203        711,743        7,117        41,117  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,765,654        2,354,194        102,002        136,002  
  

 

 

    

 

 

    

 

 

    

 

 

 

Long-term debt:

           

Secured

     1,194,341        3,084,141        68,997        178,171  

Unsecured

     —          —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1,194,341        3,084,141        68,997        178,171  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total indebtedness

     2,959,995        5,438,335        170,999        314,173  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     5,926,384        5,926,384        342,368        342,368  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capitalization

     8,886,379        11,364,719        513,367        656,541  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Solely for the convenience of the reader, peso amounts as of September 30, 2017 have been translated into U.S. dollars at the exchange rate as of September 29, 2017 of Ps.17.31 to US$1.00. See “Exchange Rates” and “Presentation of Financial and Other Information” for further information on recent fluctuations in exchange rates.
(2) Refers to indebtedness incurred after September 30, 2017. See “Summary—Recent Developments.”

 

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DILUTION

Dilution is the amount by which the offering price paid by the purchasers of ordinary shares sold in this offering will exceed the net tangible book value per ordinary share after giving effect to the La Plata Sale and this offering.

On a pro forma basis as of September 30, 2017, our net tangible book value would have been approximately Ps.6,068,169,000, or Ps.4.01, or U.S.$0.23, per common share, or Ps.40.10, or U.S.$2.30, per ADS, using the exchange rate for U.S. dollars quoted by the Banco de la Nación Argentina for wire transfers (divisas) on September 29, 2017, which was Ps.17.31 to US$1.00, and the ratio of ten common shares per ADS. This remains unchanged when adjusted for the sale by the selling shareholders of our common shares or ADSs in the global offering at an initial public offering price of U.S.$1.95, per common share, or U.S.$19.50, per ADS (the midpoint of the price range set forth on the cover of this prospectus). Purchasers of common shares or ADSs in this offering will experience substantial and immediate dilution in net tangible book value per share for financial accounting purposes, as illustrated in the following table:

 

Initial public offering price per common share(1)

     US$1.95  

Initial public offering price per ADS(1)

     US$19.50  

Pro Forma net tangible book value per common share before and after the global offering(2)(3)

     US$0.23  

Immediate dilution in net tangible book value per common share to purchasers in the global offering(4)

     US$1.72  

Immediate dilution in net tangible book value per ADS to purchasers in the global offering(4)

     US$17.20  

 

(1) Reflects the midpoint of the price range set forth on the cover of this prospectus.
(2) Pesos to U.S. dollars exchange rate as quoted by the Banco de la Nación Argentina for wire transfers (divisas) as of September 29, 2017, of Ps.17.31 per US$1.00.
(3) Determined by dividing the pro forma net tangible book value (total assets minus intangible assets) minus total liabilities after giving effect to the La Plata Sale by the number of common shares issued and outstanding before and after the offering.
(4) Because the total number of common shares outstanding following the global offering will not be impacted by any exercise of the international underwriters’ option to purchase additional common shares or ADSs from one of the selling shareholders, Guillermo Pablo Reca, and we will not receive any net proceeds in the event of such exercise, there will be no change to the dilution in net tangible book value per common share or ADS to purchasers in this offering due to any such exercise of the option.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER INFORMATION

The following tables present a summary of our historical consolidated financial data for each of the periods indicated. You should read this information in conjunction with our interim condensed consolidated financial statements and related notes beginning on page F-1, and the information under “Presentation of Financial and Other Information, “Unaudited Pro Forma Consolidated Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.

We have derived our selected financial data as of and for the two years ended December 31, 2016 and 2015 from our audited consolidated financial statements included in this prospectus. We have derived our consolidated financial data as of September 30, 2017 and for the nine-month periods ended September 30, 2017 and 2016 from our interim condensed consolidated financial statements included in this prospectus. We have prepared the interim condensed consolidated financial statements on basis consistent with our audited consolidated financial statements. Our interim condensed consolidated financial statements include all adjustments, consisting only of normal and recurring adjustments, which we consider necessary for a fair presentation of our financial position and results of operations for these periods. The results of operations for the nine-month period ended September 30, 2017 are not necessarily indicative of the results to be expected for the full year ending December 31, 2017.

