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Pampa Energia (PAM)

Filed: 30 Apr 19, 5:23pm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 20-F

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2018

 

Commission File Number: 001- 34429

PAMPA ENERGíA S.A.

(Exact name of registrant as specified in its charter)

Pampa Energy Inc.

(Translation of registrant’s name into English)

Argentina

(Jurisdiction of incorporation or organization)

Maipú 1

C1084ABA, City of Buenos Aires

Argentina

(Address of principal executive offices)

María Carolina Sigwald

Maipú 1

C1084ABA, City of Buenos Aires

Argentina

Tel.: + 54 11 4344 6000 / Fax: + 54 11 4344 6473

(Name, telephone, e-mail and/or facsimile number and address of company contact person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class

Name of each exchange
on which registered

Common Stock

American Depositary Shares, each representing

25 shares of common stock, par value Ps.1.00 per share

New York Stock Exchange*

New York Stock Exchange

*Not for trading, but only in connection with the registration of American Depositary Shares, pursuant to the requirements of the Securities and Exchange Commission.

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

     None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

1,874,434,580 outstanding shares of common stock, par value Ps.1.00 per share, excluding 25,435,684 treasury shares, representing  1.34% of our total capital stock.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes

¨ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

¨ Yes

x No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. 

x Yes

¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

x Yes

¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer

x

Accelerated Filer

¨

Non-Accelerated Filer

¨

Emerging Growth Company

¨

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.¨

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 


 
 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  ¨

International Financial Reporting Standards as issued by the International Accounting Standards Board                                                                 x

Other       ¨

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

¨ Item 17

¨Item 18

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes

x No

 

 


 
 

TABLE OF CONTENTS


Item 1.  Identity of Directors, Senior Management and Advisers

3

Item 2.   Offer Statistics and Expected Timetable

3

Item 3.  Key Information

3

SELECTED FINANCIAL DATA

3

EXCHANGE RATES

6

RISK FACTORS

8

Item 4.  Information on the Company

47

HISTORY AND DEVELOPMENT OF THE COMPANY

47

OUR BUSINESS

48

Organizational structure

55

Our Generation Business

57

Our Distribution of Energy Business

65

Our Oil and Gas Business

72

Our Refining and Distribution Business

85

Our Petrochemicals Business

87

Our Holding and Other Business

88

Quality, Safety, Environment and Occupational Health

95

Corporate Responsibility

97

Property, Plant and Equipment

98

Insurance

98

Patents and Trademarks

98

THE ARGENTINE ENERGY SECTOR

98

Item 4A. Unresolved Staff Comments

135

Item 5.  Operating and Financial Review and Prospects

135

Item 6.   Operating and Financial Review and Prospects

179

Item 7.  Major Shareholders and Related Party Transactions

192

Item 8.  Financial Information

195

CONSOLIDATED FINANCIAL STATEMENTS

195

LEGAL PROCEEDINGS

195

DIVIDENDS

200

SIGNIFICANT CHANGES

200

Item 9. The Offer and Listing

200

TRADING HISTORY

200

THE ARGENTINE SECURITIES MARKET

202

Item 10.  Additional Information

208

MEMORANDUM AND ARTICLES OF ASSOCIATION

208

MATERIAL CONTRACTS

214

EXCHANGE CONTROLS

214

TAXATION

216

DOCUMENTS ON DISPLAY

222

Item 11. Quantitative and Qualitative Disclosures about Market Risk

223

Item 12. Description of Securities Other than Equity Securities

223

Item 13. Defaults, Dividend Arrearages and Delinquencies

225

Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds

225

 


 
 

 

Item 15. Controls and Procedures

225

Item 16A.Audit Committee Financial Expert

 

226

Item 16B.Code of Ethics

 

226

Item 16C.Principal Accountant Fees and Services

 

226

Item 16D.Exemptions from the Listing Standards for Audit Committees

 

227

Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers

 

227

Item 16F.Change in Registrant’s Certifying Accountant

 

228

Item 16G.Corporate Governance

 

228

Item 16H.Mine Safety Disclosure

 

234

Item 17. Financial Statements

 

235

Item 18.  Financial Statements

 

235

Item 19.  Exhibits

 

235

 


 
 

PRESENTATION OF INFORMATION

This document comprises the annual report on Form 20-F for the year ended December 31, 2018 of Pampa Energía S.A. (“Pampa”),that has been approved by resolution of the board of directors’ (the “Board of Directors”) meeting of Pampa held on April29, 2019. In this annual report, we use the terms “we”, “us”, “our”, “registrant” and the “Company” to refer to Pampa and its subsidiaries.

 

Financial Information

This annual report contains our audited consolidated statements of financial position as of December 31, 2018 and 2017,and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the years in the three-year period ended December 31, 2018, and the notes thereto (the “Consolidated Financial Statements”). The Consolidated Financial Statements have been audited by Price Waterhouse & Co. S.R.L.,an independent registered public accounting firm in Buenos Aires, Argentina, member firm of PricewaterhouseCoopers International Limited network,whose report is included in this annual report.

Our Consolidated Financial Statements are set forth in Item 18 beginning on page F-1 of this annual report. Our Consolidated Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”). The Consolidated Financial Statements included in this annual report have been approved by resolution of the Board of Directors’ meeting of the Company held on March 11, 2019.

Consistent with Item 18 of Form 20-F, we provide the disclosure required under Accounting Standards Codification (“ASC”) 932 of the Financial Accounting Standards Board (the “FASB”) relating to extractive activities—Oil and Gas (formerly, FASB Statement of Financial Accounting Standards No. 69—Disclosures about Oil and Gas Producing Activities) (“ASC Topic 932”), as is required regardless of the basis of accounting on which we prepare our financial statements.

Functional and Presentation Currency

The information included in the Consolidated Financial Statements has been recorded in the functional currency of the Company, which is the currency of the primary economic environment in which the Company operates. The functional currency is the Argentine Peso, which is also the group’s presentation currency.

IAS 29 “Financial reporting in hyperinflationary economies” requires for financial statements of an entity whose functional currency is the currency of a hyperinflationary economy, whether they are based on a historical cost approach or a current cost approach, to be stated in terms of the measuring unit current at the end of the reporting year. In general terms, by applying to non-monetary items the change in a general price index from the date of acquisition or the date of revaluation, as appropriate, to the end of the reporting period.

In order to determine whether an economy is categorized as a high inflation economy under IAS 29, the standard details several factors to be assessed, including the existence of a cumulative inflation rate over three years approaching, or exceeding, 100%. Argentina’s cumulative inflation over the last three years exceeds 100% thus the Argentine economy should be considered a high inflation economy under IAS 29. Therefore, the Consolidated Financial Statements and the financial information included in this Annual Report has been stated in terms of the measuring unit current at the end of the reporting year. For more information, see Note 3 and Note 4.3 to our Consolidated Financial Statements.

 The results and financial position of subsidiaries and associates that have a different functional currency have been translated into the group’s presentation currency and the results from the translation process have been recognized in “Other Comprehensive Income (loss)”, net of inflation effect. Certain financial information contained in this annual report has been presented in U.S. Dollars (see “Exchange rates” below).

Rounding

Certain figures included in this annual report (including percentage amounts) have been subject to rounding adjustments. Accordingly, certain totals may therefore not precisely equal the sum of the numbers presented.

1


 
 

Exchange Rate  

In this annual report, except as otherwise specified, references to “U.S.$” and “Dollars” are to U.S. Dollars, and references to “Ps.”, “AR$” and “Pesos” are to Argentine Pesos. Solely for the convenience of the reader, we have converted certain amounts included in “Item 3. Key Information” and elsewhere in this annual report from Pesos into Dollars using, for the information provided as of December 31, 2018, the seller exchange rate reported by the Banco de la Nación Argentina (“Banco Nación”), as of December 31, 2018 was Ps.37.70 to U.S. $1.00 unless otherwise indicated. These conversions should not be considered representations that any such amounts have been, could have been or could be converted into U.S. Dollars at that or at any other exchange rate. On April29, 2019, the exchange rate was Ps.44.33, to U.S.$ 1.00. As a result of fluctuations in the Dollar Peso exchange rate, the exchange rate at such date may not be indicative of current or future exchange rates. See “Item 3. Key InformationExchange Rates” and “Item 3.Key Information—Risk Factors—Risks Relating to Argentina—Fluctuations in the value of the Argentine Peso could adversely affect the Argentine economy and could, in turn, adversely affect our results of operations.” The Federal Reserve Bank of New York does not report a noon buying rate for Pesos. For more information regarding historical exchange rates, see “Item 3. Key Information—Exchange Rates.

 

 

FORWARD-LOOKING STATEMENTS

This annual report contains estimates and forward-looking statements, principally in “Item 3. Risk Factors,” “Item 4. Our Business” and “Item 5. Operating and Financial Review and Prospects.” Some of the matters discussed herein concerning our business operations and financial performance include estimates and forward-looking statements within the meaning of the U.S. Securities Act of 1933, as amended (the “Securities Act”) and the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Our estimates and forward-looking statements are mainly based on our current expectations and estimates on future events and trends that affect or may affect our business and results of operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us.

Our estimates and forward-looking statements may be influenced by the following factors, among others:

-      

the availability of financing at reasonable terms to Argentine companies, such as us;

-

uncertainties relating to future government approvals or legal actions, such as provisional remedies, that could affect our tariffs;

-

changes in the price of hydrocarbons and their derivatives;

-

changes in the price of energy, power and other related services;

-

the volume of crude oil, oil products and natural gas we produce and sell;

-

our ability to renew certain concessions;

-

the ability to develop and monetize conventional and non-conventional reserves;

-

our ability to develop our expansion projects and to win awards for new potential projects;

2


 

 

-      

changes to our reserves estimates;

-

the treatment of pending obligations after the integral tariff revision process (Revision Tarifaria Integral, or “RTI”);

-

the evolution of Edenor’s energy losses and the impact of Edenor’s fines and penalties and uncollectable debt;

-

electricity shortages

-

the potential disruption or interruption of Edenor’s service;

-

the revocation or amendment of Edenor’s concession by the granting authority;

-

changes in the laws and regulations applicable to the energy sector in Argentina;

-

government interventions, resulting in changes in the economy, taxes, tariffs, the regulatory framework or environmental matters, or in the delay or withholding of governmental approvals;

-

general economic, social and political conditions in Argentina, and other regions where we, our subsidiaries, associates or joint ventures operate, such as the rate of economic growth, fluctuations in exchange rates of the Peso or inflation;

-

restrictions on the ability to exchange Pesos into foreign currencies or to transfer funds abroad;

-

competition in the electricity sector, public utility services and related industries;

-

the impact of high rates of inflation on our costs;

-

changes to our capital expenditure plans;

-

the failure of governmental authorities to approve proposed measures or transactions described in this annual report;

-

deterioration in regional and local business and economic conditions in or affecting Argentina;

-

any potential negative consequences arising in connection with our ongoing or future mergers, acquisitions, divestitures or other corporate reorganizations;

-

changes in general economic, business, political or other conditions in Argentina or changes in general economic or business conditions in other Latin American countries; and

-

other risks factors discussed under “Item 3. Risk Factors.”

The words “believe”, “may”, “will”, “aim”, “estimate”, “continue”, “anticipate”, “intend”, “expect” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only as of the date they were made, and we undertake no obligation to update or to renew any estimates and/or forward-looking statements because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our future results may differ materially from those expressed in these estimates and forward-looking statements. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to factors including, but not limited to, those mentioned above.

Item 1.  Identity of Directors, Senior Management and Advisers

              

Not applicable.

Item 2.Offer Statistics and Expected Timetable

 

Not applicable.

Item 3. Key Information

SELECTED FINANCIAL DATA

 

The following table presents our selected financial data as of and for each of the years in the three-year period ended December 31, 2018. The selected consolidated statement of comprehensive income and the selected consolidated statement of cash flow data for the years ended December 31, 2018, 2017 and 2016 and the selected consolidated statement of financial position as of December 31, 2018 and 2017, have been prepared inaccordance with IFRS as issued by the IASB and have been derived from our Consolidated Financial Statements included elsewhere in this annual report. The summary financial data as of and for each of the two years in the period ended December 31, 2015 and 2014 have not been presented as these cannot be provided on a restated basis without unreasonable effort or expense. Financial information as of and for the year ended December 31, 2016 reflect the effect of consolidation of Petrobras Argentina S.A. (“Petrobras Argentina”) beginning on July 27, 2016, when the Acquisition (as defined below) was consummated. Consequently, Petrobras Argentina’s results of operations before such date were not consolidated.

3


 
 

Our Consolidated Financial Statements and the financial information included elsewhere in this Annual Report have been stated in terms of the measuring unit current as of December 31, 2018 in accordance with IAS 29 "Financial reporting in hyperinflationary economies". See “Presentation of Information – Financial Information” “Presentation of Information – Functional and Presentation Currency“Risk factors—Risk Related to Argentina—If the high levels of inflation continue, the Argentine economy and our results of operations could be adversely affected”, “Item 5—Operating and Financial Review and Prospects—Results of Operations—Effects of Changes in Inflation” and Note 3 and Note 4.3 to the Consolidated Financial Statements.

You should read the information below in conjunction with our Consolidated Financial Statements, including the notes thereto, as well as the sections “Presentation of Financial Information” and “Item 5. Operating and Financial Review and Prospects.”

 

 

At December 31,

 

 

 2018

 

 2018

 

 2017

 

 2016

 

 

(in millions of US$)(1)

 

(in millions of pesos stated in terms of the measuring unit current as of December 31, 2018, except for amounts per share and number of shares or as otherwise indicated)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

 

 

    

 

Non-current assets:

 

 

 

    

 

Property, plant and equipment

 

3,316

 

125,005

 

111,571

 

117,949

Intangible assets

 

161

 

6,080

 

6,354

 

6,565

Deferred tax assets

 

2

 

80

 

1,928

 

2,270

Investments in joint ventures and associates

 

407

 

15,333

 

11,875

 

9,608

Financial assets at amortized cost

 

-

 

-

 

-

 

114

Financial assets at fair value through profit and loss

 

11

 

422

 

286

 

1,367

Other assets

 

1

 

33

 

9

 

24

Trade and other receivables

 

253

 

9,521

 

7,444

 

8,234

Total non-current assets

 

4,151

 

156,474

 

139,467

 

146,131

Current assets:

 

      

 

Inventories

 

137

 

5,169

 

4,266

 

6,191

Financial assets at amortized cost

 

35

 

1,330

 

37

 

42

Financial assets at fair value through profit and loss

 

405

 

15,273

 

21,576

 

7,717

Derivative financial instruments

 

-

 

3

 

6

 

24

Trade and other receivables

 

703

 

26,489

 

28,267

 

26,061

Cash and cash equivalents

 

241

 

9,097

 

1,179

 

2,618

Total current assets

 

1,522

 

57,361

 

55,331

 

42,653

Non current assets classified as held for sale

 

-

 

-

 

18,457

 

35

Total assets

 

5,672

 

213,835

 

213,255

 

188,819

Shareholders´ equity

 

      

 

Share capital

 

50

 

1,874

 

2,080

 

1,938

Share capital adjustment

 

261

 

9,826

 

10,906

 

10,838

Share premium

 

491

 

18,499

 

18,496

 

15,870

Treasury shares

 

1

 

25

 

2

 

-

Treasury shares cost

 

(40)

 

(1,490)

 

(126)

 

-

Treasury shares adjustment

 

4

 

134

 

13

 

-

Legal reserve

 

24

 

904

 

733

 

567

Voluntary reserve

 

195

 

7,355

 

12,554

 

9,422

Other reserves

 

(13)

 

(483)

 

367

 

333

 

4


 
 

Retained earnings

 

403

 

15,193

 

11,806

 

4,305

Other comprehensive loss

 

(8)

 

(314)

 

(353)

 

(142)

Equity attributable to owners of the company

 

1,367

 

51,523

 

56,478

 

43,131

Non-controlling interest

 

429

 

16,160

 

17,792

 

17,515

Total equity

 

1,795

 

67,683

 

74,270

 

60,646

Non-current liabilities:

 

       

Investments in joint ventures  and associates

 

4

 

153

 

-

 

-

Provisions

 

146

 

5,499

 

6,549

 

8,220

Income tax and minimum notional income tax provision

 

27

 

1,034

 

1,274

 

1,721

Deferred revenue

 

7

 

275

 

287

 

369

Taxes payables

 

14

 

542

 

540

 

564

Deferred tax liabilities

 

407

 

15,354

 

16,686

 

22,040

Defined benefit plans

 

31

 

1,175

 

1,464

 

1,697

Salaries and social security payable

 

4

 

163

 

177

 

173

Borrowings

 

1,835

 

69,189

 

54,816

 

28,165

Trade and other payables

 

216

 

8,162

 

9,457

 

9,832

Total non-current liabilities

 

2,694

 

101,546

 

91,250

 

72,781

Current liabilities:

 

       

Provisions

 

23

 

871

 

1,179

 

1,485

Deferred revenue

 

-

 

5

 

5

 

2

Income tax and minimum notional income tax provision

 

29

 

1,084

 

1,392

 

2,679

Taxes payables

 

54

 

2,052

 

2,901

 

4,407

Defined benefit plans

 

4

 

162

 

179

 

206

Salaries and social security payable

 

72

 

2,726

 

3,180

 

3,215

Derivative financial instruments

 

1

 

49

 

122

 

-

Borrowings

 

342

 

12,901

 

8,623

 

19,690

Trade and other payables

 

657

 

24,756

 

26,655

 

23,708

Total current liabilities

 

1,183

 

44,606

 

44,236

 

55,392

Liabilities associated to assets classified as held for sale

 

-

 

-

 

3,499

 

-

Total liabilities

 

3,877

 

146,152

 

138,985

 

128,173

Total liabilities and equity

 

5,672

 

213,835

 

213,255

 

188,819

 

 

       

Number of outstanding shares (in millions) (2)

 

1,874

 

1,874

 

2,080

 

1,938

 

(1) Peso amounts as of December 31, 2018 have been translated into U.S.$ at the seller exchange rate for U.S. $ quoted by Banco Nación on December 31, 2018 of Ps.37.70 to U.S.$1.00. See “Item 3. Key Information—Exchange Rates.

(2) As of December 31, 2017 and 2016, included 1,836 million shares issued and 102 million and 144 million of shares that have been issued in 2018 following the consummation of the mergers that had been initiated in 2017 and 2016, respectively. Additionally, as of December 31, 2018 and 2017 we held 25 million and 2.5 million treasury shares, respectively.

 

 

 

For the year ended December 31,

 

 

2018

 

2018

 

2017

 

2016

 

 

(in millions of US$)(1)

 

(in millions of pesos stated in terms of the measuring unit current as of December 31, 2018, except for amounts per share and number of shares or as otherwise indicated)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

Revenue

 

2,920

 

110,080

 

82,008

 

51,262

Cost of sales

 

(1,967)

 

(74,161)

 

(59,339)

 

(42,851)

Gross profit

 

953

 

35,919

 

22,669

 

8,411

Selling expenses

 

(171)

 

(6,451)

 

(4,776)

 

(4,491)

Administrative expenses

 

(206)

 

(7,751)

 

(7,481)

 

(7,511)

Exploration expenses

 

(1)

 

(45)

 

(71)

 

(199)

Other operating income

 

181

 

6,842

 

5,608

 

8,390

Other operating expenses

 

(200)

 

(7,526)

 

(3,892)

 

(3,896)

Impairment of property, plant and equipment and intangible assets

(32)

 

(1,195)

 

-

 

-

Share of profit  from joint ventures and associates

 

118

 

4,464

 

1,813

 

286

 

5


 
 

Income from the sale of associates

 

28

 

1,052

 

-

 

1,015

Operating income

 

671

 

25,309

 

13,870

 

2,005

Gain on net monetary position

 

629

 

23,696

 

11,478

 

5,770

Financial income

 

99

 

3,751

 

2,333

 

1,744

Financial costs

 

(317)

 

(11,944)

 

(8,750)

 

(8,154)

Other financial results

 

(858)

 

(32,365)

 

(3,774)

 

505

Financial results, net

 

(447)

 

(16,862)

 

1,287

 

(135)

Profit before income tax

 

224

 

8,447

 

15,157

 

1,870

Income tax and minimum notional income tax

 

(17)

 

(658)

 

985

 

1,603

Profit of the year from continuing operations

 

207

 

7,789

 

16,142

 

3,473

Profit (Loss) of the year from discontinued operations

 

80

 

3,019

 

(1,893)

 

152

Total Profit of the year

 

287

 

10,808

 

14,249

 

3,625

 

 

     

 

 

Items that will not be reclassified to profit of loss:

 

     

 

 

Results related to defined benefit plans

 

(4)

 

(160)

 

(13)

 

(34)

Income tax

 

1

 

41

 

4

 

12

Share of loss from joint ventures

 

(1)

 

(19)

 

-

 

-

Items that may be reclassified to profit of loss:

 

       

Exchange differences on translation

 

1

 

19

 

111

 

7

Other Comprehensive(loss) income of the year from continuing operations, net of tax

 

(3)

 

(119)

 

102

 

(15)

Other comprehensive income (loss) of the year from discontinued operations, net of tax

 

8

 

312

 

(533)

 

135

Total Other Comprehensive income (loss) of the year

 

5

 

193

 

(431)

 

120

Total Comprehensive income  of the year

 

292

 

11,001

 

13,818

 

3,745

 

 

 

 

 

 

 

 

 

Profit of the year attributable to:

 

       

Owners of the company

 

224

 

8,435

 

10,799

 

2,875

Non - controlling interest

 

63

 

2,373

 

3,450

 

750

Total Comprehensive Income of the year attributable to:

       

Owners of the company

 

225

 

8,474

 

10,588

 

2,877

Non - controlling interest

 

67

 

2,527

 

3,230

 

868

Total Profit (Loss) of the year attributable to owners of the company:

       

Continuing operations

 

146

 

5,506

 

12,867

 

2,702

Discontinued operations

 

78

 

2,929

 

(2,068)

 

173

Total Comprehensive Income (Loss) of the year attributable to owners of the company:

       

Continuing operations

 

141

 

5,297

 

12,940

 

2,555

Discontinued operations

 

84

 

3,177

 

(2,352)

 

322

Basic earnings per share from continuing operations

 

0.0746

 

2.8106

 

6.6462

 

1.5271

Diluted earnings per share from continuing operations

 

0.0746

 

2.8106

 

6.6462

 

1.5271

Basic earnings (loss) per share from discontinued operations

 

0.0397

 

1.4952

 

(1.0682)

 

0.1290

Diluted earnings (loss) per share from discontinued operations

 

0.0397

 

1.4952

 

(1.0682)

 

0.1290

Dividends per share(2)

 

-

 

-

 

-

 

-

Basic earnings per ADS(2)from continuing operations

 

0.0030

 

0.1124

 

0.2658

 

0.0611

Diluted earning per ADS(2)from continuing operations

 

0.0030

 

0.1124

 

0.2658

 

0.0611

Basic earning (loss) per ADS(2)from discontinuing operations

 

0.0016

 

0.0598

 

(0.0427)

 

0.0052

Diluted earning (loss) per ADS(2)from discontinuing operations

 

0.0016

 

0.0598

 

(0.0427)

 

0.0052

Dividends per ADS(3)

 

-

 

-

 

-

 

-

Weighted average amount of outstanding shares (in millions)

 

1,959

 

1,959

 

1,936

 

1,736

 

 

     

 

 

CONSOLIDATED CASH FLOW DATA

 

     

 

 

Net cash generated by operating activities

 

608

 

22,935

 

16,648

 

12,321

Net cash generated by (used in) investing activities

 

20

 

740

 

(31,938)

 

(21,909)

Net cash (used in) generated by  financing activities

 

(470)

 

(17,714)

 

13,991

 

10,592

 

(1) Peso amounts as of December 31, 2018 have been translated into U.S.$ at the seller exchange rate for U.S.$ quoted by Banco Nación on December 31, 2018 of Ps.37.70 to U.S.$ $1.00. See “Item 3. Key Information—Exchange Rates.” 

(2) Each ADS represents 25 common shares.

6


 
 

 

EXCHANGE RATES

Exchange Rates

The following table sets forth the high, low, average and period-end exchange rates for the periods indicated, expressed in Pesos per U.S. Dollar and not adjusted for inflation. There can be no assurance that the Peso will not depreciate or appreciate again in the future. The Federal Reserve Bank of New York does not report a noon buying rate for Pesos.

 

 

Exchange rates(1)

 

 

(in Pesos per U.S. Dollars)

 

 

High

Low

Average(2)

Period end

Year ended December 31,

 

    

2013

 

6.521

4.925

5.480

6.521

2014

 

8.557

6.545

8.119

8.551

2015

 

13.400

8.222

9.265

13.040

2016

 

16.030

13.200

14.782

15.890

2017

 

19.200

15.190

16.572

18.649

2018

 

41.250

18.410

28.093

37.700

 

 

 

 

 

 

Month

 

 

 

 

 

November 2018

 

39.050

35.400

36.484

37.720

December 2018

 

38.600

36.500

37.835

37.700

January 2019

 

37.710

36.900

37.388

37.350

February 2019

 

39.670

37.170

38.404

39.150

March 2019

 

43.870

39.810

41.516

43.350

April 2019(3)

 

45.970

41.620

43.214

44.325

 

 

 

 

 

 

Source: Banco Nación

(1)     Represents the average of the exchange rates on the last day of each month during the period.

(2)     Average of the lowest and highest daily rates in the month.

(3)     Represents the average of the lowest and highest daily rates from April 1 through April 29, 2019.

In the future, any cash dividends we pay will be payable in Pesos, and exchange rate fluctuations will affect the U.S. Dollar amounts received by holders of American Depositary Shares (“ADSs”), on conversion by us or by the depositary of cash dividends on the shares represented by such ADSs. Fluctuations in the exchange rate between the Peso and the U.S. Dollar will affect the U.S. Dollar equivalent of the Peso price of our shares on the Buenos Aires Stock Exchange (“BASE”) and, as a result, can also affect the market price of our ADSs.

7


 
 

RISK FACTORS

 

Risks Related to Argentina

Overview

We are a stock corporation (sociedad anónima) incorporated under the laws of the Republic of Argentina and most of our revenues are earned in Argentina and most of our operations, facilities and customers are located in Argentina. We also have investments outside of Argentina, in Venezuela (our investments in Venezuela are valued at Ps.0, see “Our Oil and Gas Business—Venezuela”)and in Ecuador (through our equity interest in OCP). Our financial condition and results of operations depend to a significant extent on macroeconomic, regulatory, political and financial conditions prevailing in Argentina, including growth rates, inflation rates, currency exchange rates, taxes, interest rates, and other local, regional and international events and conditions that may affect Argentina in any manner. For example, slower economic growth or economic recession could lead to a decreased demand for electricity in the service areas in which we and our subsidiaries operate or a decline in the purchasing power of our customers, which, in turn, could lead to a decrease in collection rates from our customers or increased energy losses due to illegal use of our services. Actions of the Argentine Government concerning the economy, including measures with respect to inflation, interest rates, price controls (including tariffs and other compensation of public services), foreign exchange controls and taxes, have had and may in the future have a material adverse effect on private sector entities, including us.

We cannot assure you that the Argentine Government will not adopt other policies that could adversely affect the Argentine economy or our business, financial condition or results of operations. In addition, we cannot assure you that future economic, regulatory, social and political developments in Argentina will not impair our business, financial condition or results of operations, or cause the market value of our ADSs and common shares to decline.

A global or regional financial crisis and unfavorable credit and market conditions may negatively affect our liquidity, customers, business, and results of operations

The effects of a global or regional financial crisis and related turmoil in the global financial system may have a negative impact on our business, financial condition and results of operations, which is likely to be more severe on an emerging market economy, such as Argentina. This was the case in 2008, when the global economic crisis led to a sudden economic decline in Argentina in 2009, accompanied by inflationary pressures, depreciation of the Peso and a drop in consumer and investor confidence.

The effects of an economic crisis on our customers and on us cannot be predicted. Weak global and local economic conditions could lead to reduced demand or lower prices for energy, hydrocarbons and related oil products and petrochemicals, which could have a negative effect on our revenues. Economic factors such as unemployment, inflation and the unavailability of credit could also have a material adverse effect on the demand for energy and, therefore, on our business, financial condition and results of operations. The financial and economic situation in Argentina or in other countries in Latin America, such as Brazil, may also have a negative impact on us and third parties with whom we do, or may do, business.

In addition, the global economic crisis that began in the fourth quarter of 2008, triggering an international stock market crash and the insolvency of major financial institutions, limited the ability of Argentine companies to access international financial markets as they had in the past or made such access significantly more costly. Once the aforementioned crisis was over, there were periods with low cost financing that Argentina did not take advantage of because of its particular internal situation. A similar global or regional financial crisis in the future could limit our ability to access the credit or capital markets at a time when we require financing, thereby impairing our flexibility to react to changing economic and business conditions. For these reasons, any of the foregoing factors could together or independently have an adverse effect on our results of operations and financial condition, and cause the market value of our ADSs to decline.

The Argentine economy remains vulnerable and any significant decline may adversely affect our business, results of operations, and financial condition

The Argentine economy has experienced significant volatility in recent decades, characterized by periods of low or negative growth, high levels of inflation and currency devaluation. Sustainable economicgrowth in Argentina is dependent on a variety of factors including the international demand for Argentine exports, the stability and competitiveness of the Peso against foreign currencies, confidence among consumers and foreign and domestic investors and a stable rate of inflation, national employment levels and the circumstances of Argentina’s regional trade partners. The Argentine economy has been volatile since 2011. For example, Argentina’s economy grew in 2017, but contracted in 2018. The Argentine economy remains vulnerable, as reflected by the following economic conditions:

8


 
 

·       

according to the revised calculation of 2004 Gross Domestic Product (“GDP”) published by the Instituto Nacional de Estadística y Censos (National Statistics and Census Institute or “INDEC”) on June 29, 2016, which forms the basis for the realGDP calculation for every year after 2004, and recent data published by the INDEC in 2019, for the year ended December 31, 2018, Argentina’s real GDP decreased by 2.5 % compared to the same period in 2017. Argentina’s performance has depended to a significant extent on high commodity prices which, despite having favorable long-term trends, are volatile in the short-term and beyond the control of the Argentine Government and the private sector;

·       

continued increases in public expenditures have resulted and could continue to result in fiscal deficit and affect economic growth;

·       

inflation remains high and may continue at those levels in the future;

·       

investment as a percentage of GDP remains low to sustain the growth rate of the past decade;

·       

several protests or strikes took place during 2018, which adversely affects the stability of the political, social and economic environment and may negatively impact the global financial market’s confidence in the Argentine economy. We cannot guarantee that these kind of events will not occur in the future;

·       

energy or natural gas supply may not be sufficient to supply increased industrial activity (thereby limiting industrial development) and consumption;

·       

unemployment and informal employment remain high; and

·       

the Argentine Government’s economic expectations may not be met and the process of restoring the confidence in the Argentine economy may take longer than anticipated.

As in the recent past, Argentina’s economy may be adversely affected if political and social pressures inhibit the implementation by the Argentine Government of policies designed to control inflation, generate growth and enhance consumer and investor confidence, or if policies implemented by the Argentine Government that are designed to achieve these goals are not successful. These events could materially adversely affect our financial condition and results of operations, or cause the market value of our ADSs and our common shares to decline.

In 2018, the Argentine Peso experienced a rapid devaluation against major foreign currencies, particularly against the U.S. dollar. According to the exchange rate information published by the Banco de la Nación Argentina, the Argentine Peso devaluated by 102.2% against the U.S. dollar during the year ended December 31, 2018 (compared to 17.4% and 21.9% in the years ended December 31, 2017 and 2016, respectively). As a result of the Argentine Peso’s increased volatility, the Argentine Government announced several measures to restore market confidence and stabilize its value. Measures implemented by the Central Bank of the Republic of Argentina (Banco Central de la República Argentina, the “Central Bank” or “BCRA”) include, among others, an increase of short term interest rates and selling foreign currency reserves. The Argentine Government in turn announced that it would accelerate the proposed reduction of the fiscal deficit. Further, on May 8, 2018, the current administration announced that the Argentine Government would initiate negotiations with the International Monetary Fund (the “IMF”) with a view to entering into a stand-by credit facility that would give Argentina access to financing by the IMF. On June 20, 2018, the executive board of the IMF approved the terms of the stand-by arrangement (the “SBA”), consisting of a stand-by credit facility for U.S.$50.0 billion, subject to adjustments and compliance with certain political and fiscal performance guidelines by the Argentine Government. On October 26, 2018, a first revision of the SBA concluded with the enlargement of the arrangement for U.S.$5.7 billion. We cannot predict whether the Argentine Government will be able to comply with all terms of the SBA. The ability of the Argentine Government to stabilize the foreign exchangemarket, restore economic growth and meet the terms of the SBA is subject to uncertainty. The continued depreciation of the Argentine Peso and the failure to meet the terms of the SBA could have a material adverse effect on Argentina’s economy and, consequently, our cash flows, financial condition and results of operations.

9


 
 

Since October 2018, the Central Bank established an exchange rate band system. The band in which the Central Bank would not intervene was initially defined between Ps.34 to U.S.$ 1.00 and Ps.44 to U.S.$ 1.00, and was initially adjusted upwards on a monthly basis. In April 2018, the Central Bank froze the non-intervention band at a floor value of Ps. 39.75 to U.S.$ 1.00 and a ceiling value of Ps. 51.45 to U.S.$ 1.00 until the end of 2019. The Central Bank allows the free floating of the currency within this band, though it reserves the right to intervene in situations of high volatility. These measures implemented by the Central Bank have been complemented with, among others, an increase of short term interest rates and a strict control of the money supply. The intention of the Central Bank is to avoid excessive fluctuations of the exchange rate. The success of these measures is subject to uncertainty and the continued depreciation of the Argentine Peso could have a material adverse effect on our financial condition and results of operations.

We cannot assure you that a decline in economic growth, an increase in economic instability or the expansion of economic policies and measures taken or that may be adopted in the future by the Argentine Government to control inflation or address other macroeconomic developments that affect private sector entities such as us, all developments over which we have no control, would not have an adverse effect on our business, financial condition or results of operations or would not have a negative impact on the market value of our ADSs and our common shares.

The impact of the next congressional and presidential elections on the future economic and political environment of Argentina remains uncertain, but is likely to be material

Since taking office on December 10, 2015, the Macri administration has announced and implemented several significant economic and policy reforms, such as: (i) declaration of a state of emergency for the electricity system and reforms thereto; (ii) reforms affecting the transport and distribution of natural gas; (iii) reforms concerning the INDEC; (iv) reforms affecting foreign exchange; (v) reforms affecting foreign trade; (vi) the modification of Argentina’s debt policy; (vii) the correction of monetary imbalances; (viii) the enactment of the Corporate Criminal Liability Law (as defined below); (ix) reform of Argentina’s capital markets; (x) reform of the pension framework; (xi) the extension of a tax on financial transactions; (xii) tax reform (the “Tax Reform”); and (xiii) the implementation of a fiscal consensus (Pacto Fiscal). As of the date of this annual report, the final impact that the aforementioned measures and any future measures to be taken by the current administration will have on the Argentine economy as a whole, and our business in particular, cannot be fully anticipated.

In this order, the measures announced by the Argentine Government during the firsts days of April 2019, stablish that there will be no more rate increases for the rest of the year. The increases that has already been authorized by the Resolution 366/18 for Resident Clients on the periods of May and August, will be absorbed by the National State.

Further, the next presidential and congressional elections in Argentina will be held in October 2019, and their impact on the future economic and political environment is uncertain, but is likely to be material. No assurances can be made as to the policies that may be implemented by a new Argentine administration, or that political developments in Argentina will not adversely affect the Argentine economy and our business, financial condition and results of operations. In addition, we cannot assure you that future economic, regulatory, social and political developments in Argentina will not impair our business, financial condition, or results of operations, or cause the market value of our ADSs and our common shares to decline.

If the high levels of inflation continue, the Argentine economy and our results of operations could be adversely affected

Historically, inflation has materially undermined the Argentine economy and the Argentine Government’s ability to create conditions that allow growth. In recent years, Argentina has confronted inflationary pressures, evidenced by significantly higher fuel, energy and food prices, among other factors. From 2011 to date, Argentina experienced increases in inflation as measured by the Wholesale Price Index (the “WPI”) that reflected the continued growth in the levels of private consumption and economic activity (including exports and public and private sector investment), which applied an upward pressure on the demand for goods and services, evidenced by significantly higher fuel, energy and food prices, among others. The INDEC resumed publication of the WPI for full year since 2016. The Argentine WPI increased by 18.8% in 2017, and 73.5% in 2018 on a year-over-year comparison.

 

According to data published by the INDEC, CPI rates forJuly, August, September, October, November and December 2018, and January, February and March 2019 were 3.1%, 3.9%, 6.5%, 5.4%, 3.2%, 2.6%, 2.9%, 3.8% and 4.7% respectively.See“—The credibility of several Argentine economic indexes was called intoquestion, which may lead to a lack of confidence in the Argentine economy and, in turn, limit our ability to access credit and the capital markets” below.The previous administration has implemented programs to control inflation and monitor prices for essential goods and services, including the freezing of prices of supermarket products, and through price support arrangements with private sector companies in several industries and markets. The Argentine Government’s adjustments to electricity and gas tariffs, as well as the increase in the price of gasoline have affected prices, creating additional inflationary pressure. Recently, the Macri administration announced the implementation of new price control agreements for different basic goods.

10


 
 

 

A high inflation rate affects Argentina’s foreign competitiveness by diluting the effects of the Peso devaluation, negatively impacting employment and the level of economic activity and undermining confidence in Argentina’s banking system, which may further limit the availability of domestic and international credit to businesses. In turn, a portion of the Argentine debt continues to be adjusted by theCoeficiente de Estabilización de Referencia (Stabilization Coefficient, or “CER”), a currency index, that is strongly related to inflation. Therefore, any significant increase in inflation would cause an increase in the Argentine external debt and consequently in Argentina’s financial obligations, which could exacerbate the stress on the Argentine economy. The efforts undertaken by the current administration to reduce inflation have not achieved the desired results. A continuing inflationary environment could undermine our results of operations, adversely affect our ability to finance the working capital needs of our businesses on favorable terms, and it could adversely affect our results of operations and cause the market value of our ADSs and our common shares to decline.

 

As of July 1, 2018, the Argentine Peso qualifies as a currency of a hyperinflationary economy and we are required to restate our historical financial statements in terms of the measuring unit current at the end of the reporting year, which could adversely affect our results of operation and financial condition

As of July 1, 2018, the Argentine Peso qualifies as a currency of a hyperinflationary economy and we are required to restate our historical financial statements by applying inflationary adjustments to our financial statements, which could adversely affect our results of operation and financial condition.

Pursuant to IAS 29 “Financial Reporting in Hyperinflationary Economies”, the financial statements of entities whose functional currency is that of a hyperinflationary economy must be restated for the effects of changes in a suitable general price index. IAS 29 does not prescribe when hyperinflation arises, but includes several characteristics of hyperinflation. The IASB does not identify specific hyperinflationary jurisdictions. However, in June 2018, the International Practices Task Force of the Centre for Quality, which monitors “highly inflationary countries”, categorized Argentina as a country with projected three-year cumulative inflation rate greater than 100%. Additionally, some of the other qualitative factors of IAS 29 were present, providing prima facie evidence that the Argentine economy is hyperinflationary for the purposes of IAS 29. Therefore, Argentine companies using IFRS are required to apply IAS 29 to their financial statements for periods ending on and after July 1, 2018.

Adjustments to reflect inflation, including tax indexation, such as those required by IAS 29, were prohibited by Law No. 23,928. Additionally, Decree No. 664/03, issued by the Argentine Government (“Decree 664”), instructed regulatory authorities, such as the Public Registries of Commerce, the Superintendence of Corporations of the City of Buenos Aires and the Argentine Securities Commission (Comisión Nacional de Valores or “CNV”), to accept only financial statements that comply with the prohibitions set forth by Law No. 23,928. However, on December 4, 2018, Law No. 27,468 (“Law 27,468”) abrogated Decree 664 and amended Law No. 23,928 indicating that the prohibition of indexation no longer applies to the financial statements. Some regulatory authorities, such as the CNV and the IGJ, have required that financial statements for periods ended on and after December 31, 2018 that are to be submitted to them should be restated for inflation following the guidelines in IAS 29. However, for purposes of determination of the indexation for tax purposes, Law No. 27,468 substituted the WPI for the CPI, and modified the standards for triggering the tax indexation procedure.

During the first three years as from January 1, 2018, the tax indexation will be applicable if the variation of the CPI exceeds 55% in 2018, 30% in 2019 and 15% in 2020. The tax indexation determined during any such year will be allocated as follows: 1/3 in that same year, and the remaining 2/3 in equal parts in the following two years. From January 1, 2021, the tax indexation procedure will be triggered under similar standards as those set forth by IAS 29.

We cannot predict the future impact that the eventual application of tax indexation and related inflation adjustments described above will have on our financial statements or their effects on our business, results of operations and financial condition.

11


 
 

 

The credibility of several Argentine economic indexes was called into question, which may lead to a lack of confidence in the Argentine economy and, in turn, limit our ability to access credit and the capital markets

Prior to 2015, the credibility of the CPI, as well as other indices published by the INDEC, were called into question.

The Fernández de Kirchner administration implemented a new price index on February 13, 2014. Such new price index represented the first national indicator to measure changes in prices of final consumption by household. Unlike the previous price index, which only measured inflation in the urban sprawl of the City of Buenos Aires, the new price index was calculated by measuring prices of goods across the entire urban population of the 24 provinces of Argentina. Although this methodology brought inflation statistics closer to those estimated by private sources, material differences between official inflation data and private estimates remained during 2015. In November 2015, the INDEC suspended the publication of the CPI and the WPI.

 

On January 8, 2016, based on its determination that the INDEC had failed to produce reliable statistical information, particularly with respect to CPI, GDP, inflation and foreign trade data, as well as with poverty and unemployment rates, the Macri administration declared a state of administrative emergency for the national statistical system and the INDEC. The INDEC suspended the publication of certain statistical data until the reorganization of its technical and administrative structure to recover its ability to produce reliable statistical information was finalized in June 2016. During the suspension period, the INDEC published CPI figures published by the City of Buenos Aires and the Province of San Luis for reference as an estimated benchmark for national inflation.In June 2016, the INDEC resumed publishing an official inflation rate using a new methodology for calculating the CPI.

 

On September 22, 2016, the INDEC resumed publication of its essential goods and services basket assessment. On July 11, 2017, the INDEC began publishing a national CPI (the “National CPI”). The National CPI is based on a survey conducted by INDEC and several provincial statistical offices in 39 urban areas including each of Argentina’s provinces. The official CPI inflation rate for the year ended December 31, 2018 was 47.6%.

 

Any future required correction or restatement of the INDEC indexes could result in decreased confidence in Argentina’s economy, which, in turn, could have an adverse effect on our ability to access international capital markets to finance our operations and growth, and which could, in turn, adversely affect our results of operations and financial condition and cause the market value of our ADSs and our common shares to decline.

Argentina’s ability to obtain financing from international markets could be limited, which may impair its ability to implement reforms and foster economic growth and, consequently, affect our business, results of our operations and prospects growth

Argentina’s history of defaults on its external debt and the protracted litigation with holdout creditors, summarized below, may reoccur in the future and prevent Argentine companies such as us from accessing the international capital markets readily or may result in higher costs and more onerous terms for such financing, and may therefore negatively affect our business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations.  

Following the default on its external debt in 2001, Argentina sought to restructure its outstanding debt by offering holders of the defaulted bonds two opportunities to exchange them for newly issued debt securities, in 2005 and again in 2010. Holders of approximately 93% of Argentina’s defaulted debt participated in the exchanges. Nonetheless, a number of bondholders held out from the exchange offersand pursued legal actions against Argentina in the courts of the United States and several other jurisdictions.  

