Aug 12, 2016
Executives
Leandro Montero - CFO of Edenor Lida Wang - Chief of IR
Analysts
Frank McGinnis - Bank of America Merrill Lynch Carolina Carneiro - Santander Alan Siow - BlueBay Asset Management Gustavo Fingeret - Itaú
Operator
Good morning, ladies and gentlemen and thank you waiting. At this time, we would like to welcome everyone to Pampa Energia and Edenor's joint second quarter 2016 results conference call.
We would like to inform you that this event is being recorded and all participants will be in listen-only mode during both companies’ presentations. After the companies' remarks are completed, there will be a question-and-answer session.
At that time, further instructions will be given. [Operator Instructions] Before proceeding, let me mention that forward-looking statements are based on the beliefs and assumptions of Pampa Energia and Edenor's management and on information currently available to both companies.
They involve risks, uncertainties and assumptions because they relate to future events and therefore depend on circumstances that may or may not occur in the future. Investors should understand that general economic conditions, industry conditions and other operating factors could also affect the future results of Pampa Energia and Edenor and could cause results to differ materially from those expressed in such forward-looking statements.
Now I will turn the conference call over to Mr. Leandro Montero, CFO of Edenor.
Mr. Montero, you may begin your conference.
Leandro Montero
Thank you very much. Good morning, everyone and thanks for joining us on this joint conference call of Pampa Energia and Edenor.
As we usually do, myself, Leandro Montero, will be presenting for Edenor first and then for this quarter, Lida Wang will present for Pampa Energia. First, we will focus on the main events that lately took place and then briefly review the results of the second quarter of 2016.
As you know, you can always call any member of our team for more details on the results of the period or any doubts you might have. So going to the relevant events, on June this year and before we announced and before the measures taken by the charter, we announced the call for reduction of our notes issued 2017, at that moment the outstanding principal amount of the loan was $14.7 million.
On July 12, we made a redemption payment totalizing $15 million out of which 400,000 corresponds to our grids interest. As a consequence, our current total debt amount to $176 million maturing in 2022.
In June this year, we were given notice of certain resolutions or the release issued by courts of different judicial department of the province of Buenos Aires, applicable for La Matanza, Escobar and Pilar districts establishing a three month suspension of the tariff increases set forth on the resolution’s number 6 and 7 of the Ministry of Energy and Mining and resolution number 1 issued by ENRE this year. These suspensions apply structurally from February 1, 2016, so the customers affected were credited in the invoices for the payments they made in excess in the previous month taking into account this change in the tariff applied.
This measure resulted in ARS618 million impact in our gross margin in the first semester. In addition, on July 15, the Federal Court of the City of La Plata issued a new release which expended the scope of the suspension to the whole province of Buenos Aires.
This measures affects 80% of our customers. In this case, the suspension was made from July 15 onwards for a period of three months.
Up-to-date, this resolution has been appealed by the federal government and it is still pending resolution by Supreme Court. Moving to the financials, financial results recorded by the company as of June 30, 2016 consumed 100% of the results and more than 50% of its share capital therefore the company is subset to compliance with the provisions of sections 206 of the Argentine business organization law which provides fundamental capital reduction.
If this situation remains as of year-end, our shareholders would decide to reduce the number of shares maintaining the proportionality of the holders in the following annual meeting. Now taken into consideration the result of Edenor in the second quarter of 2016, net sales increased by 202% reaching about ARS2.7 billion compared to ARS899 million for the same period in 2015.
This increase was mainly due to the new tariff structure applicable since February 1 this year partially offset by a negative impact in sales of ARS1.2 billion for the mine five months period retroactive effect which was accounted for insurance resulting from the instructions related issued by court affecting retroactively the margin of La Matanza, Pilar and Escobar district. Regarding to the volume of sales, electricity sold increased 4.5% to 5790 kilowatt hour in the second quarter of 2016 from 5475 kilowatt hour in the second quarter of last year basically due to increase of 11.7% of residential customers compensated by 5.5% decline in drilling system customers.
The electricity power purchases increased 204% to ARS1.5 billion in the second quarter of 2016 compared to ARS477 million pesos in the same period of the year before mainly due to the purchase price increase issued in February 2016 by resolution number 6 of the Ministry of Energy and Mining which represented in average an increase of approximately 282%. This growth was diminished by an assessment of ARS553 million due to the release and for the effective period mentioned above.