Selected Consolidated Statement of Comprehensive Income

 

    Nine-month Period Ended
September 30,
    Year Ended
December 31,
 
    (in thousands of
US$)(1)
    (in thousands of Ps.)     (in thousands of Ps.)  
    2017
(unaudited)
    2017
(unaudited)
    2016
(unaudited)
    2016     2015  

Revenues

  US$ 330,345       Ps.5,718,278       Ps.3,905,310       Ps.5,320,413       Ps.3,234,775  

Cost of sales

    (172,337     (2,983,155     (2,287,369     (3,151,731     (1,750,209
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross income

    158,008       2,735,123       1,617,941       2,168,682       1,484,566  

Administrative and selling expenses

    (26,179     (453,154     (339,329     (460,633     (379,409

Other operating income

    18,000       311,588       986,703       1,165,506       741,687  

Other operating expenses

    (2,055     (35,575     (105,740     (84,845     (53,961
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    147,774       2,557,982       2,159,575       2,788,710       1,792,883  

Finance income

    48,284       835,800       496,088       420,988       362,363  

Finance expenses

    (28,072     (485,927     (639,052     (634,903     (160,186

Share of the profit of associates

    12,878       222,915       85,967       147,513       43,390  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax

    180,864       3,130,770       2,102,578       2,722,308       2,038,450  

Income tax for the period/year

    (60,756     (1,051,681     (699,432     (953,472     (696,452
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income for the period/year

    120,109       2,079,089       1,403,146       1,768,836       1,341,998  

Other comprehensive income, net

    (16,998     (294,241     141,273       199,075       132,953  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income for the period/year

    103,111       1,784,848       1,544,419       1,967,911       1,474,951  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Selected Consolidated Statement of Financial Position

 

     As of
September 30, 2017
     As of
December 31,
 
     (in thousands of
US$)(1)
     (in thousands of Ps.)      (in thousands of Ps.)  
     (unaudited)      (unaudited)      2016      2015  

Non-current assets

           

Property, plant and equipment

   US$ 284,024        Ps.4,916,450        Ps.2,811,539        Ps.1,968,148  

Intangible assets

     11,954        206,916        236,530        276,691  

Investment in associates

     28,513        493,560        307,012        210,529  

Trade and other receivables(2)

     162,136        2,806,567        3,553,129        2,780,635  

Other non-financial assets

     12,099        209,428        1,466,547        487,429  

Inventories

     1,781        30,830        30,830        29,619  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current assets

     500,507        8,663,751        8,405,587        5,753,051  
  

 

 

    

 

 

    

 

 

    

 

 

 

Current assets

           

Inventories

     9,744        168,671        137,965        82,672  

Other non-financial assets

     8,426        145,859        137,110        135,012  

Trade and other receivables(2)

     197,598        3,420,413        2,215,535        1,267,032  

Other financial assets

     57,310        992,044        1,796,756        1,912,016  

Cash and cash equivalents

     1,321        22,875        30,008        292,489  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current assets

     274,399        4,749,862        4,317,374        3,689,221  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

     774,906        13,413,613        12,722,961        9,442,272  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity and liabilities

           

Equity

           

Capital stock

     87,465        1,514,022        1,514,022        199,742  

Adjustment to capital stock

     38,416        664,988        664,988        664,988  

Merger premium

     21,755        376,571        376,571        366,082  

Legal and other reserves

     29,994        519,189        431,007        363,289  

Voluntary reserve

     26,047        450,865        68,913        1,507,513  

Retained earnings

     121,040        2,095,209        1,757,051        1,347,763  

Accumulated other comprehensive income

     2,340        40,506        334,747        122,286  

Non-controlling interests

     15,311        265,034        6,717        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

     342,368        5,926,384        5,154,016        4,571,663  
  

 

 

    

 

 

    

 

 

    

 

 

 

Non-current liabilities

           

Other non-financial liabilities

     29,232        506,008        635,162        596,632  

Other loans and borrowings

     —          —          —          318,410  

Borrowings from CAMMESA

     68,997        1,194,341        1,284,783        542,858  

Compensation and employee benefits liabilities

     4,959        85,842        87,705        56,112  

Deferred income tax liabilities

     51,765        896,059        1,136,481        770,737  

Provisions

     —          —          125,201        133,284  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total non-current liabilities