After almost 15 years of litigation, and following the beginning of Macri Administration, in February 2016 Argentina negotiated and reached settlement agreements with a significant portion of its holdout creditors. As required by the settlement, on March 31, 2016, the Argentine Congress voted to repeal Laws No. 26,017 (known as “Ley Cerrojo”) and 26,984 (known as “Ley de Pago Soberano”), which prohibited Argentina from offering to the holdouts better conditions than those offered in the debt swaps of 2005 and 2010. On April 13, 2016, Argentina announced that it would proceed with a new bond offering of up to U.S.$ 12.5 billion to repaythe holdouts. After issuing U.S.$ 16.5 billion of new bonds to international investors, on April 22, 2016, Argentina notified the competent U.S. court that it had made full payment under the settlement agreements with the holdout creditors. Although the size of the claims involved has decreased significantly,litigation initiated by bondholders that have not accepted Argentina’s settlement offer continues in several jurisdictions.

12


 
 

However, even though Argentina has accessed the international capital markets since the settlement, there continues to be a risk that the country will not attract the foreign direct investment and financing needed to restart the investment cycle and achieve sustainable rates of economic growth. If that risk occurs, Argentina’s fiscal condition could be adversely affected, which could lead to more inflation and undermine the Argentine Government’s ability to implement economic policies designed to promote growth. The difficulty of sustaining over time economic growth with reasonable price stability could result in a renewed episode of economic instability.

 

Further, on May 8, 2018, the current administration announced that the Argentine Government would initiate negotiations with the IMF with a view to entering into a stand-by credit facility that would give Argentina access to financing by the IMF. These negotiations were culminated with the execution of a stand-by agreement that was approved by the executive board of the IMF (the “IMF Board”) on June 20, 2018 and a first revision under the mentioned stand-by arrangement that was approved by the IMF Board on October 26, 2018, which included the enlargement of the arrangement for U.S.$ 5.7 billion.

 In addition, the foreign shareholders of several Argentine companies, together with public utilities and certain bondholders that did not participate in the exchange offers described above, filed claims with the International Centre for Settlement of Investment Disputes (“ICSID”) alleging that the emergency measures adopted by the Argentine Government in 2002 do not meet the just and equal treatment requirements of several bilateral investment treaties to which Argentina is a party. Several of these claims have been resolved against Argentina.

Past situations, such as the lawsuits with creditors that did not accept to the debt exchange, the claims before the ICSID, and the economic policy measures adopted by the Argentine Government or any future default of Argentina regarding its financial obligations may harm Argentine companies’ ability to obtain financing. Further, the financial conditions of such access could be disadvantageous to Argentine companies and, therefore, may adversely affect our business, results of operations, financial condition, the value of our securities, and our ability to meet our financial obligations.

Fluctuations in the value of the Argentine Peso could adversely affect the Argentine economy and could, in turn, adversely affect our results of operations

After several years of moderate variations in the nominal exchange rate, the Argentine Peso lost more than 50% of its value with respect to the U.S. dollar in 2015 and approximately 22% in 2016 and 21.9% in 2017. In 2018, the depreciation of the Peso with respect to the U.S. Dollar reached approximately 102.2%. We are unable to predict the future value of the Peso against the U.S. Dollar. If the Argentine Peso devaluates further, the negative effects on the Argentine economy could have adverse consequences on our businesses, our results of operations and the market value of our ADSs, including as measured in U.S. Dollars.

From time to time, the Central Bank may intervene in the foreign exchange market in order to maintain the currency exchange rate. Additional volatility, appreciation or depreciation of the Peso against the U.S. dollar or reduction of the Central Bank’s reserves as a result of currency intervention could adversely affect the Argentine economy and our ability to service our debt obligations and could affect the value of our ADSs and our common shares.

On the other hand, a significant appreciation of the Argentine Peso against the U.S. Dollar also presents risks for the Argentine economy, including the possibility of a reduction in exports (as a consequence of the loss of external competitiveness). Any such increase could also have a negative effect on economic growth and employment, reduce the Argentine public sector’s revenues from tax collection in real terms, and have a material adverse effect on our business, our results of operations and the market value of our ADSs, as a result of the overall effects of the weakening of the Argentine economy. 

Fluctuations in the value of the Peso may also adversely affect the Argentine economy, our financial condition and results of operations. The Peso has been subject to significant devaluation against the U.S. dollar in the past and may be subject to further fluctuation in the future. A depreciation of the Peso against major foreigncurrencies may also have an adverse impact on our capital expenditure program and increase the Peso amount of our trade liabilities and financial debt denominated in foreign currencies. The devaluation of the Argentine Peso may have a negative impact on the ability of certain Argentine businesses to service their foreign currency-denominated debt, lead to high inflation, significantly reduce real wages, jeopardize the stability of businesses whose success depends on domestic market demand, including public utilities and the financial industry, and adversely affect the Argentine Government’s ability to honor its foreign debt obligations.

13


 
 

Intervention by the Argentine Government may adversely affect the Argentine economy and, as a result, our business and results of operations

In the recent past, the Fernández de Kirchner administration increased its direct intervention in the economy, including through the implementation of expropriation and nationalization measures, price controls and exchange controls.

Notwithstanding the measures adopted by the Macri administration and its planned liberalization of the economy, we cannot assure you that measures that may be adopted by the current or any future Argentine Government, such as expropriation, nationalization, forced renegotiation or modification of existing contracts, new taxation policies, changes in laws, regulations and policies affecting foreign trade and investments will not have a material adverse effect on the Argentine economy and, as a consequence, adversely affect our financial condition, our results of operations or cause the market value of our ADSs and our common shares to decline.

The implementation in the future of new exchange controls and restrictions on capital inflows and outflows could limit the availability of international credit and could threaten the financial system, adversely affecting the Argentine economy and, as a result, our businesses

Starting in December 2001, the Argentine Government imposed a number of monetary and foreign exchange control measures in an attempt to prevent capital flight and a further depreciation of the Peso. These measures included restrictions on the free disposition of funds deposited with banks, the exchange of Argentine currency into foreign currencies and the transfer of funds abroad without prior approval by the Central Bank were implemented in circumstances where a serious imbalance developed in Argentina’s balance of payments.

Although several of such exchange controls and transfer restrictions were subsequently suspended or terminated, in June 2015 the Argentine Government issued a decree that established new controls on capital flows, which resulted in a decrease in the availability of international credit for Argentine companies. Through a combination of foreign exchange and tax regulations from 2011 until President Macri assumed office in December 2015, the Fernández de Kirchner administration significantly curtailed access to the foreign exchange market by individuals and private-sector entities. In response, an unofficial U.S. Dollar trading market was developed in which the Peso-U.S. Dollar exchange rate in such market differed substantially from the official Peso-U.S. Dollar exchange rate. See “Item 10. —Exchange Controls.”

As of the date of this annual report, the Macri administration has eliminated all foreign exchange restrictions that were implemented by the Fernández de Kirchner administration.

Notwithstanding the measures adopted by the Macri administration, in the future the Central Bank and Argentine Government could re-introduce exchange controls, impose restrictions on transfers abroad, restrictions on the movement of capital or take other measures in response to capital flight or a significant depreciation of the Argentine Peso, which could limit our ability to access the international capital markets. Such measures could lead to political and social tensions and undermine the Argentine Government’s public finances, as has occurred in the past, which could have an adverse effect on economic activity in Argentina and, consequently, adversely affect our business and results of operations and cause the market value of our ADSs and our common shares to decline. As of the date of this annual report, however, the transfer of funds abroad to pay dividends is permitted to the extent such dividend payments are made in connection with audited financial statements approved by a shareholders’ meeting of the Company.

The Argentine economy remains vulnerable to external shocks that could be caused by significant economic difficulties of Argentina’s major regional trading partners, particularly Brazil, or by more general “contagion” effects. Such external shocks and “contagion” effects could have a material adverse effect on Argentina’s economic growth, and consequently, our results of operations and financial condition

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Weak, flat or negative economic growth of any of Argentina’s major trading partners such as Brazil could adversely affect Argentina’s economic growth. Argentina’s economy is vulnerable to external shocks. For example, economic slowdowns, especially in Argentina’s major trading partners, led to declines in Argentine exports in the last few years. Specifically, fluctuations in the price of the commodities sold by Argentina and a significant revaluation of the Peso against the U.S. dollar could harm Argentina’s competitiveness and affect its exports. In addition, international investors’ reactions to events occurring in one market sometimes demonstrate a “contagion” effect in which an entire region or class of investment is disfavored by international investors.

The economy of Brazil, Argentina’s largest export market and the principal source of imports to Argentina, has experienced heightened negative pressure due to the uncertainties stemming from the ongoing political crisis and extensive corruption investigations. The Brazilian economy contracted by 3.6% during 2016. Although the Brazilian economy slightly expanded by 1% in 2017 and1.1%in 2018, a deterioration of economic conditions in Brazil may reduce demand for Argentine exports and increase demand for Brazilian imports. In October 2018, Jair Bolsonaro was elected president of Brazil. As a result, political uncertainty has increased in Brazil, in relation to future actions that may be taken by the president, which might include substantial economic reforms and changes in Brazil’s foreign policy, as was proposed during Jair Bolsonaro’s campaign. A further deterioration of economic conditions in Brazil could reduce the demand for Argentine exports and increase demand for Brazilian imports. There is a possibility that continued uncertainty with respect to Brazil’s economic and political conditions or the occurrence of an economic and political crisis in Brazil might result in an impact on the Argentine economy, and in turn, have a material adverse effect on our business, financial condition and result of operations.Financial and securities markets in Argentina are also influenced by economic and market conditions in other markets worldwide. U.S. monetary policy has significant effects on capital inflows and asset price movements in emerging market economies. Increases in U.S. interest rates result in the appreciation of the U.S. dollar and decreases in prices for raw materials, which can adversely affect commodity-dependent emerging economies.

Additionally, a slowing of China’s GDP growth has led to a reduction in exports to China, which in turn has caused oversupply and price declines in certain commodities. Decreases in exports may have a material adverse effect on Argentina’s public finances due, among others, to a loss of tax on exports, and cause an imbalance in the country’s exchange market.

On June 23, 2016, the United Kingdom voted in favor of exiting the European Union. As of the date of this annual report, the actions that the United Kingdom will take to effectively exit from the European Union or the length of such process are uncertain. The results of the United Kingdom’s referendum and the initiation of the Brexit process have caused, and are anticipated to continue to cause, volatility in the financial markets, which may in turn have a material adverse effect on our business, financial condition and results of operations. The United Kingdom was due to leave the EU on March 29, 2019 at 11 pm UK time. However, the period for negotiating a Withdrawal Agreement was extended. Brexit could lead to additional political, legal and economic instability in the European Union and produce a negative impact on the commercial exchange of Argentina with that region.

On November 8, 2016, Donald J. Trump was elected President of the United States and he assumed office in January 2017. The results of the presidential election have created significant uncertainty about the future relationship between the United States and other countries, including with respect to the trade policies, treaties, government regulations and tariffs that could apply to trade between the United States and other nations. Even though President Trump's protectionist measures are not, for the time being, aimed at Argentina, we cannot predict how they will evolve, nor can we predict the effect that the same or any other measure taken by the Trump administration could cause on global economic conditions and the stability of global financial markets. Furthermore, the ongoing trade tensions between United States and China due to tariffs placed on goods traded between them, may have a potential impact in trade-dependent countries such as Argentina.

On October 27, 2017, the regional government of Catalonia declared independence from Spain. In response to this declaration, the Spanish national government rejected the declaration and intervened dissolving the regional parliament and convening new elections to elect new regional authorities. These conflicts in the European Union in general, and in Spain in particular, may have political, regulatory and economic implications on the international markets.

During August 2018, an increase in inflation and a sustained deficit in current accounts, as well as the protectionist measures taken by the United States which included the doubling of the tariffs on steel and aluminum from Turkey, caused a collapse of the Turkish lira against the Dollar. Such collapse triggered a waveof sales of assets from emerging markets and the significant drop in the value of shares from emerging markets, generating a contagion effect in international markets and several stock exchanges in the world, including Argentina.Although economic conditions vary from country to country, investors’ perceptions of events occurring in other countries have in the past substantially affected, and may continue to substantially affect, capital flows into and investments in securities from issuers in other countries, including Argentina. International investors’ reactions to events occurring in one market sometimes demonstrate a “contagion” effect in which an entire region or class of investment is disfavored by international investors. Argentina could be adversely affected by negative economic or financial developments in other countries, which in turn may have an adverse effect on our financial condition and results of operations.

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There can be no assurance that the Argentine financial system and securities markets will not be adversely affected by policies that may be adopted by the government in the future or by events in the economies of developed countries or in other emerging markets.

Argentina could be adversely affected by negative economic or financial developments in other emerging and developed countries, which in turn may have material adverse effect on the Argentine economy and, indirectly, on our business, financial condition and results of operations, and the market value of our ADSs and our common shares.

The application of certain laws and regulations could adversely affect our results of operations and financial condition  

Law No. 26,854, which regulates the procedure applicable to injunctions that are requested against or by the Argentine Government or any of its decentralized entities, was promulgated on April 30, 2013 as part of a judicial reform bill approved by the Argentine Congress. The principal changes implemented pursuant to Law No. 26,854 include: (i) prior to issuing a ruling on injunctions requested against the Argentine Government or decentralized entities, judges must request a report on the relevant matters from the competent administrative agency (the "Preliminary Report"), within five days in ordinary proceedings and three days in abbreviated proceedings and in amparo actions. Also, judges are authorized to request an opinion on the matter from the relevant representative of the General Prosecuting Office, (ii) judges are permitted to order interim measures before ruling on the injunction request, in the event that "exceptional circumstances, objectively insurmountable" are present. Such interim measures are effective until the competent administrative authority has produced the Preliminary Report or until the term for producing such report has expired, and (iii) injunctions that are ordered against the Argentine Government or its decentralized entities must have a "reasonable term of effectiveness" (a maximum term of six months if the injunction is granted within the framework of an ordinary judicial procedure or three months if it is an abbreviated proceeding or an amparo action). In addition, Law No. 26,855, which became effective on May 27, 2013, modified the structure and functions of the ArgentineConsejo de la Magistratura(judicial council), which has the authority to appoint judges, present charges against them and suspend or remove them. As of the date of this annual report, several aspects of this legislation have been struck down as unconstitutional by the Argentine Supreme Court.

On August 7, 2014, Law No. 26,944 on State Responsibility was enacted to regulate the liability of the Argentine Government and public officers, including state liability for unlawful and lawful actions. Such law governs the responsibility of the Argentine Government regarding the damages that its activity or inactivity may cause to individuals’ properties or rights. Additionally, Law No. 26,944 establishes that the Argentine Government’s responsibility is objective and direct, that the provisions of the civil and commercial codes are not applicable to the actions of the Argentine Government in a direct or subsidiary manner and that no dissuasive financial penalties may be imposed on the Argentine Government, its agents or officers. Additionally, Law No. 26,944 provides that the Argentine Government shall not be liable for the damages caused by public services concessionaires.

On September 18, 2014, the Argentine Congress enacted Law No. 26,991 amending Law No. 20,680 (the “Supply Law”), which became effective on September 28, 2014, to increase control over the supply of goods and provision of services. The Supply Law applies to all economic processes linked to goods, facilities and services which, either directly or indirectly, satisfy basic consumer needs (“Basic Needs Goods”) and grants a broad range of powers to its enforcing agency. It also grants the enforcing agency the power to order the sale, production, distribution or delivery of Basic Needs Goods throughout Argentina in case of a shortage of supply. The Supply Law includes the ability of the Argentine Government to regulate consumer rights under Article 42 of the Constitution and permits the creation of an authority to maintain the prices of goods and services (the “Observer of Prices of Goods and Services”). The Supply Law, as amended: (i) requires the continued productionof goods to meet basic requirements; (ii) creates an obligation to publish prices of goods and services produced and borrowed; (iii) allows financial information to be requested and seized; and (iv) increases fines for legal entities and individuals. Additionally, on September 18, 2014 the Argentine Congress enacted Law No. 26,993, amending, among other laws, Law No. 25,156, which provides (i) the creation of a preliminary system where consumers may request a settlement of their complaints with companies, (ii) the incorporation of a new branch within the judicial power, namely the “National Courts on Consumer Relations” and (iii) the amendment of Law No. 24,240 (the “Consumer Defense Law”). Such reforms and creation of the Observer of Prices of Goods and Services could adversely affect our operations. On October 1, 2014, the Argentine Congress approved the reform, update and unification of the National Civil and Commercial codes. A single new National Civil and Commercial Code became effective on August 1, 2015. In addition, more recently the Argentine Congress has passed certain laws such as those reforming the pension system and establishing corporate criminal liability for certain corrupt practices and a tax law reform (see “The impact of the next congressional and presidential elections on the future economic and political environment of Argentina remains uncertain, but is likely to be material”).

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The implementation of the aforementioned legislation has modified Argentina’s legal system. Future changes in applicable laws and regulations (including as a result of a change in government administration) administrative or judicial proceedings, including potential future claims by us against the Argentine Government, cannot be predicted and we cannot assure you that such changes will not adversely affect our business, financial condition and results of operations.

Current investigations being conducted on corruption in Argentina could have an adverse impact on the development of the Argentine economy and on investor confidence

As of the date of this annual report, several Argentine businessmen, mainly associated with public works projects, and former government officials of the former Fernández de Kirchner administration are being investigated for inappropriate gifts and unlawful association. On September 17, 2018, prosecution for unlawful association began against the former president of Argentina, Cristina Fernández de Kirchner, and several businessmen and the Argentine court with jurisdiction over the process ordered an attachment on some of their assets worth Ps. 4 billion.

 

Depending on the results of such investigations and the time it takes to complete them, the companies involved could face, among other consequences, a decrease in their credit rating, claims from their investors, as well as restrictions on financing through capital markets. These adverse effects could hinder the ability of these companies to meet their financial obligations on time. In relation to the above, the lack of future financing for these companies could affect the realization of the projects or works that are currently in execution.

 

Likewise, the effects of these investigationsor any future investigation could affect the levels of investment in infrastructure in Argentina, as well as the continuation, development and completion of public works projects and public-private participation (PPP) projects, which could ultimately lead to lower growth of the Argentine economy.

 

We cannot estimate the impact that these investigations could have on the Argentine economy. Similarly, the duration of the corruption investigations cannot be predicted, nor can it be determined, what other companies might be involved or how far-reaching the effects of these investigations might be, particularly in the energy sector, or if there will be any other future investigations in this or other industry, which may negatively impact the Argentine economy. In turn, the decrease in investor confidence resulting from any of these, among other issues, could have a significant adverse effect on the growth of the Argentine economy, which could, in turn, harm our business, our financial condition and the results of our operations and affect the trading price of our common shares and ADSs.

 

Any downgrade in the credit rating or rating outlook of Argentina could adversely affect both the rating and the market price of our ADS and our common shares

Argentina’s long-term debt denominated in foreign currency is currently rated “B2” by Moody’s, “B” by S&P and “B” by Fitch. Although Moody’s currently maintains a stable outlook, on November 7, 2018, Fitch revised its outlook of Argentina’s long-term and short-term sovereign credit rating from stable to negative, primarily as a result of the sharply weaker economic activity and uncertain prospects for multiyear fiscal consolidation and market financing availability as IMF funds are utilized, posing risks to sovereign debt sustainability. In addition, on November 13, 2018, S&P downgraded Argentina’s long-term and short-term sovereign credit ratings from “B+” to “B,” primarily as a result of an erosion of the Argentine debt profile, theeconomic growth trajectory and the dynamics of inflation against the backdrop of the implementation of a challenging economic adjustment program. There can be no assurance that Argentina’s credit rating or rating outlook will not be downgraded in the future, which could have an adverse effect both on the rating and the market price of our ADS and our common shares.

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Risks Relating to our Company

We operate a material portion of our business pursuant to public concessions granted by the Argentine Government, the revocation or termination of which would have a material adverse effect on our business

We conduct a material part of our businesses pursuant to public concessions granted by the Argentine Government. These concessions contain several requirements regarding the operation of those businesses and compliance with laws and regulations. Compliance with our obligations under our concessions is, in certain cases, secured by a pledge of our shares in the concessionaires in favor of the Argentine Government. Accordingly, upon the occurrence of specified events of default under these concessions, the Argentine Government would be entitled to foreclose on its pledge of the concessionaire and sell our shares in that concessionaire to a third party. Such sale would have a severe negative impact on our ability to operate a material portion of our business, and as a result, our results of operations would be materially adversely affected. Finally, our concessions also generally provide for termination in the case of insolvency or bankruptcy of the concessionaire. If any of our concessions are terminated or if the Argentine Government forecloses its pledge over the shares we own in any of our concessionaire companies, such companies could not continue to operate as a going concern, and in turn our consolidated results of operations would be materially adversely affectedand the market value of our shares and ADSs could decline.

We employ a largely unionized labor force and could be subject to organized labor action, including work stoppages that could have a material adverse effect on our business

The sectors in which we operate are largely unionized. As of December 31, 2018,52% of our workforce was represented by unions under collective bargaining agreements.Although our relations with unions are currently stable, we cannot assure you that we or our operating subsidiaries will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and revenues. In addition, our collective bargaining agreements generally expire after a one-year term.We cannot assure you that we will be able to negotiate new collective bargaining agreements on the same terms as those currently in effect, or that we will not be subject to strikes or work stoppages before or during the negotiation process. If we are unable to negotiate salary agreements or if we are subject to strikes or work stoppages, our results of operations, financial condition and the market value of our shares and ADSs could be materially adversely affected.

In the event of an accident or other event not covered by our insurance policies, we could face significant losses that could materially adversely affect our business and results of operations

We carry insurance policies that are consistent with industry standards in each of our different business segments. Although we believe our insurance coverage is commensurate with international standards, no assurance can be given of the existence or sufficiency of risk coverage for any particular risk or loss. If an accident or other event occurs that is not covered by our current insurance policies in any of our business segments, we may experience material losses or have to disburse significant amounts from our own funds, which may have a material adverse effect on our net profits and our overall financial condition and the market value of our shares and ADSs.

We conduct a portion of our operations through joint ventures, and our failure to continue such joint ventures or to resolve any potential material disagreements with our partners could have a material adverse effect on the success of these operations

We conduct a portion of our operations through joint ventures and as a result, the continuation of such joint ventures is vital to our continued success. In the event that any of our partners were to decide to terminate its relationship with us in any of such joint venture or sell its interest in such joint venture, we may not be able to replace our partner or obtain the necessary financing to purchase our partner’s interest. Furthermore, in certain cases such as with respect to Compañía Inversora en Transmisión Eléctrica Citelec S.A. (“CITELEC”), which has a controlling interest of 52.65% in Transener and Compañía de Inversiones de Energía S.A. (“CIESA”) which hasa controlling interest of 51% in Transportadora de Gas del Sur S.A. (“TGS”), we are not able to acquire our partners’ interests under applicable Argentine regulations. As a result, the failure to continue some of our joint ventures or to resolve any potential disagreement with our partners or to find new partners could adversely affect our ability to conduct the business that is the subject of such joint venture, which would in turn negatively affect our financial condition and results of operationsand the market value of our shares and ADSs.

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Our performance is largely dependent on recruiting and retaining key personnel

Our current and future performance and the operation of our business are dependent upon the contributions of our senior management and our skilled team of engineers and other employees. We depend on our ability to attract, train, motivate and retain key management and specialized personnel with the necessary skills and experience. There is no guarantee that we will be successful in retaining and attracting key personnel and the replacement of any key personnel who were to leave could be difficult and time consuming. The loss of the experience and services of key personnel or the inability to recruit suitable replacements and additional staff could have a material adverse effect on our business, financial condition and results of operations.

If we are not able to effectively hedge our currency risk in full and a devaluation of the Argentine Peso occurs, our results of operations and financial condition, could be materially adversely affected

Our revenues are mainly collected in Argentine Pesos. For instance, although the power generation segment’s remuneration scheme establishes U.S. Dollar denominated prices, payment is made in Argentine Pesos by applying the Central Bank’s exchange rate effective on the business day before the expiration date, in accordance with procedures of Compañía Administradora del Mercado Mayorista Eléctrico Sociedad Anónima (the Wholesale Electric Market Administration Company or “CAMMESA”). As a result, we areexposed to an exchange rate risk between the collection date and the payment date (in the event of CAMMESA does not pay at the expiration date, see “CAMMESA could alter and delay payments to electricity generators and natural gas producers”) of U.S. Dollars-denominated financial indebtedness. The same applies to contracts signed with gas distributors for the sale of natural gas, since the exchange rate agreed in those contracts is the one fixed by the Ente Nacional Regulador del Gas (National Gas Regulatory Entity or “ENARGAS”) for the seasonal period corresponding to the delivery of the invoiced gas. In addition, a significant portion of our existing financial indebtedness is denominated in U.S. Dollars, which exposes us to the risk of loss from the devaluation of the Argentine Peso. During 2018, our hedging contracts did not cover all of our exposure to such depreciation. If we are not able to effectively hedge all or a significant portion of our currency risk exposure, a devaluation of the Argentine Peso, may significantly increase our debt service burden, which, in turn, may have a material adverse effect on our financial condition and results of operations.

We and our subsidiaries are involved in various legal proceedings which could result in unfavorable decisions for us

We and our subsidiaries are party to a number of legal proceedings, some of which have been pending for several years. We cannot be certain that these claims will be resolved in our favor, and responding to the demands of litigation may divert our management’s time and attention and our financial resources. See “Item 8. Legal Proceedings”.

Downgrades in our credit ratings could have negative effects on our funding costs and business operations

Credit ratings are assigned to the Company and its subsidiaries. The credit ratings are based on information furnished by us or obtained by the credit rating agencies from independent sources and are also influenced by the credit ratings of Argentine Government bonds and general views regarding the Argentine financial system as a whole. The credit ratings are subject to revision, suspension or withdrawal by the credit rating agencies at any time. A downgrade, suspension or withdrawal in our credit ratings could result in, among others, the following: (i) increased funding costs and other difficulties in raising funds; (ii) the need to provide additional collateral in connection with financial market transactions; and (iii) the termination or cancellation of existing agreements. As a result, our business, financial condition and results of operations could be materially and adversely affected.

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Cybersecurity events, such as a cyber-attack could adversely affect our business, financial condition, results of operations and cash flows

We depend on the efficient and uninterrupted operation of internet-based data processing communication and information exchange platforms and networks, including administrative and business related systems (such as Supervisory Control and Data Acquisition (“SCADA”) and DCS Software, Inc. (“DCS”)). Cybersecurity risks have generally increased in recent years as a result of the proliferation of new technologies and the increased sophistication and activities of cyber-attacks. Through part of our business, we have increasingly connected equipment and systems to the internet. Furthermore, we depend on digital technology, including information systems to process financial and operating data, analyze seismic and drilling information and oil and gas reserves estimates. Due to the critical nature of our infrastructure and the increased accessibility enabled through connection to the internet, we may face a heightened risk of cybersecurity incidents such as computer break-ins, phishing, identity theft and other disruptions that could negatively affect the security of information stored in and transmitted through our computer systems and network infrastructure. In the event of a cyber-attack, we could have our business operations disrupted, property damaged and customer information stolen; experience substantial loss of revenues, response costs and other financial loss; and be subject to increased regulation, litigation and damage to our reputation. In addition, while we have not experienced any loss related to cybersecurity events, contingency plans in place may not be sufficient to cover liabilities associated with any such events and therefore, applicable insurance coverage may be deemed inadequate, preventing us from receiving full compensation for the losses sustained as a result of such a disruption. Although we intend to continue to implement security technology devices and establish operational procedures to prevent disruption resulting from, and counteract the negative effects of cybersecurity incidents, it is possible that not all of our current and future systems are or will be entirely free from vulnerability and these security measures will not be successful. Accordingly, cybersecurity is a material risk for us and a cyber-attack could adversely affect our business, results of operations and financial condition.

 

Our operations could cause environmental risks and any change in environmental laws could increase our operating costs

Some of our operations are subject to environmental risks that could arise unexpectedly and cause material adverse effects on our results of operations and financial condition. In addition, the occurrence of any of these risks could lead to personal injury, loss of life, environmental damage, repair and expenses, equipment damage and liability in civil and administrative proceedings. We cannot assure you that we will not incur additional costs related to environmental issues in the future, which could adversely affect our results of operations and financial condition. In addition, we cannot ensure that our insurance coverage is sufficient to cover the losses that could potentially arise from these environmental risks.

In addition, we are subject to a broad range of environmental legislation, both in Argentina and in other countries where companies we have interests in are located. Local, provincial and national authorities in Argentina and other countries where companies we have interests in are located may implement new environmental laws and regulations and may require us to incur higher costs to comply with new standards. The imposition of more stringent regulatory and permit requirements in relation to our operators in Argentina could significantly increase the costs of our activity.

We cannot predict the general effects of the implementation of any new environmental laws and regulations on our financial condition and results of operations.

CAMMESA could alter and delay payments to electricity generators and natural gas producers

 

 Electricity generators receive, through CAMMESA, payments corresponding to the power availability and the energy effectively supplied to the spot market and under the contracts with CAMMESA.

 

There is a deficit between the payments received by CAMMESA and the claims of generation companies against that entity.

The Argentine Government has covered such deficit through non-reimbursable contributions from the treasury to CAMMESA. If these treasury contributions were not enough to cover all of the generators’ claims against CAMMESA. CAMMESA’s debt to generators would grow over time. We cannot assure you that the gap between spot prices and electricity generation prices will not exist or will not increase in the future or that CAMMESA will be able to pay generators, for its debts. The generators inability to collect their credits fromCAMMESA could have a material adverse effect on their income and, consequently, on the results of their operations and financial condition.

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Certain of our outstanding financial indebtedness includes bankruptcy, reorganization proceedings and expropriation events of default, and we may be required to repay all of our outstanding debt upon the occurrence of any such events

As of the date of this annual report, certain expropriation and condemnation events with respect to us may constitute an event of default, which, if declared, could trigger the acceleration of our obligations under the relevant indebtedness and require us to immediately repay all such accelerated indebtedness. In addition, a significant part of our outstanding financial indebtedness includes certain events of default related to bankruptcy and voluntary reorganization proceedings (“concurso preventivo”). If we are not able to comply with certain payment obligations as a result of our financial situation and if the requirements set forth in the Argentine Bankruptcy Law No. 24,522 are met, any creditor, or even we, would be able to file for our bankruptcy, or we would be able file for a voluntary reorganization proceeding (“concurso preventivo”). In addition, certain of our outstanding financial indebtedness also includes cross-default or cross-acceleration provisions that could cause all of our indebtedness to be accelerated if the indebtedness including the expropriation or bankruptcy or reorganization proceeding events of default goes into default or is accelerated. In such a case, we would expect to actively pursue formal waivers from the corresponding financial creditors to avoid such potential situation, but if those waivers are not timely obtained and immediate repayment is required, we could face short-term liquidity problems, which could adversely affect our results of operations and cause the market value of our ADSs to decline.

Covenants in our indebtedness could adversely restrict our financial and operating flexibility

Some of our current indebtedness includes, and our future indebtedness may include, affirmative and restrictive covenants that limit our ability to create liens, incur additional indebtedness, dispose of our assets, pay dividends or consolidate, merge or sell part of our businesses. These restrictions may limit our ability to operate our business and may prohibit or limit our ability to enhance our operations or take advantage of potential business opportunities as they arise. The breach of any of these covenants or the failure to meet any of such conditions could result in a default under the relevant indebtedness. Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions and the renegotiation of concessions and licenses used in our businesses.

There is uncertainty as to what other measures the Argentine Government may adopt in connection with tariffs on public services and their impact on the Argentine economy

 

As explained in other risk factors in this annual report, following the economic crisis of 2001-2002, the subsequent freeze on gas and electricity rates in Pesos and the significant devaluation of the Argentine Peso against the U.S. Dollar, there was a lack of investment in the supply and transport capacities of gas and electricity and, at the same time, demand for natural gas and electricity increased substantially.

In response, the Macri administration announced several measures, including the revision of subsidy policies, Decree No. 134/2015 of December 16, 2015, which placed the national electricity system in a state of emergency until December 31, 2017 and Decree No. 367/2016 of February 16, 2016, which instructed the ministries, including the Ministry of Energy and Mining  (“ME&M”) to continue the procedures related to the renegotiation of contracts related to the provision of public services and their RTI, among which are the distribution and transportation of gas and electricity.

In relation to natural gas, on November 29, 2017, with the backing of the ME&M, natural gas distributors executed an agreement with the country’s main natural gas producers, effective from January 1, 2018 to December 31, 2018 with natural gas prices within the Transportation System Entry Point (natural gas price at wellhead)  (“PIST) ranging between U.S.$ 1/MBTU and U.S.$ 6.5/MBTU. However, on account of the significant devaluation of the Argentine peso and the impossibility to transfer this new exchange rate on to final users’ tariff schemes, in early October, 2018 this agreement was made ineffective and, consequently, prices with gas distributors began to be agreed to in the spot market on a daily basis. Subsequently, ENARGAS Resolutions No. 280-289 and No. 292/18 were issued, which established, effective for a six-month period beginning October 1, 2018, the new natural gas final tariffs for SGP, CNG and residential users considering a price for natural gas as input ranging between U.S.$ 1.74/MBTU y U.S.$ 3.98/MBTU, including the differential tariff.

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Regarding gas transportation, on March 27, 2018, ENARGAS issued Resolution No. 310/18 which implemented a 50% tariff increase applicable to natural gas transportation utility service of TGS, effective as from April 1, 2018. Subsequently, ENARGAS issued Resolution No. 265/2018 which implemented a 19.7% tariff increase effective as of October 1, 2018. See, “Item 4. Information on the Company—Our Interest in TGS.”

In relation to the distribution of electricity, on January 31, 2018, the Ente Nacional Regulador de la Electricidad (the Natiomal Energy Regulator or “ENRE”) issued Resolution No. 33/18 which approved the tariff scheme for Edenor to be applied as from February 1, 2018. Such resolution approved the last VAD increase of 17.8%, and the 22.5% CPD update for the August 2017-January 2018 period (including a stimulus factor “E” of negative 2.51%), accumulated since January 2017 and determined the deferred income as a result of a gradual tariff application between February 2017 and January 2018 to be recovered in 48 instalments beginning on  February 1, 2018.

On July 31, 2018, Edenor agreed with the former Ministry of Energy (the MinEn, former ME&M) defer the application of 50% of the CPD update for the February – July 2018 period, without this implying a negative economic impact for Edenor or affecting the service quality parameters resulting from the RTI implemented on February 1, 2017. Furthermore, the MinEn (formerly, ME&M) agreed to carry out the necessary actions to regularize the Memorandum of Understanding entered into in 2007 and the Framework Agreement. Consequently, on August 1, 2018, ENRE Resolution No. 208/2018 was published, which provided for a 15.85% update in the CPD, 7.925% effective as from August 1, 2018, and the balance being payable in six monthly consecutive installments effective as from February 1, 2019 and adjustable based on the CPD update applicable on that date.

In relation to the transmission of electricity, on February 19, 2018, the ENRE issued Resolutions No. 37/18 and No. 38/18, which were modified on April 5, 2018 by ENRE Resolutions No. 99/18 and No. 100/18 that adjusted Transener’s and Transba’s remuneration by 24.15% and 23.39% for the December 2016 to December 2017 period, respectively, to be applied to the remuneration scheme as from February 2018. Subsequently, on November 16, 2018, the ENRE issued Resolutions No. 280/18 and No. 281/18, which adjusted Transener’s and Transba’s compensation by 42.55% and 43.25%, respectively, for the December 2016 to June 2018 period, to be applied to the remuneration scheme as from August 2018. As CAMMESA did not compute interest for the months of August and September 2018, Transener and Transba filed a claim before the ENRE and CAMMESA for the settlement of the applicable interest.

Notwithstanding the measures adopted recently, there is uncertainty as to what measures the Argentine Government may adopt in connection with tariffs, whether tariffs will be updated from time to time to reflect an increase in operating costs, and their impact on the Argentine economy.

Our businesses are subject to risks arising from natural disasters, catastrophic accidents and terrorist attacks. Additionally, our businesses are subject to the risk of mechanical or electrical failures and any resulting unavailability may affect our ability to fulfill our contractual commitments and thus adversely affect our business and financial performance

Our generation facilities, gas pipeline and oil fields or the third-party fuel transportation or electric power transmission infrastructure that we rely on, may be damaged by flooding, fires, earthquakes and other catastrophic disasters arising from natural or accidental or intentional human causes. We could experience severe business disruptions, significant decreases in revenues based on lower demand arising from catastrophic events, or significant additional costs to us not otherwise covered by business interruption insurance clauses. There may be an important time lag between a major accident, catastrophic event or terrorist attack and our definitive recovery from our insurance policies, which typically carry non-recoverable deductible amounts, and in any event are subject to caps per event. In addition, any of these events could cause adverse effects on the energy demand of some of our customers and of consumers generally in the affected market. Some of these considerations, could have a material adverse effect on our business, financial condition and our result of operations.

Additionally, our assets are subject to the risk of mechanical or electrical failures and may experience periods of unavailability affecting our ability to fulfill our contractual commitments. Any unplanned unavailability of our assets may adversely affect our financial condition or results of operations and our ability to fulfill our contractual commitments, so we could be subject to fines and penalties.

Risks Relating to Our Businesses

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Risks Relating to the Electricity Sector

The Argentine Government has intervened in the electricity sector in the past, and may continue intervening

Historically, the Argentine Government has exerted a significant influence on the economy, including the energy sector, and companies such as us that operate in such sector have done so in a highly regulated context that aims mainly at guaranteeing the supply of domestic demand.

To address the Argentine economic crisis in 2001 and 2002, the Argentine Government adopted the Public Emergency Law and other regulations, which made a number of material changes to the regulatory framework applicable to the electricity sector. These changes severely affected electricity generation, distribution and transmission companies and included the freezing of nominal distribution margins, the revocation of adjustment and inflation indexation mechanisms for tariffs, a limitation on the ability of electricity distribution companies to pass on to the user increases in costs due to regulatory charges and the introduction of a new price-setting mechanism in the wholesale electricity market (the “WEM”) which had a significant impact on electricity generators and generated substantial price differences within the market. From time to time, the Argentine Government intervened in this sector, by, for example, granting temporary nominal margin increases, proposing a new social tariff regime for residents of poverty-stricken areas, removing discretionary subsidies, creating specific charges to raise funds that were transferred to government-managed trust funds that finance investments in generation and distribution infrastructure and mandating investments for the construction of new generation plants and the expansion of existing transmission and distribution networks.

On December 17, 2015, the Argentine Government issued Decree No. 134/15 declaring the emergency of the national electricity sector which was in effect until December 31, 2017, and instructing the ME&M to adopt any measure the ME&M deemed necessary regarding the generation, transmission and distribution segments, to adjust the quality, and guarantee the provision of electricity. The emergency declaration was not renewed after its expiration.

On January 27, 2017, the Subsecretariat of Electric Energy (former Secretariat of Electric Energy or “SEE”) issued Resolution No. 19/2017 which modified the remuneration scheme approved by Resolution No. 22/2016, improving the revenue of generators. See “Item 4. The Argentine Energy Sector—SEE Resolution No. 19/2017: Remuneration Scheme for Old Capacity”. Recently, the Secretariat of Renewable Resources and Electricity Market (“SRRYME”) issued Resolution No. 1/19 establishing a new remuneration scheme for energy generation. This new regime has, in general, a negative impact on the revenues of generating units that do not have the benefit of a special regime (e.g. Energía Plus or MATER) or a contract with CAMMESA, particularly, over older TG and TV units (such as those that are installed in CPB and CTG), as it has decreased the prices for capacity and generated/operated energy. Moreover, the new regime introduced a 50% discount on the capacity and energy remuneration in the event that the generator had assumed its own supply of fuel and, when dispatched, lacked such fuel. We cannot assure that future remuneration scheme will not have an adverse effect on our results of operation.

On November 28, 2017, through Resolution SEE No. 1085/17, a new scheme that transferred the cost of electricity transport to the users was enacted. Generators pay for the connection and operation costs of their own connection through a special charge determined by the SEE.

During 2017, the Argentine Government, through the relevant agencies, enacted several resolutions to establish the penalties regime and adjust tariffs. On February 1, 2017, the RTI process was completed and a new tariff scheme for the following five-year period was enacted.

Notwithstanding the recent measures adopted, we cannot assure you that certain other regulations or measures that may be adopted by the Argentine Government will not have a material adverse effect on our business and results of operations or on the market value of our shares and ADSs or that the Argentine Government will not adopt emergency legislation similar to the Public Emergency Law, or other similar regulations in the future that may increase our obligations, including increased taxes, unfavorable alterations to our tariff structures or remuneration scheme and other regulatory obligations, compliance with which would increase our costs and may have a direct negative impact on our results of operations and cause the market value of our ADSs and our common shares to decline.

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Electricity distributors, generators and transmitters were severely affected by the emergency measures adopted during the economic crisis, many of which remain in effect

Distribution and transmission tariffs include a regulated margin that is intended to cover the costs of distribution or transmission, as applicable, and provide an adequate return. Generators, which mostly depend on sales made to the spot market (the market created by the supply and demand of energy available for immediate delivery), used to have stable prices and were able to reinvest their profits to become more efficient and achieve better margins. Under the Convertibility Regime, which established a fixed exchange rate of one Peso per U.S. Dollar, distribution and transmission tariffs and electricity spot prices were calculated in U.S. Dollars and distribution and transmission margins were adjusted periodically to reflect variations in U.S. inflation indexes. However, the Public Emergency Law, which came into effect in January 2002, froze all margins, revoked all margin adjustments provisions and converted tariffs into Argentine Pesos at a rate of Ps.1.00 per U.S.$1.00. These measures, coupled with the effect of high inflation and the devaluation of the Peso, led to a decline in revenues and an increase of costs in real terms, which could no longer be recovered through margin adjustments or market price-setting mechanisms. This situation, in turn, led many public utility companies, including Edenor, to suspend payments on their commercial debt (which continued to be denominated in U.S. Dollars despite the pesification of revenues), effectively preventing these companies from obtaining further financing in the domestic or international credit markets and making additional investments.

In the past, the Argentine Government granted temporary and partial relief to some distribution companies, including limited increases in distribution margins, a temporary cost adjustment mechanism which was not fully implemented and the ability to apply certain additional charges to customers.

Although as of the date of this annual report, the Argentine Government completed the process after RTI for distributors, transmitters and transporters of gas and approved the new remuneration scheme for generators and the declaration of emergency expired and was not renewed (see“Item 4. The Argentine Energy Sector —SEE Resolution No. 19/17: Remuneration Scheme for Old Capacity”, “SRRYME Resolution No. 1/19: Current Remuneration Scheme for Legacy Capacity” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Results of Operations—Electricity prices and tariffs”). We cannot assure you that these recent measures will be sufficient to address the structural problems created for our Company by the economic crisis and in its aftermath. Our inability to cover the costs or to receive an adequate return on our asset base may further adversely affect our financial condition and results of operations.

Electricity demand may be affected by tariff increases, which could lead distribution companies, such as Edenor, to record lower revenues

From 2013 through 2018, electricity demand in Argentina increased by 6%, which in part reflects the relative low cost, in real terms, of electricity to users due to the freezing of distribution margins, the establishment of subsidies in the purchase price of energy and the elimination of the inflation adjustment provisions in distribution concessions coupled with the devaluation of the Peso and inflation through 2018.

We cannot make any assurance that recent increases or any future increases in the cost of electricity will not have a material adverse effect on electricity demand or result in a decline in collections from users. In this respect, we cannot assure you that these measures or any future measure will not lead electricity companies, like Edenor, to record lower revenues and results of operations, which may, in turn, have a material adverse effect on the market value of our ADSs.

