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Pampa Energia (PAM)

Filed: 30 Apr 20, 5:22pm

 

 

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, 2019

 

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

Trading Symbol

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

 

PAM

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:

1,677,112,043 outstanding shares of common stock, par value Ps.1.00 per share, excluding 70,761,196 treasury shares.

 

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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (§ 15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.x

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

8

Item 2.

Offer Statistics and Expected Timetable

8

Item 3.

Key Information

8

SELECTED FINANCIAL DATA

8

EXCHANGE RATES

11

RISK FACTORS

12

Item 4.

Information on the Company

55

HISTORY AND DEVELOPMENT OF THE COMPANY

55

OUR BUSINESS

56

Organizational structure

66

Our Generation Business

68

Our Distribution of Energy Business

77

Our Oil and Gas Business

83

Our Petrochemicals Business

98

Our Holding and Other Business

99

Quality, Safety, Environment and Occupational Health

107

Corporate Responsibility

109

Property, Plant and Equipment

110

Insurance

111

Patents and Trademarks

111

THE ARGENTINE ENERGY SECTOR

112

Item 4A.

Unresolved Staff Comments

142

Item 5.

Operating and Financial Review and Prospects

142

Item 6.

Directors, Senior Management and Employees

182

Item 7.

Major Shareholders and Related Party Transactions

195

Item 8.

Financial Information

198

CONSOLIDATED FINANCIAL STATEMENTS

198

LEGAL PROCEEDINGS

198

DIVIDENDS

204

SIGNIFICANT CHANGES

204

Item 9.

The Offer and Listing

204

TRADING HISTORY

204

THE ARGENTINE SECURITIES MARKET

207

Item 10. 

Additional Information

211

MEMORANDUM AND ARTICLES OF ASSOCIATION

211

MATERIAL CONTRACTS

218

EXCHANGE CONTROLS

218

TAXATION

219

DOCUMENTS ON DISPLAY

225

Item 11.

Quantitative and Qualitative Disclosures about Market Risk

226

Item 12.

Description of Securities Other than Equity Securities

226

Item 13.

Defaults, Dividend Arrearages and Delinquencies

228

Item 14.

Material Modifications to the Rights of Security Holders and Use of Proceeds

228

Item 15.

Controls and Procedures

228

   

 


 
 
 
 

PRESENTATION OF INFORMATION

This document comprises the annual report on Form 20-F for the year ended December 31, 2019 of Pampa,that has been approved by resolution of the Board of Directors meeting of Pampa held on April 29, 2020. 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, 2019 and 2018,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, 2019, 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 9, 2020.

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.

1


 
 

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 Company changed its functional and presentation currencies from the Peso to the U.S. Dollar commencing on January 1, 2019 following a change in facts and circumstances relevant to its business operations.  Therefore, as from January 1, 2019, the Company records its operations in U.S. Dollars, the new functional currency, and also presents its Consolidated Financial Statements in U.S. Dollars.

 

The comparative information has been stated in terms of the measuring unit current as of December 31, 2018 in accordance with IAS 29 "Financial reporting in hyperinflationary economies", since the Peso was the Company’s functional currency up to that date.

As from the change in functional currency, the Company has discontinued the preparation and presentation of financial statements in accordance with IAS 29, and has treated the amounts expressed in terms of the measuring unit current as of December 31, 2018 as the basis for the carrying amounts in subsequent financial statements.

The information as of December 31, 2018 and 2017 disclosed for comparative purposes arises from the Consolidated Financial Statements denominated in Pesos stated in terms of the measuring unit current as of December 31, 2018 in accordance with IAS 29, and was translated into U.S. Dollars using the exchange rate as of that date.

 

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)”. For more information, see Note 3 and Note 4.3 to our Consolidated Financial Statements.

 

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.

 

 

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 power and other related services;

 

2


 
 

- 

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

- 

our ability to renew certain concessions;

- 

the ability to develop and monetize conventional and unconventional reserves;

- 

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

- 

changes to our reserves estimates;

- 

the treatment of pending obligations after the RTI;

- 

the evolution of Edenors energy losses and the impact of Edenors fines and penalties and uncollectable debt;

- 

electricity shortages;

- 

the potential disruption or interruption of Edenors service;

- 

the revocation or amendment of Edenors 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;

- 

more severe 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;

- 

the effects of a pandemic or epidemic and any subsequent mandatory regulatory restrictions or containment measures; 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.