     154,954        2,682,250        3,269,332        2,418,033  
  

 

 

    

 

 

    

 

 

    

 

 

 

Current liabilities

           

Trade and other payables

     48,486        839,286        655,598        381,128  

Other non-financial liabilities

     36,752        636,170        476,785        177,664  

Other loans and borrowings

     7,117        123,203        1,293,178        511,555  

Borrowings from CAMMESA

     94,885        1,642,451        1,047,722        661,086  

Compensation and employee benefits liabilities

     14,497        250,942        205,923        147,770  

Income tax payable

     46,436        803,804        278,922        330,496  

Provisions

     29,412        509,123        341,485        242,877  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total current liabilities

     277,585        4,804,979        4,299,613        2,452,576  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

     432,538        7,487,229        7,568,945        4,870,609  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity and liabilities

     774,906        13,413,613        12,722,961        9,442,272  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1) Trade and other receivables include receivables from CAMMESA. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Receivables from CAMMESA” and “—Liquidity and Capital Resources.”

Adjusted EBITDA

In this prospectus, we define Adjusted EBITDA as net income for the year, plus finance expenses, minus finance income, minus share of the profit of associates, plus income tax expense, plus depreciation and amortization.

We believe that Adjusted EBITDA, a non-IFRS financial measure, provides useful supplemental information to investors about us and our results. Adjusted EBITDA is among the measures used by our management team to evaluate our financial and operating performance and make day-to-day financial and operating decisions. In addition, Adjusted EBITDA is frequently used by securities analysts, investors and other parties to evaluate companies in our industry. We also believe that Adjusted EBITDA is helpful to investors because it provides additional information about trends in our core operating performance prior to considering the impact of capital structure, depreciation, amortization and taxation on our results.

Adjusted EBITDA should not be considered in isolation or as a substitute for other measures of financial performance reported in accordance with IFRS. Adjusted EBITDA has limitations as an analytical tool, including:

 

    Adjusted EBITDA does not reflect changes in, including cash requirements for, our working capital needs or contractual commitments;

 

    Adjusted EBITDA does not reflect our finance expenses, or the cash requirements to service interest or principal payments on our indebtedness, or interest income or other finance income;

 

    Adjusted EBITDA does not reflect our income tax expense or the cash requirements to pay our income taxes;

 

    although depreciation and amortization are non-cash charges, the assets being depreciated or amortized often will need to be replaced in the future, and Adjusted EBITDA does not reflect any cash requirements for these replacements;

 

    although share of the profit of associates is a non-cash charge, Adjusted EBITDA does not consider the potential collection of dividends; and

 

    other companies may calculate Adjusted EBITDA differently, limiting its usefulness as a comparative measure.

We compensate for the inherent limitations associated with using Adjusted EBITDA through disclosure of these limitations, presentation of our consolidated financial statements in accordance with IFRS and reconciliation of Adjusted EBITDA to the most directly comparable IFRS measure, net income.

 

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The following table sets forth a reconciliation of our net income to Adjusted EBITDA:

 

    Nine-month period ended
September 30,
    Year ended
December 31,
 
    2017     2017     2016     2016     2015  
    (in thousands of
US$)(1)
    (in thousands of Ps.)  

Net income for the period/year

  US$ 120,109       Ps. 2,079,089       Ps. 1,403,146       Ps. 1,768,836       Ps. 1,341,998  

Finance expenses

    28,072       485,927       639,052       634,903       160,186  

Finance income

    (48,284     (835,800     (496,088     (420,988     (362,363

Share of the profit of associates

    (12,878     (222,915     (85,967     (147,513     (43,390

Income tax expense

    60,756       1,051,681       699,432       953,472       696,452  

Depreciation and amortization

    12,194       211,082       179,236       242,026       194,460  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

    159,969       2,769,064       2,338,811       3,030,736       1,987,343  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other Data

 

    Nine-month period ended
September 30,
    Year ended
December 31,
 
    2017     2016     2016     2015  

Financial debt to Adjusted EBITDA

    0.04 (1)      0.31 (1)      0.43       0.42  

Profitability ratio (net income for the period/ average equity(2))

    0.38       0.26       0.36       0.34  

Adjusted EBITDA margin (Adjusted EBITDA/revenues)

    48.42     59.89     56.96     61.44

Outstanding shares (basic and diluted)(3)

    1,505,695,134       1,505,695,134       1,505,695,134       1,505,695,134  

Net income per share (basic and diluted) (Ps.)