Operating expenses increased approximately ARS1.4 billion as a result of basically two effects, the rise in ENRE penalties and salaries and social security taxes totalizing a combined loss of ARS1.36 billion will represent almost the whole increase. As I mentioned in the previous conference call, ENRE penalties increased due to changes in the estimation methodology introduced by note number 12151 issued by the regulator in April this year.
The increase can be basically explained by the application of the new methodology regulation which establishes that penalties should be based on the BAD that corresponds to the date on which the event occurs. This means a charge of about ARS1 billion in the second quarter this year.
In the north, net operating income decreased by ARS1.7 billion amounting to loss of ARS1.5 billion in the second quarter of 2016 compared to gain of ARS216 million pesos in the same period last year. This negative result was due to the increase in operating expenses as I described before and to a reduction in the amount of paying through resolution of 32 issued by the Secretary of Energy in 2015 which was supposed to be replaced by the new tariff structure effective since February 1, 2016.
Finally, the net income of the period shows a decrease of ARS1.3 billion pesos amounting to a loss of ARS1.1 billion pesos in the second quarter of this year compared to a gain of ARS255 million in the same period of 2015 mainly due to the increase in operation results explained above and to a declining financial results caused basically by a rise in financial expenses most of them generated by commercial interests from CAMMESA debt, and partially compensated by the positive response of the deferred income tax. Related to Edenor, adjusted EBITDA has resulted in the loss of ARS1.3 billion in the second quarter of 2016 compared to a gain of ARS296 million for the same quarter of 2015.
As explained before, the EBITDA is affected by the judiciary measures which should be sought in the near future. Finally, regarding Edenor’s capital expenditures during the second quarter of 2016, our reimbursement increased by 46% which is about ARS711 million pesos compared to ARS487 million pesos in the same period of 2015, mainly due to some enhancement, maintenance and improvement and communication and telecontrol facility.
Lastly, and taken into account the subsequent events on August 3, the federal court of the judicial department of [indiscernible] of the aforementioned resolutions applicable to 100% of our customers with proactive effects to federal rate prices 2016. We have learnt about this measure through the media while the company has not been yet duly notified about.
We consider that the compliance of this release would place the company in an emergency situation. First of all, we will incur an operating deficit that may cost the non-fulfilment of payments to CAMMESA, inability to comply with the capital investment for sections and operational cost cut.
Moreover, this situation would place the electrical distribution service and their construction into an acceptable risk situation and surely affecting the quality level as well. This measure if applied would in turn return to a non-reasonable market position in which 70% of customers, many of them with payment ability would be paying again monthly bills of approximately ARS30.
The abovementioned situation is kept over time, will also generate a monthly cash flow deficit and could serve the company and the dissolution risk due to the loss of its equity. Today this measure is not being applied and [Technical Difficulty].
We are of the opinion that since the [indiscernible] issued by the Ministry of Energy and Mining this year which among other things provide resolution 32 issued by the Secretary of Energy in 2015, [indiscernible] generated by these measures should be covered by funds transferred by the national government to the federal distributors and that the same proceeding affected in 2016. So, this concludes my review on Edenor, I will now leave you with Lida Wang, Chief of Investor Relations at Pampa Energia who will review the relevant event of the group as well as the consolidated result, after that we will open to question.
Lida Wang
Thank you Leandro, lately lot of developments have happened but one of them in Pampa’s history, the takeover of Petrobras on July 27. Since our last call on May, when we announced the signing of FDA, we have been working very hard on fulfilling all the conditions presented in record time, especially in successfully refinancing Petrobras Argentina's outstanding bonds Series S by issuing another bond Series T $500 million bond due in seven years and on a 7.5 yield.
We are proud because we not only acquired a terrific company with great assets; we started with the right foot by coming back to the international market at a very attractive yield [indiscernible]. The final purchase price after adjustments amounted to $897 million which implies a value of $1.3 billion for 100% of the equity of Petrobras Argentina.
Still we are waiting for the closing of the assignment in the Aguarague block by Petrobras Argentina in favor of Tecpetrol which might imply a reduction of the price of approximately $2.5 million. Without this ticket, Pampa funded with a combination of own cash for $280 million which partly paid the 20% advance of purchase price at the signing of the SPA.
Collected sale proceeds of TGS for $161 million, transaction that we closed in the same day as Petrobras Argentina for the final price of $241 million, which I will briefly comment about this later. A syndicated loan granted to Pampa which originally was up to $700 million and increased $50 million more as Crédit Agricole and Banco Hipotecario joined the syndicate originally composed by Deustche Bank, Citibank, ICBC and Banco Galicia.