 

 

3


 
 

GLOSSARY

 

Glossary of certain terms used in this Annual Report

 

Unless the context indicates otherwise, the following terms have the meanings shown below:

  • “ADDUC”:Asociación de Defensa de Derechos de Usuarios y Consumidores;
  • “Adjustment Agreement”: Renegotiation of the Concession, an agreement entered into between Edenor and the Argentine Government in February 2006 relating to the adjustment and renegotiation of the terms of Edenor’s concession (Acta Acuerdo sobre la Adecuación del Contrato de Concesión del Servicio Público de Distribución y Comercialización de Energía Eléctrica);
  • “ADR”: American Depositary Receipt;
  • “ADS” or “ADSs”: American Depositary Shares;
  • “AFIP”: Federal Administration of Public Revenue (Administración Federal de Ingresos Públicos);
  • “AML in the Capital Market Sector”: Resolution UIF No. 21/2018 and, subsequently amended by Resolutions No. 156/2018, No. 18/2019 and No. 117/2019;
  • “ANSES”: National Social Security Agency (Administración Nacional de la Seguridad Social);
  • “Anti-Money Laundering Law”: Law No. 25,246, subsequently amended by Laws No. 26,087, 26,119, 26,268, 26,683, 26,733, 26,734 and Decree No. 27/2018;
  • “ASC”: Accounting Standards Codification;
  • “Authorized Markets”: securities market in Argentina that require authorization from the CNV to operate.
  • “Banco Nación”: Banco de la Nación Argentina;
  • “BASE”: Buenos Aires Stock Exchange;
  • “BCL”: Business Corporation Law;
  • “BLL”: Bodega Loma La Lata S.A;
  • “Board of Directors”: the board of directors of Pampa Energía S.A.;
  • “BONY”: The Bank of New York Mellon;
  • “BOPS”: Bi-orientated polystyrene;
  • “ByMA”: Argentine stock exchange and markets (Bolsas y Mercados Argentinos S.A.);
  • “CAMMESA”: Wholesale Electric Market Administration Company (Compañía Administradora del Mercado Eléctrico Mayorista Sociedad Anónima);
  • “Caja de Valores”: Caja de Valores S.A.;
  • “CAU”: Charge of Access and Use (Cargo de Acceso y Uso);
  • “CBs”: Corporate Bonds;
  • “CC”: Combined Cycle;
  • “CEE”: Emergency Executive Committee (Comité Ejecutivo de Emergencia);
  • “CER”: refers to theCoeficiente de Estabilización de Referencia, a benchmark stabilization coefficient that follows the currency value before pesification upon Executive Order No. 214 dated year 2002;
  • “CFEE”: Federal Council on Electricity (Consejo Federal de la Energía Eléctrica);
  • “CIESA”: Compañía de Inversiones de Energía S.A.;
  • “CITELEC”: Compañía Inversora en Transmisión Eléctrica Citelec S.A.;
  • “CML”: Capital Markets Law No. 26,831;
  • “CMM”: Cost Monitoring Mechanism;
  • “CMIEE”: Average Incremental Charge of Surplus Demand (Cargo Medio Incremental de la Demanda Excedente);
  • “CNG”: compressed natural gas;
  • “CNV”: Comisión Nacional de Valores;
  • “Consolidated Financial Statements”: audited consolidated statements of financial position as of December 31, 2019 and 2018, 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, 2019, and the notes thereto of Pampa;
  • “Corporate Criminal Liability Law”: Corporate Criminal Liability Law No. 27,401;
  • “Corod”:Corod Producción S.A.;
  • “CPB”: Central Piedra Buena S.A. or “Central Térmica Piedra Buena”;
  • “CPD”: Costo Propio de Distribución or Own Distribution Costs;
  • “CPI”: Consumers Prices Index;
  • “CSJN”:Corte Suprema de Justicia de la Nación;
  • “CTB”: CT Barragán S.A. (previusly known as PEA);
  • “CTEB”:Central Térmica Ensenada de Barragán;

4


 
 
