EDN Empresa Distribuidora Y Comercializadora Norte SA

EDENOR S.A.

CONDENSED INTERIM FINANCIAL STATEMENTS

AS OF JUNE 30, 2016 AND FOR THE SIX AND THREE-MONTH PERIODS

ENDED JUNE 30, 2016

PRESENTED IN COMPARATIVE FORM

Glossary of Terms

The following definitions, which are not technical ones, will help readers understand some of the terms used in the text of the notes to the Company’s Financial statements.

Legal Information

Corporate name: Empresa Distribuidora y Comercializadora Norte S.A.

Legal address: 6363 Del Libertador Ave., City of Buenos Aires

Main business: Distribution and sale of electricity in the area and under the terms of the concession agreement by which this public service is regulated.

Date of registration with the Public Registry of Commerce :

-           of the Articles of Incorporation: August 3, 1992

-           of the last amendment to the By-laws: May 28, 2007

Term of the Corporation : August 3, 2087

Registration number with the “Inspección General de Justicia” (the Argentine governmental regulatory agency of corporations) : 1,559,940

Parent company: Electricidad Argentina S.A. (EASA)

Legal address: 3302 Ortiz de Ocampo, Building 4, City of Buenos Aires

Main business of the parent company:  Investment in Edenor S.A.’s Class “A” shares and rendering of technical advisory, management, sales, technology transfer and other services related to the distribution of electricity.

Interest held by the parent company in capital stock and votes: 51.54%

(1)   Includes 9,412,500 treasury shares as of June 30, 2016 and December 31, 2015.

(2) Relates to the Employee Stock Ownership Program Class C shares that have not been transferred.

Edenor S.A.

Condensed Interim Statement of Financial Position

as of June 30, 2016 presented in comparative form

(Stated in thousands of pesos)

2

Edenor S.A.

Condensed Interim Statement of Comprehensive Income  

for the six and three-month periods ended June 30, 2016

 presented in comparative form

(Stated in thousands of pesos)

The accompanying notes are an integral part of these Financial statements.

Edenor S.A.

Condensed Interim Statement of Changes in Equity

for the six-month period ended June 30, 2016

presented in comparative form

(Stated in thousands of pesos)

The accompanying notes are an integral part of these Financial statements.

Edenor S.A.

Condensed Interim Statement of Cash Flows

for the six-month period ended June 30, 2016

presented in comparative form

(Stated in thousands of pesos)

Edenor S.A.

Condensed Interim Statement of Cash Flows

for the six-month period ended June 30, 2016

presented in comparative form (continued)

(Stated in thousands of pesos)

The accompanying notes are an integral part of these Financial statements.

1.                    General information

History and development of the Company

Edenor S.A. was organized on July 21, 1992 by Decree No. 714/92 in connection with the privatization and concession process of the distribution and sale of electric power carried out by SEGBA.

By means of an International Public Bidding, the PEN awarded 51% of the Company’s capital stock, represented by the Class "A" shares, to the bid made by EASA, the parent company of Edenor S.A. The award as well as the transfer contract were approved on August 24, 1992 by Executive Order No. 1,507/92 of the Federal Executive Power.

On September 1, 1992, EASA took over the operations of Edenor S.A.

The corporate purpose of Edenor S.A. is to engage in the distribution and sale of electricity within the concession area. Furthermore, among other activities, the Company may subscribe or acquire shares of other electricity distribution companies, subject to the approval of the regulatory agency, assign the use of the network to provide electricity transmission or other voice, data and image transmission services, and render advisory, training, maintenance, consulting, and management services and know-how related to the distribution of electricity both in Argentina and abroad. These activities may be conducted directly by Edenor S.A. or through subsidiaries or related companies. In addition, the Company may act as trustee of trusts created under Argentine laws.

The Company’s economic and financial situation

In fiscal year 2015, the Company recorded positive operating and net results, thus reversing its negative economic and financial situation of the last years. This improvement has been achieved as a consequence of the issuance by the SE on March 13, 2015 of Resolution 32/15, which addressed the need for the adjustment of the distribution companies’ resources and considered that the adoption of urgent and temporary measures were necessary in order to maintain the normal provision of the public service, object of the concession.