As well as another high probability that the Argentine National Pension Fund (ANSES) will dispose it’s assets among them are 11.8% of Petrobras Argentina. However, as a result of the sale of TGS and such proceeds used to fund the ticket, the commitment amount was reduced by $150 million.
Being the syndicated loan, final committed amount of $600 million, of which 75% is in US dollars denominated currency and the rest is in Argentine pesos. That syndicated loans financed $271 million with the transaction and the remaining will partly finance a mandatory cash tender offer for the minority shareholders of Petrobras that I will later comment on.
The committed amount is available for six months during one year after the disbursement and accruing an interest rate of LIBOR plus 700 basis and increasing with time for the US dollar tranche, for the peso tranche will be LIBOR plus 550 basis. Private financing of $225 million of which $85 million came from internal with Petrolera Pampa and $140 million from a loan with YPF and might be can still canceled as YPF option yearly cash or for credit our agents under disposal of our part, one third of Río Neuquén and 80% of Aguada de la Arena.
And our sales were $50 million of financing from an investment vehicle led by the controlling shareholders of Pampa along with other investors which [indiscernible] 20% of the signing of SPA and the balance was paid at the closing of the transaction. This debt will be subordinated to the syndicated loans and before the duration of the shares exchange offering or the merger between Pampa and Petrobras Argentina, the company committed to cancel the further amount with ADRs of Pampa and as we previously informed this is a related party transaction it was submitted and consider reasonable by the audit committee of Pampa.
As it was informed when we announced the acquisition of Petrobras Argentina in compliance with capital markets law Ley de Mercado de Capitales relating to the mandatory tender offer to be made in the event of change of control and indirect acquisition, Pampa disclosed its intention for carrying out a mandatory cash acquisition offer and voluntary shares exchange offer addressed to all minority holders of Petrobras Argentina. On May, and June the Board Of Directors and shareholders’ meeting of Pampa respectively, resolved to formally promote those offering being one, the price of the cash acquisition offer set at $0.6574 per Petrobras share as a result of replicating per-share to base price offered to Petrobras Brazil, there is $892 million.
The cash acquisition offer shall be paid in pesos at the official exchange ask rate. The issuance of up to 320 million new ordinary shares of Pampa equivalent to 12.8 million new ADRs, which will be paid in kind to the minority shareholders of Petrobras that wishes to participate in the exchange offer.
This capital increase of Pampa only represents a maximum of almost 16% of Pampa capital stock and after the increases. The ratio of the exchange offer will be weighted average - will be the weighted average price of Pampa shares during the five days prior to opening of the offer divided by the base price of Petrobras Argentina per share.
Pampa’s board will have the discretionary of making plus 10% or minus 10% adjustment on Pampa’s average share price. As of today, both offerings have yet not been approved by the Argentine SEC, the CNV.
The company is currently in the process of complying all the requirements in order to be able to consummate them as soon as possible. That said, notable fields the same period that we applied the base price we applied the global price of $892 million minus $2.5 million adjustment to the price per share of Petrobras Argentina implying a purchase price of $0.659 per share which converting to pesos, it amounts to ARS10.01 per share of Petrobras Argentina.
In the event the financing provided by the syndicated result is not enough to meet the payment of the cash acquisition offer, Pampa will borrow from Grupo MTRES, a vehicle controlled by certain controlling shareholders of Pampa for up to $25 million which will be diverse only upon the request of the company. This debt in case of being materialized it is also subordinated to the syndicated loan.
We will consolidate Petrobras Argentina results by next quarter. Oil and gas, E& P business will dominate our P&L as we will be adding new segments to Pampa; downstream, gas midstream, petrochemicals and enhancing generation full capacity.
So, Pampa strategies onwards consists of merging Pampa with Petrobras Argentina operating as a single entity as the end of the year and being Pampa the absorbing entity, still after being truly analyzed it will be submitting for the approval of both companies’ Board Of Directors and Shareholders meeting. Moreover, as related to what I mentioned before, due to the expiration of the exclusivity period with Harz Energy for the sale of Pampa’s 25.5% indirect stake in TGS, Pampa began again the process of selling to other interested parties.
So, on July 19, Pampa agreed to for $241 million to a consortium buyer composed by the Sielecki family and Grupo Werthein. The at signing of the documents, the buyer paid $8 million and at the same time the closing for Petrobras Argentina will carry out the closing of the sale of TGS being $241 million the final price and $153 million paid by the buyers coming to $161 million that I was telling you before.