  • “CTIW”:Central Térmica Ingeniero White;
  • “CTG”:Central Térmica Güemes S.A.;
  • “CTGEBA” or “Genelba”:Central Térmica Genelba;
  • “CTLL”:Central Térmica Loma La Lata S.A. or “Central Térmica Loma La Lata”;
  • “CTP”:Central Térmica Piquirenda;
  • “CTPP”:Central Térmica Parque Pilar;
  • “CVP”: Corporación Venezolana de Petróleo S.A;
  • DIGO”: Guaranteed Availability Commitments;
  • “DisTro”: High-Voltage Electric Power Transmission System and/or Main Distribution Electric Power Transmission System.
  • “DOP”: delivery or pay.
  • “EASA”: Electricidad Argentina S.A
  • “Ecuador TLC”: EcuadorTLC S.A.;
  • “Edenor”: Empresa Distribuidora y Comercializadora Norte S.A.;
  • “Edesur”: Empresa Distribuidora Sur S.A.;
  • “Eg3Red”: Eg3 Red S.A;
  • “EMESA”: Empresa Mendocina de Energía Sociedad Anónima;
  • “ENARGAS”:Ente Nacional Regulador del Gas or National Gas Regulatory Entity;
  • “ENARSA/IEASA”. Integración Energética Argentina S.A. (former Energía Argentina S.A.);
  • “ENRE”:Ente Nacional Regulador de la Electricidad or Electricity Regulatory Entity;
  • “ENOPSA”: Energía Operaciones ENOPSA S.A. (former Petrobras Energía Operaciones Ecuador S.A.)
  • “Energy Plus”: a program under SE Resolution 1,281/2006;
  • Exchange Act”:United States Securities Exchange Act of 1934, as amended;
  • “FO or GO”: Fuel Oil or Gas Oil;
  • “FODER”: Fondo para el Desarrollo de Energía Renovables;
  • “FONINVEMEM”: Fund for Investments required to increase the Power Supply in the Electricity Wholesale Market (Fondo Para Inversiones Necesarias que Permitan Incrementar la Oferta de Energía Eléctrica en el Mercado Eléctrico Mayorista);
  • “Foundation”:Fundación Pampa Energía S.A;
  • “FOCEDE”:Fund for Electricity Distribution Expansion and Consolidation Works(Fondo para Obras de Consolidación y Expansión de Distribución Eéectrica);
  • “GCA”: Gaffney, Cline & Associates
  • “G&P”:Gas y Petróleo de Neuquén S.A.;
  • “GDP”: Gross Domestic Product;
  • “Greenwind”: Greenwind S.A.;
  • “GT” or “TG”: gas turbine;
  • “GU”: Large Users (Grandes Usuarios)
  • “GUMA”:Major Large Users (Grandes Usuarios Mayores);
  • “GUME”:Minor Large Users (Grandes Usuarios Menores);
  • “GUDI”:Major Distribution Users (Grandes Usuarios del Distribuidor);
  • “HIDISA”: Hidroeléctrica Diamante S.A.;
  • “HINISA”: Hidroeléctrica Los Nihuiles S.A.;
  • “HMRT”: hours with a high thermal demand;
  • “HPPL”: Pichi Picún Leufú Hydroelectric Complex
  • “Hydrocarbons Law”: Law No. 17,319 as amended by Law No. 27,007;
  • “ICSID”: International Centre for Settlement of Investment Disputes;
  • “IGJ”: City of Buenos Aires’s Public Registry of Commerce (Inspección General de Justicia);
  • “INDEC”: National Statistics and Census Institute (Instituto Nacional de Estadística y Censos);
  • “Independent Reserves Engineers Firm”: Gaffney, Cline & Associates;
  • “INDISA”: Inversora Diamante S.A.;
  • “INNISA”: Inversora Nihuiles S.A.;
  • “IPB”: Inversora Piedra Buena S.A.;
  • “IPIM”: Wholesale Domestic Price Index (Índice de Precios Internos al por Mayor);
  • “J.P. Morgan”: JPMorgan Chase Bank, N.A;
  • “LNG”: liquefied natural gas;
  • “LPG”: liquefied petroleum gas;
  • “LVFVD”: Sales Settlements with Maturity Date to be Defined(Liquidaciones de Ventas sin Fecha de Vencimiento a Definir);
  • “MAT”: Term Market (Mercado a Término);
  • “MAT ER”: Renewable Energy Term Market

5


 
 
