PGR.L Regulatory News (PGR)

Andes Energia plc

("Andes" or the "Company")

Final Results for the year ended 31 December 2011

HIGHLIGHTS

Andes Energia plc ("Andes" or the "Company" and with its subsidiaries the "Group"), the oil and gas, electricity distribution and hydro-electric power company in Argentina with certain other exploration interests outside Argentina, is pleased to announce its Final Results for the year ended 31 December 2011.

The Group's focus is on the Argentinean energy sector, which it believes offers premium assets at undervalued prices. Its principal assets are a 51% indirect controlling interest in Empresa Distribuidora de Electricidad de Mendoza S.A., the main electricity distribution company in the Province of Mendoza ("EDEMSA"), an indirect controlling 47% interest in Hidroelectrica Ameghino S.A., a 60MW hydroelectric power plant in the Province of Chubut ("HASA") and oil and gas interests in Argentina which include seven exploration licence blocks in the San Jorge basin, three exploration and development blocks in the Neuquén basin and a 100% interest in Grecoil S.A. with one producing field with reserves and two development blocks with reserves.

Financial

Operational

·; Expansion of asset base and acquisition of reserves and resources

·; Successful drilling campaign with two new unconventional wells drilled in the Vaca Muerta formation

·; Acquisition of Grecoil S.A., an operator and producer with experience in the Neuquén basin

·; Successful bid for block CÑ-01 "Ñirihuau Sur"

·; Acquisition of joint venture partner's interest in Chubut and Rio Negro

·; Farm-in agreement with YPF

·; Option to acquire an indirect 78.44% interest in Empresa Distribuidora de Electricidad de La Rioja S.A.

·; New EDEMSA syndicated loan agreement and termination of Total Return Swap Agreement ("TRS")

For further information please contact:

Annual Report

On 1 June 2012, the Company plans to post a copy of the audited annual report for the year ended 31 December 2011 together with a notice of Annual General Meeting, to be held at the offices of Nabarro LLP at Lacon House, 84 Theobald's Road, London WC1X 8RW at 10.00a.m. on 25 June 2012. The report and notice will be available from the Group' website at www.andesenergiaplc.com.ar at that time.

CHAIRMAN'S STATEMENT

Overview

Our financial results incorporating the results of Andes together with its subsidiaries for the year ended 31 December 2011 are set out below.

The Group recorded a profit before tax and exceptional items of US$2 million on revenue of US$176 million for the year compared to a profit before tax of US$22 million on revenue of US$171 million in 2010. This revenue increase results primarily from the pass through of increases in the cost of energy purchased. Basic and diluted earnings per share adjusted for exceptional items were 0.10 cents for the year compared to a basic and diluted loss per share of 3.55 cents in 2010. In line with the dividend policy set out in the Group's re-admission document, no dividend is proposed.

We continue to advance the development of our oil and gas strategy and our main focus for the balance of 2012 is to maximise the potential of the licences we hold.

Outlook

Whilst the results of EDEMSA were adversely affected by delays in the approval of the implementation of a tariff polynomial formula, we are very pleased with the progress made in the development of our oil and gas interests.

EDEMSA successfully concluded a new AR$144 million syndicated loan agreement, which facilitated the buy back and cancellation of the EDEMSA bonds and the termination of the TRS. The repurchase of the debt has significantly changed the financial profile of EDEMSA, decreasing exposure to foreign exchange risk. However, it is important that the implementation of a tariff polynomial formula, that recognises costs in real terms, is approved by the authorities to maintain economic and financial sustainability.

The results of HASA were impacted by reduced rain fall and the resulting low water levels but this is not unusual over the short to medium term cycle.

The highlight of the year has been the development of our oil and gas interests; in particular the acquisition of our previous joint venture partner's interest in the Chubut and Rio Negro licences; the conclusion of a farm-in agreement with YPF; the acquisition of Grecoil S.A.; and the successful drilling campaign in the Neuquén basin.

