ARGENTINA: GOA CHARGES AES AFFILIATE WITH

C O N F I D E N T I A L BUENOS AIRES 001653

SIPDIS

E.O. 12958: DECL: 12/03/2028
TAGS: EINV ECON EFIN BEXP AR
SUBJECT: ARGENTINA: GOA CHARGES AES AFFILIATE WITH
ACCOUNTING MANIPULATION, UNDERINVESTMENT

REF: '07 BUENOS AIRES 1352

Classified By: CdA T. Kelly. Reasons 1.4 (B,D)

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Summary
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1. (C) Argentine Planning Minister De Vido convoked
Ambassador December 2 to inform him that that the GoA plans
to take civil and criminal action against AES Corporation for
tax evasion and intentional decapitalization of its Edelap
electricity distribution subsidiary. De Vido emphasized that
this legal action against AES is a stand-alone case that did
not in any way reflect a GoA bias against U.S. companies or
investment. De Vido has summoned senior AES management from
the United States to answer GoA concerns. Separately, the
GoA has issued a series of official news agency releases
charging that an audit of Edelap has uncovered "grave
accounting irregularities" involving the transfer of Edelap
debt to tax-advantaged Uruguayan AES affiliates, keeping
Edelap indebted to the extent that it has been unable to fund
capital investment needed to maintain service quality to its
300,000-strong client base. Local energy analysts call De
Vido's action the latest in a series of GoA efforts to
encourage AES to sell down its Edelap affiliate to crony
capital interests linked to the Kirchner administration at a
price far below market value. AES management notes GoA
controls on electricity tariffs have kept Edelap operating at
substantial losses since the 2001/2 economic crisis. They
categorically deny GoA charges and argue that the firm's
purchase of Edelap debt was intended to conserve Edelap cash
reserves for needed capital expenditures. The GoA move comes
in the immediate aftermath of four days of heat wave-induced
power outages in the Greater Buenos Aries metropolitan area,
including by Edelap, that are said to have personally
embarrassed Minister de Vido. End Summary.

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Ambassador Summoned by Planning Minister
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2. (SBU) On the evening of December 2, Ambassador met with
Planning Minister De Vido at the Minister's request to be
notified that GoA electricity regulator Ente Nacional
Regulador de la Electricidad (ENRE) would take legal action
against AES Corporation for the alleged tax evasion of its
Edelap subsidiary. Edelap is an electricity distribution
company serving some 300,000 clients in the La Plata, Buenos
Aires province region. Also attending the meeting were
Planning Ministry Undersecretary for Coordination and Control
Roberto Baratta, Undersecretary for Legal Affairs Rafael
Llorens, EconCouns, and Press Attache.

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GoA Announces Legal Action Against AES
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3. (SBU) The Ambassador's summoning had been previewed in a
Telam (official news agency) release November 30 that noted
irregularities found in an ENRE audit of Edelap that raised
suspicions of "vaciamiento" (an intentional hollowing-out or
decapitalization of the firm by its owners). Immediately
following the meeting, the Planning Ministry issued a press
statement, picked up by all major dailies, that an ENRE audit
of Edelap had uncovered "grave irregularities," highlighting
allegedly questionable accounting that benefited Edelap
parent AES while "provoking a significant deterioration in
the economic/financial condition" of Edelap. The release
linked the irregular accounting to AES's purchase of Edelap
debt to commercial banks under "beneficial conditions" (i.e.,
at a discount) while maintaining these Edelap obligations on
AES books at full face value. In so doing, the release
charged, AES effectively transferred Edelap's profitability
to other AES group companies, including AES affiliate Luz de
La Plata SA, which also benefited by charging Edelap
exorbitant management fees. As a result of such accounting
manipulation, the release charged, AES has kept Edelap
indebted to the extent that it has been unable to meet
capital investment levels needed to maintain service quality
to its 300,000-strong client base. The release concluded
that both the Planning Ministry and ENRE are evaluating civil
and criminal "corrective actions."