  • “MBTU” refers to million of British Thermal Units (BTU);
  • “MDP”: Ministry of Productive Development (former SGE)
  • “ME&M”: Ministry of Energy and Mining;
  • “MinEn”: Former Ministry of Energy (former ME&M)
  • “MMBOE”: million barrels of oil equivalent.
  • “MMC”: Cost Monitoring Mechanism (Mecanismo de Monitoreo de Costos);
  • “MMm3/d”: million cubic meters of gas per day
  • “MULC”: Single Free Exchange Market (Mercado Único y Libre de Cambios);
  • “National CPI”: a CPI which is based on a survey conducted by the INDEC and several provincial statistical offices in 39 urban areas including each of Argentina’s provinces;
  • “NAL”: new tariff items that must file for non-automatic licenses, under the Resolution N°1/20 of the Secretariat of Industry, Knowledge Economy and Foreign Commercial Management;
  • “NGL”: Natural Gas Liquids
  • “NYSE”: New York Stock Exchange;
  • “OCP”:Oleoducto de Crudos Pesados Ltd.;
  • “OED”:Agency in Charge of Dispatch(Organismo Encargado del Despacho);
  • “Official Gazette”: Official Gazette of Argentina (Boletín Oficial de la República Argentina);
  • “Oldeval”:Oleoductos del Valle S.A.;
  • “OPGW”:Optical Ground Wire;
  • “PACOSA”:Pampa Comercializadora S.A.;
  • “Pampa” or “the Company”: Pampa Energía S.A.;
  • “Pampa Cogeneración”: Pampa Cogeneración S.A.;
  • “PDVSA”: Petróleos de Venezuela S.A.;
  • “PEB”: Pampa Energía Bolivia S.A. (former “PBI” - Petrobras Bolivia Internacional S.A.);
  • “PEISA”: Petrobras Energia Internacional S.A.;
  • “PELSA”: Petrolera Entre Lomas S.A.;
  • “PEMC”: Parque Eólico Mario Cebreiro;
  • “PEMF”: Parques Eólicos Fin del Mundo S.A
  • “PEN”: National Executive Branch (Poder Ejecutivo Nacional);
  • “PEO”: Petrobras Energía Operaciones S.A.
  • “PEPASA”: Petrolera Pampa S.A.;
  • “PEPE”: Parque Eólico Pampa Energía
  • “Pesos” of “Ps.” or “AR$”:Argentine Pesos;
  • “Petrobras Argentina”: Petrobras Argentina S.A.;
  • “Petrobras”:Petroleo Brasileiro S.A;
  • “Petrolera Pampa”: Petrolera Pampa S.A.;
  • “PHA”: PHA S.A.U.;
  • “PISA”: Pampa Inversiones S.A.;
  • “PIST”:Transportation System Entry Point or natural gas price at wellhead (Punto de Ingreso al de Sistema de Transporte);
  • “Plasticos de Zarate”: Plásticos de Zárate S.A.;
  • “Polisur”: PBB Polisur S.A;
  • “PPA” or “PPAs”: relevant wholesale electricty supply agreements orpower purchase agreements (Contratos de Abastecimiento Mayorista de Electricidad);
  • “PP”: Pampa Participaciones S.A.U.;
  • “PP II”: Pampa Participaciones II S.A.;
  • “PPP”: public-private participation projects;
  • “PPSL”: Petrobras Participaciones S.L.;
  • “PROCELAC”:Procuraduría de Criminalidad Económica y Lavado de Activos;
  • “Public Emergency Law: Law No. 25,561 – the Public Emergency and Exchange Rate Regime Reform Law.”;
  • “PUREE”:Programa de Uso Racional de la Energía Eléctrica;
  • “QSELH”: Quality, Safety, Environment and Labor Health;
  • “Refinor”: Refinería del Norte S.A.;
  • “RENPER”: National Registry of Renewable Source Electric Power Generation Projects (Registro de Proyectos de Generación de Energía Eléctrica de Fuente Renovable);
  • “Regulatory Framework Law”: Law No. 24,065, which established guidelines for the restructuring and privatization of the electricity sector;
  • “Reserves Report”: the year-end reserves report by Gaffney, Cline & Associate;
  • “RET”: Temporary Special Regime (Régimen Especial Temporario);

6


 
 