    1.38       0.93       1.17       0.89  

Cash dividend per share (Ps.)

    0.85       —         0.925       0.226  

 

(1) Financial debt to Adjusted EBITDA is calculated for the last twelve months (LTM) at the period end.
(2) “Average equity” means the average value of our equity measured at the beginning and at the end of the period.
(3) Adjusted to give retroactive effect to the 2016 stock split (dividend) and the capital stock decrease relating to the 2016 Merger (as defined below). See “Business—History and Development of the Company—The 2016 Merger.”

 

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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

The following unaudited pro forma consolidated financial information is based on the Company’s historical consolidated financial statements, adjusted to give pro forma effect to the sale of the La Plata plant, which is located in the city of La Plata, Ensenada, Province of Buenos Aires. The unaudited pro forma consolidated statement of income for the nine-month period ended September 30, 2017 and for the years ended December 31, 2016 and 2015 give effect to the La Plata Plant Sale as if it had occurred on January 1, 2015. The unaudited pro forma consolidated statement of financial position as of September 30, 2017 gives effect to the La Plata Plant Sale as if it had occurred on September 30, 2017. For further information on the La Plata Plant Sale, see “Summary—Recent Developments—La Plata Plant Sale.”

The assumptions and estimates underlying the unaudited adjustments to the unaudited pro forma consolidated financial information are described in the accompanying notes, which should be read together with the unaudited pro forma consolidated financial information.

The unaudited pro forma consolidated financial information should be read together with the Company’s historical consolidated financial statements included elsewhere in this prospectus.

The unaudited pro forma consolidated financial information do not necessarily reflect what the Company’s financial condition or results of operations would have been had the sale occurred on the dates indicated. They also may not be useful in predicting the future financial condition and results of operations of the Company. The actual financial position and results of operations may differ significantly from the unaudited pro forma amounts reflected herein due to a variety of factors.

 

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Unaudited pro forma consolidated statement of financial position

As of Setpember 30, 2017

 

     Historical      Pro forma
adjustments
    Notes     Pro forma adjusted  
     (in thousands of Ps.)      (in thousands of Ps.)           (in thousands of Ps.)  

Assets

         

Non-current assets

         

Property, plant and equipment

     4,916,450        (111,990     (a     4,804,460  

Intangible assets

     206,916        —           206,916  

Investment in Associates

     493,560        —           493,560  

Trade and other receivables

     2,806,567        —           2,806,567  

Oter non-financial assets

     209,428        —           209,428  

Cash and cash equivalents

     30,830        —           30,830  
  

 

 

    

 

 

     

 

 

 
     8,663,751        (111,990       8,551,761  
  

 

 

    

 

 

     

 

 

 

Curent assets

         

Inventories

     168,671        (24,695     (a     143,976  

Other non-financial assets

     145,859        —           145,859  

Trade and other receivables

     3,420,413        —           3,420,413  

Other financial assets

     992,044        —           992,044  

Cash and cash equivalents

     22,875        542,115       (b     564,990  
  

 

 

    

 

 

     

 

 

 
     4,749,862        517,420         5,267,282  
  

 

 

    

 

 

     

 

 

 

Total assets

     13,413,613        405,430         13,819,043  
  

 

 

    

 

 

     

 

 

 

Equity and liabilities

         

Capital Stock

     1,514,022        —           1,514,022  

Adjustment to capital stock

     664,988        —           664,988  

Merger premium

     376,571        —           376,571  

Legal and other reserve

     519,189        —           519,189  

Voluntary reserve

     450,865        —           450,865  

Retained earnings

     2,095,209        348,701       (c     2,443,910  

Accumulated other comprehensive income

     40,506        —           40,506  
  

 

 

    

 

 

     

 

 

 

Equity attributable to holders of the parent

     5,661,350        348,701         6,010,051  

Non-controlling interests

     265,034        —           265,034  
  

 

 

    

 

 

     

 

 

 