The remaining $80 million shall be paid on or before February 15, 2017 accruing 5% annual interest rate. Going on to the news in generation segment, officially Loma de la Lata power plant, on July 15 the new 105 megawatt high efficiency gas turbine was commissioned for service including Loma de la Lata sole capacity to 645 megawatt.
However, as of today, still negotiating with CAMMESA the final terms of the PPA. Moreover, on July 1, Loma de la Lata committed to a ten-year CVA as a word to that tenders for new generation capacity.
As stipulated in the SEE resolution 21-16. In same tender, generation subsidiaries of Pampa submitted four different new generation projects, out of which one was awarded.
The awarded project consists of the expansion of Loma capacity to the new GE aeroderivative gas turbine with a gross generation capacity of 105 megawatt the same unit we just installed in Loma de la Lata. The estimated cost of the project amount to $90 million plus VAT.
Once the addition is completed, which is estimated to be August 2017, Loma will reach a total installed capacity of 750 megawatt. The [indiscernible] remuneration full capacity for our initial fixed price of $24,000 per megawatt monthly basis during the first six years and then decreasing to $20,000 per megawatt monthly for towards the last years of the contract.
The agreed variable price is $12 per megawatt hour. Moreover, in our goal of supporting the development of renewable energies in the country on May 17, Loma acquired 100% of the share capital Parques Eólicos del Fin del Mundo for $670,000.
Fin del Mundoas is a developer of Parque Eólico de la Bahía project, 50 megawatt installed capacity wind farm to be built in Bahía Blanca, Buenos Aires province. Fin del Mundo holds the right to also for 500 hectares field, in which wind having measured for the last four years.
Going on to Petrolera Pampa news, on July we collected the payment of ARS455 million as compensation owned to the Plan Gas program as of December 2015 through the delivery of BONAR 2020 for a face value of almost $30 million. Such bonds face restrictions on its transferability setting a limit of up to 3% per month without penalty with the exception of subsidiaries and/or affiliates as well as requires the filing of information on a monthly basis.
Moreover, moving to our last section, on June, Petrolera Pampa issued BONAR Series 8 for an amount of ARS403 million bullet in 12 months, and Badlar plus 400 basis. Also on March, Petrolera Pampa was granted by Santander a loan for $120 million maturing bullets in 18 months and accruing an interest rate of 7.5%.
Finally in the news recap, our power plant Güemes issued two series of bond [indiscernible] Series 7 for ARS173 million at Badlar plus 350 basis maturing bullet in 18 months and the US dollar link Series 8 for $1.4 million payable in four year bullet and at 7% interest rate. So, regarding the results, Pampa’s consolidated results, first let me remind you that because we control Transener, we only consider 50% of this adjusted EBITDA.
Moving to the results in the second quarter of 2016, we recorded negative EBITDA of ARS328 million compared to a positive EBITDA of ARS853 million in the same period of 2015 mainly due to reductions of ARS100 million in transmission, ARS1.6 billion in distribution and higher losses of ARS46 million in holding another, partially offset by increases of ARS45 million in generation and ARS551 million in oil and gas segment. The higher EBITDA in our generation segment was mainly even by higher price for oil capacity remuneration from the application of resolution 22 compared to 2015 second quarter prices that were under the old pricing scheme.
The peso generation which impacts our US dollar contract which we sell the energy to CAMMESA as well as Energía Plus as well as lower losses on the natural gas purchases due to increased recognized prices by CAMMESA for gas segment. This said, were partially offset by a lower electricity generation which is mostly due to technical problems and lower availability of debt in our thermal units overhaul expenses in [indiscernible] and also due to increasing operating cost.
In the transition segment, EBITDA fell ARS100 million pesos during the second quarter in 2016 versus the same period of last year nearly because the increase in operating costs outpaces the accruals of revenue corresponding to the renewal agreements. Moving on briefly to the distribution segment which was previously reviewed by Leandro, during the second quarter of 2016 the EBITDA decreased by ARS1.6 billion on a consolidated basis compared to the same period of 2015, mainly because of the injunctions on tariff increases to certain consumers and increasing operating costs.
In the oil and gas business, in the second quarter of 2016 reported and adjusted EBITDA of ARS716 million compared to ARS182 million in the same period of 2015. This EBITDA was mainly driven by a higher natural gas sales from the joint venture between Petrolera Pampa and YPF Rincón del Mangrullo as well as the effect peso evolution impacting our U.S.
dollar sales price. In that sense, during the second quarter of 2016 we produced an average of 2.7 million cubic meters per day versus 1.2 million cubic meters per day in the same period of 2015.