  • “RT”: Technical Resolution (Resolucion Tecnica);
  • “RTI”: Tariff Structure Review (Revision Tarifaria Integral);
  • “SACDE”: Sociedad Argentina de Construcción y Desarrollo Estratégico S.A.;
  • “SADI”:the Argentine Electricity Interconnected Grid(Sistema Argentino de Interconexión);
  • “SBR”: styrene butadiene rubber;
  • “SE”: Secretariat of Energy (Secretaría de Energía);
  • “SEC”: Security and Exchange Commission;
  • “Securities Act”: U.S. Securities Act of 1933, as amended;
  • “SEDRONAR”: Secretariat of Planning for the Prevention of Drug Addiction and Action against Drug Trafficking (Secretaría de Políticas Integrales sobre Drogas de la Nación Argentina);
  • “SEE”: Subsecretariat of Electric Energy, former Secretariat of Electric Energy (Subsecretaría de Energía Eletrica);
  • “SGE”: Former Government Secretariat of Energy (former MinEn) (Ex Secretaría de Gobierno de Energía (ex MinEn);
  • “SHC”: Undersecretary of Hydrocarbons and Fuels (Subsecretaría de Recursos Hidrocarburíferos (ex Secretaría de Recursos Hidrocarburíferos);
  • “SIMI”: “Integral Import Monitoring System” (AFIP) (Sistema Integral de Monitoreo de Importaciones).
  • “Social Solidarity and Productive Reactivation Law”: Law No. 27,541;
  • “SRRYME”:Secretary of Renewable Resources and Electricity Market (Secretaría de Recursos Renovables y Mercado Eléctrico);
  • “SSERyEE”: Undersecretary of Renewable Energy and Energy Efficiency (Subsecretaria de Energías Renovables y Eficiencia Energética de la Nación);
  • “ST”: steam turbine;
  • “TGS”: Transportadora de Gas del Sur S.A.;
  • “TJSM”: Termoeléctrica José de San Martín S.A.;
  • “TMB”: Termoeléctrica Manuel Belgrano S.A.;
  • “TOP”: take or pay.
  • “Transba”: Empresa de Transporte de Energía Eléctrica por Distribución Troncal de la Provincia de Buenos Aires Transba S.A.;
  • “Transelec”: Transelec Argentina S.A.;
  • “Transener”: Compañía de Transporte de Energía Eléctrica en Alta Tensión Transener S.A.;
  • “Transfer Agreement”: Agreement on the Implementation of the Transfer of Jurisdiction between the City of Buenos Aires and the Province of Buenos Aires entered into by and among the Federal Government, the City of Buenos Aires and the Province of Buenos Aires, dated May 9, 2019;
  • “TV”: Vapor Turbine (Turbina a Vapor);
  • “UIF”: Financial Information Unit (Unidad de Información Financiera);
  • “UNIREN”: Public Utility Contract Renegotiation and Analysis Unit (Unidad de Renegociación de Contratos de Servicios Públicos);
  • “U.S.”: United Stated of America;
  • “US$ and/ or U.S. Dollars”: U.S. currency;
  • “UTEs”: joint operations (Unión Transitoria);
  • “VAD”: Distribution Added Value (Valor Agregado de Distribución);
  • “VAT”: Value Added Tax;
  • “WEM”: Wholesale Electricity Market;
  • “WEM Large Users”: WEM users with a capacity higher than 300 KW;
  • “Wheeling System Users”: certain of Edenor’s large users that are eligible to purchase their energy needs directly from generators in the WEM and only acquire from Edenor the service of electricity delivery.
  • “Wheeling Charges”: Edenor’s tariffs for wheeling system users; and
  • “YPF”: YPF S.A.

 

7


 
 

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 four-year period ended December 31, 2019. The selected consolidated statement of comprehensive income and the selected consolidated statement of cash flow data for the years ended December 31, 2019, 2018 and 2017 and the selected consolidated statement of financial position as of December 31, 2019 and 2018, have been prepared in accordance with IFRS as issued by the IASB and have been derived from our Consolidated Financial Statements included elsewhere in this annual report. The selected consolidated statement of comprehensive income and the selected consolidated statement of cash flow data for the year ended December 31, 2016 prepared in accordance with IFRS have derived from our audited consolidated financial statements for each of the years in the three-year period ended December 31, 2018 that are not included in this annual report, which were audited by Price Waterhouse & Co. S.R.L. The summary financial data as of and for the year ended December 31, 2015 have not been presented as these cannot be provided on a restated basis without unreasonable effort or expense.

Comparative information in our Consolidated Financial Statements and the comparative financial information included elsewhere in this Annual Report arises from figures denominated in Pesos stated in terms of the measuring unit current as of December 31, 2018 in accordance with IAS 29 and was translated into U.S. Dollars using the exchange rate as of that date. See “Presentation of Information—Financial Information” “Presentation of Information—Functional and Presentation Currency”,“Item 5—Operating and Financial Review and Prospects—Results of Operations” and Note 3 and Note 4.3 to the Consolidated Financial Statements.

The Company changed its functional and presentation currencies from the Peso to the U.S. Dollar commencing on January 1, 2019. 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.”