We continue to work with YPF in the same cooperative manner as we have over the last 12 months and we consider the Argentinean oil and gas market as one of the biggest opportunities in the world today; this is supported by the interest shown by most of the major oil companies to invest in Argentina to develop conventional and unconventional resources.

As announced earlier in the year, we are proposing to demerge our E&P activities and electricity assets into separate quoted companies and we continue to make progress in pursuing this objective.

Overall we remain very optimistic over the Group's long term prospects.

Neil Bleasdale

Chairman

CHIEF EXECUTIVE'S REVIEW

Introduction

Whilst the 2011 results have been adversely impacted by the delay in the approval of the implementation of EDEMSA's tariff polynomial formula, we are extremely pleased with the progress we have made in the development of our oil and gas interests.

The highlights for 2011 are:

·; Expansion of asset base and acquisition of reserves and resources

·; Successful drilling campaign with two new unconventional wells drilled in the Vaca Muerta formation with oil discovered in both wells

·; Acquisition of Grecoil S.A., an operator and producer with experience in the Neuquén basin with interests in the producing block Vega Grande and two development blocks; Cerro Alquitrán and La Paloma

·; Successful bid for block CÑ-01; "Ñirihuau Sur"

·; Acquisition of joint venture partner's interest in Chubut and Rio Negro

·; Farm-in agreement with YPF

·; Option agreement entered into, to acquire an indirect 78.44% interest in an electricity distribution company; Empresa Distribuidora de Electricidad de La Rioja S.A. ("EDELAR")

·; EDEMSA syndicated loan agreement concluded and TRS terminated

In light of the increasing activities expected in both of the Company's business units (electricity and E&P) and in particular the progress made with its current drilling campaign, we recently announced the proposed demerger of our E&P and electricity assets. We believe the demerger of the two business units will enhance shareholder value and that the separate entities will provide shareholders and the investment community with greater clarity therefore improving access to the capital markets. As a result of this proposal, we will be looking to strengthen the board and management team with specialists in their respective industries.

Oil and Gas Interests

Andes Energia has made substantial progress in the development of its oil and gas portfolio. During 2011 we successfully acquired licences, reserves, resources and an operating company and concluded farm-in agreements for six blocks in the province of Chubut with the largest oil and gas player in Argentina.

As part of our stated objective last year, we continued to grow and consolidate our oil and gas interests with the aim of creating a unique oil and gas portfolio whilst at the same time de-risking the assets where appropriate.

During 2011 the Group acquired a 100% participation in three blocks with reserves and resources whilst taking operational and management control of the blocks.

Andes has significantly increased and improved its portfolio through the year, which now includes;

·; 13 licenses

·; 2.6 million of net acres (10,500 km2)

·; 9 million boe of P3 net reserves

·; 42 million boe of net contingent resources

·; 108 million boe of net prospective resources

Grecoil acquisition - Vega Grande, La Paloma and Cerro Alquitrán

In the second quarter we acquired an initial 34% interest in the Vega Grande block with the option to acquire the remaining 66% and a 100% working interest in the La Paloma and Cerro Alquitrán blocks. During the fourth quarter we exercised the option and as a consequence the Group is now the operator with a 100% working interest in three licences in the province of Mendoza.

Grecoil declared to the Secretary of Energy in Argentina, a total net production of 36,838 barrels of oil for the year 2011. The management is defining a new work program to mobilise the 5.89 million boe P1/P2 reserves and gather new information to expand the production area.

Corralera and Mata Mora Blocks

In recent years activity in the unconventional resource arena has picked up pace, with the Vaca Muerta formation being the focus of an increasing number of domestic and international players.

In November 2010, Andes successfully concluded a farm-in agreement with YPF for the Corralera and Mata Mora blocks in the province of Neuquén. Operations carried out by YPF as operator commenced with an exploration and appraisal campaign with the drilling of two unconventional wells; YPF.NQ.MMO.x-1 ("MMX1") in the Mata Mora block and YPF.NQ.Corr.x-1 ("CORRX1" ) in the Corralera block.