This is representing 125% quarter over quarter increase. This agreement with YPF signed in 2013 and initially committed to invest $150 million later was extended in May and then this year an increase to a total investment from Petrolera of around $420 million to be done until 2017.
As of June, under this joint venture we have 101 productive wells with around 2.3 million cubic meters per day of natural gas production during the quarter. Overall, including the agreement with Petrolera and Apache, as of June, we have 133 productive wells.
Finally, on holding and other segments, we presented negative EBITDA of ARS54 million in the second quarter of 2016 compared to a loss of ARS7 million in the same period of 2015. Finally, in terms of the net income, Pampa presented a consolidated loss of ARS1.1 billion in the second quarter of 2016 of which ARS668 million corresponds to the shareholders of the company compared to a gain of ARS61 million in the same period of 2015.
It was mainly due to the Edenor’s injunction, a higher losses financial liability exchange rate different and interest, as a result of peso’s depreciation against US dollar partially offset by higher profits from gas upstream in Petrobras and Pampa and exchange rate difference from the holding of financial instrument. So this concludes our review for Pampa Energia, now we open the floor for questions.
Operator
[Operator Instructions] Our first question comes from Frank McGinnis of Bank of America Merrill Lynch. Please go ahead.
Frank McGinnis
Couple of straightforward questions, one in Edenor, I was just wondering if you could comment on the demand trends that you're seeing, how you are seeing the evidence you have as to, if and how residential customers when they did have the prospects for higher tariffs, if you saw any response in terms of conservation or change in consumer habits. Also just from - same thing on the industrial side and commercial side whether it's related to the tariff itself or the economy.
Then second question would be, Leandro, you had mentioned something about capital limits are reaching some capital limit, I'm just wondering if you could provide a little bit more detail on that and the risks associated with that, how you can deal with that. And then lastly, Lida you mentioned the availability of gas being an issue, and I was just wondering how serious that is if you think that in a broad sense or just it’s some specific moments when gas availability is more limited?
Leandro Montero
Good morning Frank, this is Leandro, I’m going to answer your question, you had basically two questions about Edenor. First of all, we started to build the new tariff structure or scheme in February, in fact the full impact of the new tariff with a monthly billing was effective since April this year, and despite this new tariff scheme, we didn't see any change in consumer habits.
In fact, during May, May, it was a very cold month in comparison to the history. It was one of the five more colder - one of the five colder months in the history in May.
The residential conception increased about more than 19% in comparison to the same month a year before. So as you can see, we didn't see any changes in the conception habit.
Maybe one explanation for that is that still with the tariff increase, approximately 90% of our customers pay bill between 80 and 300 pesos per month, which is still much more lower than other services and other monthly billing conceptions like the cable TV, Internet or whatever. So we didn't see any changes in the consumer habits.
On the other side, in comparison, when we take the full semester, it remained the same conception than last year. So, in the same period, so we didn't see yet any changes, but maybe in the month in June, it was a bit lower than the year before.
Then in connection with your question about our capital issue, in fact we have been in that situation in the past during 2013, and during, and in 2014, we were in the situation, we have two different situations. If we are at the moment and with the financial assignment as of June, we are under the terms of the article 206 of the business law, business organization’s law and would provide some monetary capital reduction.
This is because of our losses, our accumulated losses, consume the total amount of our results or more than 50% of our share capital. In the case that this judicial measures could keep in force during the rest of the year, for sure, we will be in negative shareholder equity and negative equity at the end of the year and in that case, the same law, the business organization’s law provides the solution of the company.
We have the situation before. In fact, we reached negative equity in March 2013.
So what we expect. Maybe the problem with the capital reduction or the capital issue is not the main issue here, because first of all, or first of that, we need the necessary funds to operate.
First off that, we will be lack of money to pay salaries or to buy our investment. So we think that first off that, we will have a solution from the government or from the charities in order to avoid the situation.
This is basic service for our community. So we think it is impossible to remain in this situation.
So we think that before reaching this situation of the capital reduction or the distribution, we should have an answer in order to operate the company, not only to solve the accounting problem.
Lida Wang
About the [indiscernible], we are talking which segment. Remember that, generation business, we have all generation business and regarding the whole, it means that, for example, CTG requirements or capacity is not able to generate, because of the lack of fuel, but it’s - so it’s not collecting the generation remuneration, like variable costs, the additional costs, but because if it is available, they can collect the fixed cost.