Total Equity

     5,926,384        348,701         6,275,085  
  

 

 

    

 

 

     

 

 

 

Non-current liabilities

         

Other non-financia liabilities

     506,008        —           506,008  

Borrowings from CAMMESA

     1,194,341        —           1,194,341  

Compensation and employee benefits liabilities

     85,842        —           85,842  

Deferred income tax liabilities

     896,059        7,149       (a     903,208  

Provisions

     —          —           —    
  

 

 

    

 

 

     

 

 

 
     2,682,250        7,149         2,689,399  
  

 

 

    

 

 

     

 

 

 

Current liabilities

         

Trade and other payables

     839,286        —           839,286  

Other non-financial liabilities

     636,170        —           636,170  

Borrowings from CAMMESA

     1,642,451        —           1,642,451  

Other loans and borrowings

     123,203        —           123,203  

Compensation and employee benefits liabilities

     250,942        —           250,942  

Income tax payable

     803,804        180,612       (d     984,416  

Provisions

     509,123        (131,032     (a     378,091  
  

 

 

    

 

 

     

 

 

 
     4,804,979        49,580         4,854,559  
  

 

 

    

 

 

     

 

 

 

Total Liabilities

     7,487,229        56,729         7,543,958  
  

 

 

    

 

 

     

 

 

 

Total equity and liabilities

     13,413,613        405,430         13,819,043  
  

 

 

    

 

 

     

 

 

 

See accompanying notes to the unaudited pro forma consolidated financial statements

 

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Unaudited pro forma consolidated statement of income

for the nine-months period ended September 30, 2017

 

     Historical     Pro forma
adjustments
    Notes     Pro forma adjusted  
     (in thousands of Ps.)     (in thousands of Ps.)           (in thousands of Ps.)  

Continuing operations

        

Revenues

     5,718,278       (1,696,898     (e     4,021,380  

Cost of sales

     (2,983,155     1,027,553       (e     (1,955,602
  

 

 

   

 

 

     

 

 

 

Gross income

     2,735,123       (669,345       2,065,778  

Administrative and selling expenses

     (453,154     13,852       (f     (439,302

Other operating income

     311,588       (7,207     (g     304,381  

Other operating expenses

     (35,575     13,822       (g     (21,753
  

 

 

   

 

 

     

 

 

 

Operating income

     2,557,982       (648,878       1,909,104  

Finance income

     835,800       —           835,800  

Finance expenses

     (485,927     —           (485,927

Share of the profit of associates

     222,915       —           222,915  
  

 

 

   

 

 

     

 

 

 

Income before income tax from continuing operations

     3,130,770       (648,878       2,481,892  

Income tax for the period

     (1,051,681     227,107       (i     (824,574
  

 

 

   

 

 

     

 

 

 

Net income for the period

     2,079,089       (421,771       1,657,318  
  

 

 

   

 

 

     

 

 

 

Attributable to:

        

—Equity holders of the parent

     2,085,652       (421,771       1,663,881  

—Non-controlling interests

     (6,563     —           (6,563
  

 

 

   

 

 

     

 

 

 
     2,079,089       (421,771       1,657,318  
  

 

 

   

 

 

     

 

 

 

Earnings per share:

        

—Basic and diluted (ARS)

     1.37           1.10  
  

 

 

       

 

 

 

Weighted average number of ordinary shares

     1,505,695,134           1,505,695,134  

See accompanying notes to the unaudited pro forma consolidated financial statements

 

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Unaudited pro forma consolidated statement of income

for the year ended December 31, 2016

 

     Historical     Pro forma
adjustments
    Notes     Pro forma adjusted  
     (in thousands of Ps.)     (in thousands of Ps.)           (in thousands of Ps.)  