If the demand for energy is increased suddenly, current levels of power generation and the difficulty in increasing the capacity of transmission and distribution companies in a short or medium term, could adversely affect the Company, which in turn could result in customer complaints and substantial fines for any interruptions

In recent years, the increase in electricity demand was greater than the structural increase in electricity generation, transmission and distribution capacities, which led to power shortages and disruptions, in certain occasions. A sustained increase in electricity demand could generate future shortages. In addition, the condition of the Argentine electricity market has provided little incentive to generators and distributors to further invest in increasing their generation and distribution capacity, respectively, which would require material long-term financial commitments. Although there were several investments in generation during 2017 and 2018, which would increase the installed capacity in the coming years, the highest density of investments was concentrated in the Greater Buenos Aires area.It is still necessary to make several investments in the transmission anddistribution system to guarantee the delivery of electricity to the users and reduce the frequency of interruptions. During December 2013, an increase in demand for electricity resulted in energy shortages and blackouts in Buenos Aires and other cities around Argentina.

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The dispatch of electricity by generators could be substantially and adversely affected since the transmission line may lack sufficient capacity to transport the output of all connected power plants. As a result, our results of operations could be affected, as well as our financial condition.

Additionally, according to Argentine law, distribution companies such as Edenor are responsible to their customers for any interruption in the supply of electricity. Consequently, customers can direct their claims to the distribution companies. Also, distribution companies are subject to fines and penalties for service disruptions caused by energy shortages, unless the respective Argentine authorities determine that energy shortages constitute force majeure events. As a result, we could face user claims and fines and penalties for service disruptions caused by energy shortages unless the relevant Argentine authorities determine that energy shortages constitute force majeure. Additionally, disruptions in the supply of electricity could expose us to intervention by the Argentine Government, which warned of such possibility during the blackouts of December 2013. We cannot assure that we will not experience a lack in the supply of energy or that such claims, fines, penalties or government intervention could not adversely affect our businesses’ financial condition and results of operations and cause the market value of our ADSs and our common shares to decline.

Risks Relating to Our Generation Business

There are electricity transmission constraints in Argentina that may prevent us from recovering the full marginal cost of our electricity, which could materially adversely affect the financial results of our generation business

During certain times of the year, more electricity can be generated than can be transmitted. While under the remuneration scheme established by SEE Resolution No. 19/2017, such transmission constraints should not affect the price that is paid to the generator, nonetheless our dispatch may be affected. We cannot make any assurance that required investments will be made to increase the capacity of the transmission system. As a result of lower dispatch, our generation business may record lower operating profits than we anticipate, which could adversely affect our consolidated results of operations and financial condition and the market value of our shares and ADSs.

Changes in regulations governing the dispatch of generators may affect our generators

Pursuant to Note No. 5,129/13, the former Secretariat of Energy (“SE”) instructed CAMMESA to optimize the dispatch of WEM’s generators according to the available fuels and their actual costs. Such modifications or any other modifications under the emergency established by Decree No. 134/15 or any other measures may result in a lower dispatch of our generators and, in turn, could adversely affect our results of operations and financial conditions.

We may be unable to collect amounts due, or to collect them in a timely manner, from CAMMESA and other customers in the electricity sector, which would have a material adverse effect on our financial condition and results of operations

Electricity generators, including us and our subsidiaries, are paid by CAMMESA for their energy and capacity sold on the spot market, which collects revenue from other WEM agents. Since 2012, a significant number of WEM agents – mostly distributors, including Edenor - defaulted in the payment of amounts they owed to the WEM or failed to pay in a timely manner (as of December 31, 2018, Edenor owed approximately Ps. 11.9 billion (principal plus interest accrued as of December 31, 2018) to CAMMESA (see “Edenor may not have the ability to raise the funds necessary to repay its commercial debt with CAMMESA, Edenor’s major supplier”)), which adversely affected the ability of CAMMESA to meet its own payment obligations to generators or to pay them in a timely manner. This situation led to the creation of theFondo Transitorio de Recomposición de Cobranzas”– SE Notes No. 7588/12, 8147/12 and 8476/12 (the Transitory Recovery Fund), by means of which the SE instructed CAMMESA to collect the charges and interest accrued from distributors’ defaults and renegotiate the terms of the payment of the defaulted amounts. As of the date of this annual report, the SE has not instructed CAMMESA to pay the generators the amounts collected from WEM agents on account of interest from delayed payments to CAMMESA.

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Additionally, the stabilization fund created by the SE to cover the difference between the spot price and the seasonal price of electricity recorded a permanent deficit. This difference was due to the intervention of the Argentine Government and the measures adopted pursuant to the Public Emergency Law.

Resolution ME&M No. 197/2016, instructed CAMMESA to negotiate payment plans with distributors and large users for the repeal of injunctions that had suspended tariff increases. It further ordered that the payment plans be in four monthly installments, equal and consecutive free of interest or surcharges related to non-payment. The first installment expired in October 2016. Similarly, with respect to the amounts not paid by the users of Edenor and Edesur, it was also provided that such amounts were to be paid in four installments under same conditions.

We cannot provide any assurance that any measures aimed at reducing the debt of distributors and large users will be implemented, that the difference between the spot price and the seasonal price will not increase in the future, that the Argentine Government will use funds of the National Treasury to cover any differences or that CAMMESA will be able to pay generators, both with respect to energy and capacity sold in the spot market.

Furthermore, as a consequence of the suspension of the incorporation or renewal of contracts in the term market (except for Energy Plus Program and MATER), the revenues of electricity generators will depend on the payments received from CAMMESA.

The inability of generators, including us and certain of our subsidiaries, to collect their credits from CAMMESA or to collect them in a timely manner, may have a material adverse effect on the revenues of our generation subsidiaries and accordingly, on our results of operations and financial condition and the market value of our shares and ADSs.

New measures encouraging renewable energy generation projects may affect our generation sales

On October 15, 2015, Law No. 27,191 was enacted. Pursuant to such law, among others, by December 31, 2025, 20% of the total domestic energy demand must be sourced from renewable energy sources. In order to meet such goal, the statute required wholesale users and CAMMESA to cover their respective portion of domestic energy demand with renewable sources of energy at 8%, by December 31, 2017. The percentage of domestic energy demand required to be covered by renewable energy increases every two years reaching 20% by 2025. The statute also includes tax and other benefits for new renewable energy projects. As of December 31, 2018, 2% of the domestic energy demand was covered by renewable sources of energy.

Additionally, under Resolution 281/2017 the ME&M regulated the contracts for energy of renewable sources among WEM agents. Such resolution, allows Major Large Users (as defined below) to purchase their total energy demand from a generator of renewable sources that made an investment in generation (see “Item 4. Our Generation BusinessRenewable Energy”). However, we cannot make any assurances that the implementation of this law and its regulation will not affect our generation sales, particularly sales under the Energy Plus regime, which, in turn, could adversely affect our results of operations and financial condition.

Our ability to generate electricity in our thermal generation plants depends on the availability of natural gas, and fluctuations in the supply or price of gas could materially adversely affect our results of operations

The supply or price of gas used in our generation business has been and may from time to time continue to be affected by, among others, the availability of gas in Argentina, our ability to enter into contracts with local gas producers and gas transportation companies, the need to import a larger amount of gas at a higher price than the price applicable to domestic supply as a result of low domestic production, and gas redistribution mandated by the SE, given the present shortage of supply and declining reserves. Since 2009, the SE has applied a procedure by means of which generators assign in favor of CAMMESA the natural gas acquired from the producers. CAMMESA may assign those volumes to other generation plants.

 

Several of our generation facilities are equipped to run solely on gas and, in the event that gas becomes unavailable, these facilities will not be able to switch to other types of fuel in order to continue generating electricity. If we were unable to purchase gas at prices that are favorable to us, if the supply of gas was reduced or if CAMMESA did not provide gas to our generation facilities, our costs could increase or our ability to profitably operate our generation facilities could be impaired. Moreover, some of our generation units are included in the “Energy Plus” program under SE Resolution 1,281/2006 and/or have executed WEM supply agreements underSE Resolution No. 220/2007 (“WEM Supply Agreements”), and both regulations require the generator to assure the committed capacity with its own fuels through the execution of firm natural gas and transport contracts.

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Moreover, WEM supply agreements under SEE Resolution No. 21/16 and SEE Resolution 287/17 also require that the generator covers its fuel supply. Consequently, if we cannot guarantee our fuel supply, penalties under such supply agreements may apply, which, together with a lower production of the relevant generation units, could adversely affect our results of operations.

 

Until November 2018, supply remained centralized in CAMMESA (with the exception of fuel supply for generators covered by the Energy Plus program) as provided for by SE Resolution No. 95/2013 and amending provisions. SGE Resolution No. 70/2018 authorized power generators, co-generators and self-generators within the WEM to acquire fuels required for own power generation, originally for units corresponding to capacity under the SEE Resolution No. 19/17, and later being extended to units under PPAs executed with CAMMESA. It should be noted that CAMMESA will remain in charge of the commercial management and the dispatch of fuels for power generators which ‘do not or cannot’ make use of such capacity,

 

Any disruption or inability to acquire the necessary fuels for our generation business could, in turn, materially adversely affect our results of operations and financial condition and the market value of our ADSs.

 

Our ability to generate electricity using gas under the Gas Plus Program depends on the recognition by CAMMESA of Gas Plus costs

We have executed several natural gas provision agreements with producers whose production is included under the terms of the “Gas Plus” program (SE Resolution No. 24/2008). Under such program, the producers are able to sell their production at a price higher than the reference price (gas market value for generators). By virtue of the agreements executed with the SE, and the mechanism established in Note No. 7,585/10 of the SE, CAMMESA recognizes such costs to us. CAMMESA has to recognize the Gas Plus cost to us in order for us to be able to make the corresponding payments to their natural gas suppliers. If CAMMESA does not recognize the Gas Plus cost or if such recognition is delayed, our ability to pay the natural gas suppliers may be affected. Consequently, in such a situation, we would have to renegotiate the terms and conditions previously agreed on with our natural gas suppliers and, in case an agreement is not reached, any of the parties may terminate the contracts under which they committed to supply natural gas.In this respect, during 2012, due to a delay in collecting payments from CAMMESA, renegotiation ensued with natural gas producers in order to comply with our obligations and keep the agreements in force. As a result, we could need to search for alternative suppliers of natural gas, and if we were unsuccessful in reaching new agreements with natural gas suppliers, our ability to generate electricity using gas plus recognized under the Gas Plus Program could be affected.

Until November 2018, supply remained centralized in CAMMESA (with the exception of fuel supply for generators covered by the Energía Plus Service) as provided for by SE Resolution No. 95/2013 and amending provisions. SGE Resolution No. 70/2018 authorized power generators, co-generators and self-generators within the WEM to acquire fuels required for own power generation, originally for units corresponding to capacity under the SEE Resolution No. 19/17, and later being extended to units under PPAs executed with CAMMESA. It should be noted that CAMMESA will remain in charge of the commercial management and the dispatch of fuels for power generators which ‘do not or cannot’ make use of such capacity,

We cannot assure you that any changes to the terms and conditions for the provision of natural gas under the Gas Plus Program and, particularly, the lack of recognition of costs associated with our supply pursuant to the former SE Resolution No. 529/14 described above, would not have an adverse effect on the operation of our generation facilities and the revenues derived from such activity.

Penalties may be applied under our energy supply agreements with CAMMESA, which may adversely affect the revenues derived from such contracts

We have executed several energy supply agreements with CAMMESA in which a breach of our commitments allows CAMMESA to apply penalties to us, may adversely affect the revenues derived from such contracts, such as:

(i)              

a breach of the availability commitments set forth in our WEM Supply Agreements under SE Resolution No. 220/2007, SEE Resolution No. 21/2016 and SEE Resolution 287/17 allows CAMMESA to apply penalties to us that may adversely impact the revenues derived from such agreements, which in turn may adversely affect our results. Moreover, under the WEM Supply Agreement under SEE Resolution 287/17 for the Genelba Plus Combined Cycle, a breach of the obligation to enter into commercial operations by a specified date entitles CAMMESA to apply penalties that may adversely impact the revenues derived from such agreements, which in turn may adversely affect our results of operation. If the delay in the entry into commercial operations extends for more than 180 days from the specified date, the relevant wholesale demand agreements (“PPA”) may be automatically terminated by CAMMESA who may enforce the performance guaranteegranted under such contract. In such event the project will be remunerated according to the general WEM remuneration scheme and therefore could negatively impact our results of operations.

(ii)              

a breach of the energy delivery commitments set forth in Greenwind’s PPA allows CAMMESA to apply penalties to the generator that may adversely impact the revenues derived by the generator from such agreements and, ultimately, result in the obligation to sell the assets involved in the operation of the wind farm, which in turn may adversely affect our results.

(iii)              

A breach of PEPE II, PEPE III and PEPE IV obligations to enter into commercial operations by the committed date in the process for obtaining the dispatch priority as established in Resolution ME&M No. 281-E/17 may result in the enforcement of the performance guarantees granted in connection with these projects. See “Item 4. Our Generation Business—Renewable Energy”.

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A breach to our energy supply agreements with CAMMESA may, ultimately, cause the termination of such agreements, which could adversely affect our results of operations.

A breach of certain conditions set forth in the PPAs, such as those under SE Resolution No. 220/2007, SEE Resolution No. 21/2016, SEE Resolution No. 287/17 and Greenwind’s PPA, may cause the early termination of such agreements, if the generator losses its authorization to act as a generator in the WEM, initiates bankruptcy procedures, suffers judicial intervention, or certain other events happen, which could adversely affect our results of operations.

Revenues from PEPE II, PEPE III and PEPE IV depend on meteorological conditions and the ability to contract the energy to be produced by the WPP to WEM Large Users

PEPE II, PEPE III and PEPE IV energy generation depends on the prevailing meteorological conditions. Meteorological conditions that result in lower winds could led to a breach of our sales commitments with WEM Large Users. Such breach could lead, in turn, to the application of penalties in favor of our clients (such penalties differ based on the type of contract executed with each client).

 

Moreover, PEPE II, PEPE III and PEPE IV depend on their ability to have their estimated energy generation fully contracted with WEM Large Users and for each project to maintain its dispatch priority. If a project looses its dispatch priority, its ability to contract its energy generation could be impaired. Moreover, if the energy generation is not contracted with WEM Large Users, then such energy will be remunerated according to SE Resolution 19/17 which establishes lower prices. The ability to contract the projects’ energy generation may also be impaired by regulatory measures taken by CAMMESA or the relevant authorities. For example, measures that affect WEM Large Users to exit the “Group Purchase Mechanism” (Mecanismo de Compra Conjunta,a mechanismby means of which WEM Large Users may comply with their statutory obligations to purchase renewable energy from CAMMESA) would result in lower demand for renewable energy from MATER projects and, therefore, potentially affect our results of operation.

 

A breach of the availability commitment set forth in CPB’s Loan Agreement with CAMMESA may adversely affect CPB’s results of operations

On April 8, 2014, Central Térmica Piedra Buena S.A (“CPB” or “Piedra Buena”) executed a loan agreement with CAMMESA for the Peso-equivalent of U.S.$82.6 million plus associated taxes and nationalization costs. On September 12, 2016, CPB and CAMMESA executed an amendment to the loan agreement, which resulted in several changes, including a raise in the loan amount to the Peso equivalent of U.S.$99.2 million plus associated taxes and nationalization costs. This loan is to be repaid in 36 equal installments. As long as CPB’s availability is higher than 80% (summer) or 83% (winter), CPB’s payment obligations shall be limited to the revenue established to cover extraordinary maintenance works (SE Resolution No. 529/2014, as amended). If CPB’s availability is below the abovementioned percentages, CPB shall pay the applicable installment. A breach of the availability commitments set forth in the loan agreement and a subsequent acceleration of the loan may adversely impact CPB’s results of operations.

However, SRRYME Resolution No. 1/19, established a new scheme for the repayment of the loans for major maintenances executed between generators and CAMMESA. According to the new regime, CAMMESA shall withheld from the payments due to the generators pursuant to the economic transaction an amount equal tothe maximum between 1 US/MWh for the energy generated in such month or 700 US/MW-month for the real availability (MW). 

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Our ability to generate electricity at our hydroelectric generation plants may be negatively affected by poor hydrological conditions, which could, in turn affect our results of operations

Prevailing hydrological conditions could adversely affect the operations of our hydroelectric generation plants owned by Hidroeléctrica los Nihuiles S.A. (“HINISA”), Hidroeléctrica Diamante S.A. (“HIDISA”) and Pichi Picún Leufú Hydroelectric Complex (“HPPL”), in a number of ways, which we cannot fully predict. For example, hydrological conditions that result in a low supply of electricity in Argentina could lead to, among others, the implementation of broad electricity conservation programs, including mandatory reductions in electricity generation or consumption. Hydrological conditions since 2006, the year in which our units recorded the greatest intake to date, have been poor. The worst conditions were registered in 2014, in which the water intake at HINISA and HIDISA available for electricity generation was 62% and 64% lower, respectively, as compared to 2006. A prolonged continuation of poor conditions could force the Argentine Government to focus its generation efforts on the use of other sources of electricity generation. In the event of electricity shortages, the Argentine Government could mandate the implementation of broad electricity conservation programs, including mandatory reductions in electricity generation or consumption; the Argentine Government could also mandate increased production from thermal plants that use fossil fuels as their generation sources and preserve the available water resources for future electricity generation. Although such a shift in production could benefit our thermal generation plants, it would negatively affect our hydroelectric plants and any mandated reduction in electricity generation or consumption could reduce revenues in our generation business and lead to a decline in our consolidated results of operations, which may have a material adverse effect on our financial condition and the market value of our shares and ADSs.

Moreover, in a case where the water level of the dams of our hydroelectric facilities decreases to the minimums established in the applicable concession contract, the local water authority (i.e. the Province of Mendoza and Neuquén Irrigation General Department) would gain control of the amount of water that may be dispatched in order to assure the continuity of other water uses such as human consumption and irrigation.

Operational difficulties could limit our ability to generate electricity, which could adversely affect our results of operations

We may experience operational difficulties that could require us to temporarily suspend operations or otherwise affect our ability to generate electricity and, as a result, adversely impact our operating results. These difficulties may affect our generation equipment, electromechanical components or, in general, any of our assets required for the supply of electricity. We cannot make any assurances that events of such nature will not occur in the future. While we maintain comprehensive insurance for each of our facilities, we cannot make any assurances that the amounts for which we are insured or the amounts that we may receive under such insurance policies would cover all of our losses. If operational difficulties prevent our generation of electricity, the disruption may lead to reduced revenues from our generation business, which would have an adverse effect on our results of operations and may negatively affect the market value of our shares or ADSs.

We may no longer own a controlling interest in HINISA, if the Province of Mendoza sells its participation in HINISA

We own a 52.04% controlling stake in HINISA, a hydroelectric generation company in the Province of Mendoza, Argentina, and the Province of Mendoza, through EMESA, currently owns 47.96% of the capital stock of HINISA. In 2006, the Province of Mendoza publicly announced its intention to sell shares representing 37.75% of the capital stock of HINISA pursuant to HINISA’s concession. If the Province of Mendoza sells these shares, we will be required to sell 20% of HINISA’s capital stock and would no longer own a controlling 52.04% interest in HINISA. In addition, according to HINISA’s by-laws, we would not be permitted to purchase any additional shares of HINISA.

We currently consolidate the results of operations of HINISA. If we lose our controlling interest in HINISA, we may have a significant adverse effect on the value of our investment in HINISA and on our consolidated results of operations and the market value of the Company. In addition, we have no control over the timing of the Province of Mendoza’s proposed sale or the price at which we would be required to sell our 20% of HINISA’s shares. As a result, these shares may be sold at a time and price per share that are adverse to our interests and the return on our investment in HINISA.

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CPB could be exposed to third-party claims on real property utilized for its operations that could result in the imposition of significant damages, for which we have not established a provision in our consolidated financial statements for potential losses

At the time of CPB’s privatization in 1997, the Province of Buenos Aires agreed to expropriate and transfer to CPB the real property on which the plant was built and to create administrative easements in favor of CPB over the third-party lands through which a gas pipeline and an electricity transmission line run. Although the Province of Buenos Aires is in the process of expropriating the property on which the plant is built, as of the date of this annual report, it had not transferred all of the real property with clear and marketable title to CPB. In addition, the Province of Buenos Aires has not created the administrative easements for CPB’s gas pipeline or the electricity transmission line. In July 2008, CPB sued the Province of Buenos Aires seeking the creation of the administrative easements in favor of CPB. CPB has received several complaint letters from third parties seeking compensation for the use of this land.If the Province does not complete the expropriation process or the administrative easement process,CPBmay be exposed to judicial claims by third parties seeking compensation or damages for which we have not established a provision in our consolidated financial statements. IfCPBwere required to pay material damages or compensation for the right to use this real property as a result of adverse outcomes from legal proceedings, we could be required to use cash from operations to cover such costs, which could have a materially adverse effect on our financial condition and consolidated results of operations and cause the market value of our ADSs to decline.

This risk extends to our thermal generation plant Ingeniero White (“CTIW”) which is constructed on CPB’s real property.

CPB could be subject to fines and penalties for not having a concession for the use of seawater for the refrigeration of its generation units

CPB uses seawater to refrigerate its generation units. According to applicable provincial law, such activity requires a concession to be granted by the provincial government. In the documentation that we received with the privatization of CPB, no concession was included. CPB consulted the regulatory authorities who informed that, according to their files, no such concession has been granted to CPB. The penalties for such infringement may vary from the application of a maximum Ps.50,000 fine to the closing of the plant. While CPB considers that the likelihood of any such penalties being imposed is low, we cannot assure you that the operation of CPB would not be affected if such penalties were to be imposed.

Our profits may be affected by our failure to fulfill the requirements of the Energy Plus Program or by the modification or the cancellation of such program

If we do not comply with the requirements of the Energy Plus Program (SE Resolution No. 1281/2006) or if such program is modified or canceled, the non-compliant party would have to sell the production on the spot market, and also, eventually, under the remuneration scheme applicable under SEE Resolution No. 19E/17, which could affect our revenues.

In October 2015, CAMMESA issued Note No. B-102407-4, pursuant to which it mandated us to sell our uncommitted production under the Energy Plus Program to the spot market under the price scheme established by SE Resolution No. 482/2015 (currently SEE Resolution 19/2017).

In Note No. 567/07, as amended, the SE established the“Cargo Medio Incremental de la Demanda Excedente” (“CMIEE”) as a maximum fee for WEM users with a capacity higher than 300 KW (“WEM Large Users”) for their surplus demand in the event that they do not have their demand backed with a contract under the Energy Plus Program. As of the date of this annual report, the CMIEE applicable toGrandes Usuarios Mayores (Major Large Users or “GUMAs”) andGrandes Usuarios Menores (Minor Large Users or “GUMEs”) is equal to the higher between 1200 Ps./MWh or the temporary dispatch surcharge and forGrandes Usuarios del Distribuidor (Major Distribution Users or “GUDIs”) 0 Ps./MWh. The CMIEE implies an indirect maximum limit to the price that generators under the Energy Plus Program may charge. The detrimental effect that such limits could have on our generators could be exacerbated if the Peso continues to devalue. As a consequence, if the CMIEE is not adjusted or a higher devaluation of the Peso occurs, this could result in a decline in prices charged by our generators under their Energy Plus Program contracts or in a discontinuance of the Energy Plus contracts, forcing such generators to sell the capacity and energy unsold in the spot market at lower prices.

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Risks Relating to our Distribution of Energy Business

Failure or delay to negotiate further improvements to Edenor’s tariff structure, including increases in Edenor’s distribution margin, and/or to have Edenor’s tariffs adjusted to reflect increases in Edenor’s distribution costs in a timely manner, or at all, affected Edenor’s capacity to perform its commercial obligations and could also have a material adverse effect on Edenor’s ability to perform its financial obligations

Since the execution of the agreement entered into between Edenor and the Argentine Government in February 2006 relating to the adjustment and renegotiation of the terms of our concession (Acta Acuerdo sobre la Adecuación del Contrato de Concesión del Servicio Público de Distribución y Comercialización de Energía Eléctrica or the “Adjustment Agreement”) and as required by them, Edenor was engaged in an RTI with the ENRE through February 1, 2017. 

The Adjustment Agreement contemplated a cost adjustment mechanism for the transitional period during which the RTI process was being conducted. This mechanism, known as the Cost Monitoring Mechanism (“CMM”), required the ENRE to review our actual distribution costs every six months (in May and November of each year) and adjust our distribution margins to reflect variations of 5% or more in our distribution cost base. We could also request that the ENRE apply the CMM at any time that the variation in our distribution cost base was at least 10% or more. Any adjustments, however, were subject to the ENRE’s assessment of variations in our costs, and the ENRE’s approval of adjustments were not sufficient to cover our actual incremental costs in a timely manner. During such time, even when the ENRE approved adjustments to Edenor’s tariffs, there was a lag between the time when we actually experienced increases in Edenor’s distribution costs and the time when Edenor received increased income following the corresponding adjustments to our distribution margins pursuant to the CMM.

As a result of the foregoing, during the years ended December 31, 2014, 2012 and 2011, Edenor recorded negative operating results and net results, and thus Edenor’s working capital and liquidity levels were negatively affected (even in 2013), primarily as a result of the delay in obtaining tariff increases to reflect increases in Edenor’s distribution costs, coupled with a constant increase in operating costs to maintain adequate service levels all of which affected Edenor’s capacity to perform its commercial obligations. In this context and in light of the situation that affected the electricity sector, the ENRE issued Resolution No. 347/12 in November 2012, which established the application of fixed and variable charges that allowed Edenor to obtain additional revenue as from November 2012 through 2016. However, changes made by Resolution No. 250/13 and Notes No. 6,852/13, No. 4,012/14, No. 486/14 and No. 1,136/14 of the SE and additional revenue obtained through Resolution No. 347/12 were insufficient to make up for our operating deficit in 2014, due to the constant increase in operating costs.

 

In March 2015, Resolution No. 32/15 of the former SE granted Edenor a temporary increase in income through funds provided by CAMMESA, applicable retroactively as from February 1, 2015 through February 1, 2016, to cover costs and investments associated with the regular provision of the public service of distribution of energy on account of the RTI.

 

In January 2016, the ME&M issued Resolution No. 7/16, pursuant to which the ENRE implemented a VAD adjustment to the tariff schedule on account of the future RTI in effect as of February 1, 2016.

 

In addition, such resolution: (i) abrogated the PUREE; (ii) repealed Resolution No. 32/15 as from the date the ENRE resolution implementing the new tariff schedule becomes effective; (iii) discontinued the application of mechanisms that imply the transfer of funds from CAMMESA in the form of loan agreements with CAMMESA; (iv) ordered the implementation of the actions required to terminate the trusts created pursuant to Resolution No. 347/12 of the ENRE and (v) prohibited the distribution of dividends in accordance with Section 7.04 of the Adjustment Agreement.

However, pursuant to Resolution No. 7/16, the ENRE issued Resolution No. 1/16 establishing a new tariff structure, which remained in force (with certain suspensions as a result of injunctions, which are no longer in effect) until February 2017, when the RTI process was completed.

Prior to the completion of the RTI process, several regulatory mechanisms, programs or changes were implemented from time to time by the ENRE to adjust Edenor’s tariffs to reflect increased costs. Any requestedadjustments were usually subject to the ENRE’s assessment of variations in Edenor’s costs, and not sufficient to cover Edenor’s actual incremental costs in a timely manner.

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On April 1, 2016, the ENRE issued Resolution No. 55/16, which approved the program for the review of the distribution tariff scheme, establishing the criteria and methodologies for completing the RTI process.

On September 5, 2016, pursuant to Resolution No. 55/16, Edenor submitted its rate schedule proposal for the following five-year period. On October 28, 2016, a public hearing was held to provide information and listen to the public opinion on the RTI.

The RTI was completed on February 1, 2017, on which date the ENRE issued Resolution No. 63/17, through which it approved a new tariff scheme that established our new distribution added value (VAD) for the following five-year period.For more information, see “Item 4. Our Distribution of Energy Business—Empresa Distribuidora y Comercializadora Norte S.A. (Edenor) —Tariffs”. On January 31, 2018, the ENRE issued Resolution Nº 33/18 approving the new distribution cost for Edenor applicable from February 1, 2018 and the new tariff scheme applicable to Edenor.On July 31, 2018, the ENRE issued Resolution No. 208/18, pursuant to which it approved, the CPD for January 2018 through June 2018 of which 7.93% was to be applied as of August 1, 2018, and 6.51% in six consecutive monthly installments as of February 1, 2019.The CPD amounted to 15.85%.

However, if Edenor is not able to recover all future cost increases and have them reflected in its tariffs, and/or if there is a significant lag of time between when it incurs the incremental costs and when it receives increased income Edenor may be unable to comply with its financial obligations,  Edenor may suffer liquidity shortfalls and need to restructure its debt to ease its financial condition, any of which, individually or in the aggregate, could have a material adverse effect on our business and results of operations and may cause the value of our ADSs or our common shares to decline.

Edenor’s distribution tariffs may be subject to challenges by Argentine consumer and other groups

In the recent years, Edenor’s tariffs have been challenged by Argentine consumer associations, such as the action brought against Edenor in December 2009, by an Argentine consumer association, (Unión de Usuarios y Consumidores), seeking to annul certain retroactive tariff increases, which was ultimately dismissed by the Argentine Supreme Court of Justice on October 1, 2013.

In May 2016, Edenor was notified by several courts of the Province of Buenos Aires of certain injunctions granted to individual and collective users against Resolution No. 6/16 and Resolution No. 1/16 issued by the ENRE (which authorized our new tariff schedule as from February 2016). Consequently, the then applicable tariff schedule, which included the WEM prices established by Resolution No. 6/16, was not applied during certain periods in 2016 (i) to the entire concession area as a result of the injunctions issued in the “Abarca” case and (ii) to the districts of “Pilar” and “La Matanza” where injunctions remained in effect until October 24 and November 11, 2016, respectively, when they expired. Therefore, as of those dates tariff increases have been applied to all users. If any future legal challenge were successful and prevented Edenor from implementing any tariff adjustments granted by the Argentine Government, Edenor could face a decline in collections from its users, and a decline in its results of operations, which could have a material adverse effect in our financial condition and the market value of our ADSs or our common shares.

Our distribution business has been, and may continue to be, subject to fines and penalties that could have a material adverse effect on our financial condition and results of operations

We operate in a highly regulated environment and our distribution business has been and in the future may continue to be subject to significant fines and penalties imposed by regulatory authorities, including for reasons outside our control, such as service disruptions attributable to problems at generation facilities or in the transmission network that result in a lack of electricity supply. Since 2001, the amount of fines and penalties imposed on our distribution business has increased significantly. As of December 31, 2018, 2017 and 2016, Edenor’s accrued fines and penalties totaled Ps. 6,933 million, Ps. 6,133 million and Ps.6,511 million, respectively (taking into account adjustments made to fines and penalties following the ratification of the Adjustment Agreement and recent regulation).See Item 4. Our Distribution of Energy Business—Empresa Distribuidora y Comercializadora Norte S.A. (Edenor) —Fines and Penalties”.

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 On October 19, 2016,pursuant to Note No. 123,091 the ENRE established the average rate values (Ps./KWh) to be applied as from December 2012, for calculating the penalties payable to the Argentine Government. In accordance with the terms of Edenor’s Concession Agreement, such values should correspond to the average sale price of energy charged to users. Since the amounts set forth in the note were not consistent with the principle contained in Edenor’s Concession Agreement, on November 1, 2016, Edenor submitted a claim to the ENRE requesting that the amounts inNote No. 129,061 be modified to reflect the amounts contained in theEdenor’s Concession Agreement.As of the date of this annual report, Edenor had received the response from the ENRE (Note No. 129,061), which clarified that the increases or adjustments are not applicable, and only the values paid by the customers should be considered.

On February 1, 2017, the ENRE issued Resolution No. 63/17, through which it approved new parameters related to the quality standards with the purpose of achieving an acceptable quality level by the end of the 2017-2021 period. In this regard, the ENRE established a penalty regime to be applied in the event of non-compliance with the requisite quality rates.

On March 29, 2017, through Note No. 125,248 the ENRE established a new methodology for the calculation of fines and penalties, determining that they must be valued according to the KWh values in effect as of the first day of the six-month period during which the event giving rise to the penalty occurred or the KWh values in effect as of the day of the occurrence of the event in the case of penalties arising from specific events.

In addition, fines and penalties, accrued and not imposed during the transition period of the Adjustment Agreement must be updated using the CPI that the Central Bank uses to elaborate the Multilateral Real Exchange Rate Index, corresponding to the month prior to the six-month period during which the event giving rise to the penalty occurred or the month prior to that on which the specific penalty event occurred, till the previous month of the day on which the penalty was imposed. Those fines and penalties accrued and imposed since the date of issuance of the Note No. 120,151 through the completion of the RTI on February 1, 2017 (i.e., the period between April 2016 and February 2017) must also be updated using the CPI.

Furthermore, we cannot assure that Edenor will have the ability to comply with the quality standards set forth by Resolution No. 63/17. In the case of penalties which had been imposed but are still unpaid, the 30-day interest rate of theBanco Nación corresponding to commercial discounts applies, as from the day when the penalty was imposed through the date of payment.

Despite the issuance of Resolution No. 63/17, the treatment to be given to the penalties and reductions is still pending settlement.

We cannot assure you that our distribution segment will not incur significant fines in the future, which could have a material adverse effect on our financial condition and results of operations, and the market value of our ADSs and our common shares.

If Edenor is unable to control its energy losses, its results of operations could be adversely affected

Edenor’s distribution concession does not allow our energy distribution business to pass through to Edenor’s users the cost of additional energy purchased to cover any energy losses that exceed the loss factor contemplated by the concession, which is, on average, 10%. As a result, if our energy distribution business experiences energy losses in excess of those contemplated by the concession, we may record lower operating profits than we anticipate. Prior to the 2001 and 2002 economic crisis in Argentina, Edenor was able to reduce the high level of energy losses experienced at the time of the privatization down to the levels contemplated (and reimbursed) under the concession. However, during the last years, Edenor’s level of energy losses, particularly Edenor’s non-technical losses, started to grow again, in part as a result of the increase in poverty levels and, in turn, in the number of delinquent accounts and fraud. Although Edenor continues to make investments to reduce energy losses, these losses continue to exceed the average 10% loss factor contemplated by the concession, and based on the current tariff schedule and the economic turmoil, we do not expect these losses to decrease in the near term. Energy losses in our distribution business amounted to 18.2% in 2018, 17.1% in 2017 and 17.0% in 2016. We cannot assure you that energy losses will not continue to increase in future periods, which may lead to lower margins in our distribution segment and could adversely affect our financial condition and consolidated results of operations and the market value of our shares or our ADSs.

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The Argentine Government could foreclose on its pledge over Edenor’s Class A common shares under certain circumstances, which could have a material adverse effect on our business and financial condition

Pursuant to Edenor’s Concession Agreement and the provisions of the Adjustment Agreement, the Argentine Government has the right to foreclose on its pledge over Edenor’s Class A common shares and sell these shares to a third-party buyer if:

·                      

the fines and penalties incurred in any given year exceed 20% of Edenor’s gross energy sales, net of taxes, which corresponds to Edenor’s energy sales;

·                      

Edenor repeatedly and materially breaches the terms of its distribution concession and does not remedy these breaches upon the request of the ENRE;

·                      

Edenor’s controlling shareholder, creates any lien or encumbrance over Edenor’s Class A common shares (other than the existing pledge in favor of the Argentine Government);

·                      

Edenor or Edenor’s controlling shareholder obstructs the sale of Class A common shares at the end of any management period under our distribution concession;

·                      

Edenor’s controlling shareholder fails to obtain the ENRE’s approval in connection with the disposition of Edenor’s Class A common shares;

·                      

Edenor’s shareholders amend its articles of incorporation or voting rights in a way that modifies the voting rights of the Class A common shares without the ENRE’s approval; and

·                      

Edenor or any existing shareholders or former shareholders of Edenor’s controlling shareholder who have brought a claim against the Argentine Government in the ICSID do not desist from such ICSID claims following completion of the RTI and the approval of a new tariff regime.

            On February 1, 2017, the ENRE issued Resolution No. 63/17 establishing the new tariff scheme resulting from the completion of the RTI process, for the following five-year period. In accordance with the provisions of the Adjustment Agreement, Electricidad Argentina S.A. (“EASA”) (currently merged into Pampa Energia S.A) (see “Item 4. Recent Developments—Corporate Reorganization Process”) and EDF International S.A. (“EDFI”) withdrew their ICSID claim, and on March 28, 2017, the ICSID acknowledged the discontinuance of the procedure.

In 2018, our fines and penalties remained below 20% of our gross energy sales. See Item 4. Our Distribution of Energy Business—Empresa Distribuidora y Comercializadora Norte S.A. (Edenor) —Fines and Penalties”.

If the Argentine Government were to foreclose on its pledge over Edenor’s Class A common shares, pending the sale of those shares, the Argentine Government would also have the right to exercise the voting rights associated with such shares. In addition, the potential foreclosure by the Argentine Government on its pledge on Edenor’s Class A common shares could be deemed to constitute a change of control under the terms of Edenor’s Senior Notes due 2022. See “Edenor may not have the ability to raise the funds necessary to finance a change of control offer as required by Edenor’s Senior Notes due 2022.” If the Argentine Government forecloses on the pledge over Edenor’s Class A common shares, our results of operations and financial condition could be significantly affected and the market value of our shares and ADSs could also be affected.

Default by the Argentine Government could lead to termination of Edenor’s distribution concession, and have a material adverse effect on our business and financial condition

If the Argentine Government breaches its obligations in such a way that Edenor cannot comply with its obligations under its distribution concession or in such a way that Edenor’s service is materially affected, Edenor may request the termination of its distribution concession, after giving the Argentine Government a 90 days’ prior notice in writing. Upon termination of Edenor’s distribution concession, all of its assets used to provide the electricity distribution service would be transferred to a new state-owned company to be created by the ArgentineGovernment, whose shares would be sold in an international public bidding procedure. The amount obtained in such bidding would be paid to Edenor, net of the payment of any debt owed by Edenor to the Argentine Government, plus an additional compensation established as a percentage of the bidding price, ranging from 10% to 30% depending on the management period in which the sale occurs. Any such default could have a material adverse effect on our business and financial condition.

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Edenor may be unable to import certain equipment to meet the growing demand for electricity, which could lead to a breach of Edenor’s concession and could have a material adverse effect on its operations and financial position

               Certain restrictions on imports that may be adopted in the future by the Argentine Government could limit or delay Edenor’s ability to purchase capital goods that are necessary for its operations (including carrying out specific projects). Under Edenor’s concession, it is obligated to satisfy all of the demand for electricity originated in its concession area, maintaining at all times certain service quality standards that have been established for its concession. If Edenor is not able to purchase significant capital goods to satisfy all of the demand or suffers unexpected delays in the import process, it could face fines and penalties, which may, in turn, adversely affect our activity, financial position, results of operations and/or the market value of our ADSs and common shares.

Edenor employs a largely unionized labor force and could be subject to an organized labor action, including work stoppages that could have a material effect on their business

As of December 31, 2018, approximately 83% of Edenor employees were union members. Although Edenor’s relations with unions are currently stable and Edenor has had an agreement in place with the two unions representing its employees since 1995, we cannot assure you that Edenor will not experience work disruptions or stoppages in the future, which could have a material adverse effect on our business and revenues. We cannot assure you that Edenor will be able to negotiate salary agreements or labor conditions on the same terms as those currently in effect, or that Edenor will not be subject to strikes or work stoppages before or during the negotiation process. If Edenor is unable to negotiate salary agreements or if Edenor is subject to demonstrations or work stoppages, our results of operations, financial conditions and the market value of our ADSs and common shares could be materially adversely affected.

Edenor could incur material labor liabilities in connection with outsourcing in our distribution business that could have an adverse effect on our business and results of operations

Edenor outsources a number of activities related to our distribution business to third-party contractors in order to maintain a flexible cost base. As of December 31, 2018, Edenor had approximately7,397third-party employees under contract in its distribution business. Although Edenor has very strict policies regarding compliance with labor and social security obligations by contractors, Edenor is not in a position to ensure that contractors will not initiate legal actions to seek indemnification from us based upon a number of judicial rulings issued by labor courts in Argentina which have recognized joint and several liability between the contractor and the entity to which it is supplying services under certain circumstances. We cannot make any assurances that such proceedings will not be brought against Edenor or that the outcome of such proceedings would be favorable to Edenor. If we were to incur material labor liabilities in connection with the outsourcing of our distribution business, such liabilities could have an adverse effect on our financial condition and consolidated results of operations and the market value of our shares and ADSs.

In the event of an accident or other event not covered by our insurance, Edenor could face significant losses that could materially adversely affect our business and results of operations

As of December 31, 2018, Edenor’s physical assets were insured for up to U.S.$1,603.9 million.

 

However, Edenor does not carry insurance coverage for losses caused by its network or business interruption, including for the loss of Edenor’s concession. Although Edenor believes its insurance coverage is commensurate with standards for the distribution industry, no assurance can be given of the existence or sufficiency of risk coverage for any particular risk or loss. If an accident or other event occurs that is not covered by Edenor’s current insurance policies, Edenor may experience material losses or have to disburse significant amounts from its own funds, which may have a material adverse effect on our financial condition and consolidated results of operations and the market value of our shares and ADSs.

 

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A substantial number of Edenor’s assets are not subject to attachment or foreclosure and the enforcement of judgments obtained against us by Edenor’s shareholders may be substantially limited

A substantial number of Edenor’s assets are essential to the public service Edenor provides. Under Argentine law, as interpreted by the Argentine courts, assets which are essential to the provision of a public service are not subject to attachment or foreclosure, whether as a guarantee for an ongoing legal action or in aid of enforcement of a court judgment. Accordingly, the enforcement of judgments obtained against Edenor by Edenor’s shareholders may be substantially limited to the extent Edenor’s shareholders seek to attach those assets to obtain payment on their judgment.

The loss of exclusivity to distribute electricity in Edenor’s service area may be adversely affected by technological or other changes in the energy distribution industry, which would have a material adverse effect on our business

Although Edenor’s distribution concession grants Edenor the exclusive right to distribute electric energy within Edenor’s service area, this exclusivity may be revoked in whole or in part if technological developments would make it possible for the energy distribution industry to evolve from its present condition as a natural monopoly into a competitive business. In no case does the complete or partial revocation of Edenor’s exclusive distribution rights entitle Edenor to claim or to obtain reimbursement or indemnity. Although, to our knowledge, there are no current projects to introduce new technologies in the medium or long-term, which may reasonably modify the composition of the electricity distribution business, we cannot assure you that future developments will not enable competition in Edenor’s industry that would adversely affect the exclusivity right granted by Edenor’s concession. Any total or partial loss of Edenor’s exclusive right to distribute electricity within Edenor’s service area would likely lead to increased competition, and result in lower revenues in our distribution segment, which could have a material adverse effect on our financial condition and consolidated results of operations and the market value of our shares and ADSs.

A potential nationalization or expropriation of 51% of Edenor’s capital stock, represented by its Class A shares, may limit the capacity of the Class B common shares to participate in the Board of Directors

As of the date of this annual report, the ANSES owned shares representing 26.8% of the capital stock of Edenor and appointed five Class B directors in the last shareholders’ meeting. The remaining directors were appointed by the Class A shares.

If the Argentine Government were to expropriate 51% of Edenor’s capital stock, represented by Edenor’s Class A shares, the Argentine Government would be the sole holder of the Class A shares and the ANSES would hold the majority of the Class B shares. Certain strategic transactions require the approval of the holders of the Class A shares. Consequently, the Argentine Government and the ANSES would be able to determine substantially all matters requiring approval by a majority of Edenor’s shareholders, including the election of a majority of Edenor’s directors, and would be able to direct Edenor’s operations.

If the Argentine Government nationalizes or expropriates 51% of Edenor’s capital stock, represented by its Class A shares, our results of operations and financial condition could be adversely affected and this could cause the market value of our ADSs and Edenor’s ADSs and Class B common shares to decline.