 

 

As of December 31,

 

 

 2019

 

 2018

 

 2017

 

 2016

 

 

(in million of US$)(1)

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

 

 

 

    

 

Non-current assets:

 

      

 

Property, plant and equipment

 

3,507

 

3,316

 

2,959

 

3,129

Intangible assets

 

151

 

161

 

169

 

174

Right-of-use assets

 

16

 

-

 

-

 

-

Deferred tax assets

 

28

 

2

 

51

 

60

Investments in joint ventures and associates

 

511

 

407

 

315

 

255

Financial assets at amortized cost

 

18

 

-

 

-

 

3

Financial assets at fair value through profit and loss

 

11

 

11

 

8

 

36

Other assets

 

1

 

1

 

-

 

1

Trade and other receivables

 

79

 

253

 

197

 

218

Total non-current assets

 

4,322

 

4,151

 

3,699

 

3,876

Current assets:

 

      

 

Inventories

 

153

 

137

 

113

 

164

Financial assets at amortized cost

 

54

 

35

 

1

 

1

Financial assets at fair value through profit and loss

 

365

 

405

 

572

 

205

Derivative financial instruments

 

4

 

-

 

-

 

1

Trade and other receivables

 

561

 

703

 

751

 

691

Cash and cash equivalents

 

225

 

241

 

31

 

69

Total current assets

 

1,362

 

1,521

 

1,468

 

1,131

Non current assets classified as held for sale

 

-

 

-

 

490

 

1

 

8


 
 

Total assets

 

5,684

 

5,672

 

5,657

 

5,008

Shareholders´ equity

 

      

 

Share capital

 

46

 

50

 

55

 

51

Share capital adjustment

 

260

 

260

 

289

 

287

Share Premium

 

510

 

491

 

491

 

422

Treasury shares

 

1

 

-

 

-

 

-

Treasury shares cost

 

(44)

 

(39)

 

(3)

 

-

Treasury shares adjustment

 

1

 

4

 

-

 

-

Legal reserve

 

42

 

24

 

19

 

15

Voluntary reserve

 

422

 

195

 

333

 

250

Other reserves

 

(18)

 

(13)

 

10

 

9

Retained earnings

 

726

 

403

 

313

 

114

Other comprehensive income

 

(29)

 

(9)

 

(9)

 

(4)

Equity attributable to owners of the company

 

1,917

 

1,366

 

1,498

 

1,144

Non-controlling interest

 

492

 

429

 

472

 

465

Total equity

 

2,409

 

1,795

 

1,970

 

1,609

Non-current liabilities:

 

      

 

Investments in joint ventures  and associates

 

4

 

4

 

-

 

-

Provisions

 

145

 

146

 

174

 

218

Income tax and minimum notional income tax provision

 

10

 

27

 

34

 

46

Deferred revenue

 

5

 

7

 

8

 

10

Taxes payables

 

4

 

14

 

14

 

15

Deferred tax liabilities

 

368

 

407

 

443

 

585

Defined benefit plans

 

27

 

31

 

39

 

45

Salaries and social security payable

 

4

 

4

 

5

 

5

Borrowings

 

1,764

 

1,835

 

1,454

 

747

Trade and other payables

 

90

 

220

 

250

 

260

Total non-current liabilities

 

2,421

 

2,695

 

2,421

 

1,931

Current liabilities:

 

      

 

Provisions

 

20

 

23

 

31

 

39

Deferred revenue

 

-

 

-

 

-

 

-

Income tax and minimum notional income tax provision

 

53

 

29

 

37

 

71

Taxes payables

 

72

 

54

 

77

 

117

Defined benefit plans

 

4

 

4

 

5

 

5

Salaries and social security payable

 

65

 

72

 

84

 

85

Derivative financial instruments

 

3

 

1

 

3

 

-

Borrowings

 

183

 

342

 

229

 

522

Trade and other payables

 

454

 

657

 

707

 

629

Total current liabilities

 

854

 

1,182

 

1,173

 

1,468

Liabilities associated to assets classified as held for sale

 

-

 

-

 

93

 

-

Total liabilities

 

3,275

 

3,877

 

3,687

 

3,399

Total liabilities and equity

 

5,684

 

5,672

 

5,657

 

5,008

 

 

      

 

Number of outstanding shares (in millions) (2)

 

1,677

 

1,874

 

2,080

 

1,938

(1) Peso amounts as of December 31, 2018, 2017 and 2016 have been translated into US$ at the seller exchange rate for US$ quoted by Banco Nación on December 31, 2018 of Ps.37.70 to US$1.00. See “Item 3. Key Information—Exchange Rates.

