ARGENTINA: PAMPA HOLDINGS BETS ON GOVERNMENT PROMISE TO

UNCLAS BUENOS AIRES 001819

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E.O. 12958: N/A
TAGS: EINV ECON ENRG AR
SUBJECT: ARGENTINA: PAMPA HOLDINGS BETS ON GOVERNMENT PROMISE TO
REWARD NEW ELECTRICITY GENERATION CAPACITY

Ref: (A) Buenos Aires 1726
(B) Buenos Aires 1456
(C) Buenos Aires 1415
(D) Buenos Aires 1352
(E) Buenos Aires 978
(F) Buenos Aires 65

This cable contains business-sensitive information - not for
internet distribution.

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Summary
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1. (SBU) Pampa Holdings, one of Argentina's largest investment funds
with a market capitalization of over $760 million, is aggressively
expanding its participation in Argentina's electricity generation,
transmission, and distribution sectors. Pampa principal Carlos
Mindlin described his investment strategy to Ambassador as (1)
buying quality "distressed" energy assets cheaply as large
multinationals re-position themselves out of the Argentine market
(e.g. CMS, Total, Electricite de France); and (2) investing to build
incremental electricity generation capacity based on the GoA's
promise to reward new capacity with closer to international market
returns. If the GoA continues to keep domestic retail and wholesale
energy prices significantly below international market levels,
Argentina will require roughly 1,000 MW of new generating capacity
in each of the next 4-5 years simply to keep up with growing
domestic demand. The GoA has announced over US$ 10 billion in new
energy infrastructure projects in the past few months (Ref A),but a
recent study argues that Argentina will need US$ 3 - 4.5 billion
worth of new energy investment each year to meet demand. Mindlin
argues that, sooner or later, the GoA will have to compare the
relative costs and ability to deliver of public vs. private sector
players. Pampa appears to be benefiting from the Kirchner
administration's unofficial policy favoring domestic ownership of
energy assets. End Summary.

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Pampa Holdings: Energy Investment Vehicle
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2. (SBU) Ambassador and EconCouns met August 28 with Marcelo
Mindlin, Chairman of one of Argentina's largest investment fund
Pampa Holdings (and senior manager of Pampa's majority owner, the
Dolphin Group) to review Pampa's growing investment in Argentina's
electricity generation and distribution sector. Originally a
refrigeration storage company, Pampa was acquired by the Dolphin
Group in 2005 to serve as its investment vehicle for "distressed
valuation" energy assets. According to Mindlin, 50% of Pampa
Holding equity is held by Argentine nationals, 35% by U.S. interests
(including U.S. investment fund Eton Park with a 4-5% stake, Ref D)
and the remainder primarily by European interests.


3. (SBU) Mindlin called Pampa's first two years of growth
"spectacular" and emphasized that Pampa's strategy is to continue
growing via equity rather than debt funding. Pampa was taken public
in 2006 and, with a market capitalization of over US$ 760 million,
it is now the second-most heavily weighted stock on Argentina's
benchmark MerVal index. In addition, Pampa took its Edenor
electricity distribution subsidiary public in 2007 with an equity
issue of over $300 million. In a comment on the relative
under-development of Argentina's capital markets and the lack of
home-grown entrepreneurial spirit, Mindlin noted that in all of 2006
and 2007 there have been only four major Argentine equity issues
(Pampa, Edenor, Banco Macro and Banco Patagonia) for roughly US$ 2
billion. This amount, he said, is equivalent to a week's worth of
equity issues in Brazil's deeper and far more active markets.


4. (SBU) Key Pampa Group holdings includes its ownership of Buenos
Aires power distribution company Edenor (with roughly 2.4 million
retail clients),its stake in national electricity distribution
network Transener (Ref D),and its equity stakes in a portfolio of
electricity generation assets. These include two hydroelectricity
generation complexes in Mendoza province (Nihuiles and Diamante,
which provide 2.7% of national capacity),Central Termica Guemes in
Salta province, Loma de la Lata in Neuquen province, and Central
Puerto in Buenos Aires province.

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Pampa Strategy: Buy Low, Build Capacity
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5. (SBU) Mindlin described his investment strategy as (1) buying
quality "distressed" energy assets cheaply as large multinationals
re-position themselves out of the Argentine market (e.g. Total,
Electricite de France, CMS); and (2) investing to build incremental
capacity of these generation assets under the GoA's "Energy Plus"
scheme, whereby new private sector capacity is to be purchased by
the GoA-regulated wholesaler CAMESSA at rates higher than those paid
for existing capacity. Mindlin noted that Argentina will require
roughly 1,000 MW of new generating capacity in each of the next 4-5
years simply to keep up with growing domestic demand. (Separately,
a recent study prepared by the prestigious Technical Institute of
Buenos Aires, ITBA, concluded that Argentina will need US$ 3 - 4.5
billion worth of new energy investment each year to meet demand.
Pampa has already contracted to build 100 MW of incremental capacity
at its Central Thermica Guemes facility in Salta province.


