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Viewing cable 07BUENOSAIRES1819, ARGENTINA: PAMPA HOLDINGS BETS ON GOVERNMENT PROMISE TO

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Reference ID Created Released Classification Origin
07BUENOSAIRES1819 2007-09-12 16:48 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Buenos Aires
VZCZCXYZ0003
RR RUEHWEB

DE RUEHBU #1819/01 2551648
ZNR UUUUU ZZH
R 121648Z SEP 07
FM AMEMBASSY BUENOS AIRES
TO RUEHC/SECSTATE WASHDC 9220
INFO RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/USDOC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHC/DEPT OF LABOR WASHINGTON DC
RHMFIUU/HQ USSOUTHCOM MIAMI FL
RUEHAC/AMEMBASSY ASUNCION 6563
RUEHMN/AMEMBASSY MONTEVIDEO 6756
RUEHSG/AMEMBASSY SANTIAGO 0777
RUEHBR/AMEMBASSY BRASILIA 6426
RUEHLP/AMEMBASSY LA PAZ SEP CARACAS 1495
RUEHSO/AMCONSUL SAO PAULO 3540
RUEHRI/AMCONSUL RIO DE JANEIRO 2372
UNCLAS BUENOS AIRES 001819 
 
SIPDIS 
 
SIPDIS 
SENSITIVE 
 
ESC/IEC/EPC FOR MCMANUS,JIZZO 
WHA/EPSC FOR FCORNEILLE 
PASS NSC FOR MICHAEL SMART 
PASS FED BOARD OF GOVERNORS FOR PATRICE ROBITAILLE 
PASS USTR FOR KATHERINE DUCKWORTH AND MARY SULLIVAN 
TREASURY FOR LTRAN, MMALLOY 
USDOC FOR 4322/ITA/MAC/OLAC/PEACHER 
US SOUTHCOM FOR POLAD 
 
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. 
 
------- 
Summary 
------- 
 
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. 
 
----------------------------------------- 
Pampa Holdings: Energy Investment Vehicle 
----------------------------------------- 
 
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. 
 
--------------------------------------- 
Pampa Strategy: Buy Low, Build Capacity 
--------------------------------------- 
 
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. 
 
--------------------------------------------- ------ 
The Transener Electricity Transmission Company Deal 
--------------------------------------------- ------ 
 
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. 
 
--------------------------- 
Bio Note on Marcelo Mindlin 
--------------------------- 
 
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. 
 
------- 
Comment 
------- 
 
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