But it’s in pesos and it’s not enough to cover their cost entirely. So it affects a little bit.
That's for the whole generation units. For the new generation unit, when there is no gas and we have to back out the gas, the gas for the PPAs that we are involved.
So when we have to assign it for commence, they pay us the same price that we buy it, for example, in the 220 PPAs with CAMMESA, we buy it at $5.2 per MMbtu if we assign it to CAMMESA, we get payback. We will get that price again.
So the margin is zero, we don't lose money, we don’t earn money in that. That's the situation, of course, this is one of the most important incentives for government incentivize local production that is where we are heading our strategy there to be very bullish in the gas distribution business.
Frank McGinnis
Okay, great. Thank you.
Operator
Our next question comes from Carolina Carneiro of Santander. Please go ahead.
Carolina Carneiro
Hi, guys. Good morning.
I also have two questions. First one, when you mentioned that, and we agree that probably with the tariff suspensions, the way they are, resolution 7 2016, we go back to the previous model, where a resolution 32 if I’m not mistaken, was valid.
But before you start to receive back from the gold mine the compensation for costs through subsidies, should we wait legally for a final decision from the court or do you think that the government could resume the payments, given the severe situation that you already mentioned how to avoid negative equity or problems with the capital structure, given the lack of funds to cover the costs? And secondly, when you guys mentioned about the renewable business and acquisition of a project wind farm to potentially participate in the next auction in Argentina.
I just wanted to get a little bit more of the color on the government idea for this auction to have an update on when it’s coming, when it’s going to occur and when should be know the results of such auction? That's it, thank you.
Leandro Montero
Hi, Carolina. First, I will answer about your question about revenue.
Such as we mention, all the news about the current measures and this objective released comes today. We have news every day, we change the billing for our different customers almost every weeks.
So we are adopting our cash flows and our predictions to the everyday news we have from them. First of all, we - currently, we have two different situations, first of all with La Matanza district, we are still with a shaded relief.
[indiscernible] today or yesterday, we were aware that the shaded relief is not effective by the moment. So it is the effect, the retroactive effect is not working, so we will have to rebuild for those customers, again.
But at the same time, we have instruction relief from the province of Buenos Aires as I mentioned before for all the promise of Buenos Aires clients under which we have the tariff increase suspended for the following three months. So, and the other thing to mention is that under this Corti’s measure from the province of Buenos Aires, for the province, for the record of La Plata, we expect that the court, the Supreme Court will treat this resolution or will have at least an initial solution to this claim next Thursday, as it has been mentioned in the media.
So we will see, first of all, we will see what the Supreme Court tells about the situation and then if the Supreme Court decision is to keep these measures in force, we will have to ask the government for the financial assistance.
Carolina Carneiro
Okay.
Lida Wang
Alright, Carolina. Hi, good morning.
About the renewal tender, it's made public by the government. They want to cover the increase in full capacity for the next few years with renewables.
The tender that is coming on next September 8 I think, finally, that is the date that we have to also meet. September 5, sorry, of the participant wants to submit their bids, the final day.
The government wants to award 600 megawatts. That’s what they say for the permanent tender that it was carried out in June, they wanted to only award 1000 megawatts and they - at the end, they did for almost 3000 megawatts.
So that could change in the meantime. I think, and the company thinks that this tender is going to be very competitive.
There is a lot of projects out there. The results - we think that the results said to October, so by then, we will know which projects were awarded.
Carolina Carneiro
Okay, thank you.
Operator
Our next question comes from Alan Siow of BlueBay Asset Management. Please go ahead.
Alan Siow
Hi, there. Thanks.
A portion of my question has already been answered by the other callers. My question was - the remaining one I have, a general one around the attractiveness of the auctions for generation in general.
And second is really about the mechanics of these public hearings. As I understand it, part of the reason why you have received the judgments sort of freezing the tariffs or asking you to retrospectively reduce them to refund to customers the difference between the current tariffs and the old tariff is because of these public hearings have not been held.
Is it just the case that that's a procedural thing, you just have to hold the public hearings and regardless of the outcome, i.e., whether or not people complain or not complain, it was just that you were missing the hearings or is there a feedback from the hearing, which needs to be taken into account? And therefore as you run that hearing, is there a chance that for example if many customers or many people say this is not acceptable, we don't like it or, even though you mentioned all the good points about the average electricity building lower that for many other services, if enough people are upset, does that feedback somehow affect the process or is it just the case of you just need to have, it's a box you need to tick, that's the first question.