6. (SBU) In response to the Ambassador's question on the GoA's
announcement of over US$ 10 billion (Ref A) in new energy
infrastructure projects in the past few months, Mindlin argued that,
sooner or later, the GoA will have to compare both the relative
costs of public vs. private sector and the relative ability of
public vs. private sector players to deliver projects on time.
Public sector costs are high due to general government inefficiency
and pervasive corruption, he said. As a result, Pampa has declined
to get involved in some energy sector projects where high levels of
government procurement are involved, including the expansion of
natural gas pipeline capacity (Ref E). Public sector energy
construction has been plagued by delays, Mindlin said, noting a
2-year delay in the GoA's construction of the two 800 MW
"Foninvenmem" generators (Ref B) as an example.

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The Transener Electricity Transmission Company Deal
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7. (SBU) Pampa holds a minority stake but management control of
regulated national electricity transmission company Transener.
Mindlin commented on the GoA's decision earlier in 2007 to reject
the bid of U.S. investment fund Eton Park to buy out Brazilian state
oil company Petrobras's minority equity stake in Transener (Ref D)
in favor of a joint venture of local construction company
Electroingenieria and GoA state-owned energy company ENARSA.
Electroingenieria, he said, had experience in building transmission
lines, but no experience running a transmission company. If the GoA
does not significantly raise regulated transmission rates in the
next three years, Electroingenieria will have difficulty servicing
the debt it has incurred to purchase its share of Transener.

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Bio Note on Marcelo Mindlin
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8. (U) Marcelo Mindlin is the Chairman of Pampa Holdings S.A. and,
since 1989, has served as Senior Portfolio Manager of Grupo Dolphin
S.A. Previously, from 1991 to 2003, Mindlin was Vice Chairman and
CFO of IRSA (Inversiones y Representaciones S.A.),a major Argentine
real estate development group controlled by prominent local
entrepreneur Eduardo Elzstain with substantial Soros Group
investment. From 1999 to 2004, he served as a Board Member at the
formerly state-owned Banco Hipotecario (now controlled by IRSA).
From 1996 to 1999, he was a Director of Fondo de Valores
Inmobiliarios in Venezuela and of Brazil Realty in Brazil.


9. (U) In November 2003, Mindlin left the IRSA Group, and, with
15-odd years of portfolio management and corporate finance
experience, founded the Grupo Dolphin S.A. Mindlin holds a Masters
in Business Administration from Universidad del CEMA (Center of
Macroeconomic Studies) and a degree in Economics from Universidad de
Buenos Aires.

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Comment
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10. (SBU) Pampa Holdings, with its aggressive investment profile and
attractive returns on capital to date, is one of the darlings of the
Argentine market. It is widely rumored in local financial circles
that President Kirchner has invested a portion of his own wealth in
Dolphin/Pampa equity. While most local energy analysts agree that
Pampa has indeed purchased quality energy assets cheaply, they have
different interpretations of why the purchase prices have been so
low. Some argue that the Kirchner administration, besieged by ICSID
international arbitration suits filed by multinational energy
companies in the aftermath of the 2001/2 economic crisis that seek
cumulative awards worth billions of dollars (Ref F),made a
strategic decision to decrease international participation in
Argentina's energy sector and to increase boh direct state and
private Argentine participation. To "encourage" foreign
multinationals to cede control of electricity assets, the GoA is
said to have used its formidable power to delay needed
post-devaluation rate adjustments. As a case in point, they note
Pampa/Dolphin's 2005 purchase of a 65% stake in Argentina's largest
electricity distributor, Edenor, for $100 million while Electricite
de France (EDF) had paid US $800 million for a smaller 45% stake in

2001. EDF had filed an ICSID suit against the GoA following the
economic crisis and had been unable to negotiate a tariff rate
increase to return to profitability. Shortly after its purchase by
Pampa, Edenor negotiated a 28% interim tariff increase for rate
payers.


11. (SBU) Pampa's own strategy of building incremental generation
capacity based on the GoA's promise to reward new capacity with
returns closer-to-international-market levels appears a high-risk
play given the precarious finances of regulated electricity
wholesaler CAMESSA. The GoA's CAMESSA is a full six months behind
on capacity and variable cost payments to generators, and is also
footing the bill for the GoA's expensive "Total Energy" diesel fuel
subsidy program (Ref B). Pampa is betting that the GoA will --
sooner than later -- adjust internal energy market prices to
encourage and reward new investment. Others are not so sanguine,
and wonder how quickly and aggressively the next GoA administration
will move to rationalize energy prices.
WAYNE