Memorandum of Understanding with the Federal Government

In February 2006, Edenor entered into a Contract Renegotiation Memorandum of Understanding with the UNIREN (Public Utility Contract Renegotiation and Analysis Unit), which established, effective as from November 2005, a 23% increase in the average VAD (Distribution Added Value), as well as a 5% additional VAD increase to be allocated to certain specific investments in capital goods. Furthermore, it provides for the inclusion of a social tariff, quality standards for the service to be rendered and a minimum investment plan in the electricity grid to be performed by Edenor, as well as the performance of an RTI (Integral Tariff Review). Upon the failure to perform the RTI, the SE (former Secretariat of Energy) and the ENRE (Ente Nacional Regulador de la Electricidad or National Electricity Regulatory Entity) passed several transitory measures seeking to reduce Edenor’s operating and asset deterioration resulting from the tariff freeze. The background and the current tariff situation are disclosed below.

SE Resolution No. 250/13

Since May 2013, the SE provided for the recognition of costs owed to Edenor resulting from the partial application of the MMC (Cost Monitoring Mechanism), the result of which was lower than the actual increase. It was stipulated in the 2007 Contractual Renegotiation Agreement, which was not duly passed on to tariffs. This measure was implemented by SE Resolution No. 250/13 and its subsequent extensions, which allowed for the offsetting of this recognition with Edenor’s liabilities under PUREE (Program for the Rational Use of Electric Power) and with CAMMESA (Compañía Administradora del Mercado Mayorista Eléctrico or the Argentine Wholesale Electricity Market Clearing Company) for energy purchases. However, in February 2016 the SE issued Resolution No. 6/16 abrogating the MMC.

ENRE Resolution No. 347/12

ENRE Resolution No. 347/12 applied a differential fixed amount to each of the different tariff categories, except for customers exempt from paying the tariff scheme provided for by ENRE Resolution No. 628/08. Such amounts —which continued to be deposited in a special account and were used exclusively for the execution of infrastructure and corrective maintenance works in Edenor’s facilities within the concession area— were managed by the FOCEDE (Fondo de Obras de Consolidación y Expansión de Distribución Eléctrica or Fund for Electricity Distribution Expansion and Consolidation Works). ENRE Resolution No. 2/16 terminated the FOCEDE trust on January 31, 2016 and established a new system for the funds collected pursuant to ENRE Resolution No. 347/12, which were managed by Edenor. With the implementation of the RTI in February 2017, these amounts ceased to be charged as a special item on customer bills.

Loan Agreements – Extraordinary Investments Plan

Due to the delay in obtaining the RTI, the Federal Government granted to Edenor loans for the conduction of the investments plan it may deem appropriate. Pursuant to Resolution No. 7/16 of the MEyM (former Ministry of Energy and Mining), CAMMESA suspended, as from February 2016 and until receiving further instructions, all effects from the executed loan agreements and the transfer of resources to distribution companies on behalf of the FOCEDE trust and, therefore, the new works plan would be financed exclusively with tariff proceeds. The amounts owed by Edenor under loan agreements and works were offset by the Federal Government in the Liabilities Regularization Agreement executed on May 10, 2019.

SE Resolution No. 32/15

SE Resolution No. 32/15, passed in March 2015, implemented a transitory increase in Edenor’s income as from February 2015 to be charged against the RTI. Moreover, pursuant to this provision, the amounts collected under the PUREE program were deemed as part of Edenor’s income. This Resolution did not generate tariff increases for customers but was directly transferred by the Federal Government.

However, in January 2016 ENRE Resolution No. 7/16 ordered the performance of all necessary acts to conduct Edenor’s RTI, annul the tariff schemes of SE Resolution No. 32/15, and adjust the VAD to be charged against the RTI, thus canceling the PUREE and suspending the investments loan agreements entered into with Edenor. Consequently, the ENRE issued Resolution No. 1/16 and 2/16 granting a new tariff scheme for Edenor effective as from February 2016. In September 2016, Edenor filed its tariff proposal for the RTI, clarifying that it does not contemplate the value Edenor assigns to damages resulting from the failure to timely and properly implement the Memorandum of Understanding or the collection of income necessary to face the liabilities Edenor has incurred as a result.

RTI

ENRE Resolution No. 63/17, as amended, established the final tariff schemes, the review of costs, required quality levels and other rights and obligations by Edenor for the five-year period starting February 2017. A 42% cap was set in the VAD increase resulting from the Integral Tariff Review (RTI) as from February 2017, the remaining increase being completed in November 2017 and February 2018. The VAD difference resulting from the gradual application was updated in real terms and incorporated in 48 installments payable as from February 2018. The tariff schemes included the prices established in the seasonal programming for the February – April 2017 period under Resolution No. 20/17 of the SEE (Secretariat of Electric Energy).

However, both the CPD (Own Distribution Cost or Costo Propio de Distribución) update contemplated for August 2017 and the VAD increase scheduled for November 2017 were deferred to December 2017, which tariff schemes were fixed pursuant to ENRE Resolution No. 603/17 for the December 2017 – January 2018 two-month period, also contemplating the 18% VAD increase and the 11.6% CPD update, adjusted retroactively as of the dates they should have been implemented.

Furthermore, ENRE Resolution No. 33/18 published a new tariff scheme, effective as from February 2018, applying the last 17.8% VAD increase, the 22.5% CPD update, and considered the total deferred amount of AR$6,343 million recoverable in 48 installments, subject to an annual review each February for the years 2019 through 2021. These Resolutions included electricity prices and discount schemes for users benefiting from the social tariff and evidencing consumption savings, as provided for in SEE Resolutions No. 1091/17 for the December 2017 – January 2018 and February – April 2018 periods, which were later extended until October 2018 pursuant to SEE Provision No. 44/18.