In spite of the deterioration of the economic and financial equation over the last years, the Company has been able to reasonably maintain the quality of the electricity distribution service and satisfy the constant year-on-year increase in the demand for electricity that has accompanied the economic growth and the rise in the standard of living. The imbalance of the business equation was caused by the delay in the compliance with certain obligations under the Adjustment Agreement, especially with regard to both the recognition of the semiannual rate adjustments resulting from the MMC, and the carrying out of the RTI, mitigated by the adoption of certain temporary measures. In this regard, the Company has absorbed the higher costs associated with the provision of the service and complied with the execution of the investment plan and the carrying out of the essential operation and maintenance works that are necessary to maintain the provision of the public service in a satisfactory manner in terms of quality and safety.

In line with the above-described situation, on December 16, 2015, the Executive Power issued Executive Order No. 134, which declared the state of emergency in the country’s electricity sector and authorized the MEyM to implement a plan of action for the generation, transmission and distribution of electricity at national level and guarantee the provision of the electricity public service under adequate economic and technical conditions.

As part of the measures aimed at the restructuring of the electricity sector, in January 2016, the MEyM issued Resolutions Nos. 6 and 7 and the ENRE its Resolution No. 1, pursuant to which a new electricity rate system was implemented aimed not only to improve the distribution companies’ revenue in order for them to be able to make investments and carry out network maintenance and expansion works, but also to reflect the approved new generation cost. This new electricity rate system protects those sectors that cannot afford the full cost of the service through the creation of a “Social Tariff”, is accompanied by a program aimed at reducing the consumption of electricity and provides for the billing of electricity consumption on a monthly basis in order to soften the impact of the increases on customers.

At the same time, the aforementioned Resolution No. 7 repealed SE Resolution 32/15, pursuant to which the government grant mentioned in the first paragraph of this Note had been granted, and instructed the ENRE to take all the necessary steps to conclude the RTI before December 31, 2016. In this regard, on April 1, 2016, the ENRE issued Resolution No. 55/16 which approves the program for the Review of the distribution tariff for the current year and establishes the criteria and methodologies for both the process and the compensation and penalty system (Note 2.a).

Despite these advances, in the months of May, June and July different courts granted precautionary measures, ordering the temporary suspension of the aforementioned Resolutions in the Province of Buenos Aires (Note 2.b). These precautionary measures result not only in 80% of the customers paying -since the month of July- the electricity supply at the rates in effect until January 31, 2016, but also in the suspension being applied retroactively to February 1, 2016 for 30% of the customers, whose next bills will, for that reason, be credited for the amounts already paid.

If the situation described in the preceding paragraph continued, it would generate a significant cash deficit in the current fiscal year that would jeopardize the operations of the Company, which will once again have to incur in payment delays for the energy it acquires in the MEM, paralyze investments and cut other operating expenses, of which salaries represent approximately 80%.

Taking this situation into account, and due to the fact that the precautionary measures suspend MEyM Resolution 7/16, which, as previously mentioned, had repealed SE Resolution 32/15 (Note 2.c. IX to the financial statements as of December 31, 2015), the Company believes that SE Resolution 32/15 is once again effective in those jurisdictions in which the precautionary measures apply; therefore, in the opinion of the Company Board of Directors the deficit generated by said precautionary measures should be covered with funds transferred by the Federal Government to this Distribution Company.

Faced with this scenario, the Company Board of Directors is assessing the sufficiency of the financial resources to cover operation costs, investment plans and debt interest payments, as well as the impact of the different variables that affect the Company’s business, such as behavior of the demand, losses, delinquency, penalties and service quality, among others.

At this date, it is not possible to estimate the final outcome of this situation. In any case, the Company continues to prepare its financial statements on a going concern basis because in its opinion the Federal Government should once again begin to provide the Company with assistance to pay its obligations until a new tariff increase is established.

2.                   Regulatory framework

At the date of issuance of these condensed interim financial statements, the changes with respect to the situation reported by the Company as of December 31, 2015, are as follow:

a)       Tariff Structure Review

By means of MEyM Resolution No. 7/16 (suspended by the precautionary measures, see Note 2.b), SE Resolution 32/15 was repealed and the ENRE was instructed to adopt all the necessary measures, within its field of competence, to conclude the RTI before December 31, 2016.