Continuing operations

        

Revenues

     5,320,413       (1,757,692     (e     3,562,721  

Cost of sales

     (3,151,731     1,081,979       (e     (2,069,752
  

 

 

   

 

 

     

 

 

 

Gross income

     2,168,682       (675,713       1,492,969  

Administrative and selling expenses

     (460,633     15,221       (f     (445,412

Other operating income

     1,165,506       (25,947     (g     1,139,559  

Other operating expenses

     (84,845     (1,823     (g     (86,668
  

 

 

   

 

 

     

 

 

 

Operating income

     2,788,710       (688,262       2,100,448  

Finance income

     420,988       —           420,988  

Finance expenses

     (634,903     14,455       (h     (620,448

Share of the profit of associates

     147,513       —           147,513  
  

 

 

   

 

 

     

 

 

 

Income before income tax from continuing operations

     2,722,308       (673,807       2,048,501  

Income tax for the year

     (953,472     235,833       (i     (717,639
  

 

 

   

 

 

     

 

 

 

Net income for the year

     1,768,836       (437,974       1,330,862  
  

 

 

   

 

 

     

 

 

 

Attributable to:

        

—Equity holders of the parent

     1,768,843       (437,974       1,330,869  

—Non-controlling interests

     (7     —           (7
  

 

 

   

 

 

     

 

 

 
     1,768,836       (437,974       1,330,862  
  

 

 

   

 

 

     

 

 

 

Earnings per share:

        

—Basic and diluted (ARS)

     1.17           0.88  
  

 

 

       

 

 

 

Weighted average number of ordinary shares

     1,505,695,134           1,505,695,134  

See accompanying notes to the unaudited pro forma consolidated financial statements

 

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Unaudited pro forma consolidated statement of income

for the year ended December 31, 2015

 

     Historical     Pro forma
adjustments
    Notes     Pro forma adjusted  
     (in thousands of Ps.)     (in thousands of Ps.)           (in thousands of Ps.)  

Continuing operations

        

Revenues

     3,234,775       (580,595     (e     2,654,180  

Cost of sales

     (1,750,209     352,844       (e     (1,397,365
  

 

 

   

 

 

     

 

 

 

Gross income

     1,484,566       (227,751       1,256,815  

Administrative and selling expenses

     (379,409     7,924       (f     (371,485

Other operating income

     741,687       (9,965     (g     731,722  

Other operating expenses

     (53,961     5,054       (g     (48,907
  

 

 

   

 

 

     

 

 

 

Operating income

     1,792,883       (224,738       1,568,145  

Finance income

     362,363       —         362,363  

Finance expenses

     (160,186     21,878       (h     (138,308

Share of the profit of associates

     43,390       —         43,390  
  

 

 

   

 

 

     

 

 

 

Income before income tax from continuing operations

     2,038,450       (202,860       1,835,590  

Income tax for the year

     (696,452     71,001       (i     (625,451
  

 

 

   

 

 

     

 

 

 

Net income for the year

     1,341,998       (131,859       1,210,139  
  

 

 

   

 

 

     

 

 

 

Attributable to:

        

—Equity holders of the parent

     1,341,998       (131,859       1,210,139  

—Non-controlling interests

     —       —         —  
  

 

 

   

 

 

     

 

 

 
     1,341,998       (131,859       1,210,139  
  

 

 

   

 

 

     

 

 

 

Earnings per share:

        

—Basic and diluted (ARS)

     0.89         0.80
  

 

 

       

 

 

 

Weighted average number of ordinary shares

     1,505,695,134           1,505,695,134  

See accompanying notes to the unaudited pro forma consolidated financial statements

 

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Notes To The Unaudited Pro Forma Consolidated Financial Information

Note 1—Basis of Presentation—La Plata Plant Sale

Our historical consolidated financial statements have been adjusted in the unaudited pro forma consolidated financial information to give pro forma effect to events that are (1) directly attributable to the La Plata Plant Sale as described below, (2) factually supportable and (3) with respect to the unaudited pro forma consolidated statement of income, expected to have a continuing impact on the results following the sale.

On December 20, 2017, YPF EE accepted our offer for the La Plata Plant Sale, subject to certain customary conditions, for US$31.5 million in cash. The effective transfer of the La Plata plant is expected to occur in the first quarter of 2018. The operations of the La Plata plant are expected to be classified as discontinued operations in the historical financial statements of the Company, pursuant to IFRS 5, Non-Current Assets Held for Sale and discontinued operations. Accordingly, the unaudited pro forma consolidated statement of income reflect the results of the continuing operations of the Company. For further information about the La Plata Plant Sale, see “Summary—Recent Developments—La Plata Plant Sale,” “Risk Factors—Risks Relating to Our Business—If the conditions for the La Plata Plant Sale are not met, our results of operations could be adversely affected” and “Unaudited Pro Forma Consolidated Financial Information.”