Edenor may not have the ability to raise the funds necessary to repay its commercial debt with CAMMESA, Edenor’s major supplier

As of December 31, 2018, Edenor owed approximately Ps.11.9billion to CAMMESA (including interest accrued as of December 31, 2018). This commercial debt is due and unpaid and Edenor has not secured any waivers from CAMMESA. If CAMMESA requested that Edenor repay such debt in a single payment, Edenor may be unable to raise the funds necessary to repay it and, consequently, Edenor could be exposed to a cash attachment, which could in turn result in Edenor’s filing for a voluntary reorganization proceeding (“concurso preventivo"), which could cause the market value of our ADSs and Class B common shares to decline.

On April 26, 2017, Edenor was notified through Note No 2016-01193748 that the ME&M decided that the SEE, with the support of the Under-Secretariat for Tariff Policy Coordination and the ENRE, would be responsible for determining (within a period of 120 days) whether any pending obligations under the Adjustment Agreement remained outstanding as of the effective date of the applicable electricity tariff schedules resulting from the implementation of the RTI process. If any such obligations remained outstanding, the treatment to begiven to those obligations was also to be determined by the SEE as described above. Edenor has submitted the information requested by the ME&M as part of its efforts to comply with these requirements. However, as of the date of this annual report, due to the fact that a definitive decision on the treatment of these obligations is still pending, Edenor started negotiations with the SEE thereon.

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All of Edenor’s outstanding financial indebtedness contains bankruptcy, reorganization proceedings and expropriation events of default, and Edenor may be required to repay all of its outstanding debt upon the occurrence of any such events

As of the date of this annual report, U.S.$161.6 million of Edenor’s financial debt was represented by its Senior Notes due 2022. Under the indenture for the Senior Notes due 2022, certain expropriation and condemnation events with respect to Edenor may constitute an event of default, which if declared could trigger the acceleration of Edenor’s obligations under the notes and require Edenor to immediately repay all such accelerated debt. In addition, all of Edenor’s outstanding financial indebtedness contains certain events of default related to bankruptcy and voluntary reorganization proceedings (“concurso preventivo”). If Edenor is not able to comply with certain payment obligations as a result of its current financial situation, and if the requirements set forth in the Argentine Bankruptcy Law No. 24,522 are met, any creditor, or even Edenor, could file for its bankruptcy, or Edenor could file for a voluntaryconcurso preventivo. In addition, all of Edenor’s outstanding financial indebtedness also contains cross-default provisions or cross-acceleration provisions that could cause all of Edenor’s debt to be accelerated if the debt containing expropriation or bankruptcy and/or reorganization proceeding events of default goes into default or is accelerated. In such a case, Edenor would expect to actively pursue formal waivers from the corresponding financial creditors to avoid such potential situation, but in case those waivers are not timely obtained and immediate repayment is required, Edenor could face short-term liquidity problems, which could adversely affect our results of operations and cause the market value of our shares and ADSs and our common shares to decline.

Edenor may not have the ability to raise the funds necessary to finance a change of control offer as required by Edenor’s Senior Notes due 2022

As of the date of this annual report, U.S.$161.6 million of Edenor’s financial debt was represented by its Senior Notes due 2022. Under the indenture for the Senior Notes due 2022, if a change of control occurs, Edenor must offer to repurchase any and all such notes that are outstanding at a purchase price equal to 100% of the aggregate principal amount of such notes, plus any accrued and unpaid interest thereon and additional amounts, if any, through the purchase date. Edenor may not have sufficient funds available to make the required repurchases of the Senior Notes due 2022 upon a change of control. If Edenor fails to repurchase such notes in circumstances that may constitute an event of default under the indenture, it may in turn trigger cross-default provisions in other of Edenor’s debt instruments then outstanding, our results of operations could be adversely affected and the market value of our ADSs and common shares could decline.

The New York Stock Exchange and/or the BASE may suspend trading and/or delist Edenor’s ADSs and Class B common shares, upon the occurrence of certain events relating to Edenor’s financial situation

The New York Stock Exchange (“NYSE”) and/or the BASE may suspend and/or cancel the listing of Edenor’s ADSs and Class B common shares, respectively, in certain circumstances, including upon the occurrence of certain events relating to Edenor’s financial situation. For example, the NYSE may decide such suspension or cancellation if its shareholders’ equity becomes negative.

The NYSE may in its sole discretion determine on an individual basis the suitability for continued listing of an issue in the light of all pertinent facts. Some of the factors mentioned in the NYSE Listed Company Manual, which may subject a company to suspension and delisting procedures, include: “unsatisfactory financial conditions and/or operating results,” “inability to meet current debt obligations or to adequately finance operations,” and “any other event or condition which may exist or occur that makes further dealings or listing of the securities on the NYSE inadvisable or unwarranted in the opinion of NYSE.”

The BASE may cancel the listing of Edenor’s Class B common shares if it determines that Edenor’s shareholders’ equity and Edenor’s financial and economic situation do not justify Edenor’s access to the stock market or if the NYSE cancels the listing of Edenor’s ADSs.

We cannot assure you that the NYSE and/or BASE will not commence any suspension or delisting procedures in light of Edenor’s financial situation, including if Edenor’s shareholders’ equity becomes negative. A delisting or suspension of trading of Edenor’s ADSs or Class B common shares by the NYSE and/or the BASE, respectively, could adversely affect Edenor’s results of operations and financial conditions and cause the market value of Edenor’s ADSs and its Class B common shares to decline.

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Changes in weather conditions or the occurrence of severe weather (whether or not caused by climate change or natural disasters), could adversely affect Edenor’s operations and financial performance

Weather conditions may influence the demand for electricity, Edenor’s ability to provide it and the costs of providing it. In particular, severe weather may adversely affect Edenor’s results of operations by causing significant demand increases, which Edenor may be unable to meet without a significant increase in operating costs. This could strongly impact the continuity of Edenor’s services and its quality indicators. For example, the exceptional thunderstorms that occurred in April and December of 2013 and a heat wave that occurred in December of 2013 affected the continuity of Edenor’s services, both in the low voltage and medium voltage networks. Furthermore, any such disruptions in the provision of Edenor’s services could expose Edenor to fines and orders to compensate those customers affected by any such power cuts, as has occurred in the past. Edenor’s financial condition, results of operations and cash flows could therefore be negatively affected by changes in weather conditions and severe weather.

The Argentine Government signed an agreement with the Province of Buenos Aires and the City of Buenos Aires for the transfer of the public service of electricity distribution

Pursuant to Law No. 27,467, which enacted the 2019 Federal Budget of Expenditures and Resources, the Executive Branch was instructed to promote the transfer of Edenor’s jurisdiction to the joint jurisdiction of the Province of Buenos Aires and the City of Buenos Aires as of January 1, 2019 and the creation of a new oversight body. On February 28, 2019, the Argentine Government, the Province of Buenos Aires and the City of Buenos Aires, entered into an agreement for the transfer of the public service of electricity distribution duly awarded to Edenor under the Concession Agreement (as defined below) entered into by the Argentine Government (including the Concession Agreement), to the joint jurisdiction of the Province of Buenos Aires and the City of Buenos Aires. Pursuant to such agreement, the Province of Buenos Aires and the City of Buenos Aires will create a new entity in lieu of the ENRE, in charge of controlling and regulating the distribution service. It was also agreed that the Argentine Government shall be the sole responsible for any and all debts and credits relating to the distribution service awarded to Edenor which cause is prior to February 28, 2019.

As of the date of this annual report, there are certain major issues related to such transfer still to be defined, including, among others, the continuation of the existing Concession Agreement as is; whether the federal legal and regulatory framework shall continue to apply or not; and the resolution of claims and debts between Edenor and the Argentine Government resulting from the Contractual Transition Period ended on January 31, 2016. An agreement addressing those matters is expected to be entered into between the Company and the Argentine Government, the Province of Buenos Aires and the City of Buenos Aires). We cannot assure that such transfer or any action or omission from the transferees following the consummation of such transfer will not have an adverse effect on our business, financial condition or result of operations or would not have a negative impact on the market value of our ADSs and common shares.

Risks Relating to our Oil and Gas Business

Oil and gas companies have been affected by certain measures taken by the Argentine Government and may be further affected by additional changes in their regulatory framework

Since December 2011, the Argentine Government has adopted from time to time a number of measures concerning the repatriation of funds obtained from oil and gas exportation and charges applicable to the production of liquid gas, which have affected the business of oil and gas producers and manufacturers. Beginning in April 2012, the Argentine Government provided for the nationalization of YPF and imposed major changes to the system under which oil companies operate, principally through the enactment of Law No. 26,741, Decree No. 1277/2012 and Law No. 27,007. Further changes in such regulations may increase the adverse effect of such measures on the business, revenues and our result of operations and financial condition.

Argentine oil and gas production concessions and exploration permits are subject to certain conditions and may not be renewed or could be revoked

 

Law No. 17,319 the “Hydrocarbons Law” (as amended by Law No. 27,007) provides for oil and gas concessions to remain in effect for 25, 30 or 35 years, depending on the concession, as from the date of their award, and further provides for the concession term to be extended for periods of 10 additional years, subject to terms and conditions approved by the grantor at the time of the extension. The authority to extend the terms of current and new permits, concessions and contracts has been vested with the Argentine Government of theprovince in which the relevant area is located (and the Argentine Government in respect of offshore areas beyond 12 nautical miles). In order to be eligible for an extension, any concessionaire and permit holder must (i) have complied with its obligations under the Hydrocarbons Law and the terms of the particular concession or permit, including evidence of payment of taxes and royalties, the supply of the necessary technology, equipment and labor force and compliance with various environmental, investment and development obligations, (ii) be producing hydrocarbons in the relevant concession area and (iii) submit an investment plan for the development of the areas as requested by the relevant authorities at least one year prior to the expiration of the original concession. In addition, concessionaires that request extensions under Law No. 27,007 have to pay additional royalties ranging from 3% to a maximum of 18%. Under the Hydrocarbons Law, non-compliance with these obligations and standards may also result in the imposition of fines and in the case of material breaches, following the expiration of applicable cure periods, the revocation of the concession or permit.  

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We cannot assure you that our concessions will be extended in the future as a result of the review by the relevant authorities of investment plans submitted for such purposes, or that additional requirements to obtain such concessions or permits will not be imposed.

Hydrocarbon activities (including, exploitation, industrialization, transportation and commercialization) in the territory of Argentina are deemed of “national public interest.” We cannot assure you that any measures that may be adopted by the Argentine Government to secure Argentina’s self-sufficiency in oil and gas supply will not have a material adverse effect on the Argentine economy and, as a consequence, adversely affect our financial condition, our results of operations and the market value of our shares and ADSs.

Oil and gas reserves in Argentina are likely to decline

The possibility of replacing our crude oil and gas reserves in the future is dependent on our ability to access new reserves, both through successful exploration and reserve acquisitions. We consider exploration, which carries inherent risks and uncertainties, to be our main vehicle for future growth and reserves replacement.

Without successful exploration activities or reserves acquisitions, our proved reserves would decline as our oil and gas production would be forced to rely on our current portfolio of assets.

We cannot guarantee that our exploration, development and acquisition activities will allow us to offset the decline of our reserves. If we are not able to successfully find, develop or acquire sufficient additional reserves, our reserves and therefore our production may continue to decline and, consequently, this may adversely affect our future results of operations and financial condition.

Substantial or extended declines and volatility in the prices of crude oil, oil products and natural gas may have an adverse effect on our results of operations and financial condition

A significant amount of our revenue is derived from sales of crude oil, oil products and natural gas. Factors affecting international prices for crude oil and related oil products include: political developments in crude oil producing regions, particularly the Middle East; the ability of the Organization of Petroleum Exporting Countries (“OPEC”) and other crude oil-producing nations to set and maintain crude oil production levels and prices; global and regional supply and demand for crude oil, gas and related products; competition from other energy sources; domestic and foreign government regulations; weather conditions; and global and local conflicts or acts of terrorism. We have no control over these factors. Changes in crude oil prices generally result in changes in prices for related oil products. International oil prices have fluctuated widely in recent years, declining significantly from the second half of 2014 through December, 2017. However, due to various factors (including, but not limited to, the exchange rate and the increase in international prices of oil and the consequent difficulties to pass-through the corresponding variation to domestic prices) the intended liberalization of the domestic market at the end of 2017, could not be fully realized during 2018.  As a result, we cannot assure that such liberalization of oil and fuel prices may finally operate in the future due to various factors such as, domestic demand, macroeconomic and political conditions prevailing in Argentina or potential new regulatory or legal limitations. Substantial or extended declines in international prices of crude oil and related oil products may have a material adverse effect on our business, results of operations and financial condition and the value of our proved reserves. In addition, significant decreases in the prices of crude oil and related oil products may require us to incur impairment charges in the future or cause us to reduce or alter the timing of our capital expenditures, and this could adversely affect our production forecasts in the medium-term and our reserves estimates in the future.

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Export taxes and import regulations on our products negatively affected the profitability of our operations in the past

On March 1, 2002, the Argentine Government imposed a withholding tax on exports of hydrocarbons, initially lasting five years. The export tax was extended in 2006 by Law No. 26,217 and in 2011 by Law No. 26,732 and was in effect through 2017. This tax framework prevented us from benefiting from significant increases in international prices for oil, oil related products and natural gas, hindered us from offsetting sustained increases in costs related to the energy industry, and materially affected our competitiveness and results of operations. On January 6, 2017, the Argentine Government did not extend the resolutions that imposed a withholding tax on exports of hydrocarbons.

On August 22, 2018 the Argentine Government issued a new Natural Gas Exportation Procedure regulating the process to obtain the authorizations needed to export natural gas.

Later, on September 4, 2018, the Argentine Government published Decree No. 793/2018 which imposed an exportation duty on several goods including natural gas until December 31, 2020. The exports duty consists of a Ps. 4 tax on every U.S.$1.00 worth of exports, with a maximum tax rate of 12% on the value of exports.

We cannot assure that the Argentine Government will create new export and import regulations. We cannot predict the impact that any such changes may have on our results of operations and financial condition.

Oil and gas prices could affect our level of capital expenditures

The prices that we are able to obtain for our hydrocarbon products affect the viability of investments in new exploration, development and refining activities, and as a result, the timing and amount of our projected capital expenditures for such purposes. We budget capital expenditures by taking into account, among others, the market prices for our hydrocarbon products. In the event that current domestic prices decrease, the ability to improve our hydrocarbon recovery rates, identify new reserves and carry out certain other capital expenditure plans is likely to be affected, which, in turn, could have an adverse effect on our results of operations.

Limits on exports and imports of hydrocarbons and related oil products have affected and may continue to affect our results of operations

In recent periods, the Argentine Government has introduced a series of measures limiting exports and imports of hydrocarbons and related oil products, which have prevented oil and gas companies from benefiting from the prices of these commodities in the international markets, and materially affected the competitiveness and results of operations of those companies.

Crude oil exports, as well as the export of most of our hydrocarbon products, currently require prior authorization from the SGE pursuant to Resolution No. 241-E/17, as amended. Oil companies seeking to export crude oil or LPG must first demonstrate that the local demand for such product is satisfied or that an offer to sell the product to local purchasers has been made and rejected.

In addition, on March 21, 2017, Decree No. 192/2017 created the “Oil and its Byproducts Import Operations Registry” (the “Registry”) and provided that the MinEn (formerly, ME&M) would be responsible for controlling the Registry. The Registry covered the import of (i) crude oil and (ii) certain other specific byproducts (section 2 of the decree). The regulation established that any company that wished to perform such import operations was obligated to register such operation in the Registry and to obtain authorization from MinEn (formerly, ME&M) before the import took place. According to this decree, MinEn (formerly, ME&M) had to set the methodology applicable to issue import authorizations, which would be based in the following criteria: (a) lack of crude oil with the same characteristics offered in the domestic market; (b) lack of additional treatment capacity in domestic refineries with domestic crude oil; and (c) lack of byproducts listed in section 2 of the decree offered in the domestic market. This regime exempted any import by CAMMESA in order to supply power plants with the main purpose of technical supply to the “Inter-connection Argentinean System” (Sistema Argentino de Interconexión or “SADI”). On November 24, 2017, Decree No. 962/2017 amended Decree No. 192/2017 by providing that the Registry would be in effect until December 31, 2017. Decree No. 962/2017 provided that the need for the Registry was temporary and therefore, since December 31, 2017, the import operations related to crude oil, gasoline, and diesel oil included in Decree No. 192/2017 are no longer subject to registration.

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On August 22, 2018, the former ME&M issued Resolution No. 104/2018, which established a new procedure to obtain authorizations to export natural gas (“Item4. The Argentine Energy Sector—Oil & Gas Regulatory Framework —Gas Market Regulatory Framework”).

 

These and any other export-import related restrictions may significantly and adversely affect our profitability and prevent us from capturing, in the event that international prices so reflect it, the upside of export prices, and may negatively affect the total volume of refined products sold in the domestic market due to the need to regulate processed crude oil volumes in accordance with our storage capacity, adversely affecting our financial condition and results of operations.

 

We may not be the operating partner in all of the joint arrangements (joint operations for accounting purposes) in which we participate, and actions undertaken by the operators in such joint arrangements could have a material adverse effect on the success of these operations

 

We generally undertake our activities in exploration and exploitation of hydrocarbons in a particular area by entering into an agreement with third parties to participate in joint arrangements (joint operations for accounting purposes). Under the terms and conditions of these agreements, one of the parties takes the role of operator of the joint operation, and thus assumes responsibility for executing all activities undertaken pursuant to the joint operation agreement. However, we may not assume the role of operator and therefore, in such cases, we are exposed to risks relating to the performance of and the measures taken by the operator to carry out the activities. Such actions could have a material adverse effect on the success of these joint operations, and thus adversely affect our financial condition and results of operations.

We conduct most of the operations through joint arrangements (joint operations for accounting purposes), and our failure to resolve any material disagreements with our partners or to continue such joint arrangements could have a material adverse effect on the success of such operations

We conduct most of our oil and gas operations through joint operations and as a result, the continuation of such joint operations is vital to their success. In the event that any of our partners were to decide to terminate the relationship in respect of a joint operation or sell their interest in a joint operation, we may not be able to replace that partner or obtain the necessary financing to purchase that partner’s interest. Accordingly, our failure to resolve disagreements with our partners or to maintain our joint operations could adversely affect our ability to conduct the underlying operations of such joint operation, which, in turn, could negatively affect our financial condition and results of operations.

Our failure to comply with our commitments to make certain investments under our investment agreements could negatively affect our results of operations

We have commitments to make certain investments under investment agreements. Failure to comply with such commitments in a timely manner could result in a breach of the relevant partnership agreement, foreclosure of any guarantees and/or the loss of all rights over the underlying area, which could have an adverse effect on our results of operations.

Oil and gas activities are subject to significant economic, environmental and operational risks

 

Oil and gas exploration and production activities are subject to particular economic and industry-specific operational risks, some of which are beyond our control, such as production, equipment and transportation risks, as well as natural hazards and other uncertainties, including those relating to the physical characteristics of onshore and offshore oil or natural gas fields. Our operations may be curtailed, delayed or cancelled due to bad weather conditions, mechanical difficulties, shortages or delays in the delivery of equipment, compliance with governmental requirements, fire, explosions, blow-outs, pipe failure, abnormally pressured formations, and environmental hazards, such as oil spills, gas leaks, ruptures or discharges of toxic gases. If these risks materialize, we may suffer substantial operational losses or disruptions in our operations. Drilling may be unprofitable, not only with respect to dry wells, but also with respect to wells that are productive but do not produce sufficient net revenues to return a profit after drilling, operating and other costs are taken into account.

 

The Argentine Government could alter and delay payments to natural gas producers under key government programs

 

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In recent years, we participated in the Gas Plan I (as defined below) and the Gas Plan II (as defined below). Companies that participate in the Gas Plan I and the Gas Plan II agree to a minimum injection volume (the “Base Volume”) to be sold at a fixed price (the “Base Price”) and receive between U.S.$4.00 and U.S.$7.50 per MMBtu (depending on the production level, the “Surplus Price”) for any amount of natural gas produced in excess of the Base Volume (the “Surplus Injection”). The Argentine Government agrees to compensate participating companies, on a monthly basis, for: (i) any difference between the Surplus Price and the price actually received for the sale of the Surplus Injection and (ii) any difference between the Base Price and the price actually received for the sale of the Base Volume.

In connection with these government programs, we received U.S.$7.50 per MMBtu from the Argentine Government for the volume of natural gas that we produced in excess of the agreed threshold. As of the date of this annual report, we had only collected payments from the Argentine Government for December 2016 and three months of 2017. The Gas Plan I and the Gas Plan II of Pampa finished on December 31, 2017 and June 31, 2018 respectively.

On April, 3, 2018, ME&M Resolution No. 97/18 was issued approving the procedure to cancel the outstanding compensation and/or payments regarding the Gas Plan I, Gas Plan II and Gas Plan III (as defined below). On May 2, 2018, we adhered to this procedure for the cancellation in 30 equal consecutive installments, payable as from January 1, 2019, of the amounts owed under the following programs: (i) Gas Plan I (Resolution No.1/13); (ii) the Gas Plan II (SE Resolution No. 60/13); and (iii) the Gas Plan III (ME&M Resolution No. 74/16).

On February 21, 2019, SGE Resolution No. 54/19 was published, cancelling the obligations arising from the provisions of the ME&M Resolution No. 97/18 through the issuance of public debt instruments. Consequently, on February 26, 2019, joint Resolution No. 21/2019 of the Secretariat of Finance and the Secretariat of Treasury was published, which provided the issuance of Natural Gas Program Bonds denominated in U.S.$, issued on February 27, 2019, for a term of 2 years and 4 months, without interest and with an amortization of 29 monthly and consecutive installments, the first installment representing 6.66% of the original nominal value, the following 18 installments representing 3.33% of the original nominal value and the remaining 10 installments representing 3.34% of the original nominal value. Pampa adhered to the terms and scope of SGE Resolution No. 54/19 (see“Item 4—Our Business—The Argentine Energy Sector—Oil & Gas Regulatory Framework —Gas Market Regulatory Framework”). This resolution keeps 85% of the Argentine Government debt denominated in U.S. dollars, despite the billing in Pesos described above, reducing our currency devaluation risk. As of the date of this annual report, we have not collected any payment or bond related to Resolution No. 97/18.

We face the risk of the Argentine Government suspending or further delaying remaining payments due under Resolution No.97/18, which would negatively affect our financial condition and results of operations.

Unless we replace our oil and gas reserves, such reserves and production will decline over time

 

Production from oil and gas fields declines as reserves are depleted, with the rate of decline depending on reservoir characteristics. Accordingly, the amount of proved reserves declines as these reserves are produced. The level of our future oil and natural gas reserves and production, and therefore our cash flows and income, are highly dependent on our success in efficiently developing current reserves, entering into new investment agreements and economically finding or acquiring additional recoverable reserves. While we have had success in identifying and developing commercially exploitable deposits and drilling locations in the past, we may be unable to replicate that success in the future. We may not identify any more commercially exploitable deposits or successfully drill, complete or produce more oil or gas reserves, and the wells that we have drilled and currently plan to drill may not result in the discovery or production of any further oil or natural gas. If we are unable to replace our current and future production, the value of reserves will decrease, and our results of operations could be negatively affected, as well as our financial condition and results of operations.

Our estimated oil and gas reserves are based on assumptions that may prove inaccurate

Our oil and gas reserves estimates as of December 31, 2018 are based on the year-end reserves report (the “Reserves Report”) by Gaffney, Cline & Associates (“Independent Reserves Engineers Firm” or “GCA”). Although classified as “proved reserves,” the reserves estimates set forth in the Reserves Report are based on certain assumptions that may prove inaccurate. The Independent Reserves Engineers Firm’s primary economic assumptions in estimates included oil and gas sales prices determined according to the guidelines described in theReserves Report, future expenditures and other economic assumptions (including interests, royalties and taxes) provided by us.

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The estimation process is initiated with an initial review of the assets by geophysicists, geologists and engineers. A reserves coordinator protects the integrity and impartiality of the reserves estimates through supervision and technical support to technical teams responsible for the preparation of the reserves estimates. Our reserves estimates are approved by the director of Oil and Gas Production. Reserves engineering is a subjective process of estimating underground accumulations involving a certain degree of uncertainty. Reserves estimates depend on the quality of the available engineering and geological data as of the estimation date and on the interpretation and judgment thereof.

Oil and gas reserves engineering is a subjective process of estimating accumulations of oil and gas that cannot be measured in an exact way, and estimates of other engineers may differ materially from those set out in this annual report. Numerous assumptions and uncertainties are inherent in estimating quantities of proved oil and gas reserves, including projecting future rates of production, timing and amounts of development expenditures and prices of oil and gas, many of which are beyond our control. Results of drilling, testing and production after the date of the estimate may require revisions to be made. The estimate of our oil and gas reserves would be impacted if, for example, we were unable to sell the oil and natural gas we produced. Accordingly, reserves estimates are often materially different from the quantities of oil and gas that are ultimately recovered, and if such recovered quantities are substantially lower than the initial reserves estimates, this could have a material adverse impact on our results of operations.

We face significant competition in the acquisition of exploratory acreage and oil and natural gas reserves

The Argentine oil and gas industry is extremely competitive. When we bid for exploration or exploitation rights with respect to a hydrocarbon area, we face significant competition not only from private companies, but also from national or provincial public companies. In fact, the provinces of La Pampa, Neuquén and Chubut have formed companies to carry out oil and gas activities on behalf of their respective provincial governments. The state-owned energy companies Integración Energética S.A. (“IEASA”), YPF and other provincial companies (such as Gas y Petróleo del Neuquén S.A. (“G&P”) and Empresa de Desarrollo Hidrocarburífero Provincial S.A. (“EDHIPSA”)) are also highly competitive in the Argentine oil and gas market. As a result, we cannot assure that we will be able to acquire new exploratory acreage or oil and gas reserves in the future, which could negatively affect our financial condition and results of operations. There can be no assurance that the participation of IEASA or YPF (or any province-owned company) in the bidding processes for new oil and gas concessions will not influence market forces in such a manner that could have an adverse effect on our financial condition and results of operations.

We may incur significant costs and liabilities related to environmental, health and safety matters

Our operations, like those of other companies in the Argentine oil and gas industry, are subject to a wide range of environmental, health and safety laws and regulations. These laws and regulations have a substantial impact on our operations and could result in material adverse effects on our financial position and results of operations.

Environmental, health and safety regulation and case law in Argentina is developing at a rapid pace and no assurance can be provided that such developments will not increase our cost of doing business and liabilities. In addition, due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, new regulatory requirements to reduce greenhouse gas emissions, such as carbon taxes, increased efficiency standards, or the adoption of cap and trade regimes. If adopted in Argentina, these requirements could make our products more expensive as well as shift hydrocarbon demand toward relatively lower-carbon sources such as renewable energies.

Limitations on local pricing in Argentina may adversely affect our results of operations

In recent years, due to regulatory, economic and government policy factors, domestic crude oil, gasoline, diesel and other fuel prices have differed substantially from the prices for such products prevailing on the international and regional markets, and the ability to increase or maintain prices to adjust to international price or domestic cost variations has been limited. International crude oil and related oil product prices have declined significantly from the second half of 2014 through December, 2017.

 

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On January 11, 2017, the ME&M signed together with Argentine oil producers and refineries the Agreement for the Transition to International Price of the Argentine Hydrocarbons Industry (the “Transition Agreement”), which, through a price transition, was aimed at driving the price of the barrel of crude oil produced and traded in Argentina closer to parity with respect to the international markets.

 

On September 26, 2017, the ME&M announced the suspension of the Transition Agreement, due to the condition set forth in section 9 of the Transition Agreement being satisfied. This condition provided that if the average international price per barrel of Brent crude oil surpassed, during a period of more than ten consecutive days, the reference value for a barrel of Medanito’s local crude oil by more than U.S.$ 1.00/barrel, resulting in a Brent crude oil price of at least U.S.$54 per barrel, the obligations under the Transition Agreement were suspended as from the following calendar month. The condition mentioned above was satisfied on September 13, 2017. Accordingly, the suspension became effective as from October 1, 2017. The effect of this suspension was that, as from October 1, 2017, the price per barrel of crude oil, as well for its derivatives, were subject to local market rules. The suspension remained effective until December 31, 2017, when the Transition Agreement expired. As from January 1, 2018, oil prices in Argentina are free from any government regulation and are freely set according to market rules. However, due to various factors (including, but not limited to, the exchange rate and the increase in international prices of oil and the consequent difficulties to pass-through the corresponding variation to domestic prices) the intended liberalization of the domestic market at the end of 2017 could not be fully realized during 2018. 

 

We cannot assure that in the future new regulations on local oil prices will not be applied.

 

We cannot assure that we will be able to maintain or increase the domestic prices of our products, and limitations on our ability to do so could adversely affect our financial condition and results of operations. Similarly, we cannot assure that hydrocarbon prices in Argentina will track increases or decreases in hydrocarbon prices in the international or regional markets. Discrepancies between domestic and international prices may adversely affect our financial condition and results of operations.

Our activities may be adversely affected by events in other countries in which we do business, particularly in Venezuela

We operate in Argentina and we have investments in Ecuador and Venezuela but most of our activities are concentrated in Argentina. Latin America is a region that has experienced significant economic, social, political and regulatory volatility. In recent periods, many governments in Latin America have taken steps to assert greater control or increase their share of revenues from the energy sector, spurred by soaring oil and gas prices and nationalist policies.

 

For example, regarding our investments in mixed companies in Venezuela, the monetary and fiscal policies implemented by the Venezuelan government together with the significant drop in international oil prices since 2014 have eroded the ability of the mixed companies to efficiently operate the producing fields, creating greater uncertainty as to the risks of our investments in Venezuela.

The level of government intervention in the economy of Latin American countries has adversely affected our business and results of operations, including, by changing the terms and conditions of operating service agreements in Venezuela and by increasing tax rates. Even though our investment in Venezuela is valued at Ps.0, we cannot assure that such intervention will not continue or increase, which could adversely affect our future business, results of operations and financial condition. As of the date of this annual report, we had not obtained the authorizations of the Government of Venezuela related to the change of indirect control requested. Likewise, CVP has determined that, given the time that has elapsed, we should begin the process of submitting plans according to new guidelines to be provided by theMinisterio del Poder Popular de Petróleo de la República Bolivariana of Venezuela, which have not been communicated to us yet. As a result, we have expressed with the authorities of the Government of Venezuela that our interest in making investments and/or financing proposals in the mixed companies has ceased and that we are willing to negotiate the transfer of our shares to CVP.                                                          

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 Risks Relating to our Shares and ADSs

Restrictions on the movement of capital out of Argentina may impair the ability of holders of ADSs to receive dividends and distributions on, and the proceeds of any sale of, the shares underlying the ADSs, which could affect the market value of the ADSs

The Argentine Government may impose restrictions on the conversion of Argentine currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Argentina. Argentine law currently permits the Argentine Government to impose this kind of restrictions temporarily in circumstances where a serious imbalance develops in Argentina’s balance of payments or where there are reasons to foresee such an imbalance. Beginning in December 2001, the Argentine Government implemented an unexpected number of monetary and foreign exchange control measures that included restrictions on the free disposition of funds deposited with banks and on the transfer of funds abroad, including dividends, without prior approval by the Central Bank, some of which could be reinstated in the future. Although the transfer of funds abroad in order to pay dividends no longer requires Central Bank approval to the extent such dividend payments are made in connection with audited financial statements approved by a shareholders’ meeting, future restrictions on the movement of capital to and from Argentina such as those that previously existed could, if reinstated, impair or prevent the conversion of dividends, distributions, or the proceeds from any sale of shares, as the case may be, from Pesos into U.S. Dollars and the remittance of such U.S. Dollars abroad. Also, certain of our indebtedness includes covenants limiting the payment of dividends. We cannot assure you that the Argentine Government will not take similar measures in the future. In such a case, the depositary for the ADSs may hold the Pesos it cannot otherwise convert for the account of the ADS holders who have not been paid. In addition, any future adoption by the Argentine Government of restrictions on the movement of capital out of Argentina may affect the ability of our foreign shareholders and holders of ADSs to obtain the full value of their shares and ADSs and may adversely affect the market value of our shares and ADSs.

ADS holders’ ability to receive cash dividends may be limited

Our shareholders’ ability to receive cash dividends may be limited by the ability of the depositary to convert cash dividends paid in Pesos into U.S. Dollars. Under the terms of our deposit agreement with the depositary for the ADSs, the depositary will convert any cash dividend or other cash distribution we pay on the common shares underlying the ADSs into U.S. Dollars, if it can do so on a reasonable basis and can transfer the U.S. Dollars to the United States. If this conversion is not possible or if any government approval is needed and cannot be obtained, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. If the exchange rate fluctuates significantly during a time when the depositary cannot convert the foreign currency, shareholders may lose some or all of the value of the dividend distribution.

Under Argentine law, shareholder rights may be fewer or less well-defined than in other jurisdictions

Our corporate affairs are governed by our by-laws and by Argentine corporate law, which differ from the legal principles that would apply if we were incorporated in a jurisdiction in the United States, such as the States of Delaware or New York, or in other jurisdictions outside Argentina. In addition, the rights of holders of the ADSs or the rights of holders of our common shares under Argentine corporate law to protect their interests relative to actions by our board of directors may be fewer and less well-defined than those under the laws of those other jurisdictions. Although insider trading and price manipulation are illegal under Argentine law, the Argentine securities markets are not as highly regulated or supervised as the U.S. securities markets or markets in some other jurisdictions. In addition, rules and policies against self-dealing and regarding the preservation of shareholder interests may be less well-defined and enforced in Argentina than in the United States, putting holders of our common shares and ADSs at a potential disadvantage.

Holders of ADSs may be unable to exercise voting rights with respect to the common shares underlying the ADSs at our shareholders’ meetings

Shares underlying the ADSs are held by the depositary in the name of the holder of the ADS. As such, we will not treat holders of ADSs as one of our shareholders and, therefore, holders of ADSs will not have shareholder rights. The depositary will be the holder of the shares underlying the ADSs and holders may exercise voting rights with respect to the shares represented by the ADSs only in accordance with the deposit agreement relating to the ADSs. There are no provisions under Argentine law or under our by-laws that limit the exercise by ADS holders of their voting rights through the depositary with respect to the underlying shares. However, thereare practical limitations on the ability of ADS holders to exercise their voting rights due to the additional procedural steps involved in communicating with these holders. For example, holders of our shares will receive notice of shareholders’ meetings through publication of a notice in an official gazette in Argentina, an Argentine newspaper of general circulation and the daily bulletin of the BASE, and will be able to exercise their voting rights by either attending the meeting in person or voting by proxy. ADS holders, by comparison, do not receive notice directly from us. Instead, in accordance with the deposit agreement, we provide the notice to the depositary. If we ask it to do so, the depositary will mail to holders of ADSs the notice of the meeting and a statement as to the manner in which instructions may be given by holders. To exercise their voting rights, ADS holders must then instruct the depositary as to voting the shares represented by their ADSs. Due to these procedural steps involving the depositary, the process for exercising voting rights may take longer for ADS holders than for holders of shares and shares represented by ADSs may not be voted as the holders of ADSs desire. Shares represented by ADSs for which the depositary fails to receive timely voting instructions may, if requested by us, be voted at the corresponding meeting either in favor of the proposal of the board of directors or, in the absence of such a proposal, in accordance with the majority.

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Our shareholders may be subject to liability for certain votes of their securities

Because we are a limited liability corporation, our shareholders are not liable for our obligations. Shareholders are generally liable only for the payment of the shares they subscribe. However, shareholders who have a conflict of interest with us and who do not abstain from voting at the respective shareholders’ meeting may be liable for damages to us, but only if the transaction would not have been approved without such shareholders’ votes. Furthermore, shareholders who willfully or negligently vote in favor of a resolution that is subsequently declared void by a court as contrary to the law or our by-laws may be held jointly and severally liable for damages to us or to other third parties, including other shareholders.

Provisions of our bylaws and of Argentine securities laws could deter takeover attempts and have an adverse impact on the price of our shares and the ADSs

Our bylaws and Argentine securities laws contain provisions that may discourage, delay or make more difficult a change in control of our Company, such as the requirement, upon the acquisition of a certain percentage of our capital stock, to launch a tender offer to acquire a certain percentage of our capital stock, which percentage ranges from 10% to 100% depending on several factors. These provisions may delay, defer or prevent a transaction or a change in control that might otherwise be in the best interest of our shareholders and may adversely affect the market value of our shares and ADSs. In addition, the provisions of our bylaws and of Argentine securities laws with respect to the obligation to launch a mandatory tender offer differ in certain respects; as of the date of filing of this annual report, it is unclear whether the provisions of our bylaws, which might be more beneficial to minority shareholders under certain circumstances than the provisions of Argentine securities laws in effect as of the date hereof, would prevail over the provisions of Argentine securities laws.

 

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Item 4.   Information on the Company

HISTORY AND DEVELOPMENT OF THE COMPANY

Pampa Energía S.A. is incorporated as asociedad anónima under the laws of Argentina. Our principal executive offices are located at Maipú 1, City of Buenos Aires, Argentina (C1084ABA). Our telephone number is + 54 11 4344 6000. Our website address is www.pampaenergia.com. None of the information available on our website or elsewhere is included or incorporated by reference into this annual report.Our authorized representative in the United States for our registration statement with the SEC is Puglisi Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

We were incorporated on February 21, 1945, for a duration of 99 years, until June 30, 2044, under the name Frigorífico La Pampa S.A. In 2003, we suspended our former business activities, which were limited to the ownership and operation of a cold storage warehouse building. In 2005, the Company was acquired by the principals of Grupo EMES (formerly Grupo Dolphin), an Argentine private equity group, to serve as a corporate vehicle for its investments in Argentina. Following such acquisition, we changed our corporate name to Pampa Holding S.A. We changed our corporate name again, to Pampa Energía S.A, in September 2008 and have operated under this name since then. As a result of several acquisitions made since 2006, we are currently the largest independent energy integrated company in Argentina and, directly and/or through our subsidiaries and joint controlled companies, we participate in the electricity and gas value chains.

In July 2016, we acquired from Petrobras all of the shares of Petrobras Participaciones S.L., which in turn owned, at such time, 67.2% of the shares of Petrobras Argentina (the “Acquisition”). On August 4, 2016, (i) 100% of the rights and obligations under the concession agreement relating to the Colpa and Caranda areas in Bolivia were sold to Petrobras; (ii) 33.66% of the rights and obligations in the Río Neuquén area was sold to an affiliate of Petrobras; and (iii) 33.33% and 80% of the rights and obligations in the Río Neuquén and the Aguada de la Arena areas, respectively, were sold to YPF.

Since the Acquisition, we started a corporate reorganization process and have merged certain subsidiaries into Pampa, including, among others, Petrobras Argentina, Petrolera Pampa S.A. (“Petrolera Pampa”), CTG and CTLL, by way of absorption, with Pampa as the surviving company. For more information, see“—Recent Developments—Corporate Reorganization Process—Completion of the Merger of Pampa, Petrobras Argentina, Albares and PEISA” and“—Recent Developments—Corporate Reorganization Process—Completion of the Merger of Pampa, Petrolera Pampa, CTG, CTLL, EG3 Red S.A., BLL, INDISA, INNISA, Inversora Piedra Buena S.A. and Pampa Participaciones II S.A.” In addition, we recently made strategic divestments in our refining and distribution, oil and gas and crude oil transport business in line with our strategy to focus our resources on our core businesses. For more information about recent strategic divestments, see“—Recent Developments— Strategic Divestments— Sale of Equity Ownership in Oleoductos del Valle S.A.(“Oldelval”), “Sale of Certain Oil and Gas Assets to Vista”, “—Sale of Refining and Distribution Assets to Trafigura”and “—Sale of Dock Sud Terminal”.

 

As of December 31, 2017, the assets and liabilities subject tothesale of certain oil and gas assets to Vista and the sale of refining and distribution assets to Trafigura have been classified as held for sale, and the results for affected operations have been disclosed under “Discontinued Operations” in the consolidated statement of comprehensive income and in the consolidated statement of cash flows for the three year period ended December 31, 2018, see Note 5.2 to the Consolidated Financial Statements. As these businesses had been acquired through the Acquisition, financial information reflects the effect of consolidation from July 27, 2016 whenthe Acquisition was consummated.

 

The Securities and Exchange Commission maintains an internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Securities and Exchange Commission.

 

Capital Expenditures and Divestitures

For a description of our capital expenditures see “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources.”

 

For a description of our strategic divestments, see “Item 4. Information on the Company—Our Business—Recent

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Developments— Strategic Divestments.

OUR BUSINESS

Overview

We are the largest independent integrated energy company in Argentina. As of December 31, 2018, we and our subsidiaries were engaged in the generation, distribution and transmission of electricity in Argentina, oil and gas exploration and production, refining and distribution, petrochemicals and hydrocarbon commercialization and transportation in Argentina and, to a lesser extent, through our interests in Ecuador and Venezuela (see “Our Oil and Gas Business—Venezuela”and “Our Oil and Gas Business—Ecuador”).

As of December 31, 2018:

·       

our generation installed capacity reached approximately 3,871 MW, with a market share in Argentina of approximately 10%. In addition, we have committed to develop projects that we expect will increase our installed capacity by another 504 MW, which would bring our total installed capacity to 4,375 MW (see “Recent Developments–Summary of the Committed Projects).

·       

our distribution of energy operations supplied electricity to approximately 3 million customers throughout the northern region of the City of Buenos Aires and the Northwestern Greater Buenos Aires area, making us the largest electricity distribution company in Argentina;

·       

our combined oil and gas production in Argentina averaged 44.8 thousand barrels of oil equivalent per day, considering continuing operations (see“—Recent Developments–Strategic Divestments–Sale of Certain Oil and Gas Assets to Vista”) and Note 5.2.1 to the Consolidated Financial Statements). Crude oil accounted for approximately 5.1 thousand barrels of oil equivalent per day, while natural gas accounted for approximately 238 million standard cubic feet per day, or 39.7 thousand barrels of oil equivalent per day based on a measure of conversion of 6,000 cubic feet of gas per barrel of oil equivalent.Additionally, we have a 2.1% direct interest in Oleoductos del Valle S.A.(“Oldelval”),which operates main oil pipelines providing access to Allen, in the Comahue area, and the Allen - Puerto Rosales oil pipeline which allow for the transportation of the oil produced in the Neuquina Basin to Puerto Rosales (a port in the City of Bahía Blanca) and the supply of the Plaza Huincul refinery located in the pipeline’s area of influence;

·       

our refining and distribution operations were based in Argentina, where we operated the Dock Sud storage facility with a capacity of approximately 1.2 million barrels of light fuels and base lubricants. In addition, we have a 28.5% interest in Refinería del Norte S.A. (“Refinor”), which owns a refinery located at Campo Durán in the Province of Salta with an installed capacity of 25.8 thousand oil bbl/day and a commercial network of 84 gas stations located in the Argentine Provinces of Tucumán, Salta, Santiago del Estero, La Rioja, Jujuy, Catamarca and Chaco; and

·       

our petrochemicals operations were entirely based in Argentina where we operated three high-complexity plants producing styrene, styrene butadiene rubber (“SBR”) and polystyrene, with a domestic market share ranging between 80% and 100%.

 

In addition, we hold interests in companies engaged in other businesses, including Transener (as defined below), which is engaged in electricity transmission and TGS (as defined below), which is engaged in gas transportation.