On April 1, 2016, the ENRE issued Resolution 55/16, which approves the program for the Review of the distribution tariff for the current year, establishing the criteria and methodologies for both the RTI process and the compensation and penalty system, together with a tentative schedule with a detail of the work plan to be submitted.

In this regard, on July 20, 2016, the Company submitted the first report which included the demand projection study and the capital base determination. The final proposal must be submitted on September 1, 2016.

As mentioned in the financial statements as of December 31, 2015, the Company estimates that the RTI must include, in addition to the definitive Electricity Rate Schedules, a review of costs, the required quality levels and other rights and obligations that would lead to an updated Concession Agreement, which, in turn, must provide for the definitive treatment to be given to all those issues, about which a decision is still pending, resulting from the Federal Government’s non-compliance with the Adjustment Agreement, including the remaining balances and other effects caused by the partial measures adopted.

These issues, among other, are the following:

i)           the treatment to be given to the remaining balances of the amounts received for the fulfillment of the Investment Plan through the Loans for consumption (Mutuums) granted to cover the insufficiency of the funds deriving from the FOCEDE;

ii)          the treatment to be given to the funds disbursed by the Company for the fulfillment of the Investment Plan, not included in i) above;

iii)        the conditions for the settlement of the balance outstanding with CAMMESA at the date of issuance of SE Resolution 32 / 15, for which purpose the Company has submitted a payment plan;

iv)        the treatment to be given to the Penalties and Discounts whose payment/crediting is pending.

b)    Precautionary measures

As from May 2016 and until the date of issuance of these financial statements, Edenor has been notified by several courts of the Province of Buenos Aires of the granting of precautionary measures requested by different customers, both individuals and groups of consumers (Hospital Privado de la Merced S.A., Municipality of La Matanza,  Club Atlético 3 de Febrero, Club Ferrocarril Mitre Deportivo Social y Cultural, Sociedad Alemana de Gimnasia de Villa Ballester, Club Social y Deportivo Las Heras, Club Sportivo San Andrés, Cooperativa de Trabajo 19 de Diciembre, residents of San Martín, Pilar and Escobar districts), which all together account for more than 30% of Edenor’s sales, ordering the suspension of MEyM Resolutions 6/16 and 7/16 and ENRE Resolution 1/16 (authorizing tariff increases), retroactively to the date on which such resolutions came into effect (February 2016).

These measures required the Company to refrain from billing with the tariff increase, and to return any amounts of the increases already collected, by crediting the customers’ accounts. The Company complied, and continues to comply as of the date of issuance of these condensed interim financial statements, with the precautionary measures granted by the courts and began to issue the bills based on the previous electricity rate schedule, crediting the customers’ accounts for the amounts collected above those rates. As of June 30, 2016, the estimated impact of complying with these resolutions amounts to approximately $ 1.1 billion in lower revenue from sales, whereas the related cost for energy purchases is of an estimated amount of $ 533 million.

Furthermore, on July 15, 2016 the ENRE notified the Company of the granting of a precautionary measure by Division II of the Federal Appellate Court of the City of La Plata, ordering the suspension of such increases in all the Province of Buenos Aires for a period of three months to commence as from the date of issuance of such judicial order. This measure impacts 80% of the Company’s billing as from the month of July.

The Company has requested that the intervening courts and the Energy Secretariat notify CAMMESA of the suspension of the above-mentioned resolutions, so as to prevent CAMMESA from continuing to invoice the energy being purchased by the Company, and affected by the precautionary measures, with the increased seasonal price established by MEyM Resolution 6/16. Furthermore, the Company has notified CAMMESA of such situation. 

The Company has taken all steps available from a judicial standpoint in order to revert this situation, and, while it awaits the judicial definitions, it is evaluating the consequences thereof and any further actions to be taken.