The second question was, in general how attractive have the auctions been in Pampa’s view and does this now change, given the impact of this ruling, because if this ruling can come and affect tariffs that were put in place by the federal government, then how should investors view long-term PPA fine with CAMMESA, is that also subject to change? Thank you.
Leandro Montero
Hi, Alan. First of all, I will answer about the public hearings questions your made.
In fact, the proceedings established that public hearings should be made in the case of increases or to approve the new tariff scheme related to the distribution added value. This is - you need to approve or you need to not to approve, you need to make these forums, when you are in the process of increasing the remuneration for the distribution companies.
Public hearings are not needed under the law to increase the price in the cost of energy in the market price of energy. So we have two different situations.
So, regarding the public hearings needed for the increase in the VAD, we have two different views from the lawyers. One of them say they are needed because of the - because it’s the normal process.
And the other part of the library says that these increases were made under the agreement [indiscernible] and the public hearings were made at that moment and the increasing tariff we're having now are just because the - applying - because of applying the proceeds that were supposed to be applied under that agreement. So we have two different views here.
So, at the same time, we are in the process of the internal tariff revision that we have started with our regulation in April this year. And until the schedule established by the regulator, we expect to have our public hearings, in the next October and in that case, we will have all the proceedings complied under the law and as you say, these public hearings are not - are just part of the process, but they are not mandatory for the regulator.
So the process ends with the tariff scheme issued by the regulator and that issuance is made, taken into account the tariff requested by the companies, the opinions of the customers and all the opinions they collect in the public hearings, but it is not mandatory for the regulator. And so we expect to have the public hearings in October and November, to end the process to establish the new tariff scheme in the future.
So I leave you with Lida in order to answer the question about the auctions for generation.
Lida Wang
Hi, Alan. Auctions for generation, for thermal generation, it's done.
The results have been disclosed in July. It was a very competitive auction actually, more than 6000 awards were bid.
To give you an idea how big it was at the beginning, the generation companies that participated with the idea of only being awarded 1000, it looks very well, it looks prospective. This is for the first time in years, a lot of players from abroad participated, many of them backed with financing credit players.
So its various perspectives, very good, that's good. We presented four and unfortunately, we only got one.
Always our strategy is to enhance our power plants, especially the old capacity power plants with new capacity and without that there, we can be very competitive in those economies of scale. The one that we are going to install is going to be due next year and it's the same machine that we recently installed, we know it very well, we installed in premise, we installed it here again as it’s commissioning and now, we're doing it again with GE.
That turbine that we are going to install, it’s 85% financed by GE. It tells a lot because in the previous years when the last administration wanted to do something like this, we couldn't even afford - we had to pay it in cash.
Now, the prospect one is the renewables tender. There is a lot of expectations about it.
We assume that in September, we will know what’s going to be the preliminary results, after the presentations, the government, what they do is to see if all the bids qualify technically and then they will do like a filtering in the economic proposal, as again, I think this one is going to be very competitive. There is a lot of purchase out there.
We are going to present two, maybe three and at the beginning, we are going to present 150 megawatts, where we will see. And the other question that you did is if this really is effective, the intention of the government to do the tender of anyway and bidders to do the bid, right.
I don't think so. I think the gap is there, the install capacity deficit in generation is out there and the government is very clear about it.
For many years, the administration and this one is tackling with this is kind of old versus new, the new with being contract with PPAs, it is working very well to give you an idea of the PPAs in the thermal tender. We are very competitive, but they are very well remunerated in dollars, right.
So they are very attractive still and I don't think it's going to stop or any way affect us.
Alan Siow
Thank you for answering the question.
Operator
Our next question comes from Gustavo Fingeret of Itaú. Please go ahead.
Gustavo Fingeret
Hi, good morning, guys. Thank you for the call.
I have two questions. And number one is regarding the regulatory tariff, the internal tariff review, which basically the government pointed out in our solution that they will, they said when they were going to be coming out, et cetera and so far they were not able to comply with those deadlines, do you know if they will be moving those deadlines, if they will be releasing to the market.
What is going to be the rub of the company and for the companies and what they will be using before they - before September or before October, they go to the public hearings. That is question number one.
And number two, Lida, if you can please say again, what are the pension - what do you think the pension funds in Argentina will do regarding the exchange of tariff on the tender offer on Petrobras Argentina? Thank you.
Leandro Montero
Hi, Gustavo. How were you?