As of the date of this annual report, were divided among our business segments, as follows:

Generation. We are engaged in the generation business through:

o  

Central Térmica Genelba (“Genelba” or “CTGEBA”), a 674 MW combined cycle gas-fired generating unit and a 169 MW open-cycle gas turbine, totaling 843 MW of installed capacity located at the central node of the Argentine electricity network, in Marcos Paz, outside the City of Buenos Aires;

 

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o  

Central Térmica Loma la Lata (“Loma de la Lata”), a thermal generation plant located in the Province of Neuquén (close to one of Argentina’s largest gas fields bearing the same name as the plant) with an installed capacity of 765 MW;

o  

Central Piedra Buena, a thermal generation plant located in Ingeniero White, Bahía Blanca, in the Province of Buenos Aires, which has an installed capacity of 620 MW, through our wholly-owned subsidiary CPB;

o  

Central Térmica Ingeniero White (“CTIW”), a thermal generation plant located in Ingeniero White, Bahía Blanca, in the Province of Buenos Aires, which has an installed capacity of 100 MW;

o  

Central Térmica Güemes, a thermal generation plant located in General Güemes, in the Province of Salta, which has an installed capacity of 361 MW;

o  

Central Térmica Piquirenda (“CTP”), a thermal generation plant located at Piquirenda, General San Martin, in the Province of Salta, which has an installed capacity of 30 MW;

o  

Central Térmica Parque Pilar (“CTPP”), a thermal power generation plant at Pilar Industrial Park, located in the district of Pilar, Province of Buenos Aires, which comprises six Wärtsila motor generators (Wärtsila W18V50DF) for an installed capacity of 100 MW and runs on natural gas and fuel oil;

o  

EcoEnergía, a cogeneration thermal power plant with 14 MW of installed capacity, located in Bahía Blanca, in the Province of Buenos Aires;

o  

Hidroeléctrica Nihuiles and Hidroeléctrica Diamante, two hydroelectric power generation systems located in the Province of Mendoza, with an aggregate installed capacity of 653 MW, through our subsidiaries HINISA and HIDISA. HINISA holds 4.6% interests in both Termoeléctrica José de San Martín S.A.(“TJSM”) and Termoeléctrica Manuel Belgrano S.A. (“TMB”), and HIDISA holds 2.4% in each entity;

o  

HPPL, which has three electricity generating units with an installed capacity of 285 MW and is located in the Comahue region, in the Province of Neuquén;

o  

PEMC, a wind farm located in Bahía Blanca, in the Province of Buenos Aires, owned by Greenwind, a company that we co-control. Greenwind was created for the main purpose of developing PEMC, which has a capacity of 100 MW. On January 23, 2017, we were awarded the contract to develop PEMC. On June 8, 2018, CAMMESA granted the commercial commissioning of PEMC;

o  

a 70% interest in Enecor, an independent electricity transmission company which provides operation and maintenance services, by subcontracting Transener, for 21 km of 132 kV double-triad electricity lines, from the Paso de la Patria transforming station, in the Province of Corrientes. Such services are provided under a 95-year concession, which is due to expire in 2088.

Our generation business segment recorded Ps.22,825 million in revenue and an operating profit of Ps.10,306 million for the year ended December 31, 2018.

Distribution of Energy. We are engaged in the electricity distribution business through our subsidiary Edenor, the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (in terms of GWh and revenues) in 2018, based on publicly available figures released by electricity distribution companies in Argentina, which holds a concession to distribute electricity on an exclusive basis to the Northwestern Greater Buenos Aires area and the northern region of the City of Buenos Aires. Edenor serves an area of approximately 4,637 square kilometers and approximately 3 million customers.

Our distribution of energy business segment recorded Ps.55,954 million in revenue and an operating profit of Ps. 3,886 million for the year ended December 31, 2018.

Oil and Gas. We are engaged in the oil and gas business directly and through our investments in Oldelval, Oleoductos de Crudos Pesados Ltd. (“OCP”) and minor interests in four productive blocks in Venezuela, throughmixed companies (Empresas Mixtas,corporations whose majority shareholder is a subsidiary ofPetróleos de Venezuela S.A. (“PDVSA”)Corporación Venezolana de Petróleo S.A. (class A shares), which are controlled by the Bolivarian Republic of Venezuela, and in which we own a minority interest (class B shares)), see “Our Oil and GasBusiness—Venezuela”.As of December 31, 2018:

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o  

our combined crude oil and natural gas proved reserves were approximately 130.3 million barrels of oil equivalent, 59% of which were proved developed reserves. Natural gas accounted for approximately 88% of our combined proved reserves and liquid hydrocarbons for 12%; and

 

o  

our combined oil and gas production in Argentina averaged 44.8 thousand barrels of oil equivalent per day, considering continued operations (see“—Recent Developments–Strategic Divestments–Sale of Certain Oil and Gas Assets to Vista”) and Note 5.2.1 to the Consolidated Financial Statements). Crude oil accounted for approximately 5.1 thousand barrels of oil equivalent per day, while natural gas accounted for approximately 238 million standard cubic feet per day, or 39.7 thousand barrels of oil equivalent per day based on a measure of conversion of 6,000 cubic feet of gas per barrel of oil equivalent. 

 

Our oil and gas business segment recorded Ps.19,638million in revenue from continuing operations and an operating profit from continuing operations of Ps. 9,429million for the year ended December 31, 2018.

Refining and Distribution. We are engaged in the refining and distribution business through our 28.5% interest in Refinor, which owns a refinery located at Campo Durán in the Province of Salta with an installed capacity of 25.8 thousand oil bbl/day, which has a commercial network of 84 gas stations located in the Argentine Provinces of Tucumán, Salta, Santiago del Estero, La Rioja, Jujuy, Catamarca and Chaco.

 

Our refining and distribution business segment results recorded from continuing operations for the year ended December 31, 2018 were immaterial.

 

As a result of our recent strategic divestments, the segment’s profit and loss only reflects continuing operations, that is, our participation in Refinor and the storage facility at Dock Sud. For more information, see “—Recent Developments—Strategic Divestments—Sale of Refining and Distribution Assets to Trafigura and —Sale of Dock Sud Terminal” andNote 5.2.2 to the Consolidated Financial Statements.

 

Petrochemicals.We are engaged in the petrochemicals business through our styrenics operations and the catalytic reformer operations conducted in our Argentine plants. We maintain our position in the styrenics market by capitalizing on current conditions and maximizing the use of our own petrochemical raw materials.

The petrochemicals division has the following assets:

o  

an integrated petrochemicals complex at Puerto General San Martín, located in the Province of Santa Fe, with an annual production capacity of 50,000 tons of gases (liquefied petroleum gas (“LPG”), which is used as raw material, and propellants), 155,000 tons of aromatics, 290,000 tons of gasoline and refines, 160,000 tons of styrene, 55,000 tons of SBR, 180,000 tons of ethyl benzene and 31,000 tons of ethylene; and

o  

a polystyrene plant located in the city of Zárate, in the Province of Buenos Aires, with a production capacity of 65,000 tons of polystyrene.

Our petrochemicals business segment recorded Ps.12,748 million in revenue and an operating loss of Ps. 2,285 million for the year ended December 31, 2018.

Holding and Other Business. We also hold other interests, including:

o  

ThroughPHA S.A.Uwe holdthe rights as sole beneficiary of the CIESA trust, that owns 40% of CIESA, which in turn owns 51% of TGS, which is engaged mainly in the transportation of gas in southern Argentina and in the processing and marketing of natural gas liquids. Also, we directly own 10% of CIESA; and

o  

We hold a 50% interest in Citelec, which holds 52.65% of the shares and votes in Transener. As a result, we have an indirect interest of 26.33% in Transener. Transener operates and maintains the largest high-voltage electricity transmission system in Argentina and holds 90% of the capital stock of Transba, which owns and operates a separate high-voltage transmission systemlocated within the Province of Buenos Aires. As of December 31, 2018, our electricity transmission operations covered 20,944 kilometers of high voltage transmission lines, representing approximately 85% of the high voltage system in Argentina.

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CIESA, CITELEC and Greenwind are accounted for using the equity method.

Our holding and other business segment recorded Ps.1,354 million in revenue and an operating profit of Ps. 4,019 million for the year ended December 31, 2018.

Recent Developments

Corporate Reorganization Process

Completion of the Merger of Pampa, Petrobras Argentina, Albares and PEISA

On December 23, 2016, Pampa, Petrobras Argentina and Petrobras Argentina’s wholly-owned subsidiaries, Petrobras Energía Internacional S.A. (“PEISA”) and Albares Renovables Argentina S.A. (“Albares”) entered into the Preliminary Agreement by which each of Petrobras Argentina, PEISA and Albares would be merged into Pampa by way of absorption, with Pampa being the surviving company, effective as from November 1, 2016. On February 16, 2017, such merger was approved by the shareholders of each of the absorbed companies and Pampa at separate extraordinary shareholders’ meetings. On April 20, 2017, the definitive merger agreement was filed with the CNV for its registration before the IGJ.

OnFebruary 26, 2018, the CNV informed us that the Argentine Federal Criminal and Correctional Court No. 11, Secretary No. 22 (the “Court”) ordered the CNV not to take any measure and/or definitive resolution regarding the case without prior authorization from such Court. The criminal investigation refers to the voluntary participation of the shareholder of FGS-ANSES in the mandatory cash tender offer made by us and is not related to the merger. The Company, as a prior condition for the Court to instruct the CNV to continue the process of registration of the merger, posted a bond in favor of the Court for an amount of U.S.$20 million as a precautionary measure, which as of the date of this annual report was realeased. On April 26, 2018, the CNV confirmed the merger, which was registered with the IGJ on May 2, 2018. As of the date of this annual report, all of the accused were dismissed.

Completion of the Merger of CTLL, IEASA and EASA

 

On December 7, 2016, the boards of directors of CTLL, IEASA S.A. (“IEASA”) and EASA resolved that it would be beneficial for these companies to merge into a single company, where CTLL would be the surviving company. The purpose of this merger was to optimize the resources of each of the companies by simplifying and consolidating their administrative and operational structure. On March 29, 2017, and in connection with the required procedures, the boards of directors of CTLL, IEASA and EASA approved the special financial statements required for the merger, the preliminary merger agreement executed among CTLL, IEASA and EASA and the merger prospectus that describes the terms and conditions of such merger. For accounting, fiscal and legal purposes, the merger has effect as from January 1, 2017.

 

On January 18, 2018, the extraordinary shareholders’ meetings of CTLL, IEASA and EASA resolved to approve the merger between CTLL, IEASA and EASA. On February 19, 2018, the definitive merger agreement was executed, and on February 21, 2018, it was filed with the CNV for its registration before the IGJ. On July 16, 2018, the merger was registered with the IGJ.

 

Completion of the Merger of Pampa, Petrolera Pampa, CTG, CTLL, EG3 Red S.A., BLL, INDISA, INNISA, Inversora Piedra Buena S.A. and Pampa Participaciones II S.A.

 

On December 21, 2017, Pampa and Petrolera Pampa S.A. (“Petrolera Pampa”), CTG, CTLL, EG3 Red S.A., Bodega Loma la Lata S.A. (“BLL”),Inversora Diamante S.A. (“INDISA”), Inversora Nihuiles S.A. (“INNISA”), Inversora Piedra Buena S.A. and Pampa Participaciones II S.A (“PPII”), entered into a preliminary merger agreement whereby Petrolera Pampa, CTG, CTLL, EG3 Red S.A., BLL, INDISA, INNISA and PPII would be merged with and into Pampa by way of absorption, with Pampa as the surviving company and with effect as from October 1, 2017.

 

On April 27, 2018, at the Shareholders meetings of the Company and of the absorbed companies, it was resolved to approve the merger and the proposed exchanged ratios. On August 2, 2018, the registration before the IGJ was obtained, and on August 15, 2018, the exchange of shares was consummated. Following the exchange, our capital stock was increased to 2,082,690,514 common shares.

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Capital Stock Reduction

 

On October 2, 2018, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 182,820,250 common treasury shares of Pampa, which represented 8.8% of the issued capital. Consequently, the IGJ registered the capital reduction and 182,820,250 shares were cancelled, decreasing Pampa’s capital stock to 1,899,870,264 shares.

 

Merger of Pampa and Parques Eólicos Argentinos S.A.(“PEA”)

 

On March 29, 2019, the boards of directors of Pampa and PEA resolved that it would be beneficial for these companies to merge into a single company, where Pampa would be the surviving company, with effect as from January 1, 2019.

 

The shareholders’ meeting of Pampa and PEA held on April 29, 2019 resolved to defer consideration of the merger. As of the date of this annual report, the definitive merger agreement had not been executed and, therefore, the approval of the IGJ was pending.

Generation

Inauguration of PEPE II

 

On March 20, 2019, we inaugurated PEPE II, our second wind farm in the area known as Corti, 20 km from the City of Bahía Blanca, in the Province of Buenos Aires, near our PEMC wind farm. The PEPE II project will contribute 53 MW of renewable energy to the national grid and required an investment of approximately US$70 million. As of the date of this annual report, PEPE II’s commercial commissioning still remains pending.

 

PEPE II consists of 14 wind generators, each one made up of a tower with four sections, a nacelle and three spades driving the turbine, with a diameter of 136 meters. The installation of these wind generators required the construction of sophisticated works on the platforms and foundations, similar to the existing ones in different wind farms of this type around the world. Moreover, PEPE II was awarded under Resolution No. 281-E/2017 of the former ME&M, which regulates the Term Market for Renewable Energy Sources (“MAT ER”). Therefore, PEPE II’s production will be destined to fulfill large electricity users through private power purchase agreements. For more information, see “Renewable Energy—Development of New Wind Farms”.

 

Commercial Commissioning of the First Wind Farm

 

On May 23, 2018, Pampa inaugurated its first wind farm, PEMC, which is also the first project of the size and technology to reach such milestone under the RenovAr 1 Program.

 

The PEMC project, which consisted of the construction and installation of 29 Vestas wind turbines, each with a 3.45 MW power capacity, a 285 feet hub height and three blades with a total diameter of 413 feet powering the turbines and is located at Corti, 12 miles from the City of Bahía Blanca, Province of Buenos Aires. The PEMC, which contributes 100 MW of renewable energy to the national grid, required a total investment of approximately U.S.$139 million.

 

On June 8, 2018, CAMMESA granted the commercial commissioning of PEMC, which was achieved before the date originally stipulated in the PPA executed with CAMMESA.

 

Power Capacity Increase at Loma de la Lata

 

In August 2011, after deferring the commissioning of Loma de la Lata’s closing to combined cycle originally stipulated for 2011, the work’s contractor informed that Siemens, the equipment’s provider, had detected some design flaws in other steam turbines using the same technology and, therefore, removed the last blade wheel of the steam turbine installed in Loma de la Lata. Hence, the commissioning was declared for an installed capacity lower than that originally committed (165 MW instead of 178 MW).

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This blade wheel was replaced in October 2017 during the turbine’s scheduled major overhaul and, after the conduction of commercial tests, on January 19, 2018, CAMMESA declared the commercial commissioning of the LDLATV01 steam turbine for 180 MW installed capacity, which represented a 15 MW increase, compensated according to the PPA executed with CAMMESA pursuant to Resolution No. 220/07. Therefore, Loma de la Lata’s total installed capacity amounts to 765 MW.

 

Oil and Gas

Gas Plan

 

Modifications to the Unconventional Gas Plan - Resolution No.46-E/17

 

The Stimulus Program for Unconventional Production issued by the ME&M Resolution No.46-E/17 as amended, was created to encourage investments in natural gas production from unconventional reservoirs at the Neuquina Basin (and, later, was extended to cover the Austral Basin).

We had requested that the SGE include our exploration projects in the Rio Neuquén, El Mangrullo and Sierra Chata areas within this program, as the same projects had previously been approved by the relevant provincial authorities. However, on January 30, 2019, at a meeting called by theSGE, in which the gas producers affected by the Unconventional Gas Plan, including us, participated, we were informed that no new projects would be approved within the Unconventional Gas Plan and that SGE would evaluate a new incentive scheme fostering the production of unconventional gas during the winter period.

 

As of the date of this annual report there was no resolution or formal instruction issued by the SGE relating to above, nor has the Company been formally notified that the inclusion within the Unconventional Gas Plan of the abovementioned projects was rejected. However, we are assessing our possible legal steps and awaiting the guidelines for the new incentive program during the winter period.

 

Extension of Concessions

 

Sierra Chata Area

 

On July 10, 2018, we executed an investment agreement with the Province of Neuquén, under which we, among others, were granted a new unconventional hydrocarbon exploitation concession for the Sierra Chata block for a 35-year term, aiming at the development of unconventional gas (shale and tight). The agreement became effective following the issuance of Provincial Decree No. 1086/2018 on July 27, 2018.

 

The Sierra Chata block is located 150 km northwest from the Neuquén City and has a surface area of 863.8 km2. We are the operator of the concession and hold a 45.5523% stake in it, along with Mobil Argentina S.A. and Total Austral S.A. Sucursal Argentina, who hold a 50.9956% and 3.4251% share, respectively.

 

The committed investments in the area amount to U.S.$520 million for the next 5 years (of which we will contribute an amount according to our participation in the Sierra Chata block). We have also made disbursements totaling U.S.$30 million in connection with an exploitation bond and a contribution for corporate social responsibility.

 

El Mangrullo Area

 

On June 5, 2018, we obtained a 35-year term extension for the operation of the El Mangrullo block for the development of unconventional gas (shale and tight) in the new unconventional hydrocarbons exploitation concession that the Neuquén Province granted to the Ente Autárquico Intermunicipal de Cutral Có y Plaza Huincul (“ENIM”), which became effective following the issuance of Provincial Decree No. 835/2018 of June 18, 2018.

 

Our commitment consists of a pilot investment plan of U.S.$ 205 million for the next 5 years. In addition, we paid an exploitation bond and a contribution for corporate social responsibility totaling U.S.$15.4 million.

 

Exploration License in Parva Negra Este Block

 

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In April 2018, the exploration license for the Parva Negra Este block, located in the Province of Neuquén, granted in concession to Gas y Petróleo de Neuquén S.A.P.E.M. (“GyP”) and operated by us for a 4-year term beginning on April 2014, expired. As the original agreement stipulated the possibility of extending the concession for a term of one year, GyP requested such extension timely and in due form.

 

Pampa has a 42.5% interest in the Parva Negra Este block. On June 7, 2018, the Province of Neuquén issued the Decree No. 759/18 confirming the extension of the exploration license for the Parva Negra Este block until April 3, 2019. As of the date of this annual report, the extension of the exploration license for the Parva Negra Este block was requested from the Province of Neuquen. The approval still remains pending.

Exploration Permits in Oil Blocks

The exploration permits for Río Atuel, a block located in the Province of Mendoza operated by Petrolera El Trébol, expired in the month of September 2018, and the term was extended until March 13, 2019 pursuant to Administrative Decision No. 19/18 issued by the Department of Hydrocarbons of Mendoza. We have a 33.33% interest in the Río Atuel block.

 

Furthermore, the exploration permits for Chirete, a block located in the Province of Salta and operated by High Luck Group Limited, expired in November 2018. However, as the drilling of a well is in progress, a term extension was requested to the Province of Salta. On February 22, 2019, Provincial Executive Order No. 249/19 was issued, which extended the exploratory term for a 12-month period effective as from November 18, 2018. We have a 50% interest in the Chirete area.

Strategic Divestments

Sale of Dock Sud Terminal

 

In line with the Company’s strategy to focus its resources on core businesses, in March 2019, we executed an agreement with Raízen Argentina, a licensee of the Shell brand, for the sale of our Dock Sud Terminal.

 

The transaction’s price was U.S.$19,500,000, plus an additional amount of U.S.$1,393,388 for terminal’s products, both being subject to customary adjustments agreed upon in the closing documents.

 

Sale of Equity Ownership in Oleoductos del Valle S.A. (“Oldelval”)

 

In line with the Company’s strategy to focus its resources on its core businesses, on November 2, 2018 we executed an agreement with ExxonMobil Exploration Argentina S.R.L. (“ExxonMobil”) for the sale of 21% of the capital stock of Oldelval, a company engaged in the crude oil transportation through a main pipeline from Neuquén to Puerto Rosales, Province of Buenos Aires.

 

On November 27, 2018, following the satisfaction of all the conditions precedent to the sale, the closing of the sale to ExxonMobil of Pampa’s direct 21% ownership in Oldelval took place. The price paid by the purchaser was U.S.$36.4 million. Following the closing of the sale, our equity ownership in Oldelval decreased to 2.1%.

 

Sale of Refining and Distribution Assets to Trafigura

On December 7, 2017, we executed an agreement with Trafigura Ventures B.V. and Trafigura Argentina S.A. (“Trafigura”) to sell our main assets related to the refining and distribution segment. The assets subject to the transaction were: (i) the Ricardo Eliçabe Refinery; (ii) the lubricants plant, located in the district of Avellaneda, Province of Buenos Aires; (iii) the Caleta Paula reception and dispatch plant, located in the Province of Santa Cruz; and (iv) the network of gas stations operated under the Petrobras brand. Our Dock Sud storage facility was excluded from the sale, as well as our interest in Refinor. The assets mentioned in (ii) and (iv) above will be transferred along the gradual rebranding of the gas stations to the “Puma Energy” brand, a process which is expected to be concluded in 2019.

 

On May 9, 2018, following the satisfaction of all the conditions to the sale, the closing of the sale to Trafigura of the assets described above took place.

 

After applying the agreed upon adjustments, the transaction price amounted to U.S.$124.5 million. Moreover, following the closing of the transaction the purchaser cancelled the U.S.$56 million debt owed to Pampa for the purchase of crude oil. The purchase price was paid by Trafigura to Pampa upon the closing of the transaction, with the exception of U.S.$9 million previously paid as down payment upon the execution of the agreement, and a sum of U.S.$13.5 million which has been deposited in an escrow account and will be released along with the transfer of the network’s gas stations.

 

The sale includes the key transfer of all the contracts, permits and licenses for the ordinary operation of the business, together with the transfer of employees involved in the operation of the relevant assets subject to the transaction. This transaction adds to the sale of three plots where Pampa-owned gas stations operated, which was executed in 2017 for a total amount of U.S.$41 million.

 

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This transaction is aligned with our strategy to focus our investments and human resources on the expansion of power generation installed capacity and the exploration and production of natural gas, particularly on the development and production of our unconventional gas reserves (shale and tight gas), as well as with our intention to continue developing our utility concessions.

 

Sale of Certain Oil and Gas Assets to Vista

 

On January 16, 2018, we executed an agreement with Vista Oil & Gas S.A.B. de C.V. (“Vista”) to sell our 58.88% interest in Petrolera Entre Lomas S.A. (“PELSA”), PELSA’s 3.85% interest in the Entre Lomas, Bajada del Palo, Agua Amarga blocks (“PELSA blocks”), and PELSA’s 100% interest in the Medanito S.E. and Jagüel de los Machos blocks (the “Vista Sale”).

 

On April 4, 2018, following the satisfaction of all the conditions precedent to the sale, the Vista Sale was closed.

 

The transaction price, after applying the agreed upon adjustments, reached approximately U.S.$399 million, which was entirely paid by Vista upon the closing of the transaction.

 

This transaction is aligned with our strategy to focus our investments and human resources on the expansion of power generation installed capacity and the exploration and production of natural gas, particularly on the development and production of our unconventional gas reserves (shale and tight gas), as well as with our intention to continue developing our utility concessions.

 

Corporate Governance

Corporate Governance Plus panel

On December 18, 2018, we joined the special stocks quote panel called “Corporate Governance Plus” (the “+GC Panel”) launched by Bolsas y Mercados Argentinos S.A. (“BYMA”). We are one of the three founding companies of the +GC Panel.

 

The +GC Panel is unprecedented in Argentina. It includes those companies that are already listed on the BYMA and that comply with the best corporate governance and transparency practices, even going beyond the level required by regulators, which we entirely satisfy. Those practices, the compliance with which is periodically controlled, are consistent with the corporate governance principles of the Organization for Economic Co-operation and Development (OECD) and adopted by the G20.

 

The standards required by +GC Panel aim to provide investors with more information that can be useful when investing or exercising their rights, and enhance the visibility and attractiveness of the Company to international investors. Participating in the BYMA’s Sustainability Index and +GC Panel recognizes the Company’s continuing efforts to adopt the best practices in corporate governance.

 

Appointment of CEO and CFO

 

Our Board of Directors, in its meeting held on December 14, 2018, appointed Mr. Gustavo Mariani as Chief Executive Officer (CEO) and Mr. Gabriel Cohen as Chief Financial Officer (CFO).

 

Mr. Marcos Marcelo Mindlin remains as the Chairman of the Board of Directors.

Organizational structure

The following chart sets forth our corporate structure as of the date of this annual report.

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Our Generation Business

We are engaged in the generation business through three hydroelectric generation plants, eight thermal generation plants and two wind farms, PEMC y PEPE II (recently inaugurated). In addition, we will develop a third new wind farm in connection with PPAs executed with private customers in the same area for an additional total installed capacity of 106 MW. As of December 31, 2018, our generation segment had an installed capacity of approximately 3,871 MW, which represents approximately 10% of Argentina’s installed capacity.

Thermal Generation plants

Loma de la Lata

Loma de la Lata is located in the Province of Neuquén, near one of the largest gas fields in Argentina bearing the same name, which has an installed capacity of approximately 765 MW, representing approximately 2% of Argentina’s installed capacity. Loma de la Lata has three gas turbines with an installed capacity of 125 MW each, one steam turbine with an installed capacity of 180 MW under the Energy Plus Program, a high-efficiency aero derivative gas turbine of 105 MW and a high-efficiency gas turbine of 105 MW.From 1997 to 2018, Loma de la Lata’s average annual generation was 1,852 GWh, with a generation record high of 4,748 GWh in 2018, and a record low of 272 GWh in 2002.

CTGEBA

CTGEBA is located in Marcos Paz, in the Province of Buenos Aires. The plant began operating in 1999 and has a combined cycle with 674 MW installed capacity, which consists of two gas turbines (“GT”) of 219 MW each and a 236 MW steam turbine (“ST”). On the same lot, a GT with 169 MW of power capacity, known as Genelba Plus, was commissioned in 2009 under theEnergy Plus Programand is currently under expansion (see below “Expansion Project at Genelba Thermal Power Plant- Resolution No. 926/17”). The total installed capacity of the CTGEBA complex amounts to 843 MW. From 2000 to 2018, CTGEBA’s average annual generation was 4,722 GWh, with a generation record high of 5,449 GWh in 2012, and a record low of 3,438 GWh in 2001.

CTGEBA is strategically located, as it is one kilometer away from the Ezeiza transformer substation, a WEM reference node for the supply of electricity to the country’s highest demand. CTGEBA's combined cycle participates in the spot market, whereas the Genelba Plus GT participates in the Energía Plus market.

Expansion Project at Genelba Thermal Power Plant- Resolution No. 926/17

 

In connection with the call for closing to combined cycle and co-generation projects, Resolution No. 926-E/2017 of the SEE was published, on October 18, 2017, pursuant to which the ME&M selected the projects to enter into PPAs with CAMMESA. Genelba Plus’s closing to combined cycle, which we expect will add an incremental installed capacity of 383 MW to CTGEBA (the “CTGEBA Project”), is among the twelve selected projects, which together will add more than 1.8 GW of power installed capacity to the grid.

 

The CTGEBA Project includes the installation of a new gas turbine and a steam turbine, as well as other enhancements for Genelba Plus’s gas turbine, which are expected to complete the second combined cycle at CTGEBA, with a power capacity of 552 MW and 52% of efficiency. CTGEBA Project’s investment is estimated at around U.S.$350 million, and the CTGEBA Project’s engineering, equipment procurement and construction will be jointly carried out by Siemens and Techint. Its commissioning is expected for the second quarter of 2019 (open cycle), and for the second quarter of 2020 (closed cycle). Therefore, once the expansion is completed we expect CTGEBA will increase its power capacity to 1,226 MW.

 

The relevant PPA will be effective for a term of fifteen years and will remunerate a fixed price of U.S.$20,500 per MW each month and a variable price of U.S.$6 per MWh.

 

CPB

CPB is a thermal generation plant (which we own through our subsidiary Piedra Buena) located in Ingeniero White, Bahía Blanca, in the Province of Buenos Aires, approximately 600 kilometers away from the City of Buenos Aires.

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CPB is an open-cycle thermal generation plant with an installed capacity of 620 MW, consisting of two identical conventional units (Unit 29 and Unit 30) with an installed capacity of 310 MW each. CPB can be powered either by natural gas or by oil No.6 (though it was originally designed and partially equipped to burn coal as well). The plant currently stores up to 60,000 m3 of fuel oil in two separate storage tanks and owns, operates and maintains a 22-kilometer natural gas pipeline that is connected to the main pipeline of TGS. CPB sells electricity to the spot market. From 1997 to 2018, CPB’s average annual generation was 2,091 GWh, with a generation record high of 3,434 GWh in 2012, and a record low of 189 GWh in 2002.

 As of the date of this annual report, Piedra Buena was not buying natural gas or fuel oil pursuant to SE Resolution No. 95/2013, which was replaced by Resolution No. 70/2018. CAMMESA, currently remains in charge of the commercial management and fuel dispatch for power generators which “do not or cannot” make use of such capacity. As a result, we decided to use our self-procurement capacity, allocating a significant part of our own production of natural gas for the dispatch of its thermal units. For more information, see “The Argentine Energy Sector—Oil & Gas Regulatory Framework —Gas Market Regulatory Framework.

CPB only maintains natural gas transport contracts that were active at the time Resolution No. 95/2013 was issued, such as, for example, the interruptible and firm gas transportation contracts with TGS for up to 214 Dam3 per day and the firm gas transportation contract with Pampa Comercializadora S.A. (“PACOSA”).

CENTRAL TÉRMICA GÜEMES

Central Térmica Güemes is located in the northwestern region of Argentina, in the City of General Güemes, Province of Salta. Privatized in 1992, it has a total installed capacity of 361 MW, comprised of 261 MW from steam generation units and 100 MW from a gas combustion turbine under theEnergy Plus Program. From 1993 to 2018, its average annual generation was 1,789 GWh, with a generation record high of 1,903 GWh in 1996, and a record low of 1,030 GWh in 2003.

Central Térmica Güemes provides system quality assurance (frequency and voltage) to the northwestern and northern regions of Argentina and, due to its geographical location, it is able to receive gas from Bolivia. The plant mostly sells electricity on the local spot market and to the Energía Plus market.

 

Royalty assignment agreement

In June 2007, we and the Province of Salta entered into a royalty assignment agreement pursuant to which the Province agreed to assign natural gas to Central Térmica Güemes, which the Province is entitled to collect as in-kind royalties in respect of natural gas produced within the provincial territory. In consideration for such assignment, we committed to pay a 5% premium over the applicable average wellhead gas price. The term of the agreement is five years, starting from the date of the first delivery of natural gas, and is subject to an automatic renewal clause. The daily amount under the agreement may reach 500,000 m3 per day if the production of gas in the Province of Salta increases from the production level existing at the time of the agreement’s execution. As of the date of this annual report, we had not requested any deliveries under this agreement because it has been able to supply the new 100 MW of generation with gas purchased from several suppliers, including our own gas production.

CTP

CTP is located in the northwestern region of Argentina, in a location known as Piquirenda, District of Aguaray, Department of General San Martín, in the Province of Salta. Its construction started in early 2008 and was completed in 2010. CTP has a 30 MW thermal electricity generation plant including ten Jenbacher (model JGS 620) gas-powered motor-generators. From 2011 to 2018, its average annual generation was 129 GWh, with a generation record high of 156 GWh in 2017, and a record low of 66 GWh in 2011.

ECOENERGÍA

 

EcoEnergía is a co-generation power plant located at TGS’s General Cerri complex in Bahía Blanca, in the Province of Buenos Aires. The plant, consisting of a steam turbine with a power capacity of 14 MW, was commissioned in 2011. The plant sells electricity in the Energía Plus market. From 2011 to 2018, EcoEnergía’s average annual generation amounted to 87 GWh, with a generation record high of 108 GWh in 2018, and a record low of 20 GWh in 2011.

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CTPP

CTPP is located in the Pilar Industrial Complex, in the district of Pilar, Province of Buenos Aires. Construction began in October 2016, and the plant was commissioned on August 29, 2017.

The plant, which was built under SEE Resolution No. 21/2016, has a total power capacity of 100 MW and is made up of 6 cutting-edge Wärtsilä engines with an approximate 43% performance rate. On January 26, 2018, pursuant to ME&M Resolution No. 7-E/2018, CTPP was authorized as a WEM generator agent.

Natural gas is supplied through a gas pipeline owned by Transportadora de Gas del Norte S.A. and the energy is evacuated through an output field of a 132kv double-bar cable, together with all the necessary auxiliary equipment, in the Pilar’s Substation No. 158 owned by Edenor (“Pilar Substation”), located at the Pilar Industrial Complex. The power plant has storage tanks for fuel oil which may be used as alternative fuel.

 

CTIW

CTIW is located in Ingeniero White, Bahía Blanca, in the Province of Buenos Aires, and consists of 6 high-efficiency Wärtsilä engines, with a total power installed capacity of 100 MW. CTIW is able to fire either natural gas or fuel oil. Engines are high-efficiency, with a 46% performance rate.

 

The power plant is interconnected to the 132 kW grid through a substation owned by Transba. Liquid fuel supply is made using CPB's discharge and storage facilities, and natural gas is also supplied from this power plant's internal facilities.

 

On December 22, 2017, CAMMESA granted the commercial operation of CTIW, pursuant to a PPA executed between CAMMESA and Pampa, as awardee pursuant to the call for new generation capacity under Resolution No. 21/2016 of the SEE).

 

ENECOR

Pampa holds a 70% interest in Enecor, an independent electricity transportation company which provides operation and maintenance services, by subcontracting Transener, for 21 km of 132 kV double-triad electricity lines from the Paso de la Patria transforming station, in the Province of Corrientes. It is under a 95-year concession, which is due to expire in 2088.

 

Hydroelectric Generation Plants

We hold interests in three hydroelectric generation plants: Hidroeléctrica Nihuiles (through our subsidiary HINISA), Hidroeléctrica Diamante (through our subsidiary HIDISA) and HPPL.

HINISA

 We own Class A and Class B shares representing 31.63% and 20.41%, respectively, of the voting capital stock of HINISA, a hydroelectric generation company with an installed capacity of 265 MW located in the Province of Mendoza.

HINISA operates under a provincial concession for the hydroelectric use of water from the Atuel River, located in the department of San Rafael in the Province of Mendoza (approximately 1,100 km southwest of Buenos Aires) and under a national concession for the generation, sale and bulk trading of electricity from the Nihuiles’ hydroelectric system (the “Nihuiles System”). The Nihuiles System consists of three dams and three hydroelectric power generation plants (Nihuil I, Nihuil II and Nihuil III), as well as a compensator dam, which is used to manage the system’s water flow for irrigation purposes. The Nihuiles System covers a total distance of approximately 40 km with the grid’s height ranging from 440 m to 480 m. In addition, HINISA owns 4.6% of the capital stock of TJSM and 4.6% of the capital stock of TMB. From 1990 to 2018, the average annual generation was 829 GWh, with the highest level of generation (1,250 GWh) recorded in 2006 and the lowest level (516 GWh) recorded in 2014.

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The Province of Mendoza, throughEmpresa Mendocina de Energía Sociedad Anónima con Participación Estatal Mayoritaria (“EMESA”), currently owns Class D shares representing 10.21% of the capital stock of HINISA and Class C shares representing 37.75% of the capital stock of HINISA, and publicly announced in 2006 its intention to sell its Class C shares. Pursuant to HINISA’s public concession contracts, if the Province of Mendoza sells its Class C shares in HINISA, we would be required to sell our Class B shares of HINISA (representing 20% of HINISA’s capital stock) through a public offering promptly after the Province’s sale of its Class C shares. Assuming that the Province of Mendoza sells its 37.75% interest in HINISA, and consequently we are required to sell our Class B shares (representing 20% of the capital stock of HINISA), we would no longer own a controlling interest in HINISA and would not be permitted to purchase any additional shares (of any class) of HINISA. We have no control over the timing of the Province of Mendoza’s proposed sale or the price at which we would be required to sell our Class B shares of HINISA. As a result, such shares may be sold at a time and price per share that is adverse to our interests. As of the date of this annual report, the Province of Mendoza had expressed no intention to modify HINISA’s by-laws. See “Item 3. Key Information—Risk Factors—Risks Relating to our Generation Business—We may no longer own a controlling interest in HINISA, if the Province of Mendoza sells its participation in HINISA.

HIDISA

We own, directly and indirectly 61% of the voting capital stock of HIDISA, a hydroelectric generation company with an installed capacity of 388 MW located in the Province of Mendoza.

HIDISA operates under a provincial concession for the hydroelectric use of water from the Diamante River, located in the department of San Rafael in the Province of Mendoza, and under a national concession for the generation, sale and bulk trading of electricity from Diamante’s hydroelectric system (the “Diamante System”). The Diamante System consists of three dams and three hydroelectric power generation plants (Agua del Toro, Los Reyunos and El Tigre). The Diamante System covers a total distance of approximately 55 km with a height differential between 873 m and 1,338 m. HIDISA owns 2.4% of the capital stock of TJSM and 2.4% of the capital stock of TMB. From 1990 to 2018, the average annual generation has been 560 GWh, with the highest level of generation (943 GWh) recorded in 2006 and the lowest level (322 GWh) recorded in 2014.

Summary of HINISA and HIDISA concessions

 

HINISA’s and HIDISA’s main purpose is the generation, sale and bulk trading of electric power through the exploitation of hydroelectric systems pursuant to the terms and conditions of the following concessions: (i) Provincial concessions granted by the Argentine Government of the Province of Mendoza with similar terms and conditions (for HINISA and HIDISA) and at each company’s own risk for the hydroelectric exploitation of the Atuel River, in the case of HINISA, and the Diamante River, in the case of HIDISA. These concessions were granted pursuant to Provincial Law No. 6,088 dated December 21, 1993 and related provisions; and (ii) national concessions granted by the Argentine Government with similar terms and conditions (for HINISA and HIDISA) and at each company’s own risk for hydroelectric power generation through HINISA’s and HIDISA’s respective hydroelectric systems. These concessions were granted pursuant to Laws No. 15,336, No. 23,696 and No. 24,065 and related provisions.

Term. The term of the HINISA and HIDISA concession agreements is 30 years, starting from June 1, 1994 in the case of HINISA and October 19, 1994 in the case of HIDISA.

Royalty payments. Each of HINISA and HIDISA is required under the respective concessions to make the following monthly royalty payments: (i) royalties in favor of (1) the Province of Mendoza, of up to 12% in the case of HIDISA and up to 6% in the case of HINISA, and (2) the Province of La Pampa, up to 6% in the case of HINISA, in each case, of the amount resulting from the application of the corresponding bulk sale rate to the electricity sold, pursuant to the provisions of Section 43 of Law No. 15,336, as amended by Law No. 23,164. Pursuant to applicable regulations, in order to establish the basis for the calculation of such royalties, the monomic price (the price of electricity that includes both the price of energy and the capacity charge) of the electricity produced resulting from the following formula should be used: the sum of the value of power generated at the hour value fixed by the wholesale market plus the amount receivable for the power rendered to the spot market if such power were sold within a certain month, divided by the total power generated during the given month; (ii) royalties in favor of the Argentine Government of (1) up to 2.5% of the amount used as the basis for the royalties calculation in the case of HIDISA, and (2) up to 1.5%, estimated on the same basis in the case of HINISA; and (iii) royalties in favor of the Province of Mendoza of up to 2.5% of the amount used as the basis for the royalties calculation for both HINISA and HIDISA.

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On February 2, 2017, SEE Resolution No. 19/2017 terminated the remuneration scheme of SEE Resolution 22/2016 as from the economic transactions for February 2017, which represented a new increase in HIDISA’s and HINISA's revenues mainly due to: (i) greater availability of power determined independently of the level of the dam, eliminating the risk of hydrology; and (ii) a higher price as a result of its dollarization, minimizing the risk associated with exchange rate fluctuations.

Moreover, on April 10, 2017, and as a result of the claims filed by the HINISA, the SEE recategorized Nihuil I, Nihuil II and Nihuil III hydroelectric plants as “small”, which had an impact in the base price applicable to such plants under SEE Resolution 19/2017 increasing from 3,000 U.S.$/MW per month to 4,500 U.S.$/MW per month.

Consequently, based on these regulatory measures, HIDISA and HINISA have been able to recompose their economic and financial equation.

Contingency fund.HINISA and HIDISA, along with the other Argentine hydroelectric generation companies, are obligated to make quarterly payments to a foundation that owns and manages a contingency fund created to cover up to 80% of the difference between the aggregate amount of potential costs relating to any repair of the hydroelectric systems at any of the hydroelectric generation companies’ plants, and U.S.$5 million that are not covered by their respective insurance policies.

As a result of the economic crisis in Argentina in 2001 and 2002, the foundation’s administrative council decided that the contribution to the contingency fund in U.S. Dollars required under the concessions, the bidding terms and conditions and the relevant provisions of HINISA’s and HIDISA’s by-laws had to be converted into Pesos at an exchange rate of Ps.1.00 = U.S. $1.00. The indexation clauses contained in such concessions were also replaced with the “CER” (a benchmark stabilization coefficient). Upon the conversion from U.S. Dollars into Pesos, the Peso value of the contingency fund exceeded the required funding. As a result, HINISA and HIDISA, along with the other hydroelectric generation companies, have suspended payments to the contingency fund. However, we can make no assurance that HINISA and HIDISA will not be required to resume making payments to the contingency fund in the future.

From the effective date of the concessions until the suspension of payments, HINISA and HIDISA made contributions totaling U.S.$1.3 million and U.S.$1.9 million, respectively.

Fines and Penalties. HINISA and HIDISA are subject to potential penalties and fines under their respective concessions that are calculated on the basis of the aggregate gross amount invoiced for the 12-month period preceding the imposition of any such penalty. Such penalties and fines range from 0.1% to 1% (in cases of breach of the terms of the agreement or regulations applicable to electric power generation, dam safety, water management, environmental protection, and non-compliance of instructions from theOrganismo Regulador de Seguridad de Presas (“ORSEP”), CAMMESA, any of the governing authorities or the ENRE); from 0.02% to 0.2% (in cases of delays or lack of payment of contributions to the contingency fund and insurance policies and for taking action without prior authorization of the respective governing authorities), from 0.01% to 0.1% (in cases of failure to submit any requested information or failure to file mandatory reports); from 0.03% to 0.3% (in cases of failure to keep routes and roads open to traffic and free from soil, air or water pollution, and delays in the fulfillment of mandatory works) and from 1% to 10% (in cases of any actions considered by the governing authorities as termination events under the concessions). In the event that the fines levied over a 12-month period exceed 20% of the gross amount invoiced for power sales, the granting authority would be entitled to terminate the relevant concession agreement.

Performance guaranties.As security for the performance of their obligations under the respective concessions, HINISA and HIDISA have each deposited the amount required for the benefit of the relevant granting authority under the respective concession. Absent any set off by the relevant granting authority in the event of a breach or any other event of non-compliance under the terms of the respective concession agreements, the guarantee amounts would be released to HINISA and HIDISA, respectively, upon the expiration or termination of the respective concession agreement.

Termination of concessions. HIDISA’s and HINISA’s concession agreements may be terminated for the following reasons (i) breach of material contractual and legal obligations. In such case, HINISA or HIDISA, as applicable, shall remain in charge of their concessions during a transitional period established by the granting authority, not exceeding 12 months, and shall indemnify the Argentine Government and the Province of Mendoza forany damages caused (the granting authorities may also apply the performance guarantee amounts toward the payment of any damages). Within 90 days following the receipt of the relevant termination notice, a new company must be incorporated, which would be granted a similar concession and a public bidding process would be called for the purpose of selling the shares of such newly formed company. After deducting all fines, interest and withholdings for prospective claims, the balance would be distributed to HINISA or HIDISA, as applicable, as the only compensation for the transfer of the concessions; (ii) certain bankruptcy events in respect of HINISA or HIDISA (as applicable), including any liquidation or winding-up proceedings. In such case, the termination of the relevant concession shall be automatic; (iii) force majeure or certain actions by third parties that prevent the compliance by HINISA and HIDISA with their respective obligations under their respective concession agreements; or (iv) expiration of the respective terms of the concession agreements.

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In addition, Section 14(d) of Law No. 6,088 of the Province of Mendoza provides for the termination of the concessions for reasons of public interest or expropriation for public use.

After the termination of the concession agreements for any cause, any assets transferred to HINISA and HIDISA under the respective concession agreements shall be transferred back to the Province of Mendoza and the Argentine Government, as applicable.