4. (C) In the December 2 meeting, De Vido outlined this
release information to the Ambassador. The Minister noted

that, had Edelap not been in such poor financial and
operating conditions, such an audit probably would not have
been undertaken. De Vido said that an Uruguayan AES special
purpose entity, AES Platense Investments Uruguay SCA, had
purchased non-performing Edelap debt held by Bank Boston
(currently Standard Bank) and Banco Galicia at a substantial
discount from face. He highlighted suspected AES tax evasion
via this "tax-advantaged" Uruguayan entity, calling this a
very serious legal issue that merited judicial review.
Finally, De Vido passed Ambassador copies of ENRE audit
documents highlighting that AES had purchased a total of ARP
76.8 million (US$ 22.6 million) in Edelap debt to Bank Boston
and Banco Galicia for a discounted value of 52.7 ARP million
(US$ 15.5 million). The document also showed that one of the
AES affiliates that owns a share of Edelap, Luz de La Plata
SA, had booked some ARP 19 million (US $ 5.6 million) in
management fees over the 2001-7 period, which Undersecretary
Baratta called "excessive." Overall, the documents showed
inter-group transfers totaling ARP 55.3 million. Baratta
also question Edelap management's competence, charging that
Edelap last year had fired some of its best technical people
without cause.

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AES' Side of the Story
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5. (SBU) AES Argentina's top managers, President Eduardo
Dutrey and External Relations Director Guellermo Baistrochi,
had contacted EconCouns following the initial November 30
Telam news agency release. Embassy has advocated extensively
on behalf of AES since 2006, including with the federal
Planning Ministry Secretary of Energy over late payments to
AES power generation plants, and with Province of Buenos
Aires authorities in 2007 to facilitate regulatory approval
of the sale of another AES electricity distribution
subsidiary in Buenos Aires province to Ashmore Energy
International.


6. (C) Post contacts in the energy sector call this GoA
action the latest in a series of GoA efforts to encourage AES
to sell down its Edelap affiliate to "designated crony
capital interests of the Kirchner administration" at a price
far below market value. They note as a case in point the
2004 sale by Electricite de France of its far larger Buenos
Aires metropolitan area electricity distributor Edenor at a
fraction of its market value to a local firm, Pampa Holdings
(owned by local entrepreneur and Kirchner friend Marcelo
Mindlin). Post energy sector contacts believe that
Cordoba-based Electro Ingeneria (EI) has been identified as
the GoA's favored candidate to purchase Edelap. EI principal
Gerardo Luis Ferreyra is an ex-Montonero guerilla who, during
the 1976-82 military dictatorship, shared a cell with current
Presidential Legal and Technical Secretary (and close
confidant) Carlos Zanini. In early 2007, U.S. investment
fund Eton Park's purchase of Petrobras' share in Argentine
electricity transmission monopoly Transener was overturned by
GoA regulatory authorities in favor of a joint venture bid
between EI and GoA national energy company ENARSA (Reftel).



7. (C) AES Argentina officials explained that, following the
GoA's "pesification" and freezing of public utility tariffs
in the wake of the 2001/2 economic crisis, Edelap (along with
virtually every other Argentine electricity distribution
company) became insolvent and unable to service $26 million
in U.S. dollar-denominated debt to Bank Boston and Banco
Galicia. Like many of its peers, Edelap filed an ICSID
international arbitration claim against the GoA. Edelap
agreed to suspend (but not withdraw) the ICSID suit in
exchange for an August 2005 GoA promise to permit a 28%
increase in Edelap's electricity rates for rural industrial
and commercial (but not politically sensitive residential)
clients and to follow-on with a February 2006 full
renegotiation of Edelap's rate base. While the 28%
industrial user rate increase was eventually granted by the
GoA to all major Buenos Aires province electricity
distribution companies, the promised comprehensive rate base
renegotiation has been repeatedly postponed. In September
2008, a second ad hoc 28% tariff increase was granted to
Edelap and to two other federally regulated distribution
companies.


8. (SBU) Notwithstanding allowed tariff increases totaling
roughly 60% since 2002, AES notes that these rate increases
have not kept pace with cumulative wholesale price index

increases of over 200% during this period. As a
consequence, AES says Edelap has been accumulating
substantial losses, including 2005 losses of ARP 13 million
on revenues of ARP 170 million, 2006 losses of ARP 7 million
on revenues of ARP 180 million, 2007 losses of ARP 10 million
on revenues of ARP 200 million, and projected 2008 losses of
ARP 20 million on projected revenues of ARP 210 million.


9. (SBU) In discussions with EconCouns, AES Argentina
management categorically denied GoA charges that it has
wittingly decapitalized its Edelap subsidiary. They argued
that AES's purchase of Edelap debt had just the opposite
intention, to conserve Edelap cash reserves for capital
expenditures. According to AES, Banco Galicia and Bank
Boston debt had been refinanced and regularized in 2004 and
in 2006 but in 2006/7, as Edelap's losses continued to mount,
an AES financing subsidiary purchased and subordinated these
bank loans; Edelap has paid neither principle nor interest to
AES on these loans, averaging US$3.0 - $3.5 million per year,
since they were purchased. AES also notes that Edelap has not
declared a dividend in seven years in order to retain needed
cash for investment.