Well MMX1 was drilled, cased and cemented to a total depth of 3,151 metres and confirmed a pay thickness of 136 metres (446 feet) of the Vaca Muerta formation. Oil and gas shows were recorded and after hydraulic fracture stimulation the well produced oil and gas with a high flow pressure.

The second well, CORRX1, was drilled, cased and cemented to a total depth of 2,405 metres. It also found the Vaca Muerta formation with a pay thickness of 346 metres (1,135 feet).

At the beginning of 2012, a Ryder Scott report, commissioned by Repsol, attributed to the Mata Mora block a gross prospective resource figure of 148 million boe for 100% of the block, which represents a net participation of 20 million boe to Andes. The same report also attributed to the Corralera block 650 million boe of gross prospective resource, which represents a net participation of 88 million boe to Andes.

Recent transactions by major oil companies, for exploration acreage in blocks with comparable locations and quality, have been concluded at between US$4,000 to US$5,200 per acre, confirming the high potential value of these blocks.

Confluencia, San Bernardo, Pampa Salamanca Norte, Buen Pasto, Sierra Cuadrada, Rio Senguerr and Laguna El Loro Blocks

At the end of the first quarter 2011 we acquired our previous joint venture partner's interest in six blocks in the province of Chubut and one block in the province of Rio Negro in order to stimulate activity on these blocks. In May 2011 we successfully signed a farm-in agreement with YPF for the six blocks in Chubut to explore the vast area of approximately 25,500 km2.

As a result of this farm-in agreement, Andes now holds a 28% carried interest plus a 2% overriding royalty on Confluencia, San Bernardo, Pampa Salamanca Norte, Buen Pasto, Sierra Cuadrada and Rio Senguerr.

Ñirihuau Block

Further to a bidding process, the Group together with Kilwer S.A. were awarded a new exploration licence in the province of Chubut. The Ñirihuau block covers an area of 4,538 km² located in the homonymous basin.

The licence has been granted for six years, with the joint venture committed, during the initial three years, to collect 3,000 geochemical samples, acquire 50 km of 2D and reprocess 150 km of 2D.

Other Interests

The Group has also maintained its interest in certain non-Argentine assets. These are primarily investments in early stage gas and mineral exploration assets located in North America, Europe and Mauritania.

Electricity Distribution and Power Generation

EDEMSA

EDEMSA reported a profit for the year of AR$11 million (2010: AR$35 million). However, it should be noted that the 2011 finance costs include non-recurring costs of AR$11 million associated with the refinancing of the debt. Furthermore, the finance costs for the comparable period last year include a one-time gain of AR$21 million resulting from the Total Return Swap agreement ("TRS").

Sales for the year increased by 9.5% over 2010, to AR$709 million. This increase resulted primarily from the pass through of increases of 9.3% in the cost of energy purchased and to a lesser extent a 2.9% increase in the demand for energy.

Gross profits were AR$197 million compared to AR$205 million in 2010. Inflationary pressure resulted in operating profit dropping from AR$89 million to AR$44 million, but this should be considered in the context of the fact that current tariffs are those based on 2008 cost values. The main increases in costs arose in salaries and other employee related costs and the costs of third party services. The company recorded EBITDA of AR$74 million in 2011 (2010: AR$118 million).

It should also be noted that, further to the advisory agreement EDEMSA signed with MSO Andes Energia Argentina S.A., a wholly owned subsidiary of Andes, the income statement of EDEMSA for the year includes a charge of AR$9 million for these services (2010: AR$10 million).

The highlight of the year was the conclusion of a AR$144 million syndicated loan agreement. This facilitated the buy back and cancellation of the EDEMSA bonds then in issue and the termination of the TRS with Andes and will also allow us to accelerate the implementation of work plans and provide working capital. Finance costs for the year were AR$37 million compared to AR$35 million in 2010 after adjusting the comparable period's costs for the one time surplus resulting from the TRS transaction referred above. The costs for the year included non-recurring finance costs of AR$11 million associated with the debt refinancing. The repurchase of the debt has significantly changed the financial profile of EDEMSA, decreasing exposure to foreign exchange risk. 