(2) As of December 31, 2019, 2018 and 2017 we held 71 million, 25 million and 2.5 million treasury shares, respectively.

 

 

 

 

For the year ended December 31,

 

 

2019

 

2018

 

2017

 

2016(3)

 

 

(in millions of US$)(1)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 

      

 

Revenue

 

2,836

 

2,920

 

2,175

 

1,360

Cost of sales

 

(2,032)

 

(1,967)

 

(1,574)

 

(1,137)

Gross profit

 

804

 

953

 

601

 

223

Selling expenses

 

(148)

 

(171)

 

(127)

 

(119)

Administrative expenses

 

(174)

 

(206)

 

(198)

 

(199)

Exploration expenses

 

(9)

 

(1)

 

(2)

 

(5)

Other operating income

 

40

 

181

 

149

 

222

Other operating expenses

 

(86)

 

(200)

 

(103)

 

(103)

Impairment of property, plant and equipment

 

(62)

 

(32)

 

-

 

-

Share of profit from joint ventures and associates

 

101

 

118

 

48

 

8

 

9


 
 

Operating income

 

751

 

670

 

368

 

54

 

 

 

 

 

 

 

 

 

Gain on net monetary position

 

187

 

629

 

304

 

153

Financial income

 

96

 

99

 

62

 

46

Financial costs

 

(299)

 

(316)

 

(232)

 

(216)

Other financial results

 

113

 

(858)

 

(100)

 

13

Financial results, net

 

97

 

(446)

 

34

 

(4)

Profit before income tax

 

848

 

224

 

402

 

50

Income tax and minimun notional income tax

 

(48)

 

(17)

 

26

 

42

Profit of the year from continuing operations

 

800

 

207

 

428

 

92

Profit (Loss) of the year from discontinued operations

 

-

 

80

 

(50)

 

4

Total Profit of the year

 

800

 

287

 

378

 

96

 

 

      

 

Items that will not be reclassified to profit of loss:

 

      

 

Remeasurements related to defined benefit plans

 

2

 

(4)

 

-

 

(1)

Income tax

 

-

 

1

 

-

 

-

Share of loss from joint ventures

 

-

 

(1)

 

-

 

-

Exchange differences on translation

 

(15)

 

-

 

-

 

-

Items that may be reclassified to profit of loss:

 

       

Exchange differences on translation

 

(22)

 

1

 

3

 

-

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

 

(35)

 

(3)

 

3

 

(1)

Other comprehensive income of the year from discontinued operations

 

-

 

8

 

(14)

 

4

Total Other Comprehensive (loss) income of the year

 

(35)

 

5

 

(11)

 

3

Total Comprehensive income of the year

 

765

 

292

 

367

 

99

 

 

      

 

Total Profit of the year attributable to:

 

      

 

Owners of the Company

 

692

 

224

 

286

 

76

Non - controlling interest

 

108

 

63

 

92

 

20

Total Profit of the year attributable to owners of the company:

 

 

 

 

 

 

 

 

Continuing operations

 

692

 

146

 

341

 

72

Discontinued operations

 

-

 

78

 

(55)

 

4

Total Comprehensive Income of the year attributable to:

 

       

Owners of the Company

 

672

 

225

 

281

 

76

Non - controlling interest

 

93

 

67

 

86

 

23

Total Comprehensive Income of the year attributable to owners of the company:

       

Continuing operations

 

672

 

141

 

343

 

68

Discontinued operations

 

-

 

84

 

(62)

 

8

Basic earnings per share from continuing operations

 

14.42

 

2.81

 

6.65

 

1.53

Diluted earnings per share from continuing operations

 

14.42

 

2.81

 

6.65

 

1.53

Basic earnings (loss) per share from discontinued operations

 

-

 

1.50

 

(1.07)

 

0.13

Diluted earnings (loss) per share from discontinued operations

 

-

 

1.50

 

(1.07)

 

0.13

Dividends per share

 

-

 

-

 

-

 

-

Basic earnings per ADS(2)from continuing operations

 

0.58

 

0.11

 

0.27

 

0.06

Diluted earning per ADS(2)from continuing operations

 

0.58

 

0.11

 

0.27

 

0.06

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

 

-

 

0.06

 

(0.04)

 

0.01

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

 

-

 

0.06

 

(0.04)

 

0.01

Dividends per ADS(2)

 

-

 

-

 

-

 