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Next Steps
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10. (C) De Vido said that he had summoned two senior U.S. AES
officials from AES Virginia headquarters -- Andres Vesey,
President of AES's Latin America Division, and Bernardo
DaSantos, Chief of Staff to Vesey -- to meet the evening of
December 3. De Vido said that he had met Vesey, a Venezuelan
national, earlier in New York. Local AES management will not
be included in this meeting, De Vido said. (In a later
aside, Undersecretary Baratta explained that the GOA had no
confidence in local AES management.) De Vido promised that
his Planning Ministry would brief the Embassy afterwards.
Ambassador agreed that discussions with AES senior management
were worthwhile in light of concerns raised by the ENRE audit
and noted that our interest would be that the company be
treated fairly.

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No GoA Problems with Other U.S. Investors
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11. (SBU) De Vido closed the meeting emphasizing that this
legal action against AES was a stand-alone case that did not
in any way reflect a GoA bias against U.S. companies or
investment. "This is not a problem with the United States,
but rather with a U.S. company," he said, noting that he'd
met for two hours earlier that day with senior Exxon
executives talking about new investments and had held recent
discussions with GE (to discuss bio-ethanol turbine
opportunities) and Boeing (to explore 737-700 aircraft sales
or leases to flag carrier Aerolineas Argentinas). He also
noted Apache Energy's participation in his Ministry's Gas
Plus program and Occidental Petroleum's likely participation
in the recently announced Petroleum Plus initiative.
Finally, De Vido noted that his earlier planned travel to the
United States in November to promote off-shore drilling
opportunities in joint ventures with national oil company
ENARSA had been postponed due to the financial crisis, but
that he hoped to re-schedule his travel for February/March.

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Comment: Tax Evasion or Tax Avoidance?
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12. (C) The Planning Ministry's orchestrated campaign to
demonize AES, in three consecutive official news agency
cables, comes in the immediate aftermath of four days of heat
wave induced rolling power outages in the Greater Buenos
Aries metropolitan area and in La Plata. The outages,
including by an AES subsidiary, reflect a pattern of
under-investment in Argentine electricity distribution
infrastructure by privately owned utilities that has largely
been forced by GoA policies holding domestic electricity
tariffs well below comparable tariffs levels in the region
(e.g., Brazil and Chile). AES insists that current tariffs
permitted by the GoA fall well below levels required to earn
a return on investment adequate to fund capital investment,
debt payments, and reasonable dividends to shareholders. The
blackouts are said to have personally embarrassed Minister de
Vido, who had recently announced that GoA investment ensured
adequate electricity supplies for the upcoming summer peak

season.


13. (C) As to the validity of GoA charges that AES has
knowingly decapitalized its Edelap subsidiary, we will learn
more following AES U.S. management discussions with De Vido.
Energy sector analysts here agree that the line between legal
tax minimization strategies, including the use of
tax-advantaged Uruguayan holding companies, and illegal tax
evasion is a fine one in Argentina. One of the GoA's key
concerns appears to be that AES purchased its own debt from
creditor banks at a substantial discount but booked it at
face value. Yet the GoA has had little compunction about
repurchasing its own sovereign debt, which is currently
trading at default level discounts of up to 60% of face value.


14. (C) The GoA's move against AES is seen by some analysts
here as one of a growing number of GoA efforts to ensure that
strategic national assets remain in -- or are returned to --
government-friendly Argentine hands. Recent examples include
the GoA's state-owned bank financing of a debt re-financing
package for Coto Supermarket in the face of a foreign buy-out
offer; the Venezuela-financed rescue package of Argentina's
emblematic San Cor Dairy Cooperative in the face of a U.S.
(Soros Group) buy-out proposal; the GoA's support for the
local Peterson group's purchase of a 15% stake in
Spanish-owned Argentine energy giant Repsol-YPF; the above
mentioned Electro-Ingeneria displacement of U.S. investment
fund Eton Park in electricity transmission monopoly
Transener; and current efforts to nationalize/expropriate
flag carrier Aerolineas Argentinas. Such economic nationalism
plays well with the Kirchner administration's populist base,
but is not exactly music to the ears of current and
prospective foreign investors.
KELLY