Cablegate: Argentina: Pampa Holdings Bets On Government Promise To

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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

=======================CABLE ENDS============================

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