It is worth highlighting that the 22.5% CPD update contemplated a -2.51% E-factor adjustment stimulating efficiency resulting from the RTI as an element geared at passing on to the distributor’s users the expected efficiency gains as from i) factor X, which captures gains resulting from management optimization and the existence of economies of scale, which reduces the CPD; and ii) investments factor Q, which captures the impact of the cost of capital and the evolution of exploitation costs resulting from investments made by the company, which increases the CPD.

As regards the CPD update scheduled for August 2018, Edenor agreed with the MinEn (former Ministry of Energy) on a 50% deferral. Moreover, the MinEn agreed to implement the actions necessary to regularize the Memorandum of Understanding entered into in 2007 and the Framework Agreement. ENRE Resolution No. 208/18 provided for a 15.85% update in the CPD, 7.925% of which was applicable as from August 2018, and the balance in six monthly consecutive installments effective as from February 2019.

Furthermore, SEE Provisions No. 75/18 and 97/18 established for the August 2018 – January 2019 period the power capacity reference price at AR$10,000/MW-month, the stabilized price for transmission in the extra high voltage system at AR$64/MWh, and a price for main distribution based on the distribution company which, in the case of Edenor, amounted to AR$0/MWh. Energy reference prices were set at AR$2,283/MWh for GUDI (Large Distribution Company Users) and at AR$1,470/MWh for the remaining users. As regards the social tariff, the criteria set by SEE Resolution No. 1091/17 for subsidies to users and discounts for savings remained in effect.

Effective as from February 2019, Resolution No. 366/18 of the SGE (former Government Secretariat of Energy) abrogated SEE Resolution No. 1091/17 and, consequently, the Federal Government’s social tariff and the savings discount scheme, and also set a power capacity reference price of AR$80,000/MW-month, with 25% and 20% increases in the months of May and August, respectively, effective until October 2019. The stabilized price for transmission in the extra high voltage system and the distributor-based main distribution price remained unchanged. Energy reference prices were set at AR$2,762/MWh for GUDI for the February – October 2019 period, and at AR$1,852/MWh for the remaining users as from February 2019, with 5% increases in the months of May and August, effective until October 2019.

ENRE Resolution No. 25/19 approved the tariff scheme effective as from February 2019, which reflected the new seasonal prices described in SGE Resolution No. 366/18, and ENRE Resolution No. 27/19 of March 2019 established the 24%⁽¹⁾ CPD update corresponding to the July 2018 – January 2019 semester, retroactive to February 2019, and a 7.925% increase which was timely deferred in August 2018, retroactive to that date. Compensatory amounts for the retroactivity were collected in five installments.

In April 2019, SGE Resolution No. 366/18 was partially amended by Resolution No. 14/19 of the SRRYME (Secretariat of Renewable Resources and Electricity Market): increases planned for May and August 2019 for the power capacity reference price and increases contemplated for residential users were suspended, whereas energy reference prices increased by 5% in May and August 2019 for GUDI, and by 7% in May and August 2019 for the rest of non-residential users. Moreover, SRRYME Resolutions No. 26/19 and 38/19 approved the seasonal programming for the August – October 2019 and November 2019 – April 2020 periods, respectively, prices remaining unaltered until April 2020. However, as of the date hereof these increases in seasonal prices for non-residential users have not been passed on to new tariff schemes.

On September 19, 2019 Edenor agreed with the Federal Government to postpone the 19.05% CPD update for August 1, 2019 until January 1, 2020. Moreover, the continuity of retroactive amounts applied in the March – July 2019 period for the timely deferred CPD was allowed, the balance being recoverable in 7 monthly consecutive installments as from January 2020. Besides, the payment of penalties by Edenor was postponed until March 1, 2020 in 6 monthly installments. However, with the entry into effect of the Solidarity Law (Law No. 27,541), on December 27 the ENRE instructed Edenor to maintain the current tariff schemes until June 2020, suspending all planned updates both in the CPD and in the seasonal price. It also contemplates the possibility of performing an RTI review for up to 180 days as from the Law’s effective date.

Note: ⁽¹⁾ Including the -1.59% E Factor stimulating efficiency.

Regularization of Liabilities and Transfer of Concession Jurisdiction

On February 28, 2019, the Federal Government entered into an agreement with the Province of Buenos Aires and the City of Buenos Aires for the transfer of Edenor’s concession jurisdiction. The Province of Buenos Aires and the City of Buenos Aires immediately bore the social tariff outlays, a bipartite regulatory body would be created, and the Federal Government undertook to terminate pending issues such as the breach of the 2006 Memorandum of Understanding, among others. Until the effective date of such transfer, the national regulatory framework would apply.

Moreover, on May 10, 2019, Edenor and the Federal Government agreed to end to the reciprocal claims regarding the 2006 – 2016 Tariff Transition Period. Edenor waived all rights and proceedings against the Federal Government, including the lawsuit brought by Edenor in 2013 upon the breach of the 2006 Memorandum of Understanding, undertook to execute investments additional to the RTI in the following 5 years, and to pay certain penalties to users and generated income tax, entailing a disbursement for a total approximate amount of AR$7,600 million over a term of 5 years. For its part, the Federal Government offset the obligations arising during such period, such as Edenor’s commercial debts for energy purchases, investment loans granted by CAMMESA and penalties owed to the National Treasury, without this implying any fund inflow for Edenor.

However, with the entry into effect of the Solidarity Law, as from December 23, 2019, the ENRE was appointed as Edenor’s regulatory body until December 31, 2020. Moreover, Edenor is currently unaware of the guidelines to follow regarding consumptions of shantytowns with community meters for non-recognized and future periods.