First of all about your question, two questions about the internal tariff revisions. First of all, yes, the regulator at the moment, they issue or they started with the process.
They defined certain deadlines. After that, the regulator moved certain dates, certain deadlines, they had to comply.
So we are still expecting to be issued quality service levels that should be established in this space. And it is expected to have the definition in August 24.
So we are waiting for those definitions in order to comply or to complete our presentation. We are working with some deadline, which is September 1 in order to present our request and it is still without moving.
And regarding the regulated asset base, the regulator established two methodologies in order to present the regulated asset base. One of that is the renewal value, which is the current value of the assets we’ve presented to the regulator and the other way was established by the regulator in the Resolution 55, it was the idea to present the asset that result from adjusting all the increases and decreases of the assets since the start of the concession till now taken into account certain indexes that we should propose - we prepare that asset base too, to be presented with our request.
Lida Wang
About pension fund, well, it's been a lot of developments in there. We publicly disclosed our intention of doing the cash offering with the acquisition of the minority shares of Petrobras Argentina in order to be in compliance with the capital markets law.
They weren't allowed so, they weren't allowed to do anything at all actually. And now, after all these legislative changes that have been made a couple of months, we think that there is a chance that they might participate in the cash tender or in exchange offering that those changes allow them to do whatever they want in those two offerings.
So it's a huge probability because we think the ratio there is going to be in the merger not going to be the same in the offerings. Okay, and the exchange offering, the ratio is not going to be this one.
That it’s almost kind of guidelines. The ratio exchange that is going to be the merger is going to be totally set by the market and after crawling out of all of the shareholders of Petrobras Argentina, it might be the start or Petrobras Argentina maybe linked with.
So we will see. This announcement that they have been able to get allowed them totally to participate either in the cash offering or in the exchange offering.
So we prepare ourselves for that in getting more commitment from the syndicated loans or in the exchange offerings, offering the shares.
Gustavo Fingeret
Okay, thank you.
Operator
[Operator Instructions] Our next question comes from [indiscernible]. Please go ahead.
Unidentified Analyst
Hi, good afternoon. Thanks for the conference call.
Two questions from me on distribution. The first is on energy losses, which spiked sequentially and year-over-year.
I’m just wondering what drove that spike in losses. And secondly also on distribution, could you guide us to some type of a normalized run rate of fines going forward.
They have surprised on the upside, both in the first quarter and more so in the second quarter, and I'm wondering what the driver of those fines is and what a reasonable expectation is for what they should be going forward? Thank you.
Leandro Montero
Hi, Francisco. About energy losses, yes, we have suffered a great increase, especially during the last two months of the semester.
This is because - mainly because we have a very higher increase in the demand from residential customers. For sure, we have two effects here, first of all, the colder winter we have.
And on the other hand, the higher tariff in the gas may - we suppose made people to change their heating from gas to electricity. So this had an impact in the demand and at the same time with the increased tariff, it made our energy losses in order to rise for sure.
And at the same time, we have certain restrictions in order to take certain measures in order to produce the energy losses, especially in those areas where it’s more dangerous to reduce that. And regarding the penalties and fines charged in the quarter, as I mentioned in my speech, what we have made, especially in the semester, was to recalculate a great part of our accurate fines and penalties, taken into account the interest and updating in the tariff rate taken into account to calculate the fines, taken into account this note from the regulator.
So it’s difficult to say which will be the normalized fine charge in the future, first of all, because we expect to have a new quality level agreement with - after the internal tariff revision in order to agree with the regulator about - in order to get a better quality standards in the future, but starting from a real - or taking into account the real situation of the agreement of the beginning of this new period after internal tariff revision. So it’s very difficult to estimate what will be the normalized fines in the future, but we should, at least what I can say is that we should have a normalized charge in the third quarter, taking into account that all the adjustment for the crude fins have been - having accounted for at June 30.
On the other hand, if all these measures, traditional measure suspended resolution, number one remains in force, we will have to recalculate the fines and penalties again to reduce them, because all these adjustments were made because the increase in the tariff, so if the tariff increase is suspended, we will have to recalculate the fine and penalties as well. So I know it’s very difficult to follow our results and expenses, but this is a situation in which we are and the changes comes every day.
Operator
This concludes the question-and-answer session. At this time, I would like to turn the floor back to Mr.
Montero and Ms. Wang for any closing remarks.
Leandro Montero
Thank you very much for your interest in our company and have a nice day.
Operator
Thank you. This concludes today's presentation.
You may disconnect your lines at this time. Have a nice day.