HASA

The company recorded a profit for the year of AR$5.7 million compared to the 2010 profit of AR$6.7 million. Sales decreased to AR$14.4 million from AR$21 million in 2010 as a result of reduced water inflows into the basin from rainfalls, which were lower than the historical average resulting in lower accumulations in the reservoir. The power generated in the year was 112GWh compared to 179GWh in 2010.

Luis Alvarez Poli

Chief Executive Officer

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2011

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2011

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

31 DECEMBER 2011

*See note 1.3

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2011

*See note 1.3

CONSOLIDATED CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2011

1. GENERAL INFORMATION

1.1 Introduction

The financial information set out in this announcement does not comprise the Group's statutory accounts for the years ended 31 December 2011 or 31 December 2010.

The financial information has been extracted from the statutory accounts of the Company for the years ended 31 December 2011 and 31 December 2010. The auditors reported on those accounts; their reports were unqualified and did not contain a statement under Section 498(2) or Section 498(3) of the Companies Act 2006. The auditors' report for the year ended 31 December 2011 did include emphasis of matter paragraphs relating to EDEMSA's ability to continue as a going concern (see note 1.2).

The Company has produced its statutory accounts for the year ended 31 December 2011 in accordance with International Financial Reporting Standards as adopted by the European Union and in accordance with the Group's accounting policies that are unchanged from those set out in the 2010 statutory accounts.

The statutory accounts for the year ended 31 December 2010 have been delivered to the Registrar of Companies, whereas those for the year ended 31 December 2011 will be delivered to the Registrar of Companies following the Company's Annual General Meeting.

1.2 EDEMSA tariffs

As set out in the Chairman's statement, the approval of the implementation of a tariff polynomial formula in EDEMSA, that recognises costs in real terms, is important to maintain economic and financial sustainability. Whilst the directors have no reason to believe a tariff increase will not be approved in the short term, continuing delays in its approval could result in EDEMSA breaching its covenant obligations under its syndicated loan agreement (see note 1.10) during the period to 31 December 2012, which would give the lenders the right to call the loans into default. At the time of approving the financial statements the Directors have a reasonable expectation that a tariff increase will be approved and for this reason consider that the going concern basis of preparation for EDEMSA to be appropriate. The carrying value of the assets of EDEMSA and its contribution to the results of the Group are shown in note 1.4 as Electricity Distribution. If EDEMSA is no longer able to continue as a going concern, these assets may be impaired.

1.3 Change in accounting treatment

As a result of EDEMSA adopting IFRS with effect from 2012 a detailed review of accounting policies resulted in the restatement of certain amounts.

The impact of these adjustments is summarised below:

1.4 Operational segments

*See note 1.3

1.5 Finance income

1.6 Finance costs

1.7 Exceptional items

As a result of the acquisitions during the year, the Group recognised an exceptional gain of US$20,591,246 arising from the difference between the consideration paid and the fair value of the net assets acquired.

1.8 Taxation

The tax rate used for the 2011 and 2010 reconciliations above is the corporate tax rate of 35% payable by corporate entities in Argentina on taxable profits under tax law in that jurisdiction.

1.9 Earnings per share

Earnings per share is presented on two bases: basic earnings per share and diluted earnings per share. Basic earnings per share is in respect of all activities and diluted earnings per share takes into account the dilution effects which would arise on conversion or vesting of warrants in issue. Adjusted basic and diluted earnings per share is presented after adjustment of exceptional items.

The warrants are deemed to be non-dilutive for the purposes of this calculation as the exercise price was more than the average market price for the year.

1.10 Financial liabilities

Bonds

Bond terms

The bonds represent the amounts owed to EDEMSA's bondholders. The discount rate used to determine the present value reflected market assessments of the time value of money and the increases specific to the liability. EDEMSA discounted the probable cash flows of the new debt applying a 10.2% annual rate in US$.

Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months after the balance sheet date.