Notwithstanding the foregoing, if such resolutions were declared null and void, the Company believes that the previous electricity rate schedule of SE Resolution 32/15 would apply again, as it was repealed by Resolution 7/16, which is now being questioned. In that case, in the opinion of the Company Board of Directors the Federal Government should begin once again to provide assistance to the Company in order for the latter to pay its obligations until a new tariff increase is established.

c)     Penalties

By means of ENRE Note No. 120,151 dated April 15, 2016, which establishes the new criterion to calculate penalties, the Company is informed that for purposes of calculating penalty amounts, the values to be applied are the kWh values in effect at the last day of the six-month period analyzed in which the penalizable event is detected, with the increases recorded in the “remuneration” as a consequence of the increases and adjustments granted as of that date. The effect of this resolution for the September 2015-February 2016 six-month period and subsequent periods was recorded in the six-month period during the six-month period ended June 30, 2016.

Furthermore, it is stated that the resulting amounts determined as indicated in the preceding paragraph, accrue interest at the thirty-day lending rate of Banco de la Nación Argentina, from the date on which they are determined until the User’s account is actually credited, effect which the Company has recorded in its financial statements.

Additionally,  considering  the  aforementioned  ENRE  Note, the Company is evaluating  with  the  regulatory  authorities  the  scope  of the provisions thereof  with  regard  to  all  the penalties recorded . This includes, for example,  clarifying  the  ENRE’s  criterion  to  define  what  constitutes “remuneration”  for  purposes of determining the penalties accrued prior to September  1,  2015  and  not  yet issued.  If the term “remuneration” were interpreted by the ENRE as to include all the amounts received in the form of, for example, government grants, the amount of the provision for penalties could increase significantly.

The penalty amount determined as of June 30, 2016 does not include the effects of the precautionary measures mentioned in the previous caption.

Compensation payable to Customers

On March 21, 2016, the ENRE issued Resolution 31/16, pursuant to which it was provided that each small-demand residential customer (T1R) who suffered  power outages between February 12 and 18, 2016 must be paid a compensation of at least (i) six hundred pesos if the power cut lasted more than 12 continuous hours but did not exceed 24 continuous hours; (ii) nine hundred thirty-one pesos if the power cut lasted more than 24 continuous hours but did not exceed 48 hours; and (iii) one thousand sixty-five pesos if the power cut lasted more than 48 continuous hours.

The total amount of the compensation payable to customers by way of discounts amounts $ 73 million, which was credited to customer bills issued as from April 25, 2016.

d)    ENRE Resolution 347/12

According to the provisions of ENRE Resolution No. 2/16, concerning the termination of the FOCEDE trust, on June 23, 2016 the Company received $ 86.3 million as reimbursement for the amounts duly transferred to the FOCEDE. On July 20, 2016, the aforementioned trust was formally terminated and liquidated.

e)     Framework Agreement

With regard to the accounts receivable from the Framework Agreement, related to the distribution of electricity to low-income areas and shantytowns, during the months of May and July the Company received payments for $ 11.4 million and $ 18.3 million, respectively from the Provincial and the Federal Governments.

3.                   Basis of preparation

These condensed interim financial statements for the six-month period ended June 30, 2016 have been prepared in accordance with the provisions of IAS 34 “Interim Financial Reporting”.

This condensed interim financial information must be read together with the Company’s financial statements as of December 31, 2015, which have been prepared in accordance with IFRS. These condensed interim financial statements are stated in thousands of Argentine pesos, unless specifically indicated otherwise. They have been prepared under the historical cost convention, as modified by the measurement of financial assets at fair value through profit or loss.

The condensed interim financial statements for the six and three-month periods ended June 30, 2016 have not been audited. The Company Management estimates that they include all the necessary adjustments to fairly present the results of operations for each period. The results of operations for the six-month period ended June 30, 2016 do not necessarily reflect the Company’s results in proportion to the full fiscal year.

These condensed interim financial statements were approved for issue by the Company Board of Directors on August 9, 2016.

Comparative information

The balances as of December 31, 2015 and for the six and three-month periods ended June 30, 2015 , disclosed in these condensed interim financial statements for comparative purposes, arise from the financial statements as of those dates. Certain amounts of the financial statements presented for comparative purposes have been reclassified following the disclosure criteria used for the periods being reported.