HPPL

A 30-year concession was awarded for hydroelectric power generation at HPPL beginning in August 1999. The HPPL complex has three electricity generating units with an installed capacity of 285 MW, and is located in the Comahue region, Province of Neuquén. The dam is made up of loose materials with a waterproof concrete side. It has a total length of 1,045 m, a total height of 54 m at the deepest point of the foundation, and a crest at 480.2 m above sea level. From 2000 to 2018, HPPL’s average annual generation was 968 GWh, with a generation record high of 1,430 GWh in 2006, and a record low of 494 GWh in 2016.

 

Summary of HPPL concession

Concession. HPPL’s main corporate purpose is the generation, sale and bulk trading of electric power through the exploitation of hydroelectric systems pursuant to the following terms and conditions:

Term. The term of the HPPL concession agreements is 30 years, starting from August 30, 1999.

Royalty payments. Pursuant to our concession contract and applicable laws, as from August 2002 we paid 1% in hydroelectric royalties, with scheduled annual increases of 1% per year until royalties reached a cap of 12%, based upon the tariff rate applied to block sales of the electricity sold. As of December 31, 2018, we paid the maximum rate of hydroelectric royalties at a rate of 12% per year. In addition, we pay the Argentine Government a monthly fee for the use of the water source amounting to 0.5% of the same amount used for the calculation of hydroelectric royalties.

Contingency fund.HPPL, along with the other Argentine hydroelectric generation companies, are obligated to make quarterly payments to a foundation that owns and manages a contingency fund created to cover up to 80% of the difference between of the aggregate amount of potential costs relating to any repair of the hydroelectric systems at any of the hydroelectric generation companies’ plants and U.S.$5 million that are not covered by their respective insurance policies.

Performance guaranties. As security for the performance of their obligations under the respective concessions, HPPL deposited Ps.2.0 million for the benefit of the relevant granting authority under the respective concession. Absent any set off by the relevant granting authority in the event of a breach or any other event of non-compliance under the terms of the respective concession agreement, the guarantee amounts would be released to HPPL upon the expiration or termination of the respective concession agreement.

Fines and Penalties.HPPL is subject to potential penalties and fines under the concessions that are calculated on the basis of the aggregate gross amount invoiced for the 12-month period preceding the imposition of any such penalty. Such penalties and fines range from 0.1% to 1% (in cases of breach of the terms of the agreement or regulations applicable to electric power generation, dam safety, water management, environmental protection, andnon-compliance of instructions from the ORSEP, CAMMESA, any of the regulatory authorities or the ENRE); from 0.02% to 0.2% (in cases of delays or lack of payment of contributions to the contingency fund and insurance policies and for taking action without prior authorization of the respective regulatory authorities), from 0.01% to 0.1% (in cases of failure to submit any requested information or failure to file mandatory reports); from 0.03% to 0.3% (in cases of failure to keep routes and roads open to traffic and free from soil, air or water pollution, and delays in the fulfillment of mandatory works) and from 1% to 10% (in cases of any actions considered by the regulatory authorities as termination events under the concessions). In the event that the fines levied over a 12-month period exceed 20% of the gross amount invoiced for power sales, the granting authority would be entitled to terminate the relevant concession agreement.

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Termination of concessions.HPPL’s concession agreements may be terminated for the following reasons (i)breach of material contractual and legal obligations, in which case, HPPL, shall remain in charge of the concessions during a transitional period established by the granting authority, not exceeding 12 months, and shall indemnify the Argentine Government for any damages caused (the granting authorities may also apply the performance guarantee amounts toward the payment of any damages). Within 90 days following the receipt of the relevant termination notice, a new company must be incorporated, which would be granted a similar concession and a public bidding process would be called for the purpose of selling the shares of such newly-formed company. After deducting all fines, interest and withholdings for prospective claims, the balance would be distributed to HPPL as the only compensation for the transfer of the concessions; (ii) certain bankruptcy events in respect of HPPL, including any liquidation or winding-up proceedings, in which case, the termination of the relevant concession shall be automatic; (iii) force majeure or certain actions by third parties that prevent the compliance by HPPL of its obligations under their concession agreement; or (iv) expiration of the term of the concession agreements.

Renewable Energy

PEMC

On April 18, 2016, we acquired 100% of Greenwind, for an amount of U.S.$2.1 million. Greenwind is a company incorporated under the laws of Argentina whose purpose was to develop the “PEMC”. For such purpose, Greenwind has the legal right to use and obtain a profit from over 1,500 hectares of land where wind measurements have been taking for the last five years.

On October 7, 2016, through Resolution No. 213/2016, the ME&M announced the winners of the RenovAR 1 Program. On January 23, 2017, we were awarded a contract to develop the PEMC project through Greenwind. Greenwind has entered into the respective supply and construction agreements for the construction and commissioning of wind farms in Bahia Blanca with affiliates of Vestas.

On March 10, 2017, we entered into an agreement with Valdatana Servicios y Gestiones S.L.U (the “Buyer”), an investment vehicle led by Castlelake L.P. (a private equity global investment company) for the sale of certain shares owned by us in Greenwind totaling U.S.$ 11.2 million. In addition, the Buyer has acquired shares of Greenwind owned by Pampa Participaciones S.A.U (“Pampa Participaciones”) for U.S.$45,9 thousand, which together with the sale of the shares owned by us account for 50% of the capital stock and rights of Greenwind. As a consequence, as of the date of this annual report, we co-control Greenwind.

The PEMC is located at Corti, 12 miles from the City of Bahía Blanca, Province of Buenos Aires. The PEMC is comprised of 29 Vestas wind turbines, each with a 3.45 MW power capacityand an 87-meter hub height. The PEMC contributes 100 MW of renewable energy to the national Argentine grid.

 

On June 8, 2018, CAMMESA granted the commercial commissioning of PEMC, which was obtained before the date originally stipulated in the PPA executed with CAMMESA. Since its commercial commissioning and during 2018, PEMC generated 247 GWh.

 

Development of New Wind Farms

ME&M Resolution No. 281-E/2017 issued on August 18, 2017 regulated the MAT ER regime that sets the conditions for major users (“GU”) within the WEM and WEM large distribution company users (“GUDI”) to comply with their demand supply obligation from renewable sources through (i) the individual purchase within the MAT ER; or (ii) self-generation from renewable sources. Furthermore, it regulates the conditions applicable to renewable energygeneration projects. Specifically, it created the Registry of Renewable Electric Power Generation Projects (“RENPER”), where such projects must be registered.

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Projects intended to supply the MAT ER may not be committed under other remuneration mechanisms (e.g., the Renovar program). However, projects covered by the Renovar Program may sell to CAMMESA up to 10% of the surplus energy exceeding their commitments with CAMMESA under existing PPAs. Surplus energy sold under the MAT ER and the PPAs executed with CAMMESA will be sold on the spot market and remunerated pursuant to SEE Resolution No. 19/2017.

Furthermore, agreements executed under the MAT ER regime will be administered and managed in accordance with WEM procedures. The contractual terms, duration, allocation priorities, prices and other conditions, notwithstanding the maximum price set forth in Section 9 of Law No. 27,191, may be freely agreed upon between the parties, although the committed electricity volumes will be limited by the electric power from renewable sources produced by the generator or supplied by other generators or suppliers with which the generator has established purchase agreements.

We registered the PEPE II, PEPE III and PEPE IV with the RENPER.

Pursuant to Resolution No. 281-E/2017, which regulates the MAT ER, CAMMESA granted a dispatch priority to PEPE II and PEPE III, targeted at the GU segment under supply agreements between private parties.

On January 30, 2018, we announced the commencement of the construction of PEPE II and PEPE III in the Province of Buenos Aires, representing a total investment of approximately U.S.$135 million. PEPE II and PEPE III will each consist of 14 wind turbines and will each have an installed capacity of 53 MW. Their commissioning is expected for the second quarter of 2019. PEPE II is located in a lot adjacent to PEMC, and PEPE III is located at Coronel Rosales, 16 miles from Bahía Blanca. The wind quality in both project areas is favorable for a load factor higher than 50%. PEPE II was inaugurated on March 20, 2019, its commercial commissioning still remains pending.

On May 23, 2018 a third project was announced: PEPE IV, which is located at the Las Armas area, in the Municipality of Maipú, Province of Buenos Aires. PEPE IV will require an estimated investment of U.S.$74 million and will have a gross power capacity of 53 MW. However, due the recent volatility of the Argentine economy and changes in the applicable regulations, we are currently reassessing the project’s viability.

Power Generation

The following chart depicts our generation assets and our respective shares of the Argentine power generation market as of and for the years ended December 31, 2018, 2017 and 2016.Our generation operations derive revenues from the sale of electricity in the spot market and under term contracts, includingEnergía Plus contracts and WEM Supply Agreements. 

Summary of Electricity
Generation Assets

Hydroelectric

Eolic

Thermal

Total

HINISA

HIDISA

HPPL

PEMC

CTLL

CTG

CTP

CPB

CTPP

CTIW

CTGEBA

ECO-ENERGÍA

Installed Capacity (MW)

265

388

285

100

765

361

30

620

100

100

843

14

3,871

Market Share

0.7%

1.0%

0.7%

0.3%

2.0%

0.9%

0.1%

1.6%

0.3%

0.3%

2.2%

0.04%

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Generation

2018 (GWh)

577

393

886

247

4,748

1,674

134

753

192

274

4,859

108

14,845

Market Share

0.4%

0.3%

0.6%

0.2%

3.5%

1.2%

0.1%

0.5%

0.1%

0.2%

3.5%

0.1%

10.8%

Sales 2018 (GWh)

577

393

886

247

4,748

2,227

134

753

192

274

5,457

110

15,999

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Generation

2017 (GWh)

751

480

760

-

3,864

1,772

156

1,453

142

23

4,685

100

14,186

Variation Net

Generation  2018-2017

-23%

-18%

17%

n/a

23%

-6%

-14%

-48%

35%

n/a

4%

8%

5%

Sales 2017 (GWh)

751

480

760

-

3,864

2,358

156

1,453

142

23

5,424

103

15,514

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Generation

2016 (GWh)

706

564

176

-

3,644

1,577

155

2,054

-

-

2,211

43

11,131

Variation Net

Generation 2017-2016

6.4%

-14.9%

n/a

n/a

3.1%

12.4%

1%

-28.1%

n/a

n/a

n/a

n/a

26.5%

Sales 2016 (GWh)

706

564

176

-

3,644

2,076

155

2,056

-

-

2,499

44

11,921

In U.S.$/MWh

 

 

 

 

 

 

 

 

 

 

 

 

 

Avg. Price 2018

31

46

22

80

43

35

59

88

195

107

36

57

44

Avg. Price 2017

24

33

22

n/a

38

32

52

32

98

42

27

69

32

Avg. Gross Margin

 2018

21

32

15

71

37

20

n/a

46

164

85

18

15

29

Avg. Gross Margin

2017

11

16

12

n/a

34

14

n/a

12

82

33

15

21

20

Sources: Pampa Energía S.A. and CAMMESA.

Note: gross margin before amortization and depreciation. Exchange rate Ps./U.S.$: 2018 – 28.13; 2017 – 16.57.

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Summary of the committed expansion projects

 

Project

MW

Equipment

Provider

Marketing

Date of

Commissioning

Thermal

CTLL

15

MAN

Resolution SEE N° 19/17

Third Quarter of 2019

CTGEBA

383

Siemens

Agreement in U.S.$ for 15 years

GT1:second quarter of 2019 / CC1:second quarter of 2020

Renewable

 

PEPE II and PEPE III

106

Vestas

MAT ER

Second Quarter of 2019

Total

504

 

 

 

     

Note: (1) GT: Gas Turbine / CC: Combined Cycle.

 

 

Our Distribution of Energy Business

 

Empresa Distribuidora y Comercializadora Norte S.A. (Edenor)

 

We are engaged in the electricity distribution business through our subsidiary Edenor, which was the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (both in GWh and in Pesos) in 2018. Edenor holds a concession to distribute electricity on an exclusive basis to the northwestern zone of the greater Buenos Aires metropolitan area and the northern portion of the City of Buenos Aires, comprising an area of 4,637 square kilometers and a population of approximately 8.5 million people. As of December 31, 2018, Edenor served 3,040,386customers.

 

Summary of the Edenor concession

Edenor is a public service company incorporated on July 21, 1992 as part of the privatization of the Argentine state‑owned electricity utility, SEGBA. At the time of privatization, SEGBA was divided into three electricity distribution companies, including Edenor, and four electricity generation companies, and, as part of the privatization process, in August 1992 the Argentine Government granted Edenor a concession to distribute electricity on an exclusive basis within a specified area, which we refer to as Edenor’s service area, for a period of 95 years.

Term. Edenor’s concession currently expires on August 31, 2087, and can be extended for one additional 10-year period if Edenor requests the extension at least 15 months before expiration. The Argentine Government may choose, however, to grant Edenor the extension on a non-exclusive basis. The concession period was initially divided into an initial management period of 15 years expiring on August 31, 2007, followed by eight ten-year periods. However, in July 2007, the initial management period was extended, at Edenor’s request, for an additional five-year period starting from the date of entry into force of the new tariff structure to be adopted under the RTI. The remaining ten-year periods will run from the expiration of such extension of the initial management period. In addition, before the end of each management period under the concession, the ENRE will arrange for an international public bidding procedure to be conducted for the sale of 51% of Edenor’s capital stock and voting rights in similar conditions to those under which we acquired our stake. If we (or our successor) is the highest bidder or if our bid equals the highestbid, we will retain 51% of Edenor’s stock, no funds will need to be paid to the Argentine Government and we will have no further obligation with respect to the bid. There is no restriction as to the price we may bid.

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Obligations. Under the concession, Edenor is obligated to supply electricity upon request of the owner or occupant of any premises in its service area. Edenor is entitled to charge for the electricity supplied at rates that are established by tariffs set by the ENRE. Pursuant to its concession, Edenor must also meet specified service quality standards relating to: (i) the time required to connect new users; (ii) voltage fluctuations; (iii) interruptions or reductions in service; and (iv) the supply of electricity for public lighting and to certain municipalities.

Edenor’s concession requires it to make the necessary investments to establish and maintain quality of service standards and to comply with stringent minimum public safety standards as specified in the concession. Edenor is also required to furnish the ENRE with all information requested by it and must obtain the ENRE’s prior consent for the disposition of assets that are assigned to the provision of electricity distribution services. The ENRE also requires Edenor to compile and periodically submit various types of reports regarding the quality of its service and other technical and commercial data, which we must periodically report to the ENRE.

Pursuant to Law No. 27,467, which enacted the 2019 Federal Budget of Expenditures and Resources, the executive branch of the Argentine Government was instructed to promote the transfer of Edenor’s jurisdiction to the jurisdiction of the Province of Buenos Aires and the City of Buenos Aires as from January 1, 2019 and the creation of a new oversight body.

On February 28, 2019, the Argentine Government, the Province of Buenos Aires and the City of Buenos Aires entered into an agreement for the transfer of the public service of electricity distribution, duly awarded under the Concession Agreement by the Argentine Government to Edenor, from the jurisdiction of the Argentine Government to the Province of Buenos Aires and the City of Buenos Aires. Edenor was not a party to such agreement, and, is analyzing the scope and implications thereof.

Edenor is obligated to allow certain third parties (namely, other agents and large users) to access any available transportation capacity within Edenor’s distribution system upon payment of a wheeling fee.

Consequently, Edenor must render the distribution service on an uninterrupted basis to satisfy any reasonable demand. Edenor is prohibited from engaging in practices that limit competition or result in monopolistic abuses.

Under Edenor’s concession, Edenor may also be required to continue rendering services after the termination of the concession term upon the request of the Argentine Government, but for a period not to exceed 12 months.

Fines and penalties. Under the terms of the concession, the ENRE may impose fines and penalties if Edenor fails to comply with its obligations, including a failure to meet any of the quality and delivery standards applicable to the concession. The ENRE may also impose fines for any of network installations that it considers a potential safety or security hazard in public spaces, including streets and sidewalks. In addition, the ENRE may impose fines for inconsistency in the technical information that is required to be furnished to the ENRE.

The fines and penalties imposed on Edenor by the ENRE amounted to Ps.3,116.5 million and Ps.856.7 million as of December 31, 2018 and 2017, respectively.

As of December 31, 2018, total accrued fines and penalties imposed on Edenor amounted to Ps.6,933.0 million, of which Ps. 4,311.4 million (including accrued interest) corresponded to penalties accrued but not yet imposed on Edenor and Ps. 2,621.6 million (including accrued interest) corresponded to penalties imposed on Edenor but not yet paid.

Additionally, by means of Note No. 125,248 dated March 29, 2017, the ENRE set the new penalty determination and adjustment mechanisms in relation to the control procedures, the service quality assessment methodologies, and the penalty system applicable from February 1, 2017 for the 2017 – 2021 period set by ENRE Resolution No. 63/17. According to the ENRE, many of the penalties imposed in KWh must be valued at the date of the penalizable event. The effects of these modifications have been quantified by the Company and recognized as of December 31, 2018.  

 

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In accordance with the provisions of ENRE Resolution No. 63/17, Edenor is required to submit, within a term of 60 calendar days, the calculation of global indicators, interruptions for which force majeure was alleged, and the calculation of individual indicators and will determine the related discounts, crediting the amounts thereof within ten business days. In turn, the ENRE will examine the information submitted by Edenor, and in the event that the crediting of such discounts was not verified, will impose a fine, payable to the Argentine Government, for an amount equivalent to twice the value of the original amount that should have been recorded. As of the date of this annual report, Edenor has complied with the provisions of ENRE Resolution No. 63/17 in relation to the six-month period ended August 31, 2018 and Edenor is preparing the information in relation to the six-month period ended February 28, 2019, which Edenor will present before its expiration date.

 

Furthermore, through certain resolutions concerning penalties relating to the quality of the commercial and technical service, the ENRE has provided for the application of increases and adjustments, applying for such purpose a criterion different from the one applied by Edenor. In this regard, the ENRE implemented an automatic penalty mechanism so that the discounts on account of deviations from the established limits may be credited to users within a term of 60 days as from the end of the six-month control period.

 

In fiscal year 2018, the ENRE regulated and/or issued several new penalty procedures, including: (i) ENRE Resolution No. 118/18 regulating the compensation for extraordinary service provision interruptions; (ii) ENRE Resolution No. 170/18 regulating the penalty system for deviations from the investment plan, a procedure whereby real investments are compared to the annual investment plan submitted by Edenor, and the investment plan carried out for the 5-year rate period is assessed as against the five-year period plan proposed in the RTI; (iii) ENRE Resolution No. 198/18 establishing a new supplementary penalty system of technical service quality, which penalizes deviations from quality parameters at the feeder level; and (iv) ENRE Resolution No. 91/18 which provides that through the filing of charges against Edenor, the ENRE informs Edenor about the penalty system to be applied for failure to comply with meter-reading and billing time periods.

 

Pledge of Class A shares. In accordance with the concession, the 51% stake we own in Edenor was pledged to the Argentine Government to secure the obligations arising from the concession. The Adjustment Agreement (as defined below) extended the pledge to secure the obligations under such agreement as well. The Argentine Government may foreclose on its pledge over the Class A shares and sell them in a public bidding process if certain situations occur(see“Item 3. Risk Factors–Risks Relating to our Distribution of Energy Business – The Argentine Government could foreclose on its pledge over Edenor’s Class A shares under certain circumstances, which could have a material adverse effect on our business and financial condition”).

Revocation of concession. The Argentine Government has the right to revoke the concession if Edenor enters into bankruptcy and if the Argentine Government decides that it shall not continue rendering services, in which case all of its assets will be transferred to a new state‑owned company that will be sold through an international public bidding process. At the conclusion of this bidding process, the purchase price will be delivered to the bankruptcy court in favor of Edenor’s creditors, net any debt owed by Edenor to the Argentine Government, and any residual proceeds will be distributed to Edenor’s shareholders.

Tariffs.Under the terms of Edenor’s concession, the tariffs charged by Edenor (other than those applied to users in the wheeling system) are composed of:

·       

the cost of electric power purchases, which Edenor passes through to its users, and a fixed charge (which varies depending on the category and level of consumption of each user and their energy purchase prices) to cover a portion of Edenor’s energy losses in its distribution activities (determined by reference to a fixed percentage of energy and power capacity for each respective voltage level set forth in our distribution concession);

·       

Edenor’s regulated distribution margin, which is known as the value‑added for distribution, or VAD; and

·       

any taxes imposed by the Province of Buenos Aires or the City of Buenos Aires, which may differ in each jurisdiction.

Certain of Edenor’s large users (which we refer to as wheeling system users) are eligible to purchase their energy needs directly from generators in the WEM and only acquire from Edenor the service of electricity delivery. As a result, Edenor’s tariffs for these large users (known as “wheeling charges”) do not include, charges for energypurchases. Accordingly, wheeling charges consist of the fixed charge for recognized energy losses (determined by reference to a fixed percentage of energy and power capacity for each respective voltage level set forth in Edenor’s concession) and Edenor’s distribution margin. As a result, although the amounts billed to wheeling system users are relatively lower than those billed to other large users, namely industrial users, the distribution margin on sales to wheeling system users is similar to that of other large users because Edenor does not incur the corresponding cost of electric power purchases related to those sales.

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Distribution margin or value-added for distribution (VAD)

Edenor’s Concession authorizes Edenor to charge a distribution margin for its services to seek to cover its operating expenses, taxes and amortization expenses and to provide Edenor with an adequate return on its asset base.

 

Adjustment Agreement. On September 21, 2005, Edenor entered into theActa Acuerdo sobre la Adecuación del Contrato de Concesión del Servicio Público de Distribución y Comercialización de Energía Eléctrica (the “Adjustment Agreement”). The ratification of the Adjustment Agreement by the Argentine Government was completed in January 2007. The following are the key provisions of the Adjustment Agreement:

·       

a cost adjustment mechanism (the “CMM”), pursuant to which Edenor’s distribution costs were reviewed semiannually (or, under certain circumstances, more often) and adjusted if deemed appropriate by the ENRE to cover increases in Edenor’s distribution costs;

·       

an obligation to make capital expenditures of approximately Ps.204 million for specific projects in 2006, which Edenor complied with although it was not required to, given that the Adjustment Agreement was not ratified in 2006;

·       

Edenor’s obligation to meet specified more stringent service quality standards than as originally contemplated in its concession;

·       

a restriction on Edenor’s ability to pay dividends without prior ENRE approval during the period in which Edenor was conducting the RTI;

·       

forgiveness of approximately one-third of Edenor’s accrued and unpaid fines, subject to meeting certain conditions relating to capital expenditures obligations and service quality standards, and a 7-year payment plan for the balance, commencing 180 days after the date on which the RTI comes into effect;

·       

Edenor’s obligation to apply a social tariff regime for low-income customers, which regime would be defined in the context of the RTI; and

·       

Edenor’s obligation to extend its network to provide service to certain rural areas.

Pursuant to the Adjustment Agreement, the Argentine Government granted Edenor an increase of 28% in Edenor’s distribution margin, including a 5% increase to fund specified capital expenditures required by the Adjustment Agreement, subject to a 15% cap on the increase of Edenor’s average tariff. Although this increase applies to all of Edenor’s tariff categories, the amount of the increase was only allocated to Edenor’s non-residential customers (including wheeling customers), which customers, as a result, experienced an increase in VAD greater than 28%, while Edenor’s residential customers did not experience any increase in VAD. The increase was made effective retroactively as from November 1, 2005 and remained in effect until the approval of the tariff scheme pursuant to the RTI in February 2017.

Furthermore, on December 16, 2015, the Macri administration declared a state of emergency of the national electricity system that remained in effect through December 31, 2017. The state of emergency allowed the Argentine Government to take actions designed to guarantee the supply of electricity.See “Item 3. Key Information—Risk Factors—Risks Related to Argentina—The impact of the next congressional and presidential elections on the future economic and political environment of Argentina remains uncertain, but is likely to be material.”

 

During 2016, Edenor, guided by the ENRE, complied with all the procedural obligations required to complete the RTI process set forth in the Memorandum of Agreement (2005-2007). The RTI was completed on February 1, 2017, on which date the ENRE issued Resolution No 63/2017. In relation to the new tariff schedule and charges, the ENRE established a VAD increase in three stages, including an initial maximum increase of 42% applicable as from February 1, 2017, and two subsequent increases in November 2017 (19%) and February 2018(17%). In addition, the ENRE shall acknowledge to Edenor the difference in VAD resulting from the application of the gradual tariff increase recognized by the RTI in 48 installments as from February 1, 2018, which will be incorporated to the VAD value on such date. Furthermore, the fixed charge corresponding to Resolution No. 347/12 was set aside.

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Integral Tariff Revision (RTI).

An integral tariff proposal includes, among other factors, a recalculation of the compensation Edenor receives for its distribution services, including taxes that are not currently passed onto Edenor’s users (such as taxes on financial transactions), a revised analysis of Edenor’s distribution costs, modifications to Edenor’s quality of service standards and penalty scheme and, finally, a revision of Edenor’s asset base and rate of return.

On April 1, 2016, the ENRE issued Resolution No. 55/16, which approved the program for the review of the distribution tariff scheme, establishing the criteria and methodologies for completing the RTI process.

On September 5, 2016, pursuant to Resolution No. 55/16, Edenor submitted its rate schedule proposal for the following five-year period. On October 28, 2016, a public hearing was held to provide information and listen to the public opinion on the RTI.

 

On February 1, 2017, the ENRE issued Resolution No. 63/17 pursuant to which, the ENRE approved a new tariff scheme which set Edenor’s VAD for the following five-year period.

 

The ENRE also established a non-automatic mechanism to adjust Edenor’s tariff, as it had done in the original Edenor Concession Agreement and the Adjustment Agreement, in order to preserve the economic and financial sustainability of the concession in the event of price variations in the economy. This mechanism has a six-month basis and includes a combined formula of wholesale and consumer price indexes (WPI, CPI and salaries increases) which trigger the adjustment of tariff when the result is above 5%. In connection with quality standards, the ENRE approved new parameters with the purpose of achieving, by the end of the five-year period an acceptable quality. In this regard, it established a penalties regime to be applied in the event of noncompliance with the quality rates.

 

Despite the progress achieved with regard to the completion of the RTI process, as of this annual report, the definitive treatment to be given by the ME&M to all the issues resulting from the non-compliance with the Adjustment Agreement, including the remaining balances and other accounting effects caused by the partial measures adopted under the RTI process, has yet to be defined. These issues, include, among others:

·       the treatment to be given to the funds received from the Argentine Government through the loans for consumption (mutuums) agreements entered into with CAMMESA for the fulfillment of the Extraordinary Investment Plan, granted to cover the insufficiency of theFondo de Obras de Consolidación y Expansión de Distribución Eléctrica’s (Fund for Electricity Distribution Expansion and Consolidation Works or “FOCEDE”) funds;

·       the conditions for the settlement of the outstanding balance with CAMMESA at the date of issuance of SEE Resolution No. 32/15; and

·       the treatment to be given to the penalties and discounts determined by the ENRE, which payment/crediting is pending.

 

During the second half of 2017 in several presentations made to the ENRE, Edenor submitted for approval the electricity rate schedules to be applied from August 1, 2017 and from November 1, 2017, related to the variation recorded in the CPD for the January-June 2017 period, and to the second stage increase set forth in Resolution No. 63/17, respectively.

On October 31, 2017, the ENRE, as instructed by the ME&M, postponed to December 1, 2017 the application of the CPD increases abovementioned.

On November 30, 2017, through Resolution No. 603/17 the ENRE established the output power reference prices and the stabilized prices for energy and transport, as well as the new social tariff methodology and the new incentive schedule for savings, by determining the tariff schedule as of December 1, 2017.

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On November 30, 2017, pursuant to Resolution No. 603/17, the ENRE approved the CPD values, applicable as from December 1, 2017, and retroactively to consumption recorded in the months of August through November 2017, which was billed in two installments, December 2017 and January 2018. Additionally, the resolution approved Edenor’s electricity rate schedule applicable to consumption recorded as from December 1, 2017.

On July 31, 2018, the ENRE issued Resolution No. 208/18, pursuant to which it approved, the CPD for January 2018 through June 2018 of which 7.93% was applied as of August 1, 2018, and 6.51% in six consecutive monthly installments as of February 1, 2019. The CPD amounted to 15.85%. Moreover, Resolution No. 208/18 established a system of caps for the social tariff as well as the values that Edenor had to apply to determine and credit discounts in the electricity bills of the users affected by deficiencies in the quality of the technical product and/or the quality of the technical and commercial service from 2018 to February 2019. Additionally, the informed average electricity rate value amounted to Ps. 2.9871/KWh.

 

On December 27, 2018, Resolution No. 366/2018 issued by the SGE approved the summer seasonal programming for the WEM submitted by CAMMESA, thus determining new prices for power capacity, energy and transmission for February 2019 to October 2019 period. Furthermore, the social tariff and savings bonuses for the residential tariff were eliminated, as beneficiaries have been transferred to the provincial jurisdictions. As of the date of date of this annual report, the Province of Buenos Aires and the City of Buenos Aires are complying with the payment of the social rate on a regular basis.

 

On January 31, 2019, ENRE Resolution No. 25 approved the values of Edenor’s tariff scheme as from February 1, 2019 and incorporated the new power capacity reference prices and stabilized prices for energy determined by the SGE until April 30, 2019. In turn, the ENRE informed that under the transfer of jurisdiction from the Argentine Government to the Province of Buenos Aires and the Autonomous City of Buenos Aires, the guidelines for the social tariff regime effective as of December 31, 2018. As of the date, the Province of Buenos Aires and the City of Buenos

Aires are assuming the payment of the social rate regularly

 

Moreover, on January 31, 2019, pursuant to Resolution No. 27/2019, the ENRE approved the VAD updates for the second six-month period of 2018 and the pending update corresponding to the first six-month period of 2019, totaling a 32.0% increase applicable as from March 1, 2019. Additionally, the application of the new -1.59% “E”-factor adjustment will be deducted from cumulative inflation updates.

 

Furthermore, the cost of deferrals for August 2018 to February 2019 and for the month of February 2019 totaled Ps. 1,005 million and Ps. 841 million respectively, and will be paid in 5 installments as from March 2019. Additionally, Ps. 51 million, will be collected under the same method due to the partial recognition of the appeal filed by Edenor to Resolution No. 208/2018, which acknowledged additional costs that had not been calculated as part of prior tariffs.

 

Users.As of December 31, 2018, Edenor served 3,040,386 users. Edenor defines a “user” as one meter. Edenor classifies its users pursuant to the following tariff categories:

·       Residential (T1-R1 to T1-R9): residential users whose peak capacity demand is less than 10kW. In 2018, this category accounted for approximately 42.3% of Edenor’s electricity sales.

·       Small commercial(T1-G1 and T1-G3): commercial users whose peak capacity demand is less than 10kW. In 2018, this category accounted for approximately 8.5% of Edenor’s electricity sales.

·       Medium commercial (T2): commercial users whose peak capacity demand is equal to or greater than 10kW but less than 50kW. In 2018, this category accounted for approximately 7.9% of Edenor’s electricity sales.

·       Industrial (T3): industrial commercial users whose peak capacity demand is equal to or greater than 50kW. This category is applied to high-demand users according to the voltage at which each user is connected. The voltage ranges included in this category are the following: (i) Low Voltage (LV): voltage less than or equal to 1 kV; (ii) Medium Voltage (MV): voltage greater than 1kV but less than 66 kV; and (iii) High Voltage (HV): voltage equal to or greater than 66kV. In 2018, this category accountedfor approximately 17.2% of Edenor’s electricity sales. This category does not include users who purchase their electricity requirements directly through the WEM under the wheeling system.

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·       Wheeling System: large users who purchase their electricity requirements directly from generation or broker companies through the WEM. As of December 31, 2018, the total number of such large users was 699, and in 2018 this category represented approximately 26.1% of Edenor´s electricity sales.

·       Others: public lighting (T1-PL) and shantytown users whose peak capacity demand is less than 10kW. In 2018, this category accounted for approximately 6% of Edenor’s electricity sales.

Edenor strives to maintain an accurate categorization of its users in order to charge the appropriate tariff to each user. In particular, Edenor focuses on its residential tariff categorizations to both minimize the number of commercial and industrial customers who are classified as residential users and to identify residential users whose peak capacity demand exceeds 10kW and which, therefore, do not qualify as residential users.

Shantytowns.In accordance with the terms of its concessionand given the nature of public service that the distribution of electricity is granted under Argentine law, Edenoris required to supply electricity to all users within the concession area, including low-income areas and shantytowns located within its service area. In October 2003, Edenor, Edesur and Edelap entered into a framework agreement (the “Framework Agreement”) with the Argentine Government and the Province of Buenos Aires to regulate their supply to low-income areas and shantytowns. Under this agreement, Edenor has the right to receive compensation for the services provided to shantytowns from funds collected from residents of each relevant shantytown, the municipality in which it is located and, if there is a shortfall, by a special fund sponsored by the Argentine Government and the Government of the Province of Buenos Aires. The Argentine Government contributes an amount equal to 21%, and the Province of Buenos Aires contributes an amount equal to 15.5%, of such compensation, net of taxes, paid by those users with payment problems and meter irregularities that is transferred to distributors as compensation.

On June 23, 2008, Edenor signed an amendment to the Framework Agreement with the Argentine Government, the Province of Buenos Aires and other national electric distributors agreeing to extend the Framework Agreement for four years from January 1, 2007. The Argentine Government ratified the amendment on September 22, 2008 and the Province of Buenos Aires ratified the amendment on May 15, 2009.

On August 3, 2017, the Framework Agreement was extended through September 30, 2017. The signing of the agreement mentioned above represented the recognition of revenue relating to the distribution of electricity to low-income areas and shantytowns for the January 1, 2015 - September 30, 2017 period for an amount of Ps.497.2 million.

As of the date of this annual report, Edenor is in negotiations with the Argentine Government for the signing of a new extension for the period elapsed from October 1, 2017 through December 31, 2018, and the payment of the electricity supplied during such period; therefore, no revenue for this concept has been recognized.

Additionally, and as a result of the transfer of jurisdiction over the public service of electricity distribution from the Argentine Government to the Province of Buenos Aires and the City of Buenos Aires pursuant to Law No. 27,467, Edenor will be required to undertake a review of the treatment to be given to low-income areas and shantytowns’ consumption of electricity as from January 1, 2019 with the new “Grantors” of the Concession, once the transfer has been completed. In this framework, the Government of the Province of Buenos Aires enacted the General Budget Law No. 15,078, which established that the Province shall pay the aforementioned expenses up to the amount paid in 2018  and any amount in excess shall be borne by the relevant municipalities, such consumption to be previously approved by the regulatory entities or local authorities having jurisdiction in each area.

Energy losses. Energy losses are equivalent to the difference between energy purchased and energy sold, and may be classified as technical or non-technical losses. Technical losses represent the energy that is lost during transmission and distribution within the network as a consequence of natural heating of the conductors that transmit electricity from the generating plants to the users. Non-technical losses are primarily due to illegal use of Edenor’s services and technical errors. Energy losses require Edenor to purchase additional electricity to satisfy demand and its concession allows Edenor to recover from its users the cost of these purchases up to a loss factor specified in the concession for each tariff category. The average loss factor under Edenor’s concession is 10%.

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The following table illustrates Edenor’s estimation of the approximate breakdown between technical and non-technical energy losses experienced in its service area since 2007.

 

Year ended December 31,

 

2018

 

2017

 

2016

Technical Losses

8.4%

 

8.8%

 

9.6%

Non Technical Loses

9.8%

 

8.3%

 

7.4%

Total  Loses

18.2%

 

17.1%

 

17.0%

 

Our Oil and Gas Business

Exploration and Production

Our strategy is to develop profitable oil and gas reserves with social and environmental responsibility. In this segment, we are focused on three main objectives:

o  development and monetization of non-conventional gas reserves;

o  exploration for reserves replacement; and

o  optimization of operations and existing infrastructure as leverage for new projects.

As is usual in the oil and gas exploration and production business, we participate in exploration and production activities in conjunction with joint operation partners. Contractual arrangements among participants in a joint operation are usually governed by an operating agreement, which provides those costs, entitlements to production and liabilities are to be shared according to each party’s interest in the joint operation. One party to the joint operation is usually appointed as operator and is responsible for conducting the operations under the overall supervision and control of an operating committee that consists of representatives of each party to the joint operations. While operating agreements generally provide for liabilities to be borne by the participants according to their respective interest, licenses issued by the relevant governmental authority generally provide that participants in joint operations are jointly and severally liable for their obligations to the relevant governmental authority pursuant to the applicable license. In addition to their interest in field production, contractual operators are generally paid their indirect administrative expenses on a monthly basis by their partners in proportion to their participation in the relevant field.

 

The oil and gas exploration and production segment is key for the integration with our energy operations. A major portion of our gas production is destined to our power generation operations in Argentina, and the remaining gas is destined to residential and gas distributors, compressed natural gas (“CNG”), industries and exports during the summer season.

 

We are engaged in the oil and gas business directly and through investments in Oldelval, OCP and minor interests in four productive blocks in Venezuela, through mixed companiesEmpresas Mixtas,corporations whose majority shareholder is a subsidiary of PDVSA,Corporación Venezolana de Petróleo S.A. (class A shares), which are controlled by the Bolivarian Republic of Venezuela, and in which we own a minority interest (class B shares)), see “Our Oil and GasBusiness—Venezuela”. As of December 31, 2018:

 

·       our combined crude oil and natural gas proved reserves were 130.3 million barrels of oil equivalent, 59% of which were proved developed reserves. Natural gas accounted for approximately 88% of our combined proved reserves and liquid hydrocarbons for 12%.

 

·       our combined oil and gas production in Argentina averaged 44.8 thousand barrels of oil equivalent per day, considering continuing operations. Crude oil accounted for approximately 5.1 thousand barrels of oil equivalent per day, while natural gas accounted for approximately 238 million standard cubic feet per day, or 39.7 thousand barrels of oil equivalent per day based on a measure of conversion of 6,000 cubic feet of gas per barrel of oil equivalent.

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During 2018, according to the ME&M, gas production in Argentina increased by 5.4% (4.55 billion cubic feet per day on average), and oil production increased 2% and stood at 497.896 barrels per day.

In December 2018, according to the ME&M, our consolidated oil and gas production (i.e. including our discontinued operations) accounted for approximately 1% and 5% of total oil production and gas production in Argentina, respectively.

 

Key Information Relating to Oil and Gas

As of December 31, 2018, we had interests in 18 areas, joint operations (UTEs) and agreements in Argentina: 11 oil and gas production areas and 7 exploration blocks located within exploration areas or pending authorization for production. As of December 31, 2018, we were directly or indirectly the contractual operator of 8 of the 18 blocks in which we had an interest.

Acreage

As of December 31, 2018, our total production and exploration acreage, both gross and net, was as follows. The table includes the total production and exploration acreage by us and our subsidiaries, joint operations and associates.

 

  

Acreage (*)

  

Production (1)

 

Exploration (2)

  

Gross

 

Net (3)

 

Gross

 

Net (3)

 

 

(in thousands of acres)

Argentina

 

999

 

318

 

668

 

305

         

 

(1) Includes all areas in which we produce commercial quantities of oil and gas or areas in the development stage.

(2) Includes all areas in which we are allowed to perform exploration activities but where commercial quantities of oil and gas are not produced, plus areas that are not in the development stage.
(3) Represents our fractional ownership working interest in the gross acreage.
(*) In Estación Fernández Oro and Anticlinal Campamento areas the acreage of the drainage radius of the drilled wells is considered.

 

Productive Wells

 As of December 31, 2018, our total gross and net productive wells were as follows. The table includes the total gross and net productive wells by us and our subsidiaries, joint operations and associates.
 

 

 

Oil

Gas

Total (3)

 

 

Gross (1)

Net (2)

Gross (1)

Net (2)

Gross (1)

Net (2)

 

 

      

Argentina

 

498

166

394

184

892

350

 

 

      

 

Note: All figures have been subject to rounding, so figures shown as totals may not sum.

(1) Refers to number of wells completed.

(2) Refers to fractional ownership working interest in gross productive wells.

(3) Includes Oil and Gas productive wells.

 

Drilling Activities

 

 In 2018, we carried out investment plans aligned with our reserves replacement and production goals, as a means to achieve sustainable growth.

The following table sets forth the number of total wells we drilled in Argentina and the results for the relevant periods.

A development well, for purposes of the following table, is one that justifies the installation of permanent equipment for the production of oil or gas. A well is deemed to be a dry well if it is determined to be incapable of commercial production. “Gross wells drilled” in the table below refers to the number of wells completed during each fiscal year, regardless of the spud date, and “net wells drilled” relates to our fractional ownership working interest in wells drilled. This table includes wells drilled by us, joint operations and associates (includes our discontinued operations). We are currently unable to obtain accurate information about the mixed companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018.

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Year ended December 31,

 

 

2018

 

2017

 

2016

 

 

Argentina

 

Venezuela

 

Argentina

 

Venezuela

 

Argentina

 

Venezuela

Gross wells drilled:

 

 

 

 

 

 

 

 

 

 

 

 

Production:

 

 

 

 

 

 

 

 

 

 

 

 

Development wells:

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

31

 

-

 

35

 

-

 

20

 

-

Gas

 

31

 

-

 

36

 

-

 

28

 

-

Dry wells

 

-

 

-

 

1

 

-

 

-

 

-

Total

 

62

 

-

 

72

 

-

 

48

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration:

 

 

 

 

 

 

 

 

 

 

 

 

Discovery wells:

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

2

 

-

 

2

 

-

 

1

 

-

Gas

 

3

 

-

 

1

 

-

 

1

 

-

Dry wells

 

-

 

-

 

-

 

-

 

1

 

-

Total

 

5

 

-

 

3

 

-

 

3

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Net wells drilled:

 

 

 

 

 

 

 

 

 

 

 

 

Production:

 

 

 

 

 

 

 

 

 

 

 

 

Development wells:

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

8

 

-

 

19

 

-

 

10

 

-

Gas

 

17

 

-

 

21

 

-

 

16

 

-

Dry wells

 

-

 

-

 

1

 

-

 

-

 

-

Total

 

25

 

-

 

41

 

-

 

26

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration:

 

 

 

 

 

 

 

 

 

 

 

 

Discovery wells:

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

1

 

-

 

1

 

-

 

-

 

-

Gas

 

1

 

-

 

-

 

-

 

1

 

-

Dry wells

 

-

 

-

 

-

 

-

 

1

 

-

Total

 

1

 

-

 

1

 

-

 

2

 

-

   Note: All figures have been subject to rounding, so figures shown as totals may not sum.

 

In 2018, we continued with the development of our investment plan focusing on the activity and development of tight gas reserves in the areas of El Mangrullo, Rincón del Mangrullo and Rio Neuquén. Our investment plan included the drilling of 67 producing and injector’s wells and the workover of 4 wells.

 

In the Neuquén Basin, Pampa concentrated its natural gas drilling activity in the El Mangrullo, Río Neuquén and Rincón del Mangrullo with 8, 12 and 9 producing wells, respectively, and the remaining 5 in the Aguaragüe and Gobernador Ayala areas. Thirty-three producing and injector wells were drilled in oil blocks, as well as 14 workovers in the areas of Gobernador Ayala and El Tordillo in the Neuquén Basin, and the San Jorge Gulf Basin, respectively.

 

Production

The following table sets forth our oil and gas production during 2018. Production figures represent our working interest in production (and are therefore net to us). In addition, the table includes our working interest in each field, operator and the expiration date of the concessions, in each case as of December 31, 2018. Although some of these concessions may be extended at their expiration, the expiration dates set forth below do not include any extensions not granted as of the date of this annual report. We are currently unable to obtain accurate information about the mixed companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018. 