Acquisition by EDEMSA

In June 2010 EDEMSA entered into a contract for the Assignment of Rights with Magnus International S.A., whereby it fully and irrevocably acquired the rights over 88.06% of the Class A notes issued by EDEMSA. In consideration for the assignment, EDEMSA paid Magnus International S.A. the sums of US$13,048,556 and AR$21,600,000, with the latter sum payable in twelve equal and consecutive monthly instalments of AR$1,800,000.

Acquisition by EDEMSA Investment Trust

In November 2008 EDEMSA set up a Trust.

In June 2010, EDEMSA was notified by the Trust that it had entered into a contract for the Assignment of Rights with Magnus International S.A. whereby it fully and irrevocably acquired the rights over 96.07% of the Class B notes issued by EDEMSA and over 98.93% of the Class D notes issued by EDEMSA. In consideration for the assignment, the Trust paid Magnus International S.A. the sum of US$11,930,980.

It should be noted that the Trust already held Class B notes issued by EDEMSA with a face value of US$700,000 (3.93% of the Class B notes in issue) and 16,367,734 Class D certificates issued by EDEMSA (98.93% of the certificates in issue).

Considering that almost all the trust assets, as detailed in the foregoing paragraphs, correspond to securities issued by EDEMSA or EDEMSA's right to hold them in the future, in these financial statements EDEMSA has been considered the beneficiary and holder of all the assets in the Trust.

Acquired rights and obligations

The above rights acquired by EDEMSA and the Trust include the rights, obligations and responsibilities attached to and related to the Total Return Swap ("TRS") entered into between Deutsche Bank AG and the Company on 27 May 2010 for a term of 3 years which, prior to the transfer to EDEMSA and the Trust, had been acquired by Magnus International S.A..

Under the TRS, US$24,359,020 of finance was provided, which under the conditions of the TRS is due for repayment within three years and carries an annual interest rate of 15%. The payment of this sum is funded from the normal payment flows generated from the EDEMSA bonds with a potential surplus or deficit being determined at the end of the TRS term (through normal or early termination, as set forth in the contract) as a result of comparing the payment flows from the EDEMSA bonds with the financed amount including accruing interest. As collateral the Company has pledged 80% of its indirect interest in Andes Energia Argentina S.A. and through its intermediary companies a first security interest in 85% of Sodem S.A. and a second security interest in 15% of Sodem S.A., which holds the Group's 51% interest in EDEMSA. For the amounts paid and payable, and as a result of the assignment, EDEMSA and the Trust shall receive at the date of termination of the TRS; Class A notes with a face value of US$51,650,000 (88.06% of Class A notes in issue); Class B notes with a face value of US$17,114,969 (96.07% of Class B notes in issue); and Class D notes with a face value of US$16,367,734 (98.93% of the Class D notes in issue).

Accounting treatment

As described above, considering the transaction as a whole and the structure of the interests acquired by EDEMSA, whether directly or through its participation in the Trust, EDEMSA recognized the effects of this transaction by calculating the net present value of the joint obligations arising under the contracts and the existing bond obligations. The rights acquired by EDEMSA gave EDEMSA the benefit of receiving the notes, the subject of the TRS, upon termination of the TRS and EDEMSA and the Trust held, together with the bonds already held by the Trust, 88.06% of the Class A notes, 100% of the Class B notes, 98.93% of the Class D notes and 98.93% of the Class D certificates. The bond liabilities have been shown net of these assets. A surplus of AR$21 million (US$5.4 million) resulting from the net present value impact of the reduction in the borrowings was recognised in the income statement in 2010 under finance costs.

Cancellation of Bonds

During the year EDEMSA cancelled all the bonds in issue and terminated the TRS and the collateral obligations were released.