Note 2—Pro forma adjustments

Adjustments to the unaudited pro forma consolidated statement of financial position

 

  (a) This adjustment reflects the elimination of assets and liabilities attributable to the La Plata plant, which mainly consist of property (i.e., the plant), spare parts and the provision for dismantling the plant.

 

  (b) This adjustment represents the receipt of cash consideration at the La Plata Plant Sale Effective Date.

 

  (c) This adjustment reflects the gain, after income tax effect, arising from the transaction. This estimated gain has not been reflected in the unaudited pro forma consolidated statement of income as it is considered to be nonrecurring in nature.

 

  (d) Reflects the income tax payable arising from the La Plata Plant Sale.

Adjustments to the unaudited pro forma consolidated statement of income

 

  (e) This adjustment reflects the elimination of revenues and the cost of sales of the La Plata plant.

 

  (f) This adjustment reflects the elimination of administrative and selling expenses of the La Plata plant.

 

  (g) This adjustment reflects the elimination of other operating income and expenses of the La Plata plant.

 

  (h) This adjustment reflects the elimination of the periodic unwinding of the discount of the provision for the plant dismantling.
  (i) This adjustment represents the estimated income tax effect of the unaudited pro forma adjustments. The tax effect of the unaudited pro forma adjustments was calculated using the statutory income tax rate (35%) in effect for the periods presented.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

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

This discussion should be read in conjunction with our consolidated financial statements and the unaudited pro forma consolidated financial information, each of which is included elsewhere in this prospectus.

Overview

We are the largest private sector power generation company in Argentina, as measured by generated power, according to data from CAMMESA. In the nine-month period ended September 30, 2017, we generated a total of 12,239 net GWh of power, and in the year ended December 31, 2016, we generated a total of 15,544 net GWh of power, representing approximately 20% of the power generated by private sector generation companies in the country during each of these periods, according to data from CAMMESA. We had an installed generating capacity of 3,791 MW as of September 30, 2017.

We have a generation asset portfolio that is geographically and technologically diversified. Our facilities are distributed across the City of Buenos Aires and the provinces of Buenos Aires, Mendoza, Neuquén and Río Negro. We use conventional technologies (including hydro power) to generate power, and our power generation assets include combined cycle, gas turbine, steam turbine, hydroelectric and co-generation.

Factors Affecting Our Results of Operations

Argentine Economic Conditions

We are an Argentine sociedad anónima (corporation). Substantially all of our assets and operations and our customers are located in Argentina. Accordingly, our financial condition and results of operations depend to a significant extent on macroeconomic and political conditions prevailing from time to time in Argentina.

As Central Puerto is affected by the conditions of Argentina’s economy, which have historically been volatile, and have negatively and materially affected the financial condition and prospects of multiple industries, including the electric power sector, the following discussion may not be indicative of our future results of operations, liquidity or capital resources.

The following table sets forth information about certain economic indicators in Argentina for the periods indicated. For information regarding the reliability of this data and why we present three measurements of inflation, see “Risk Factors—Risks Relating to Argentina—The credibility of several Argentine economic indices has been called into question, which has led to a lack of confidence in the Argentine economy and could affect your evaluation of this offering and/or the market value of the ADSs.”

 

    2011     2012     2013     2014     2015     2016(1)     Nine-month
period ended
September 30,
2017
 

Economic activity

             

Real GDP (pesos of 2004) (% change)(1)

    6.0     (1.0 )%      2.4     (2.5 )%      2.6     (2.3 )%      2.5

Nominal GDP in current US$(2) (in millions of US$)

    527,527       579,400       610,760       563,955       631,819       542,846       613,749  

 

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    2011     2012     2013     2014     2015     2016(1)     Nine-month
period ended
September 30,
2017
 

Real gross domestic investment(3) (pesos of 2004) (% change) as % of GDP

    10.7     (6.1 )%      (0.1 )%      (4.35 )%      1.2     (3.3 )%      5.5

Price indexes and exchange rate information

             

INDEC CPI (% change)(4)

    9.5     10.8     10.9     24.0     11.9     16.9     17.6