 

 

 

 

 

 

 

 

 

Argentina

 

 

 

 

2018 Production

 

 

Production Areas

Location

Basin

Oil(1)

Gas(2)

Oil 
Equivalent (3)

Operator

Direct and Indirect Interest

Expiration

 

 

 

 

 

 

 

 

 

El Mangrullo

Neuquén

NQN

 27

 35,481

 5,940

Pampa

100.00 %

2053

Sierra Chata(4)

Neuquén

NQN

 32

 8,371

 1,427

Pampa

45.55%

2053

Río Neuquén

Neuquén/Río Negro

NQN

 260

 15,813

 2,896

YPF

33.07%/31.42%

2027/2051

Rincón del Mangrullo

Neuquén

NQN

 67

 23,414

 3,970

YPF

50.00%

2052

Estación Fernández Oro

Neuquén

NQN

 1

 212

 37

Ysur

15.00%

   2026(5)

Anticlinal Campamento

Neuquén

NQN

 0

 155

 26

Ysur

15.00%

   2026(6)

Río Limay Este (Ex Senillosa)

Neuquén

NQN

 -  

 -  

 -  

Pampa

85.00%

2040

Aguaragüe

Salta

NOA

 90

 3,264

 634

Tecpetrol

15.00%

2023/2027

El Tordillo

Chubut

CGSJ

 1,075

 324

 1,129

Tecpetrol

35.67%

2027

La Tapera – Puesto Quiroga

Chubut

CGSJ

 24

 1

 24

Tecpetrol

35.67%

2027

Gobernador Ayala

Neuquén

NQN

 274

 -  

 274

Pluspetrol

22.51%

2036

Total Argentina

 

 

1,851

87,035

16,357

 

 

 

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Note: All figures have been subject to rounding, so figures shown as totals may not sum.

(1)   In thousands of barrels of oil equivalent. Includes LPG.

(2)   Gas production represents only marketable production of natural gas excluding flared gas, injected gas and gas consumed in operations. In millions of cubic feet.

(3)   In thousands of barrels of oil equivalent. Gas is converted to oil equivalent using a factor of 6,000 cubic feet of gas per barrel of oil equivalent.

(4)    Production includes Parva Negra Este block.

(5)    It corresponds to production of 13 wells and to a 15% in association with YSUR.

(6)    It corresponds to production of 9 wells and to a 15% in association with YSUR.

 

              The following table sets forth the production of oil and gas in Argentina and outside for the relevant periods:

 

 

      Year ended December 31,

 

2018

 

2017

 

2016

Argentina

Oil(1)

 

Gas(2)

 

Oil(1)

 

Gas(2)

 

Oil(1)

 

Gas(2)

 

 

 

 

 

       

Rio Neuquén area in Argentina(3)

260

 

15,813

 

234

 

13,966

 

165

 

9,526

El Mangrullo area in Argentina(3)

27

 

35,841

 

21

 

31,881

 

16

 

14,726

Rincón del Mangrullo area in Argentina(3)

67

 

23,414

 

85

 

31,308

 

90

 

30,295

Other areas in Argentina

1,494

 

12,333

 

6,807

 

25,885

 

3,847

 

12,171

Venezuela(4) (5)

-

 

-

 

465

 

-

 

307

 

62

 

 

 

 

 

       

Total

1,849

 

87,401

 

7,612

 

103,040

 

4,425

 

66,780

 

Note: All figures have been subject to rounding, so figures shown as totals may not sum.

(1) Oil production includes other liquid hydrocarbons. Amounts in thousands of barrels.

(2) Gas production represents only marketable production of natural gas excluding flared gas, injected gas and gas consumed in operations. Amounts in millions of cubic feet.

(3) Río Neuquén, El Mangrullo and Rincón del Mangrullo areas are separately included as they contain more than 15% of our total proved reserves.

(4) Indirect interests through mixed companies.

(5)We are currently unable to obtain accurate information about the mixed companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018.

 

 Argentine Oil and Gas Production

We transport our oil and gas production through several methods depending on the infrastructure available and the cost efficiency of the transportation system in a given location. We use the oil pipeline system and oil tankers to transport oil to our customers. Oil is customarily sold through contracts whereby producers are responsible for transporting produced oil from the field to a port for shipping, with all costs and risks associated with transportation borne by the producer. Gas, however, is sold at the delivery point of the gas pipeline system near the field and, therefore, the customer bears all transportation costs and risks associated therewith. Oil and gas transportation in Argentina operates in an “open access” non-discriminatory environment under which producers have equal and open access to the transportation infrastructure. We maintain limited storage capacity at each oil site and at the terminals from which oil is shipped. In the past, such capacity has been sufficient to store oil without reducing production during temporary unavailability of the pipeline systems, for example, due to, maintenance requirements or temporary emergencies.

During 2018, our production was concentrated in three basins: the Neuquén, San Jorge and Noroeste. In Argentina, we own 623,000 net acres, and in the Neuquén basin — the most important basin in the country in terms of oil and gas production —we own approximately 400,000 net acres (representing 64% of our total acres). Our most important fields in the Neuquén basin are El Mangrullo, Sierra Chata, Río Neuquén and Rincón del Mangrullo. As of December 31, 2018, we owned 911 productive wells in Argentina.

For the year 2018, our average daily production was 5,064 barrels of crude oil and 238 million cubic feet of natural gas. Considering continuing operations, oil production increased 4% and gas production decreased 3%, compared to 2017.

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Production Outside Argentina

 

Venezuela

 

With the acquisition of Petrobras Argentina, we acquired four productive blocks in Venezuela: Oritupano Leona, La Concepción, Acema and Mata. We hold interests in such productive blocks through direct and indirect interests in mixed companies operated by PDVSA: Petroritupano S.A., Petroven-Bras S.A., Petrowayú S.A. and Petrokariña S.A.

 

However, since the Acquisition, the authorizations regarding the change of indirect control by the Government of Venezuela have not been obtained, and considering the fact that the contracts of mixed companies provide the mandatory transfer of the shares to said government in these cases, we have determined that the fair value of its investment as of the date of Acquisition is Ps.0.

 

As of the date of this annual report, we have not obtained the authorizations of the Government of Venezuela related to the change of indirect control requested in a timely manner. However, we have presented the technical, legal and financial information required in due time, as well as development plans and financing proposals that were submitted to the majority of the mixed companies, shareholder CVP (Corporación Venezolana de Petróleo S.A.) without receiving a favorable response. Likewise, CVP has determined that, given the time that has elapsed, we should begin the process of submitting plans according to new guidelines to be provided by theMinisterio del Poder Popular de Petróleo de la República Bolivariana of Venezuela, which have not yet been communicated to us.

We have expressed with the authorities of the Government of Venezuela that our interest in making investments and/or financing proposals in the mixed companies has ceased and that we are willing to negotiate the transfer of our shares to CVP. As a result, we are currently unable to obtain accurate information about the mixed companies in Venezuela and, consequently, have not disclosed information on oil and gas activities regarding Venezuela for the year ended December 31, 2018.

Ecuador

On October 31, 2008, EcuadorTLC S.A. (“EcuadorTLC”, a wholly-owned subsidiary of the Company established in the Republic of Ecuador), Teikoku Oil Ecuador and Petroecuador, among others, executed a series of amendatory agreements regulating the operation of Block 18 and Palo Azul Unified Field (the “Amendatory Agreements”), while the parties negotiated the migration to a new contract modality.

The consortium decided not to accept the final proposal received from the Ecuadorian government to migrate from the original arrangements to service agreements in Block 18 and the Palo Azul Unified Field. Consequently, through a Resolution dated November 25, 2010, the Hydrocarbon Secretary notified EcuadorTLC of the termination of the participation agreements and instructed Petroamazonas EP to undertake the operational transition process.

 

Section 9 of the Amendatory Agreements provides that the Ecuadorian government must compensate the terminated parties in an amount equivalent to unamortized investments adjusted by reference to a variable rate, and provides for a period of time for the Ecuadorian government and the terminated parties to work out the details of the termination payment.

After taking the required administrative and judicial steps and being unable to reach an agreement with the Ecuadorian Government, on June 21, 2013, EcuadorTLC, Cayman International Exploration Company and Teikoku Oil Ecuador, members of the consortium, (the “Plaintiff Parties”) submitted a letter of notification of a dispute under the terms of the Amendatory Agreements to the Ecuadorian State, stating their decision to submit the dispute to international arbitration under the arbitration Rules of the UNCITRAL, which arbitration commenced on February 26, 2014.

EcuadorTLC’s participation in the Bloque 18 Consortium is 30% and the final award by the arbitration tribunal corresponding to EcuadorTLC stake, amounted to U.S.$176 million (the “Final Award”).

 

On March 19, 2018, the Republic of Ecuador and the Plaintiff Parties executed an agreement (the “Arbitration Settlement”) pursuant to which the Plaintiff Parties agreed not pursue the collection of the Final Award, in exchange for a compensation for general damages, which for EcuadorTLC comprises (i) a release from fiscal and labor claims currently in the trial stage, amounting to more than U.S.$132 million, and (ii) an additional compensation of U.S.$54 million, which was paid by the end of first half of 2018 (including the recovery of granted guarantees).  

 

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Moreover, the Republic of Ecuador has declared and acknowledged within the Arbitration Settlement that (i) such agreement is completely valid and binding for the Republic of Ecuador, (ii) any payment default by the Republic of Ecuador under the Arbitration Settlement will allow the Plaintiff Parties to fully enforce the final award, and (iii) there is no pending obligation remaining by the Plaintiff Parties in relation to the Bloque 18 Consortium’s operation’s and exploitation.

 

As a result of the Arbitration Settlement, we have disclosed net profits for U.S.$ 40 million (Ps. 1,116 million) as of December 31, 2018, consisting of: (i) a profit of U.S.$ 133 million in consequential damages after writing off of the receivable of U.S.$ 53 million to be recovered from the Ecuadorian Government pursuant to the Amending Agreements, and (ii) a U.S.$  93 million loss associated with the agreement to the terms of the tax claims assigned to Ecuador TLC in accordance with the Arbitration Settlement.

 

Crude Oil Transportation Agreement with OCP

 

Starting on November 10, 2003, EcuadorTLC, entered into a “ship or pay” agreement with OCP, whereby it secured an oil transportation capacity of 80,000 barrels per day for a 15-year term (the “Agreement with OCP”)

Under the Agreement with OCP, EcuadorTLC must comply with its contractual obligations for the aggregate committed capacity, regardless of the amount of crude oil actually transported, and pay a rate that covers OCPs operating costs and financial services, among other items.

EcuadorTLC is entitled to sell transportation capacity through OCP’s pipeline to mitigate the negative effect of excess contracted capacity. In this respect, EcuadorTLC periodically negotiates the sale of committed transportation capacity. On December 31, 2008, EcuadorTLC and Petroecuador entered into an agreement under which, as from January 1, 2009, transportation of crude oil through OCP’s pipeline is charged by Petroecuador to the transportation capacity committed to under the agreement entered into between EcuadorTLC and OCP, up to a maximum of 70,000 barrels per day. EcuadorTLC has initiated legal actions against Petroecuador due to breaches of contract by the buyers. In addition, EcuadorTLC sold transportation capacity for approximately 8,000 oil barrels per day to third parties for the July 2004-January 2012 period.

In January 2018, EcuadorTLC assigned to Petrobras Energía Operaciones S.A. (“PEO”) a transportation capacity of 10,000 barrels per day. As a result, EcuadorTLC will pay to PEO U.S.$ 2.9 million.

In January 2018, PEO declared the Equity Expropriation Event, whereby, under certain circumstances stipulated in the agreement, we, in our capacity as guarantor, will bear the payments for the capital charges associated with the assigned transportation capacity.

In April 2018, EcuadorTLC assigned to Trenerec SA (a subsidiary company in Ecuador) the remaining transportation capacity of 70,000 barrels per day held with OCP. Additionally, EcuadorTLC assigned to Trenerec S.A. the rights and obligations held under the agreement entered into with Petroecuador by which Trenerec will be able to sell to Petroecuador transportation capacity for 70,000 barrels per day.

The Agreement with OCP expired on November 10, 2018, and, therefore collaterals held to ensure compliance with related financial commitments were gradually released as those commitments become extinguished. As of December 31, 2018, we do not hold any collateral in this respect.

OCP

 

In 2001, the Ecuadorian government awarded to OCP the rights to construct and operate for a 20-year term the 503 km-long pipeline that runs from the northeastern region of Ecuador to the Balao distribution terminal on the Pacific Ocean coast. As of December 31, 2018, we held an 11.42% interest in OCP. As of the date of this annual report, OCP’s other shareholders were Andes Petroleum, Ecuador Ltd., Perenco Ecuador Limited, Occidental del Ecuador Inc., Repsol Ecuador S.A. and AGIP Oleoducto de Crudos Pesados B.V.

 

The oil pipeline has a transportation capacity of approximately 450,000 barrels per day, of which at least 350,000 barrels per day are committed under transportation agreements that include a Ship or Pay clause. Because the oil pipeline runs across ecologically sensitive areas, the pipeline was constructed following stringent environmental and technical standards. The construction of the oil pipeline was completed in 2003, when it began operations.

 

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Our subsidiary, EcuadorTLC S.A., entered into a transportation agreement with OCP that includes a Ship or Pay clause whereby OCP has committed to transport 80,000 barrels per day of our oil for a 15-year term, beginning on November 2003. For more information, see“—Oil and Gas Exploration and Production—Production—Production Outside Argentina—Ecuador”.

 

As of December 31, 2017, OCP had negative shareholders’ equity as a result of certain tax assessments in favor of the Government of Ecuador in issues where OCP and the Ecuadorian Treasury have differences in interpretation. We have not committed to make capital contributions or provide financial assistance to OCP; therefore, our equity interest in OCP was valued at Ps. 0 in our financial statements as of and for the year ended December 31, 2017.

 

However, on December 6, 2018, OCP and the Republic of Ecuador executed an agreement to settle all claims and legal actions between them in relation tocertain tax assessments in favor of the Government of Ecuador in issues where OCP and the Ecuadorian Treasury had differences in interpretation. As a result, a total amount of U.S.$182 million was established for all concepts, of which: (i) U.S.$64 million corresponded to credits for income tax withholdings made by OCP in the following periods: 2004-2005 and 2007-2014; (i) U.S.$7 million was offset by a payment previously made by OCP related to a tax determination for the fiscal period 2003; and (iii) U.S.$111 million was paid in cash in two payments. Following the satisfaction of all obligations in accordance with the agreement, on December 21, 2018, the closing of the agreement between OCP and the Republic of Ecuador took place.

 

As a result of this agreement, OCP recorded a gain of U.S.$ 387 million. We have resumed the recognition of our equity interest in OCP, through our subsidiary Pampa Energía Bolivia S.A. (“PEB”), after recognizing previously unrecognized losses and, therefore, we recognized a gain for our equity interest in OCP of U.S.$35 million as of December 31, 2018.

 

Furthermore, on December 5, 2018, through our subsidiary PEB, we executed an agreement with Agip Oleoducto de Crudos Pesados BV to purchase shares representing 4.49% of OCP’s capital stock and subordinated debt issued by us. The closing of this transaction is subject to the approval of the Government of Ecuador, among other conditions precedents. As of the date of this annual report, the transaction remains subject to approval by the Government of Ecuador.

Exploration

Our strategy is focused on constantly searching for new exploration opportunities aligned with our growth targets. In Argentina, we own substantial acreage containing undeveloped non-conventional reservoirs, including both tight and shale gas in the Neuquén basin.

 

The following table lists our exploration blocks, joint operations and permits in Argentina as of December 31, 2018, the location and basin of each area, our net working interest and the expiration date for the exploration authorization.

 

Blocks/UTE

 

Location

 

Basin

 

Operator

 

Interest

 

Expiration

Parva Negra Este

 

Neuquén

 

NQN

 

Pampa

 

42,50%

 

2019(1)

Chirete

 

Salta

 

NOA

 

High Luck

 

50,00%

 

2018(2)

Rio Atuel

 

Neuquén

 

NQN

 

Petrolera El Trebol

 

33,33%

 

2018(4)

Veta Escondida - Rincón de Aranda

Neuquén

 

NQN

 

Pampa

 

55,00%

 

2027

Borde del Limay

 

Neuquén

 

NQN

 

Pampa

 

85,00%

 

2015(3)

Los Vértices

 

Neuquén

 

NQN

 

Pampa

 

85,00%

 

2015(3)

Las Tacanas Norte

 

Neuquén

 

NQN

 

Pampa

 

90,00%

 

2022

(1) On July 24, 2015, the Province of Neuquén approved the sale of 50% of our share in Parva Negra Este to ExxonMobil Exploration Argentina S.R.L. As of the date of this annual report, the extension of the exploration license for the Parva Negra Este block was requested from the Province of Neuquen. The approval still remains pending.

(2) On February 22, 2019, Provincial Executive Order No. 249/19 was issued, which extended the exploratory term for a 12-month period effective as from November 18, 2018.

(3) In process of being transferred to GyP (holder of the exploration permit).

(4) The exploration permits expired in September 2018, and the term was extended until March 13, 2019 pursuant to Administrative Decision No. 19/18 issued by the Department of Hydrocarbons of Mendoza. On March 9, 2019, the suspension of the term for a period of six months was approved by the Department of Hydrocarbons of Mendoza pursuant to Administrative Decision No. 7/19.

 

As of December 31, 2018, we held interests in approximately 668,000 gross exploration acres in Argentina and approximately 362,000gross exploration and production acres were located in shale oil/shale gas areas.

 

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Our exploratory investments in gas in 2018 focused on the drilling of Shale Gas Pilot Wells in El Mangrullo, targeting the Vaca Muerta Reservoir. Two vertical wells were drilled, M-1104 and M-1111, each with a depth of 2900  meters. The drilling of a pilot vertical well, is the first stage of the construction of 3 wells PAD, each well with a horizontal extension of approximately 2,500 meters.  

 

In respect of oil investments, in the second semester of 2018, the Los Blancos x – 2001 well was drilled in El Chirete area. On November 29, 2018, the discovery of oil was announced in the Las Breñas formation, at a depth of 2,705 m.  Due to the positive results obtained, studies will continue to define the commercial feasibility of the project.

 

Cost of Sales, Revenues and Price

Cost of Sales, Royalties and Depreciation

 

The following table sets forth our average cost of sales, royalties and depreciation cost in our oil and gas fields in each geographic area for the fiscal years ended December 31, 2018, 2017 and 2016. This table includes our net share of production of by us, joint operations and associates. We are currently unable to obtain accurate information about the mixed companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018.

 

 

 

Year ended December 31,

Argentina

2018

2017 

2016  

 

 

(in Pesos per barrel of oil equivalent)

 

 

 

 

 

Production cost

 

236

460

389

Royalties

 

132

146

138

Depreciation

 

143

248

326

Total

511

854

853

 

 

 

 

 

  Venezuela (1)(2)

 

 

 

 

 

 

 

 

 

Production cost

 

-

3,392

27,372

Royalties

 

-

289

459

Depreciation

 

-

689

695

Total              

 

-

4,369

28,526

(1) Amounts are translated into Argentine pesos at historic exchange rates, using an annual average exchange rateand are stated in terms of the measuring unit current as of December 31, 2018.
 (2) We are currently unable to obtain accurate information about the mixed companies in Venezuela and,consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018.

 

 Revenues

The following table sets forth revenues for the oil and gas exploration and production business segment by geographic area for the fiscal years ended December 31, 2018, 2017 and 2016. We are currently unable to obtain accurate information about the mixed companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018.

 

  

Year ended December 31,

 

 

2018

2017

2016

Argentina (*)

 

 

 

 

  

(in millions of Pesos stated in terms of the measuring unit current as of December 31, 2018)

  

 

 

 

Oil

 

5,591

14,511

6,355

Gas

 

16,346

11,542

10,189

Others

 

182

1,104

410

Total

 

22,119

27,157

16,954

    

Venezuela(1)

 

 

 

 

  

 

 

 

Oil

 

-

565

436

Gas

 

-

-

6

Total

 

-

565

442

(*) Includes discontinued operations.
(1) We are currently unable to obtain accurate information about the mixed companies in Venezuela and,consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018

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For the year ended of December 31, 2018, the Gas Plan reached Ps.891million, representing a decrease of79.5% compared to 2017 (Ps.4,351million).

The following table sets forth the average sales price per barrel of oil and per million cubic feet of gas for each geographic area for the fiscal years ended December 31, 2018, 2017 and 2016. We are currently unable to obtain accurate information about the mixed companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018.

  

Year ended December 31,

 

Average price of sale for barrel of Oil and for million cubic feet of Gas

 

2018

 

2017

 

2016

Argentina

 

 

 

 

  

Oil (In Pesos per barrel of Oil)

 

863

 

1,971

 

1,843

Gas (In Pesos per thousand cubic feet)

 

161

 

112

 

141

Average price of sale for barrel of Oil and for million cubic feet of Gas

 

2018

 

2017

 

2016

Venezuela(1)(2)

 

 

 

 

 

 

Oil (In Pesos per barrel of Oil)

 

-

 

1,214

 

1,382

(1) Amounts are translated into Argentine pesos at historic exchange rates, using an annual average exchange rate and are stated in terms of the measuring unit current as of December 31, 2018.
(2)  We are currently unable to obtain accurate information about the mixed companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018.

 

Delivery commitments

We are committed to providing fixed and determinable quantities of crude oil and natural gas in the near future under a variety of contractual arrangements.

As of December 31, 2018, we were contractually committed to deliver approximately0,800MMm3 of natural gas in 2019. According to our estimates as of December 31, 2018, our contractual delivery commitments that do not extend beyond 2019, could be met with our own production and, if necessary, with purchases from third parties.

 

Oldelval

 

In line with our strategy to focus our resources on core businesses, on November 2, 2018 we executed an agreement with ExxonMobil Exploration Argentina S.R.L. (“ExxonMobil”) for the sale of 21% of the capital stock of Oldelval, which closed on November 27, 2018. For more information about strategic divestments, see“—Recent Developments— Strategic Divestments— Sale of Equity Ownership in Oleoductos del Valle S.A.(“Oldelval”). As a result, as of December 31, 2018, we held a 2.1% interest in Oldelval.

Oldelval operates main oil pipelines providing access to Allen, in the Comahue area, and the Allen - Puerto Rosales oil pipeline, which allow for the transportation of the oil produced in the Neuquina Basin to Puerto Rosales (a port in the City of Bahía Blanca) and the supply of the Plaza Huincul refinery located in the pipeline’s area of influence.

 As of December 31, 2018, oil volumes transported by Oldelval from Allen to Puerto Rosales averaged 20,737 cubic meters per day, while oil transportation to the refineries located in the Province of Neuquén totaled an average 2,576 cubic meters per day. Total transportation volume was 24,145 cubic meters per day, equivalent to 55.4 million barrel transported in 2018, representing a 7.2% increase compared to 2017. In addition, the transportation of crude oil’s service was provided without interruptions, ensuring operational continuity and a reliable pumping system.

Reserves

We believe our estimates of remaining proved recoverable oil and gas reserve volumes to be reasonable. Pursuant to Rule 4-10 of Regulation S-X, promulgated by the SEC, proved oil and gas reserves are those quantities of oil and gas, which, by analysis of geoscience and engineering data, can be estimated with reasonable certainty to be economically producible—from a given date forward, from known reservoirs, and under existing economic conditions, operating methods, and government regulations—prior to the time at which contracts providing the rightto operate expire, unless evidence indicates that renewal is reasonably certain, regardless of whether deterministic or probabilistic methods are used for the estimation. The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within a reasonable time. The evaluation of our reserves covered the reserves located in areas operated and non-operated by us. The proved oil and natural gas reserve were estimated in accordance with Rule 4-10 of Regulation S-X and in accordance with the oil and gas reserves disclosure provisions of FASB Topic 932.GCA performed an independent audit of 83% of our estimated proved reserves as of December 31, 2018. We provided all information required during the course of the audit process to the satisfaction of GCA. See the Reserves Report byGCA, datedApril 17, 2019 included as Exhibit 13.2 to this annual report.

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As of December 31, 2018, 2017 and 2016, 83%, 100% and 89%, respectively, of our estimated proved reserves were audited byGCA.

As of December 31, 2018, our liquid hydrocarbon and natural gas proved developed and undeveloped reserves totaled 130.3 MMboe (15.0 MMboe of liquid hydrocarbons and 692.0 billion cubic feet, or 115.3 MMboe, of natural gas), of which 659.7 billion cubic feet were estimated to be sales gas and 32.3 billion cubic feet were estimated to be consumed as fuel gas in operation (which are included in our total natural gas proved reserves). For variations of our reserves data, see Reserves Evolution below.

Liquid hydrocarbons and natural gas accounted for 12% and 88%, respectively, of our total proved reserves as of December 31, 2018. The reserves outside Argentina (Venezuela) were reclassified as contingents in December 2016, due to profitability and the economic situation of Venezuela.

As of December 31, 2018, proved developed reserves of crude oil equivalent represented 59% of our total proved reserves of crude oil equivalent and we had proved reserves equal to approximately eight years of production at 2018 volumes.

The following table sets forth our estimated net proved developed and undeveloped reserves of crude oil and natural gas as of December 31, 2018, including joint operations and associates.

 

 

 

Reserves as of

December 31, 2018

  

 

Reserves category

 

Crude oil,
condensate
and natural gas liquids
(millions of barrels)

Natural Gas
(billons cubic feet)

Oil Equivalent
(MMboe)

  

 

 

 

PROVED Developed

 

9.2

409.8

77.5

PROVED Undeveloped

 

5.8

282.2

52.8

 

 

 

 

 

Total proved reserves(developed and undeveloped)

15.0

692.0

130.3

     

 

The statements contained in this Item 4 regarding exploration and development projects and production estimates are forward-looking and subject to significant risks and uncertainties. Although we believe that these expectations reflected in these forward-looking statements are reasonable, we cannot guarantee that our actual levels of activity, production or performance will meet those expectations. See “Item 3. Key Information—Risk Factors.”

 

The following table sets forth the breakdown of our total proved reserves of liquid hydrocarbons and natural gas into proved developed and proved undeveloped reserves as of December 31, 2018, 2017 and 2016.

 

 

 

2018

 

2017

 

2016

 

Millions of barrels of oil equivalent(1)

 

% of total proved reserves

 

Millions of barrels of oil equivalent

 

% of total proved reserves

 

Millions of barrels of oil equivalent

 

% of total proved reserves

        

 

 

 

Proved developed reserves

77.5

 

59.4%

 

107.4

 

64.3%

 

100.1

 

69.5%

Proved undeveloped reserves

52.8

 

40.6%

 

59.7

 

35.7%

 

43.9

 

30.5%

     

 

 

 

 

 

 

 

Total Proved Reserves

130.3

 

100%

 

167.1

 

100%

 

143.9

 

100%

81


 
 

 

   Note: All figures have been subject to rounding, so figures shown as totals may not sum.

 

We prioritize the development of new business opportunities associated with unconventional gas reserves in Argentina. During 2018, we drilled 8 wells in the El Mangrullo area,12 wells in the Rio Neuquén area and 9 wells in the Rincón del Mangrullo area aimed at developing unconventional gas reserves in the Punta Rosada and Mulichinco reservoirs.

 

Estimated reserves were subject to economic evaluation to determine their economic limits. Estimated reserves in Argentina are stated before royalties since royalties have the same impact as taxes on production and are not paid in kind, and therefore are treated as operating costs. As of December 31, 2018, the reserves in Venezuela were reclassified as contingent resources since December 2016 because of profitability and the economic situation of such country.

Reserves Evolution

The table below sets forth total proved reserves and proved developed reserves of crude oil, condensate and natural gas liquids, and reserves of natural gas, at the dates indicated. This table includes our net share of the proved reserves of our joint operations and associates. We are currently unable to obtain accurate information about the mixed companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018.

               
  

Crude oil, condensate and natural gas liquids

 

Natural gas

  
               
  

Argentina

 

Venezuela

 

Total

 

Argentina

 

Venezuela

 

Total

 

Combined

  

(in thousands of barrels)

 

(in millions of cubic feet)

 

(in MMboe) (1)

Total proved developed and undeveloped reserves as of December 31, 2016

 

46,925

 

-

 

46,925

 

582,076

 

-

 

582,076

 

143.9

Proved developed reserves as of December 31, 2016

 

35,381

 

-

 

35,381

 

388,157

 

-

 

388,157

 

100.1

Increase (decrease) originated in:

              

Revisions of previous estimates

 

978

 

465

 

1,443

 

-5,516

 

-

 

-5,516

 

0.5

Improved recovery

 

64

 

-

 

64

 

219

 

-

 

219

 

0.1

Extensions and discoveries

 

224

 

-

 

224

 

232,477

 

-

 

232,477

 

39.0

Purchase of proved reserves in place

 

585

 

-

 

585

 

46,386

 

-

 

46,386

 

8.3

Sale of proved reserves in place

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Year’s production

 

-7,146

 

-465

 

-7,610

 

-102,956

 

-

 

-102,956

 

-24.8

Total proved developed and undeveloped reserves as of December 31, 2017

 

41,630

 

-

 

41,630

 

752,686

 

-

 

752,686

 

167.1

Proved developed reserves as of December 31, 2017

 

32,935

 

-

 

32,935

 

446,594

 

-

 

446,594

 

107.4

Increase (decrease) originated in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revisions of previous estimates

 

1,003

 

-

 

1,003

 

-54,588

 

-

 

-54,588

 

-8.1

Improved recovery

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Extensions and discoveries

 

1,943

 

-

 

1,943

 

99,950

 

-

 

99,950

 

18.6

Purchase of proved reserves in place

 

81

 

-

 

81

 

65,115

 

-

 

65,115

 

10.9

Sale of proved reserves in place

 

-27,814

 

-

 

-27,814

 

-85,125

 

-

 

-85,125

 

-42.0

Year’s production

 

-1,845

 

-

 

-1,845

 

-86,073

 

-

 

-86,073

 

-16.2

Total proved developed and undeveloped reserves as of December 31, 2018

 

14,997

 

-

 

14,997

 

691,965

 

-

 

691,965

 

130.3

Proved developed reserves as of December 31, 2018

 

9,179

 

-

 

9,179

 

409,782

 

-

 

409,782

 

77.5

(1)Gas converted to oil equivalent using a factor of 6,000 cubic feet of gas per barrel of oil equivalent.

82


 
 

As of December 31, 2018, our liquid hydrocarbon and natural gas proved developed and undeveloped reserves totaled 130.3 MMboe (15.0 MMboe of liquid hydrocarbons and 692.0 billion cubic feet, or 115.3 MMboe, of natural gas), representing a 22% decrease compared to proved reserves as of December 31, 2017 (a decrease of 64% and a decrease of 8% for liquid hydrocarbons and natural gas, respectively).

During 2018, previous estimates of our fields located in Argentina were subject to revisions representing a decrease of 8.1 MMboe mainly attributable to adjustments of production estimates in Rincón del Mangrullo and performance of drilling activities in the Sierra Chata and the Rincón del Mangrullo areas, extension and discoveries increased by 18.6 MMboe through drilling activities, mostly in the El Mangrullo area and the Río Neuquén area. In addition, an increase of 10.9 MMboe was attributable to the purchase of proved reserves due to the new 35-year non-conventional concession in the El Mangrullo and the Sierra Chata areas, both located in the Neuquén basin (see below). Also, the sale of our interest in the Medanito, Jaguel de los Machos and PELSA blocks to Vista, caused a reduction of 42,0 million barrels of oil equivalent in our reserves.

 

As of December 31, 2018, 59% of our proved reserves were developed, while 41% were undeveloped. Proved developed reserves were 77.5 million of barrels of oil equivalent. During 2018, we invested U.S.$65 million to convert approximately 13.3 million barrels of oil equivalent of proved undeveloped reserves to proved developed reserves.

The 11% decrease in our proved undeveloped reserves in 2018 compared to 2017 was mainly attributable to:

(1)     the conversion of approximately 13.3 MMboe of proved undeveloped reserves to proved developed reserves, mainly through drilling activities in our production areas in the Neuquén basin, mainly in the El Mangrullo, Río Neuquén and Rincón del Mangrullo areas;

(2)     extensions and discoveries, through the drilling activities, mainly in the Río Neuquén and El Mangrullo area in the Neuquén basin, which resulted in the addition of 14.9 MMboe of proved undeveloped reserves;

(3)     the purchase of proved undeveloped reserves in connection with the new 35-years non-conventional concession in the El Mangrullo and Sierra Chata areas in the Neuquén basin, which resulted in the addition of 4.2 MMboe of proved undeveloped reserves;

(4)                 a decrease of 5.6 MMboe of proved undeveloped reserves, based on negative revisions to previous estimates of reserves and adjustments to production estimates based on performance of drilling activities, mainly in the Sierra Chata and Rincón del Mangrullo areas; and

(5)                 the sale of our interest in the Medanito, Jaguel de los Machos and PELSA blocks to Vista, caused a reduction of 7.0 MMboe in our proved undeveloped reserves.

 

The activities described in items (1), (2), (3), (4) and (5) above resulted in a net decrease of 6.9 MMboe in our proved undeveloped reserves in 2018 compared to 2017.

 

83


 
 

As of December 31, 2018, our proved undeveloped reserves were 52.8 MMboe, all of which corresponded to wells located within one offset of proved developed reserves and gas fields where the activity has been scheduled to maintain production levels in accordance with contracts and installed facilities. We plan to put approximately 90% of these proved undeveloped reserves into production through activities to be implemented over the next five years. The balance 10% will be developed over periods exceeding five years and are mainly located in gas fields where the activity has been scheduled to maintain production levels in accordance with contracts and installed facilities.

We have a total of 5.3 million barrels of oil equivalent of proved undeveloped reserves, all located in Argentina, that have been booked for more than five years. This is because such reserves are mainly located in gas fields where the activity has been scheduled to maintain production levels in accordance with contracts and installed facilities.

 Internal Control over Proved Reserves

The reserves estimation process begins with an initial evaluation of our assets by geophysicists, geologists and engineers. A Reserves Coordinator (Coordinador de Reservas orRC”), safeguards the integrity and objectivity of our reserves estimates by supervising and providing technical support to technical teams who are responsible for preparing the reserves estimates. Our technical teams have degrees in geophysics, geology, petroleum engineering and accounting, and are trained internally in reserves estimations seminars. The RC is responsible for consolidating and auditing the reserves estimation process in compliance with the SEC reserves guidelines. The technical officer primarily responsible for overseeing the preparation of our Reserves Report is a member of the Society of Petroleum Engineers, with over 30 years of experience in exploration and production activities. Our reserves estimates are approved by the Oil and Gas Exploration and Production Director.

 

The reported hydrocarbon reserves were estimated based on professional, geological and engineering judgment and on information available prior to December 31, 2018. Thus, they are subject to revisions, upward or downward, as a result of future operations or as additional information becomes available.

 

The estimation of reserves is imprecise due to many unknown geologic and reservoir factors that can only be estimated through sampling techniques. Since reserves are therefore only estimates, they cannot be appraised for the purpose of verifying exactness.

There are many uncertainties in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including certain factors that are beyond our control. The reserves data set forth in this annual report solely represents estimates of our proved oil and gas reserves. Reserves engineering is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be precisely measured. The accuracy of a reserves estimate stems from available data, engineering and geological interpretation and judgment of reserves and reservoir engineering. As a result, different engineers often obtain different estimates. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimate, so the reserves estimates at a specific time are often different from the quantities of oil and gas that are ultimately recovered. Furthermore, estimates of future net revenues from our proved reserves and the present value thereof are based upon assumptions about future production levels, prices and costs that may prove to be incorrect over time. Estimates of future prices, costs and production volumes are subject to uncertainties and may prove to be incorrect over time. The meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. Accordingly, we cannot provide assurances that any specified production levels will be reached or that any cash flow arising therefrom will be produced. The actual quantity of our reserves and future net cash flows therefrom may be materially different from the estimates set forth in this annual report.

We replace our reserves through the acquisition of producing fields, exploration and by “proving up” reserves in existing fields. “Proving up” is the process by which additional reserves classified as “probable and possible reserves” in a producing field are accessed and reclassified as “proved reserves”. We prove up reserves with reservoir management techniques, such as appraisal wells, water flooding and enhanced oil recovery projects. The reservoir management techniques currently used are appraisal wells, water injection and the drilling of horizontal producing and injection wells. Technologies such as 3D seismic process, horizontal and step out wells and reservoir numerical stimulation are also used.

 

About the Independent Reserves Engineers Firm

 

84


 
 

GCA has more than 50 years of excellence in energy consulting, with extensive experience in the world's oil basins in estimating and auditing reserves and resources. GCA focuses solely on the petroleum and energy industry, and specializes in the provision of policy, strategy, technical and commercial assistance to governments, financial institutions, and national and international oil, gas and energy companies worldwide. The provision of Reserves and Resources assessments is a core component of GCA’s business. GCA is fully familiar with the SEC regulations regarding oil and gas reserves (17 CFR Part 210 Rule 4-10 (a)). GCA employs a combination of commercial and technical professionals in main offices in the United Kingdom, United States and Singapore, with supporting offices in Argentina, Australia and Brazil. This staff encompasses all upstream technical disciplines (geology, geophysics, petrophysics, reservoir engineering, drilling and completion and development planning / facilities engineering), with midstream and downstream engineering and economics, commercial, legal and business strategy professionals to complement its technical staff.

 

The Reserves Report covered 83% of our estimated total proved reserves. In connection with the preparation of the Reserves Report,the Independent Reserves Engineers Firmprepared its own estimates of our proved reserves. In the process of the reserves evaluation,the Independent Reserves Engineers Firmdid not independently verify the accuracy and completeness of information and data furnished by us with respect to ownership interests, oil and gas production, well test data, historical costs of operation and development, product prices, or any agreements relating to current and future operations of the fields and sales of production. However, if in the course of the examination something came to the attention ofthe Independent Reserves Engineers Firmthat brought into question the validity or sufficiency of any such information or data,the Independent Reserves Engineers Firmdid not rely on such information or data until it had satisfactorily resolved its questions relating thereto or had independently verified such information or data.The Independent Reserves Engineers Firmindependently audited reserves estimates to conform to the guidelines of the SEC, including the criteria of “reasonable certainty,” as it pertains to expectations about the recoverability of reserves in future years, under existing economic and operating conditions, consistent with the definition of SEC Regulation S-X Section 210.4-10(a)issued the Reserves Report based upon its evaluation.the Independent Reserves EngineersFirm’s primary economic assumptions in estimates included oil and gas sales prices determined according to SEC guidelines, future expenditures and other economic assumptions (including interests, royalties and taxes) as provided by us. The assumptions, data, methods and procedures used, were appropriate for the purpose served by such report, andthe Independent Reserves Engineers Firmused all methods and procedures as it considered necessary under the circumstances to prepare such reports.

 

Technology used in reserves estimation

 

The project to extract the hydrocarbons must have commenced or the operator must be reasonably certain that it will commence the project within five years. The term “reasonable certainty” implies a high degree of confidence that the quantities of oil and/or natural gas actually recovered will equal or exceed the estimate. Reasonable certainty can be established using techniques that have been proved effective by actual production from projects in the same reservoir or an analogous reservoir or by other evidence using reliable technology that establishes reasonable certainty. Reliable technology is a grouping of one or more technologies (including computational methods) that have been field tested and have been demonstrated to provide reasonably certain results with consistency and repeatability in the formation being evaluated or in an analogous formation.

 

There are various generally accepted methodologies for estimating reserves including volumetric, decline analysis, material balance, simulation models and analogies. Estimates may be prepared using either deterministic methods. The particular method chosen should be based on the evaluator’s professional judgment as being the most appropriate, given the geological nature of the property, the extent of its operating history and the quality of available information. It may be appropriate to employ several methods in reaching an estimate for the property.

 

Estimates must be prepared using all available information (open and cased hole logs, core analyses, geologic maps, seismic interpretation, production/injection data and pressure test analysis). Supporting data, such as working interest, royalties and operating costs, must be maintained and updated when such information changes materially.

 

Our estimated proved reserves as of December 31, 2018 are based on estimates generated through the integration of available and appropriate data, utilizing well-established technologies that have been demonstrated in the field to yield repeatable and consistent results. Data used in these integrated assessments include information obtained directly from the subsurface via wellbore, such as well logs, reservoir core samples, fluid samples, static and dynamic pressure information, production test data, and surveillance and performance information. The data utilizedalso include subsurface information obtained through indirect measurements, including high quality 2-D and 3-D seismic data, calibrated with available well control. Where applicable, geological outcrop information was also utilized. The tools used to interpret and integrate all this data included both proprietary and commercial software for reservoir modeling, simulation and data analysis. In some circumstances, where appropriate analog reservoir models are available, reservoir parameters from these analog models were used to increase the reliability of our reserves estimates.

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For recent events, please see “Item 4—Recent Developments–Strategic Divestments–Sale of Certain Oil and Gas Assets to Vista” and “Item 4—Recent Developments–Oil and Gas”.

 

Our Refining and Distribution Business

On May 9, 2018, following the satisfaction of all the conditions precedent to the sale, the sale to Trafigura of our main assets related to the refining and distribution segment assets closed. For more information, see “—Recent Developments—Strategic Divestments—Sale of Refining and Distribution Assets to Trafigura” and Note 5.2.2 to the Consolidated Financial Statements”.

As of December 31, 2018, we are engaged in the refining and distribution business through our storage facility in Dock-Sud and our 28.5% interest in Refinería del Norte S.A.

 

The following table shows main indicators for our consolidated refining and distribution segment from discontinued operations for the fiscal years ended December 31, 2018 and 2017:

 

Technical Information

2018(1)

2017

Sales (thousand m3):

 

 

Crude Oil

24.3

16.6

Gas Oil

344.5

811.0

Gasolines

195.8

455.0

Fuel Oil, IFOs and Asphalts

138.0

297.2

Others

126.5

263.5

(1) Considers volumes sold until the closing ofthe sale of our refining and distribution assets to Trafigura.

 

Refining

 

Dock Sud Terminal

The Dock Sud distribution terminal, located in the province of Buenos Aires and in close proximity to the city of Buenos Aires, has a total nominal storage capacity of approximately 228 thousand cubic meters oflight products and lubricants bases in 43 tanks. Fuel reception is carried out from the DAPSA and YPF piers through pipes, with facilities for dispatch and reception of tankers.

The Dock Sud Terminal is interconnected by pipelines to all the players located in its area and has contracts to operate in the DAPSA and YPF docks for the reception and delivery of product transported through tankers.

In March 2019, we executed an agreement with Raízen Argentina for the sale of our Dock Sud Terminal. For more information about strategic divestments, see“—Recent Developments— Strategic Divestments—Sale of Dock Sud Terminal”.

 

Refinor

We have a 28.5% interest in Refinor, whose other shareholders are YPF (50%) and Pluspetrol S.A. (21.5%). Refinor is engaged in crude oil refining, natural gas processing, product transportation, marketing and sales.

Refinor owns the only refinery in the northern region of Argentina, which is located in Campo Durán, in the Province of Salta. Refinor’s refining capacity is 25.8 thousand bbl/day and its natural gas processing capacity is 20.3 million cubic meters of gas per day (“MMm3/d”).

 

 

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Refinor owns and operates the following processing plants: an atmospheric distillation unit (topping), a vacuum distillation unit, a gasoline hydro-treatment unit, a catalytic reformer plant, an isopentane plant using fractional distillation of gasoline turbex, two turbo expander and fractioning plants for LPG production, as well as a plant for the production of auxiliary services (industrial water, steam, electricity, compressed air) used in the different processing plants.

The Campo Durán refinery receives crude oil/condensate and natural gas from the northwestern basin and from Bolivia. These operations are conducted through two oil pipelines and three gas pipelines. In 2018, the average daily processing of crude oil amounted to 6,086 barrels. In turn, gas processing reached a daily average of 15.5 million cubic meters.

 

In 2012 Refinor entered into an agreement with IEASA to supply the compression gas service, which IEASA was importing from Bolivia. This agreement was amended to extend: (i) the compression’s capacity up to 26 MMm3 of gas per day; and (ii) the term of the agreement to April 2019.