Bank Borrowings

Syndicated loan (AR$144,000,000)

The syndicated loan term is 36 months. Interest is payable quarterly at a fixed annual nominal rate of 19% during the first year and at a variable rate during the second and third years linked to Argentine deposit rates. The principal will be repaid in ten equal quarterly instalments of AR$14,400,000 beginning on 16 May 2012 and ending on 18 August 2014. Under the agreement a collateral trust has been established, which must hold at all times an amount equivalent to the following quarterly payment due. At the end of the year AR$8,343,877 was held in the trust. Under the agreement EDEMSA is entitled to prepay the loan in full at any time in whole or in part (in amounts of AR$1,000,000 or multiples thereof) at one or more interest payment dates. The agreement also provides for certain restrictions on the operations of EDEMSA, relating to sale and rental operations, increased borrowing, investment and compliance with certain indices including indebtedness, debt/EBTIDA and current ratios. 100% of the shares issued by Sodem S.A., that holds a 51% interest in EDEMSA, have been pledged as security.

Other bank borrowings (AR$41,877,900)

Of the amount outstanding; AR$25,000,000 carries interest at a rate of 18.85% per annum repayable in monthly instalments with the final payment due in June 2013; AR$8,676,892 carries interest at a rate of 17% per annum repayable in quarterly instalments with the final payment due in September 2012; AR$3,000,000 carries interest at a rate of 18% per annum, which was repaid in January 2012; AR$1,887,948 carries interest at a rate of 17% per annum repayable in quarterly instalments with the final payment due in September 2012; and AR$1,604,820 carries interest at a rate of 20% per annum repayable in monthly instalments with the final payment due in February 2013.

Other borrowings

During 2002, as a result of the economic crisis in Argentina, HDS restructured its debt. All creditors apart from one agreed to the restructure. HDS and this creditor are renegotiating the final amount and payment schedule and HDS has recorded the debt as of 31 December 2011 in other borrowings.

Of the other amounts outstanding a US$5,000,000 secured loan facility carries interest at a rate of 12.75% per annum with the principal due for repayment by 30 March 2013; a US$6,170,933 unsecured loan that carries interest at a rate of 9.75% per annum and is repayable by June 2013; a AR$10,000,000 unsecured loan that carries interest at a variable rate and is repayable in monthly instalments with the final payment due in July 2012; a AR$13,393,830 unsecured loan that carries interest at a variable rate and is repayable in monthly instalments with the final payment due in January 2013; a AR$3,272,533 unsecured loan that carries interest at a rate of 18% and is repayable by 31 December 2012; and a AR$4,596,299 unsecured loan that carries interest at a rate of 18% and is repayable by 31 December 2012.

1.11 Contingencies

(a) Contingent asset

On 3 July 2006, EDEMSA was notified by the Argentine fiscal bureau of the disallowance of a portion of value added tax credits used in prior years. The assessment is based on an objection by that authority that the credits used by EDEMSA derived from drawbacks on exports acquired from third parties.

On 7 August 2006, an appeal was lodged before the General Director of the Argentine fiscal bureau against the administrative resolutions that disallowed the above-mentioned credits.

At the date of these financial statements, the Group has paid to the tax authority as a result of that claim AR$2,667,163. The Group has received from the tax bureau a demand to pay interest of AR$2,734,301 on the amount claimed, which the Group has made a provision for. An appeal has been lodged to avoid payment of the interest.

In the opinion of EDEMSA's tax advisors, the criterion used by the Argentine fiscal bureau is not in line with tax regulations. The directors of EDEMSA believe it will recover this amount from the Argentine fiscal bureau and has taken the necessary steps to enforce its rights in the face of the Tax Authority's claim. Notwithstanding, EDEMSA has accrued the interest requested by the fiscal authority. 

(b) Contingent liability

EDEMSA has received a claim from the Argentine fiscal bureau in respect of a different interpretation of tax assessed in certain years. On 25 June 2007 the company received notice from the authorities of its intention to pursue the claim plus interest and penalties. In the opinion of EDEMSA's tax advisors, the criterion used by the Argentine fiscal bureau is not in line with tax regulation. For this reason the company has not made a provision for this claim. On 19 July 2007 EDEMSA filed appeals with the National Tax Court. The Group does not believe an estimate of its financial effect is practicable and could be misleading.