At the SEC’s request, and for filing purposes with such Commission, on July 26, 2016, the Company restated its financial statements for the year ended December 31, 2015 and 2014, with the aim of reclassifying in the Statement of Cash Flows the values related to the loan for consumption (mutuum) agreements duly entered into with CAMMESA. 

Accordingly, the Company’s statement of cash flows for the period ended June 30, 2015 has been reviewed to present the cash inflows related to such agreements within financing activities in the statement of cash flows, instead of operating activities as previously presented. Also, the increase in the balances of the loans with CAMMESA for funds received by the FOCEDE for the period ended June 30, 2015 is now presented as a non-cash transaction in the supplementary disclosures to the statement of cash flows instead of operating activities as previously presented.

This correction to the financial statements, impacts only the statement of cash flows, being no impact on the statements of financial position, comprehensive income, or equity, or on the basic and diluted (loss) earnings per share.

(1)         Relates to the loan for consumption (mutuum) for salaries that was disclosed in the statement of cash flows under the heading “Increase in trade payables and loans for consumption (mutuum) with CAMMESA” (Note 2.c.VIII to the financial statements as of December 31, 2015).

(2)         Relates to the loan for consumption (mutuum) for investments (Note 2.c.VIII to the financial statements as of December 31, 2015).

(3)         Relates to the amounts received in accordance with the provisions of SE Resolution No. 32/15, which establishes the offsetting of the loans for consumption (mutuum) for salaries with those funds (Note 2.c.IX to the financial statements as of December 31, 2015).

Financial reporting in hyperinflationary economies

IAS 29 “Financial reporting in hyperinflationary economies” requires that the financial statements of an entity whose functional currency is the currency of an economy with high inflation, whether they are based on the historical cost method or the current cost method, be stated in terms of the measuring unit current at the closing date of the reporting period. For such purpose, in general terms, the inflation produced from the acquisition date or the revaluation date, as applicable, must be computed in non-monetary items. In order to conclude whether the economy is a hyperinflationary economy, the standard details a series of factors to be considered, among which the existence of a cumulative inflation rate over three years that approaches or exceeds 100% is included.

In this regard, the Company Management has evaluated whether the Argentine peso meets the characteristics to be qualified as the currency of a hyperinflationary economy following the guidelines established in IAS 29. In order to assess the quantitative factor mentioned in the preceding paragraph, the Company Management considered the development of the IPIM index published by the INDEC because such index is the one that better reflects the conditions required by the aforementioned standard.

At the date of approval of these condensed interim financial statements, the latest IPIM released by the INDEC is that for the month of June 2016, and the cumulative inflation rate for the three-year period ended in that month, measured on the basis of the aforementioned index, and without computing the inflation data related to the months of November and December 2015 that are unavailable due to the reorganization process of that statistics bureau, is approximately 90%. As informed by different government sectors, the level of inflation is expected to show a downward trend due to the fact that the effects of the hikes in public utility rates (whose adjustment had been significantly delayed in the last years), which were one of the main reasons of the increase recorded in the cumulative inflation rate in three years, impacted during the first months of 2016.

Although the Argentine economy does not meet the necessary and objective conditions to qualify as a hyperinflationary economy, certain macroeconomic variables that affect the Company’s business, such as salary costs and the price of supplies, have suffered somewhat important annual variations, a circumstance that must be taken into account when evaluating and interpreting the Company’s financial position and results of operations in these condensed interim financial statements.

4.                   Accounting policies

The accounting policies adopted for these condensed interim financial statements are consistent with those used in the preparation of the financial statements for the last financial year, which ended on December 31, 2015, except for those mentioned below.

There are no new IFRS or IFRIC applicable as from the current period that have a material impact on the Company’s condensed interim financial statements.

These condensed interim financial statements must be read together with the audited financial statements as of December 31, 2015 prepared under IFRS.