In addition, Refinor operates a 1,108 km-long pipeline running from Campo Durán (in the Province of Salta) to Montecristo (in the Province of Córdoba) for the distribution of its products. Along the pipeline, the Banda Río Salí (in the Province of Tucumán), Güemes (in the Province of Salta) and Leales (in the Province of Tucumán) dispatch plants are supplied. This pipeline is the most important distribution channel for liquids generated in the Northwestern Basin in Argentina and transports diesel, virgin naphtha, gasoline components for formulating motonaphts for automotive use, butane and propane.

 

As of December 31, 2018, Refinor had a commercial network of 84 gas stations located in the Provinces of Tucumán, Salta, Santiago del Estero, La Rioja, Jujuy, Catamarca and Chaco. Through these gas stations, Refinor sells a high performance fuel line: Premium Max (97 octanes), Super Max (95 octanes) Eco Diesel and Eco Diesel Premium Max.

In 2018, sales of gasoline, gasoil, raw naphtha and other liquid fuels amounted to 533 thousand cubic meters, which represented a 6% decrease compared to 2017. LPG sales amounted to approximately 194 thousand tons, representing a 7% increase compared to 2017.

 

 Our Petrochemicals Business

Our petrochemical operations are entirely based in Argentina. We produce a wide array of products, such as intermediate gasoline, aromatic solvents, hexane and other hydrogenated paraffinic solvents, propellants for the cosmetic industry, monomer styrene, as well as rubber and polymers for the domestic and foreign markets from natural gas, virgin naphtha, propane and other supplies.

In Argentina, we are the only producer of styrene, polystyrene and elastomers, and the only integrated producer of plastics derived from oil production. As part of our efforts to integrate our operations, we use a substantial amount of styrene for the production of polystyrene and SBR.

As of the date of this annual report, the petrochemicals division has the following plants:

•      An integrated petrochemicals complex at Puerto General San Martín, in the Province of Santa Fé, with an annual production capacity of 50,000 tons of gases (LPG, which is used as raw material and propellants), 155,000 tons of aromatics, 290,000 tons of gasoline and raffinate, 160,000 tons of styrene, 55,000 tons of SBR, 180,000 tons of ethylbenzene and 31,000 tons of ethylene; and

•      A polystyrene plant located in the city of Zárate, in the Province of Buenos Aires, with a production capacity of 65,000 tons of polystyrene.

 

The following table sets forth main indicators of sales by major product for the petrochemicals division in Argentina for the fiscal year ended December 31, 2018 and 2017:

 

 

2018

2017

Technical Information

 

 

Sales (in thousand ton):

 

 

Styrene (incl. propylene y ethylene)

64

67

SBR

26

33

Polystyrene (incl. BOPS)

50

67

Others

2015

291

 

 

 

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Styrenics Division

 

As of December 31, 2018, monomer styrene sales volumes totaled 49 thousand tons, representing a decrease of 6% compared to 2017 and polystyrene sales volumes totaled 46 thousand tons,experiencing a 19% decrease in domestic sales associated with the fall in the refrigeration market, and a 36% decrease in exports. In 2018, BOPS sales volumes totaled 3.2 thousand tons, decreasing by 58% compared to 2017. In order to optimize the results of the business, we decided to discontinue the operation of the BOPS Plant as of April 2018. In this context, the Polystyrene Plant was temporarily stopped, affecting the sales volumes mentioned above.

 

In 2018, rubber sales totaled 26 thousand tons, of which 10 thousand tons were attributable to the domestic market and 16 thousand tons to exports. In 2018, the sales volume was 23% lower than 2017, due to lower sales to tire producers.

 

Reforming Gasoline Division

 

 

Sales of the Reforming division decreased by 25% compared to 2017 due to the lower availability of raw gasoline, as a result of the closure of the Oil Combustibles S.A.’s Plant.

 

Sales of intermediate gasoline and naphtha during 2018 totaled 153 thousand tons, which represented a 33% decrease compared to 2017, which is accounted for by a 53% decrease in domestic sales associated with the lower return of octane bases to Oil Combustibles. Sales of aromatics, hexane and paraffinic solvents during 2018 totaled 52 thousand tons, increasing by 8% compared to 2017. Propellant gas sales totaled 7,6 thousand tons in 2018, representing a 22% decrease compared to 2017 associated with lower production volumes.

 

As of December 31, 2018, our estimated market shares of the following products in Argentina were: styrene 100%, polystyrene 92% and SBR 80%.

Our Holding and Other Business

Our holding and other business segment is comprised, among other holdings, of our indirect interest in TGS, Argentina’s major gas transportation company, which owns a 9,184 km-long gas pipeline network and a gas fuel processing plant, General Cerri, with an output capacity of 1 million tons a year. Furthermore, we co-control Transener, a company that operates and maintains the Argentine high voltage transmission grid covering 14.5 thousand km of proprietary lines, as well as 6.5 thousand km of Transba-owned high voltage lines. Transener transports 85% of the electricity in Argentina.

 

Our Interest in TGS

TGS is the most important gas transportation company in Argentina, and it operates the biggest pipeline system in Latin America. It is also a leading company in the production and sale of Natural Gas Liquids (“NGL”) for both domestic and export markets, conducting its business from the General Cerri Complex located in Bahía Blanca, in the Province of Buenos Aires. TGS also provides comprehensive solutions in the natural gas area and, since 1998, it has also landed in the telecommunications area through its controlled company Telcosur. As of December 31, 2018, Pampa holds a 25.5% indirect interest in TGS through CIESA.

 

Description of TGS’s Business Segments

Regulated Segment: Gas Transportation

In 2018, revenues from this business segment amounted to Ps. 15,462 million (before the intersegment’s sales), increasing by 107% compared to Ps. 7,456 million recorded in 2017, which was mainly due to the impact of: (i) the tariff update approved by ENARGAS Resolutions No. 310/18 as from April 1, 2018; (ii) the tariff update approved by ENARGAS Resolution No. 265/18as from April 1, 2018; and (iii) to a lesser extent, the increase in revenues in the production and commercialization of liquids’ segment, attributable to both the international reference prices and volumes sold; partially offset by the effects of the restatement of TGS’ financial statements.

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Revenues from this business segment result mainly from firm natural gas transportation agreements, whereby the pipeline capacity is reserved and paid for irrespective of its actual use. Besides, TGS provides an interruptible service, where the transportation of natural gas is subject to the pipeline’s available capacity. Furthermore, TGS provides operation and maintenance services for assets assigned to the natural gas transportation system corresponding to the extensions encouraged by the Argentine Government and held by trusts created to such effect. For this service, TGS receives from customers with incremental natural gas transportation capacities the CAU (Cargo de Acceso Único, “Access and Use Position”) established by ENARGAS, whichremained unchanged since its creation in 2005 its update in May 2015.

In 2018, the daily average injection of natural gas into the gas pipeline system by local producers was 69.6 MMm3/d, a 5.8% higher than in 2017. TGS´s gas pipeline system was responsive to meet the demand.

Regarding trade, during 2018 TGS launched two open bids, for an additional average 35-year period, which allowed for the renewal of the 305.5 thousand m3/day of remaining capacity in the Neuquén - Greater Buenos Aires route, as well as the allocation of the incremental capacity obtained through the execution of certain adaptation works in the General San Martín gas pipeline, equivalent to 271 thousand m3/day in the Tierra del Fuego – Buenos Aires route. The firm transportation service was commissioned on January 1, 2019 for a 35-year term.

Non-Regulated Segment: Production and Marketing of Gas Liquids

Unlike the gas transportation business, the production and selling of gas liquids is not regulated by ENARGAS.

In 2018, this segment’s revenues accounted for 48.8% of TGS total revenues, which have increased from Ps. 11,174 million recorded in 2017 to Ps. 16,627 million in 2018. Revenues from the liquid fuel business have increased mainly as a result of the exchange rate effect on sales denominated in U.S.$. partially offset by the effects of the restatement of TGS’ financial statements.

Gas liquids production and selling activities are conducted at the Cerri Complex, located close to Bahía Blanca, which is supplied by all of TGS’s main gas pipelines. Ethane, propane, butane and natural gasoline are recovered at this industrial complex. TGS sells these liquids to both domestic and foreign markets. In the domestic market, propane and butane are sold to fractioning companies. In the foreign market, the sale of these products and natural gasoline is made at current international market prices. Ethane is sold to Polisur at a price mutually agreed by the parties.

During fiscal year 2018, the production of liquids was 1,165,286 short tons, higher than 2017, mainly as a result of the higher levels of natural gas reaching the Cerri Complex for processing and the larger quantity of ethane tons produced. Likewise, in 2018 no production restrictions were recorded during the winter period on account of the higher supply of domestic gas from unconventional gas developments.

Furthermore, TGS has entered into export agreements for the 2018/2019 summer period, which not only enabled the company to obtain better prices than with “spot” sales, but also brought short-term certainty for the sale of these products.

In the domestic market, during 2018 TGS continued satisfying the ME&M’s requirements on the volumes to be provided to the domestic market under both the new stabilization program and the network propane agreement. Under these programs, TGS sells volumes well below market prices, which, under certain conditions, results in negative operating margins.

On September 6, 2018, TGS entered into an ethane sales agreement with PBB Polisur (“PBB”), a subsidiary of Dow Chemical and TGS’s sole customer for the commercialization of this product, which is produced at the General Cerri Complex located in the City of Bahía Blanca, Province of Buenos Aires. This agreement is retroactively effective as from May 1, 2018 and will expire on December 27, 2027. This agreement not only guarantees the supply of this product to the only customer for ethane production in Argentina, but also allows the company to derive sales margins in line with those obtained in the last few years. This agreement sets forth commercial guidelines consistent with those stipulated in the previous agreement, and introduces improvements guaranteeing an increase in sales volumes for TGS, which will be gradually implemented during the first 5 years ofthe agreement’s term. In 2018 and on account of a very competitive price offer for incremental tons made by TGS,437,362shorttons of ethane were supplied to Polisur, reaching a record daily delivery of 1,352 tons.

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Non-Regulated TGS’s Segment: Other Services

The other services segment is not regulated by ENARGAS. TGS provides midstream services, which mainly consist of treatment, impurity separation and gas compression. It may also include gas extraction and transportation at gas fields, construction services, inspection and maintenance of compression plants and gas pipelines, as well as steam generation services for the production of electricity. This business segment also includes revenues from telecommunication services provided through its subsidiary Telcosur.

This segment represented 5.8% of TGS’s total income in 2018. Revenues from sales increased in 2018, mainly on account of higher revenues from natural gas operations and maintenance, and compression and treatment services during the 2018 fiscal year. Additionally, but a lesser extent, on account of the devaluation of the nominal exchange rate on revenues denominated in U.S. Dollars.

Regarding telecommunication services provided by Telcosur, during 2018 several agreements were entered into which allowed for an increase in the capacity sold and a consolidation of these operations.

In 2018, the Province of Neuquén awarded TGS the necessary concessions for the building of a 147-km gathering gas pipeline with a total transportation capacity of 60 million m3/day, which will include a treatment plant in the town of Tratayén with an initial capacity of 5 million m3/day, expandable in consonance with the increase in gas volumes transported through the Vaca Muerta formation, and allowing for the transportation and conditioning of extracted natural gas into the gas pipeline system currently operated by TGS.

TGS will invest approximately U.S.$250 million towards the startup of this transportation and conditioning capacity. As of the date of this annual report, the associated works are in the execution stage, and commissioning will take place in stages from the second quarter of 2019 to the fourth quarter of the same year.

TGS’s investments in Vaca Muerta enable it to take a significant leap in its midstream activities, thus reinforcing its commitment with the country’s energy supply.

Arbitral Claim

On May 8, 2015, the Secretariat of the International Court of Arbitration of the International Chamber of Commerce (“ICC”) notified TGS regarding the request for arbitration initiated by Pan American Energy LLC Sucursal Argentina and Pan American Sur SA (the “applicants”) related to the execution of three natural gas processing contracts between the applicants and TGS (the “Agreements”). On April 4, 2016, TGS was notified of the beginning of the corresponding demand, to which TGS responded on August 17, 2016. On March 16, 2017, the applicants submitted their response to the arguments previously filed by TGS.

According to the demand, the applicants allege breach of contracts during the period between February 2006 and February 2016, that would have resulted in a lower allocation of the products obtained, which shortfall at March 31, 2017 is claimed to be equal to U.S.$ 134 million without interest or U.S.$ 306.3 million, including interest. To this amount, accrued interest would be added from March 15, 2017 until the date of effective payment.

On April 20, 2018, TGS was notified by the ICC that on April 18, 2018 it received the Draft Award issued by the Court of Arbitration in the arbitration complaint timely filed against TGS for an amount of U.S.$306 million by Pan American Energy LLC, Argentina Branch, and Pan American Sur S.A. (the “Plaintiffs”), which award was finally approved on May 4, 2018.

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Finally, on May 28, 2018, the ICC issued the Final Award, which partially upheld the allegations of the complaint and resolved that TGS should pay to the Plaintiffs compensation in the amount of U.S.$21.3 million, interests included. Compensation was paid on June 14, 2018, an aggregate amount equal to U.S.$21.3 million.

Regulations Specifically Applicable to Gas Transportation

Public Emergency and Exchange Rate Regime Reform Law No. 25,561, which was passed and enacted during the first days of the month of January, 2002 and later extended on several occasions until early January 2018, provided for the conversion into pesos of utility service tariffs. As such the transportation tariff remained unchanged in Pesos as from 1999, despite the sharp increase in price indexes and operating costs. As a result of this situation, tariffs in this segment suffered a significant lag when compared to the important increases in other macroeconomic variables, which directly affected operating costs, and thus deteriorated TGS’s economic and financial situation.

The tariff freeze continued until April 2014, when a mere 20% increase was obtained as a result of the implementation of the transitory agreement entered into in 2008. Later on, effective as from May 1, 2015, an additional 44.3% increase in the natural gas transportation tariff and a 73.2% increase in the CAU (“Cargo de Acceso y Uso” (Access and Use Position)) were granted.

Throughout 2016, TGS conducted the relevant procedures aimed at the implementation of the transitory agreement signed with the Argentine Government on February 24, 2016. Within this context, on March 29, 2016, the ME&M issued Resolution No. 31/16 which, among other measures, instructed ENARGAS to conduct the RTI process and to grant a transitory tariff increase until the conclusion of the RTI process. In furtherance thereof, on March 31, 2016, ENARGAS passed Resolution No. 3724/16 approving the new tariff schemes for the natural gas transportation utility service and the CAU, granting a 200.1% increase effective as from April 1, 2016. However, on August 18, 2016, the Supreme Court established the obligation to hold a public hearing for setting tariffs and prices without market intervention, and declared the nullity of ME&M Resolutions No. 28/16 and No. 31/16 regarding residential users, for which tariff schemes were taken back to the values effective as of March 31, 2016. The public hearing was held on October 6, 2016, and consequently, ENARGAS issued Resolutions No. 4054/16 providing for a 200.1% transitory tariff increase effective as from October 7, 2016, the execution of the investment plan, and restrictions on the distribution of dividends.

The public hearing required by the RTI process was held in December 2016. On March 30, 2017, pursuant to ENARGAS Resolutions No. I-4362/17, a transitory tariff scheme was approved, which, if granted in a single installment as from April 2017, would have represented a 214.2% and 37% increase in the natural gas transportation utility service and the CAU, respectively, applicable as from April 1, 2017, with a semiannual non-automatic tariff adjustment mechanism subject to the PPI published by the INDEC. As a result, TGS executed the 2017 Comprehensive Memorandum of Understanding, and on the same date, the 2017 Transitory Agreement was entered into with the purpose of making a transitory tariff adjustment to be charged against the RTI. To such effect, ENARGAS Resolution No. 4362/17 was issued pursuant to ME&M Resolution No. 74/17, which limited the tariff increase resulting from the RTI process and provided for its application in three stages, 58% in April 2017, and the balance in December 2017 and April 2018.

Both the RTI process and the determination of the transitory tariff adjustments provide TGS with a framework to operate the gas pipeline system on a prudential and economically sound basis. Furthermore, the increases were granted taking into consideration the income necessary to execute a Five-Year Investment Plan that requires a high level of investments which are essential to face operational and maintenance needs. For the five-year period starting on April 1, 2017 and finishing on March 31, 2022, this plan will amount to Ps. 6,786.5 million (in nominal value at December 31, 2016, adjustable by WPI), an approximate average of Ps. 1,360 million per year for the five-year period, expressed in values as of December 2016. This Five-Year Investment Plan was devised by TGS to guarantee the safety and continuity of the natural gas transportation utility service so as to meet the expected higher demand from the system as a result of the development of natural gas reserves.

The public hearing to present costs variations was held on November 14, 2017, and pursuant to ENARGAS Resolution No. 120/17, an average 78% increase in tariff schemes was established, effective as from December 1, 2017, including a 15% increase on account of the non-automatic adjustment provided for by ENARGAS Resolution No. 4362/17 for the January – October 2017 period. This increase was deemed charged against the amounts resulting from the Comprehensive Renegotiation Memorandum of Understanding for the License executed by TGS on March 30, 2017.

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Furthermore, on January 31, 2018, ENARGAS Resolution No. 247/18 came into force, calling for a public hearing to be held on February 20, 2018 to discuss TGS’ transportation tariff update. On March 28, 2018, PEN Executive Order No. 250/18 became effective. Pursuant to such Executive Order, the Argentine Government ratified the Comprehensive Renegotiation Memorandum of Understanding for the license executed by TGS on March 30, 2017, thus concluding the RTI process initiated in the month of April, 2016, and as a result, on June 26, 2018, TGS voluntarily dismissed the arbitration proceeding it had brought before the ICSID.

 

Therefore, and pursuant to ME&M Resolution No. 74E/17, ENARGAS issued Resolution No. 310/18, which approved, effective as from April 1, 2018, the last installment of the tariff increase granted by Resolution No. 4362/17, equivalent to a 50% increase in tariff schemes applicable to the natural gas transportation utility provided by TGS, as well as in the CAU, including a 13% recognition on account of IPIM variations for the November 2017 – February 2018 period, and a compensation for the tariff increase deferral payable in installments.

On September 4, 2018, the public hearing to analyze cost variations between February and August 2018 was held, and on September 27, 2018, ENARGAS issued Resolution No. 265/2018 granting a 19.7% increase in tariff schemes applicable to the natural gas transportation utility provided by TGS, effective as from October 1, 2018.

On February 26, 2019, a new public hearing took place with the aim of the determination of the semiannual tariff. On March, 29 2019, the ENARGAS issued Resolution No. 192/2019 (“Resolution 192”) which provides an increase of 26% over the tariff for the natural gas transport service. This increase came into effect on April 1, 2019 was calculated considering the WPI for the period August 2018 – February 2019.

Regulations Specifically Applicable to the LPG Business -Household Gas Bottles’ Program and Propane for Grids Agreement

In the domestic market, during 2018 TGS continued taking part in several product supply programs developed by the Argentine Government, such as the program for the supply of butane for gas bottles at subsidized prices pursuant to PEN Executive Order No. 470/2015, later regulated by SE Resolution No. 49/2015 and No. 70/2015, the Household Gas Bottles’ Program regulated by SRH Resolutions No. 56/2017 and 287/2017 and SRH Provision No. 5/2018, and the Agreement for the Supply of Propane Gas for Undiluted Propane Gas Distribution Grids (the ‘Propane for Grids Agreement’), whereby the SE issued a series of resolutions aiming to regulate the price of propane.

The Household Gas Bottles’ Program establishes a maximum reference price for parties involved in the LPG supply chain seeking to guarantee supply to low-income residential users by compelling producers to supply LPG at a set price to fractionation companies, with a defined quota for each of them. Additionally, the payment of a compensation to participating producers is established.

The sale price for butane and propane under the Household Gas Bottles’ Program is determined by the SRH, which issued Res. No. 287/17 and Provision No. 5/18 setting a price of Ps.4,302/ton for propane and Ps. 4,290/ton for propane as from December 2017, and of Ps.5,416/ton for butane and Ps.5,502/ton for propane as from April 2018. The compensation received from the SRH amounted to Ps.550/ton, which has been the compensatory amount since April 2015. Furthermore, on January 25, 2019, SGE Resolution No. 15/19 was issued, which updated prices to Ps.9,154/ton for butane and Ps. 9,042/ton for propane, effective as from February 2019. Furthermore, the compensation receivable from the SRH has been nullified.

Due to its participation in this program, TGS is bound to produce and sell the LPG volumes required by the ME&M at prices ostensibly lower than market prices. As a result of this situation, TGS has been forced to adopt the necessary mechanisms to minimize its negative impact.

As regards the Propane for Grids Agreement and under the gradual subsidy reduction path, ME&M Resolution No. 474/17 provided, effective as from December 1, 2017, an increase in the price of undiluted propane gas to be destined to the Propane for Grids Agreement in the amount of Ps.1,941/ton and Ps.3,964/ton, depending on the client the product is targeted at. On the other hand, on May 30, 2018, TGS executed the 16th extension to the agreement, which set a new methodology for price determination and volumes to be sold for the April 1, 2018 – December 31, 2019 period under this program.

Both the Household Gas Bottles’ Program and the Propane for Grids Agreement provide for a compensation to participants, payable by the Argentine Government, which is calculated as the difference between the price defined by the SGE and the export parity published by the SRH on a monthly basis. Even though it is not being collected timely and in due form, collection terms have improved during fiscal year 2018.

Our Interest in Transener

Transelec owns 50% of CITELEC’s capital stock, which in turn owns 52.65% of the capital stock of Transener, the largest high voltage electricity transmission company in Argentina. Transener’s Class B common shares are listed on the BASE, and the remaining 47.3% of Transener is held by minority public shareholders and the ANSES. The remaining 50% of CITELEC’s capital stock was acquired equally by Electroingeniería S.A., which in turn transferred its participation to Grupo Eling S.A. and IEASA. More recently, Grupo Eling S.A. transferred its participation to IEASA.

Transener was privatized in July 1993, when CITELEC was awarded the Argentine Government’s controlling stake in Transener. In August 1997, the Province of Buenos Aires privatized Transba, a company organized in March 1996 to own and operate the regional electricity transmission system of the Province of Buenos Aires. Transener acquired 90% of Transba’s capital stock on August 5, 1997.

On September 30, 2016, Grupo Eling S.A sold its interest in CITELEC and all of their rights and obligations under the technical assistance agreement for the operation, maintenance and administration of system of the high voltage electric energy transport system dated November 9, 1994, were transferred to IEASA, except for amounts accrued to Grupo Eling S.A until September 30, 2016.

Transener’s operations

Transener is the leading company in the public service of high voltage electricity transmission in Argentina, which directly operates 85% of the high voltage lines of the country. It holds a concession over 14,489 kilometers of transmission lines and 57 transforming substations.

Transener operates and maintains the leading electricity transmission system in Argentina at the 500 kv level under a concession agreement under which Transener holds an exclusive 95-year concession to provide high voltage electricity transmission services throughout the Transener network spanning 14,489 km Transener also indirectly owns one of the seven regional transmission networks in Argentina, the Transba network. The Transba concession grants Transba an exclusive 95-year concession to provide electricity transmission services (from the 66 kV to the 220 kV levels) in the Province of Buenos Aires via trunk lines, which are the main transmission lines that connect to all other lower voltage transmission systems owned and maintained by distribution companies in a certain region, throughout the Transba network spanning approximately 6,213 km and 98 transforming substations.

Transener also generates additional revenues from, among others, the operation and maintenance of the fourth line, and services provided to third parties.

Operation and Maintenance

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The Extra High Voltage Electricity Transmission System operated and maintained by Transener is subject to increasingly higher load conditions every year. In 2018, the peak voltage exceeded the previously highest historical peak voltage of 25,628 MW recorded in 2017, reaching 26,320 MW.

Despite the great number of power grid solicitations, in 2018 service quality has been fully acceptable for the values required from a company like Transener, which ended the year with a failure rate equal to 0.35 failures per each 100 kilometer-line, which is consistent with international parameters accepted for companies that operate and maintain extra high-voltage transmission systems.

Business Development

 

Engineering Services

 

Taking into consideration its electrical system projects, Transener has focused on projects with competitive advantages by giving priority to those within the 500kV and 132kV systems.

The development of several projects for the replacement and installation of new reserves in the transportation system, has brought new service requirements such as: elaboration of contract specifications, electric studies, implementation of the generation and demand control (DAG and DAD systems), testing and entry into service of the transformer stations. A key factor on account of which the client´s decision to delegate critical tasks to Transener’s technical teams is their great experience. Agreements for the expansion of the transportation system have been elaborated within Plan Renovar I y II, as well as for other expansions to be executed by other agents of the WEM. Among the most relevant works, we expect to undertake works at ET 25 de Mayo, ET Viborata, ET Ezeiza, ET Ramallo, and other expansions of 132kV for wind farms.

Services related to the Transmission of Electric Energy

Activities relating to the operation, maintenance and other services such as specific tests hired by private clients who own transmission facilities, used for private and/or public services (independent and international transporters) have been conducted by Transener since the beginning of its activity.

Furthermore, Transener also performs tasks such as bushing replacements, oil analysis, diagnosis tests, OPGW repairs, electric and magnetic field measurement, implementation of automatisms, line and equipment maintenance of transformer stations, among others.

All necessary proceedings to maintain the actual value of Transener’s remuneration have been fulfilled in every Service Agreement and most of them have been renewed without interruption from the beginning, confirming the quality of the service provided by Transener and customer´s satisfaction.

Communications

Transener has continued to provide infrastructure services to different communication companies during 2018, including the assignment of dark fiber optics over the system property (line IV), and the lease of space in microwave station and in antenna support structure. The increasing demand from cell phone companies has increased the income through additional volume and higher prices. In addition, Transener continued support services in operative communication and data transmission to the WEM agents.

 

 

Tariffs

The Public Emergency and Exchange Rate Regime Reform Law (Law No. 25,561) imposed the obligation on public utilities, such as Transener and its subsidiary Transba, to renegotiate their agreements in force with the Argentine Government while continuing to supply electricity services. This situation has significantly affected Transener and Transba’s economic and financial situation.

 

In May 2005, Transener and Transba signed with the UNIREN the Memorandums of Understanding stipulating the terms and conditions for updating their respective concession agreements. The Memorandums of Understanding provided for the performance of an RTI before the ENRE and the determination of a new tariff regimefor Transener and Transba, which should have come into force in 2006, as well as for the recognition of variations in operating costs incurred until the entry into effect of the new tariff regime resulting from the RTI.

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Since 2006, Transener and Transba have repeatedly requested that ENRE regularize compliance with the commitments stipulated in the Memorandum of Understanding, expressing the need to launch the RTI process. Furthermore, Transener and Transba filed their respective tariff claims for their review by ENRE, the holding of a public hearing and the definition of the new tariff scheme.

 

Instrumental Agreement

In December 2010 Transener and Transba entered into an Instrumental Agreement to UNIREN’s Memorandum of Understanding with the SE and the ENRE, which mainly provided for the acknowledgment of a credit claim in favor of Transener and Transba for cost fluctuations incurred during the June 2005 – November 2010 period calculated as per the Cost Variation Index established in the Memorandum of Understanding. These receivables were assigned as consideration for disbursements by CAMMESA, which were executed through loan agreements.

 

Upon collecting these receivables and pending the RTI, in May 2013 Transener and Transba, respectively, executed with the SE and the ENRE a renewal agreement, effective until December 31, 2015, which, among other provisions, acknowledged a credit claim for cost variations recorded during the December 2010 – December 2012 period. In view of the repeated delays in the implementation of the RTI provided for in the Memorandum of Understanding, the SE and the ENRE successively extended the recognition of higher costs up to and including November 2015. In May 2016, upon the expiration of the Renewal Agreement and without any pending recognized receivables, Transener and Transba continued collecting the loans granted by CAMMESA, which were disclosed as liabilities. Finally, on December 26, 2016, Transener executed the last agreement with the SE and the ENRE, which recognized credits for cost variations in favor of Transener and Transba for the December 2015 - January 2017 period. On June 19, 2017, CAMMESA made the last disbursement in this regard, thus offsetting all credits for cost variations.

 

RTI

On September 28, 2016, pursuant to the instruction given by ME&M Resolution No. 196/16, the ENRE passed Resolutions No. 524/16 approving the program applicable to the RTI for Electric Power Transmission. The public hearing for the defense of the proposal was conducted in December 2016.

 

On January 31, 2017, the ENRE issued Resolutions No. 66/17 and No. 73/17 establishing the tariffs applicable to the 2017/2021 five-year period. Furthermore, the ENRE established the remuneration update mechanism, the service quality system and applicable penalties, the reward system, and the investment plan to be executed by both companies during such period.

 

Based on the discrepancy between Transener and Transba’s proposal and what was granted by the RTI, on April 7 and 21, 2017, Transener and Transba filed a motion for reconsideration against ENRE Resolution No. 66/17, 84/17 and 139/17, and No. 73/17, 88/17 and 138/17, respectively. In general, the motion for reconsideration mainly requested an additional 50% increase in the recognized capital base, and a 28% increase in regulatory income.

 

 

Furthermore, during the fiscal year ended December 31, 2017, Transener and Transba requested the recognition of damages for the May 2013 – January 2017 period on account of breaches by the Argentine Government in the adjustment of the remuneration for the supply of the high-voltage electric power transmission and backbone distribution service in the Province of Buenos Aires based on the actual cost variations under the Transition Tariff Regime and the failure to remunerate the capital base and the reasonable profitability which would result from the RTI.

 

The purpose of the semi-annual adjustment mechanism stipulated in the RTI is to keep real-term values for remunerations collectable by Transener and Transba during the RTI’s five-year period. The adjustment formula takes into consideration the variations during such semester in the IPIM, ‘Manufactured Products’ item, the CPI and the Salary Index published by the INDEC, which are weighed based on the cost structure and average investments for the2017-2021 period in the RTI. This mechanism contemplates a trigger clause that weighs the IPIM and the CPI semi-annual variations published by the INDEC, ascertained at a variation equal to or higher than 5%.

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For the December 2016 – June 2017 period, the trigger clause amounted to 9.02%, and, therefore, the semi-annual adjustment for Transener and Transba remuneration was activated. However, its application was deferred until December 15, 2017, when ENRE issued Resolutions No. 627/17 and No. 628/17 updating Transener and Transba’s remunerations by 11.35% and 10.96%, respectively, for the December 2016 – June 2017 period, retroactively to August 1.

 

On February 19, 2018, the ENRE issued Resolutions No. 37/18 and No. 38/18, which were later amended on April 5, 2018 by ENRE Resolutions No. 99/18 and 100/18, respectively. These resolutions updated Transener and Transba’s remunerations by 24.15% and 23.39%, respectively, accumulated during the December 2016 – December 2017 period and applicable to the remuneration scheme as from February 1, 2017.

 

Furthermore, on November 16, 2018, the ENRE issued Resolutions No. 280/18 and No. 281/18 updating Transener and Transba’s remunerations by 42.55% and 43.25%, respectively, for the December 2016 – June 2018 period, applicable to the remuneration scheme as from August 1, 2018. As CAMMESA did not compute interest for the months of August and September 2018, Transener and Transba filed a claim before the ENRE and CAMMESA for the settlement of the accrued interest.

 

As of the date of this annual report, the ENRE has still not issued the resolutions corresponding to the semi-annual update for Transener and Transba’s remuneration, which, according to the RTI, should have applied since February 1, 2019. Based on actual data and estimates, the calculation of Transener and Transba’s updates would amount to 25.5% and 27%, respectively, accumulated for the June 2018 – December 2018 period. Transener is currently conducting the applicable procedures to regularize this situation.

 

SEE Resolution No. 1,085/17

SEE Resolution No.1,085/17 issued on November 28, 2017, and effective as from December 1, 2017, established the methodology for the distribution of costs associated with the remuneration of transmission companies among the Transmission Systems’ users. These costs are distributed based on the demand and/or contribution of energy by each WEM agent (distributors, GU, self-generators and generators), directly and/or indirectly associated to the High-Voltage Electric Power Transmission System and/or Main Distribution Electric Power Transmission System (“DisTro”), after discounting costs assigned to generating agents as operation and maintenance costs for connection and transformation equipment.

It is worth highlighting that prices payable by distribution companies is consideration for electric power transmission within the WEM are stabilized for their payment by distributors, and are calculated together with each Seasonal Programming or Quarterly Reprogramming. In the case of distributing agents whose demand is connected to different DisTros, the demand percentage corresponding to each DisTro will be ascertained, and the price will contemplate the demand and the price on a weighted basis.

 

Furthermore, prices applicable to GU within the WEM are calculated in the economic transaction on a monthly basis. In the case of WEM GU not directly associated with the high-voltage transmission and/or DisTro, the applicable monthly value will be that corresponding to the connecting agent.

Quality, Safety, Environment and Occupational Health

We consider that economic progress will only be sustainable to the extent performance is attained through the implementation and improvement of a management system committed to all stakeholders: shareholders, customers, employees, community, suppliers and control bodies, with a focus on quality personal health and safety, environmental care and energy efficiency.

 

In accordance with this vision, during 2018, we implemented a new quality, safety, environment and health (“QSELH”) policy, which is applicable to all its business segments. This policy makes an integral part of its management system, and operates at all levels of the organization through the setting and monitoring of certain goals and objectives, furthering projects, plans, programs, trainings, audits and assessments. The QSELH policy is deployed through guidelines which establish good practices, create a common identity, point the way forward, improve QSELHperformance, and enable us to be a safe, reliable, high-quality, and eco-efficient company. which optimizes its resources and contributes to the quality of life of its employees and community welfare, guaranteeing at all times compliance with requirements set forth by national, provincial and municipal entities, control over different hazards and issues, and impact and risk minimization.

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In addition, we continued advancing management programs in all our operations by allocating important resources, both at the corporate and asset level, to staff training; and furthered the development and strengthening of our QSEOH culture through an integrated and aligned QSELH management.

 

Quality

 

We further our management quality using international ISO standards and the ‘National Quality Prize’ as references and seeking continuous improvement in all our activities. The main methodologies applied for quality management are: certified management systems, standards managements, anomalies and audits, and improvement teams.

 

Our asset management system is certified under ISO 9001 (generation, refining and distribution and petrochemical business - quality management), ISO 14001 (environmental management), OHSAS 18001 (occupational health and safety management) and ISO 50001 (energy management) international standards. Pursuant to the implemented model, external audits are conducted on an annual basis to guarantee adherence to the requirements of the above-mentioned international standards. Furthermore, each asset has a management program in place which promotes continuous performance improvement.

 

During 2018, we successfully completed the Certification Program under these standards, thus demonstrating the efficiency in the scope of set goals and its commitment with customers, suppliers, shareholders, employees and the community. The program includes internal and external maintenance audits and re-certifications, as well as the implementation of new certifications. External audits were conducted by renowned institutions such as TÜV Rheinland, IRAM and Bureau Veritas. Internal audits were conducted by qualified Pampa staff. Furthermore, in 2018 we completed the upgrade of ISO 9001 (quality management) and ISO 14001 (environmental management) standards under the new 2015 versions, in in all our operations. Furthermore, in 2018 we certified the management system under (the ISO 14001, 9001, 18001 international standards in CTPP, commissioned in August 2017.

 

In 2018,wereviewed the Standards Management and the Anomalies Management to promote quality throughout the organization on a daily basis.

 

With the purpose of improving operations and results through team work, we continue developing ‘Improvement Teams’, an initiative launched in 2012 with the purpose of implementing enhancements with a focus on efficiency, productivity, costs, quality, safety and environment.

 

Safety

 

As part of the management programs for all its operations, we advanced the definition and follow-up of safety goals and objectives, which are periodically monitored through the QSELH indicator board, and continued developing initiatives to sustain and improve safety management and performance in each asset.

 

In our generation business, a comprehensive review of dangerous energy blocking systems was launched to guarantee safety during maintenance procedures in our facilities. Furthermore, in our Oil and Gas business, a pilot evaluation of the safety culture was launched. In 2018, improvement plans were devised under the monitoring of the business’ senior management.

 

As regards labor hygiene, we continued focusing on quality improvements in hygiene risk maps, covering chemical, physical and ergonomic risks. Evaluations were conducted, and measurements of both working environments and individual dosimetries were optimized, resulting in several improvements in our plants, geared at minimizing risks.

 

Environment

 

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Our operations are conducted within a context of sustainable development. We are committed to the protection of the environment and endeavors to make a rational use of natural resources in each of our projects by applying proper and economically viable technologies.

 

We continued managing environmental risks to prevent the occurrence of undesirable events and/or to minimize their impact by developing actions and programs such as for the integrity of aerial and underground pipelines and tanks. In addition, monitoring and environmental studies were performed to become acquainted with different environmental situations. All these programs are encompassed within integrated management systems and contribute to environmental performance sustainability and enhancement.

 

Furthermore, in line with Argentina’s energy requirements and aiming to have an active participation in the diversification of the Argentine energy mix, in 2018 we commissioned PEMC with an installed capacity of 100 MW and began the construction of PEPE II and PEPE III, with a 106 MW power capacity. As of the date of this annual report, we inaugurated PEPE II and are moving forward with the expansion project at CTGEBA. See “Item 4. Our Generation Business— Thermal Generation Plants” and “Our Generation Business—Renewable Energy”.

 

Response to Emergency

 

We endeavor to prevent undesirable events and are fully prepared to provide a prompt and efficient response to emergency situations to minimize possible consequences. In 2018, we continued making periodic emergency response exercises in terrestrial and aquatic scenarios to develop the skills and competencies necessary to set up emergency plans and coordinate the necessary activities to be deployed should an undesirable event occur.

 

Occupational Health

 

In 2018, we continued implementing our alcohol, drugs and psychoactive substances’ policy. A communication and awareness campaign was conducted in association with CAPLA (Argentine Center for the Labor Prevention of Addictions) and Fundación Convivir consisting of the dissemination of this policy, awareness talks for employees and contractors, managerial meetings to analyze the policy, and handouts for employees.

 

During 2018, progress was made on (i) the Occupational Health Management process to promote the biopsychosocial health of all Pampa members, contributing to improving each workers’ quality of life. The process was concluded with the Labor Health qualification for contractors; and (ii) the ergonomics program, which aims to guarantee a proper layout for the working space, avoid unnecessary movements and efforts, achieve proper visibility and location of work items, establish environmental and ergonomic criteria for the development of future work positions, and improve the employees’ productivity, comfort and safety through the use of ergonomic tools. As regards prevention, we continued providing Cardiopulmonary Resuscitation and First Aid training courses, a physical activities plan, flu, and tetanus vaccination campaigns.

 

We andFundación Pampa Energía S.A.(the “Foundation”), organized a voluntary blood donation drive in several assets.

Corporate Responsibility 

We understand corporate social responsibility as a strategic management model which is developed and implemented jointly with the Foundation. With a strong commitment to the community, which goes beyond power demand satisfaction, we develop programs oriented towards improving the life quality of people and the communities where we operate.

 

In 2018, we continued reinforcing our strategic with particular focus in: education and professional training, the corporate social responsibility in our assets and corporate volunteering. Set forth below a brief description of our programs.

 

Professional Training Programs

 

The purpose of these programs is to provide equal employment and educational opportunities through the social inclusion of vulnerable persons throughout the country, and to accompany young students along each stage of their academic-professional training so that, once the process is completed, young students may become trained andqualified professionals who may successfully integrate in the labor market. Integrated programs for the different stages of this training process include: Primary Level, Secondary Level, College Level, University Level and Professional Level.

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Corporate Social Responsibility in our assets

 

We seek to strengthen our bond with the communities where our assets are located with the commitment to contribute to the social, economic and environmental development of our employees and their families and community.

 

In 2018, we continued consolidating Corporate Social Responsibility Committees with the purpose of planning and developing sustainable local management programs aligned with the values of the Company and of each business, and the community. We currently have 8 committees in place with the participation of 100 voluntary employees.

 

The actions and programs developed by our assets are focused on different work areas, based on needs identified by the committees through permanent dialog with each of our communities.

 

During 2018, we together with the Foundation, organized the following activities: (i) Open Doors Program in our plants; (ii) local actions for building and infrastructure improvement in social organizations, schools, community centers and other public welfare organizations of the Provinces of Buenos Aires, Mendoza, Salta and Neuquén; (iii) Productive Chain Programs coordinated by the Chamber of Commerce and Industry of San Lorenzo, Santa Fe; (iv) Environmental Protection, such as the donation of a low-power 350 W wind turbine to a rural school in the town of Calderón which supplies sustainable electric power to Rural Kindergarten No. 4 and Rural Primary School No. 6 in Calderón, District of Coronel Rosales, among others; and (v) Promotion of Healthy Habits, such as solidarity hockey event in support of vulnerable children and youth, among other.

 

Volunteering Actions

 

We consider that employees are our best asset, and that each of us can engage our energy and knowledge to the service of those needing them most. For this reason, we launched the “Pampa Volunteering” Program, a participation space for all employees willing to engage in solidarity work. We channeled these actions through our Corporate Social Responsibility Committees, generated a space for involvement and coordinated actions addressing the bond between the asset and the community. Throughout 2018, we performed 69 volunteering activities with the participation of 1.034 employees. Volunteers dedicated more than 18,600 hours to helping others.

 

During 2018, volunteers participated in the following activities: a “Christmas Eve for Everyone”, “Together against Cold Weather” in coordination with Fundación Sí and the Haciendo Lío organization, family and children’s day at Pampa and activities to improve educational quality and accompanying our communities.

 

Capital Expenditures  

For a discussion of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Capital Expenditures”.

Seasonality

See “Item 5 - Operating and Financial Review and Prospects Factors Affecting Our Results of Operations -Electricity Demand and Supply – Seasonality”.

Property, Plant and Equipment   

We have freehold and leasehold interests, but there is no specific interest that is individually material to us. The majority of our property, consisting of oil and gas reserves, voltage lines, petrochemicals plants, power plants, manufacturing facilities, stock storage facilities, pipelines, oil and gas wells and corporate office buildings is located in Argentina.

Insurance

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In our generation business, we carry full insurance for each of our generation assets, including business interruption and general liability insurance. As of December 31, 2018, the total generation assets covered under these policies are valued at U.S.$4,478 million.

 

In our oil & gas business, we carry full insurance, including business interruption and general liability insurance. As of December 31, 2018, the total oil & gas assets covered under these insurance policies are valued at U.S.$323 million.

 

 In our refining and petrochemical business and distribution business, we also carry full insurance, including business interruption and general liability insurance. As of December 31, 2018, the total assets covered under insurance policies are valued at U.S.$1,692 million.

Patents and Trademarks

Certain portions of our commercial activities are conducted under licenses granted by third parties. Royalties related to sales associated with such commercial activities are paid under the relevant licenses. In 2018, we used the name “Petrobras” with the permission of Petrobras or its relevant affiliates. We used the name “Petrobras” and related brands for the performance of the downstream business activities in Argentina (basically, operation of gas service stations and production and commercialization of lubricant products), and we have the right to continue doing so (subject to certain contractual terms) for a period of three years, ending in July 2019.

THE ARGENTINE ENERGY SECTOR

Electricity Regulatory Framework

Overview

Until 1990, virtually all of the electricity supply in Argentina was controlled by the public sector. In 1991, the Argentine Government undertook the privatization of state-owned electricity generation, transmission and distribution companies. In January 1992, the Argentine Congress enacted Law No. 24,065 (the “Regulatory Framework Law”), which established guidelines for the restructuring and privatization of the electricity sector. The Regulatory Framework Law, which continues to provide the framework for regulation of the electricity sector, distinguished between the generation, transmission and distribution of electricity as separate businesses and made each subject to its own regulatory framework.

The ultimate objective of the privatization process was to reduce rates paid by users and improve the quality of the electricity supply service through competition. The privatization process commenced in February 1992 with the sale of several large thermal generation facilities, and continued with the sale of transmission and distribution facilities (some of which we currently own) and additional thermoelectric and hydroelectric generation facilities.

The Public Emergency Law combined with the devaluation of the Peso and high rates of inflation had a severe effect on public utilities in Argentina. Because public utilities were no longer able to increase tariffs, infla