New standards, amendments and interpretations not effective and not early adopted by the Company :

IFRS 16 “Leases” : On January 13, 2016, the IASB published IFRS 16, which replaces the current guidance in IAS 17. The standard defines a lease as a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration. The standard requires the recognition of a lease liability that reflects future lease payments and a ‘right-of-use asset’ for almost all lease contracts. This is a significant change compared to IAS 17 under which lessees were required to make a distinction between a finance lease (reported on the balance sheet) and an operating lease (off balance sheet). IFRS 16 contains an optional exemption for certain short-term leases and leases of low-value assets; however, this exemption can only be applied by lessees. IFRS 16 is effective for annual reporting periods beginning on or after January 1, 2019.

IAS 7 "Statement of cash flows": In February 2016, the IASB published an amendment pursuant to which an entity is required to disclose information that will allow users to understand changes in liabilities arising from financing activities. This includes changes arising from cash flows, such as drawdowns and repayments of borrowings; and non-cash changes, such as acquisitions, disposals and unrealized exchange differences. The amendment is effective for annual periods beginning on or after January 1, 2017.

IAS 12 “Income taxes”: In February 2016, the IASB published amendments to clarify the requirements for recognizing deferred tax assets on unrealized losses. The amendments clarify the accounting for deferred tax where an asset is measured at fair value and that fair value is below the asset’s tax base. They also clarify certain other aspects of accounting for deferred tax assets. The amendments are effective from January 1, 2017.

IFRS 2 “Share based payments”: In June 2016, an amendment was published to clarify the measurement basis for cash-settled, share-based payments and the accounting for modifications that change an award from cash-settled to equity-settled. It also introduces an exception to the principles in IFRS 2 that will require an award to be treated as if it was wholly equity-settled, where an employer is obliged to withhold an amount for the employee’s tax obligation associated with a share-based payment and pay that amount to the tax authority. The amendment is effective for annual periods beginning on or after January 1, 2018.

The Company is currently assessing the impact of these new standards and amendments.

5.                    Financial risk management

The Company’s activities and the market in which it operates expose the Company to a series of financial risks: market risk (including currency risk, cash flows interest rate risk, fair value interest rate risk and price risk), credit risk and liquidity risk.

There have been no significant changes in the Company’s risk management policies since the last fiscal year end.

Financial risk factors

                i.           Currency risk 

As of June 30, 2016 and December 31, 2015, the Company’s balances in foreign currency are as follow:

(1)       The exchange rates used are those of Banco Nación in effect as of June 30, 2016 for US Dollars (USD), Euros (EUR), Swiss Francs (CHF) and Norwegian Krones (NOK).  

          ii.                Fair value estimate

The Company classifies the measurements of financial instruments at fair value using a fair value hierarchy that reflects the relevance of the variables used to carry out such measurements. The fair value hierarchy has the following levels:

-           Level 1 : quoted prices (unadjusted) in active markets for identical assets or liabilities.

-           Level 2 : inputs other than quoted prices included in level 1 that are observable for the asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from the prices).

-         Level 3 : inputs for the asset or liability that are not based on observable market data (i.e. unobservable inputs).

The table below shows the Company’s financial assets measured at fair value as of June 30, 2016 and December 31, 2015:

6.                   Critical accounting estimates and judgments

The preparation of the condensed interim financial statements requires the Company Management to make estimates and assessments concerning the future, exercise critical judgments and make assumptions that affect the application of the accounting policies and the reported amounts of assets and liabilities and revenues and expenses.

These estimates and judgments are permanently evaluated and are based upon past experience and other factors that are reasonable under the existing circumstances. Future actual results may differ from the estimates and assessments made at the date of preparation of these condensed interim financial statements.

Except for that mentioned in Note 2.c, in the preparation of these condensed interim financial statements, there have been no changes in either the critical judgments made by the Company when applying its accounting policies or the information sources of estimation uncertainty with respect to those applied in the financial statements for the year ended December 31, 2015.

7.                    Contingencies and lawsuits

At the date of issuance of these condensed interim financial statements, there are no significant changes with respect to the situation reported by the Company in the financial statements as of December 31, 2015.

8.                   Property, plant and equipment

·            During the period ended June 30, 2016, direct costs capitalized amounted to $ 152.6 million.

·            Financial costs capitalized for the period ended June 30, 2016 amounted to $ 133 million.