-

Weighted average amount of outstanding shares (in millions)

 

48

 

52

 

51

 

46

 

 

      

 

CONSOLIDATED CASH FLOW DATA

 

      

 

Net cash generated by operating activities

 

802

 

610

 

439

 

327

Net cash (used in) generated by investing activities

 

(369)

 

19

 

(846)

 

(581)

Net cash generated by (used in) financing activities

 

(390)

 

(470)

 

372

 

281

 

(1) Peso amounts as of December 31, 2018, 2017 and 2016 have been translated into US$ at the seller exchange rate for US$ quoted by Banco Nación on December 31, 2018 of Ps.37.70 to US$1.00. See “Item 3. Key Information—Exchange Rates.” 

(2) Each ADS represents 25 common shares.

(3) Financial information for the year ended December 31, 2016 reflects the effect of consolidation of Petrobras Argentina beginning on July 27, 2016, when we consummated the acquisition from Petrobras of all the shares of PPSLwhich in turn owned, at such time, 67.2% of the shares of Petrobras Argentina. Consequently, Petrobras Argentina’s results of operations before such date were not consolidated.

 

10


 
 

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,

 

    

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

2019

 

60.400

36.900

48.234

59.890

 

 

 

 

 

 

Month

 

 

 

 

 

November 2019

 

59.950

59.500

59.745

59.940

December 2019

 

59.990

59.815

59.875

59.890

January 2020

 

60.350

59.815

60.010

 60.350

February 2020

 

62.210

60.470

61.356

62.210

March 2020

 

64.469

62.259

63.124

64.469

April 2020(3)

 

66.750

64.529

65.707

66.750

 

 

 

 

 

 

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, 2020.

Pursuant to Argentine law, we are required to pay cash dividends in Pesos, and exchange rate fluctuations will affect the U.S. Dollar amounts received by holders of American Depositary Shares, 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 BASE and, as a result, can also affect the market price of our ADSs.

11


 
 

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 currently valued at Ps.0, see “Our Oil and Gas Business——Others—Venezuela”)and in Ecuador (through our equity interest in OCP). Our financial condition and operational results 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, a slowdown in 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 higher delinquency rate 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 utility companies), foreign exchange controls and taxes, have had and may in the future have a material adverse effect on private sector entities, including us. Our activities are highly regulated and subject to uncertainties due to political and economic factors, changes in legislation, expropriations, termination and modification of contractual rights, revocation of permits and consents, the need to obtain permits from regulatory authorities, foreign currency restrictions, price controls, currency fluctuations and increases in royalties, among others.

We cannot assure you that the Argentine Government will not adopt policies that could adversely affect the Argentine economy or our business, financial condition or operational results. In addition, we cannot assure you that future economic, regulatory, social and political developments in Argentina will not impair our business, financial condition or operational results, 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 operational results

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, capacity to access credit and international capital markets, financial condition and operational results, which is likely to be more severe on an emerging market economy, such as Argentina (See“—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 growth prospects. The Argentine Government may not be able to renegotiate its debt with their private creditors and/or with the IMF, affecting its capacity to obtain financing and credit and to plan and implement public policies and reforms that foster economic growth” below). 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 operational results. 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.

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, on our operational results and financial condition

Although economic conditions vary from country to country, investors’ perceptions of events occurring in certain countries have in the past substantially affected, and may continue to substantially affect, capital flowsinto and investments in securities of issuers from other countries, including Argentina. 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 foreign governments or the Argentine Government in the future. Argentina can also be adversely affected by negative economic or financial events that take place in other countries, subsequently affecting our operations and financial condition, including our ability to repay our debt at its maturity date.

12


 
 

Argentina’s economy is vulnerable to external shocks. For example, economic slowdowns, especially in Argentina’s major trading partners such as Brazil, led to declines in Argentine exports in the last few years. Specifically, fluctuations in the price of commodities sold by Argentina and a significant devaluation 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 may result in a “contagion” effect which could lead to an entire region or class of investment being disfavored by international investors.

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. In January 2017, Donald J. Trump took office as President of the United States, generatingsignificant 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.

During the second semester of 2019, Latin America was subject to a period of turmoil stemming from unexpected results regarding certain political elections and a couple of major protests throughout the region generating instability and political uncertainty which could affect Argentina and our business.

On January 1, 2019, Jair Bolsonaro took office as Brazil’s president, generating uncertainties in connection with his administration’s announced policies. Those policies included, among others, a major economic reform and significant changes in foreign relationships. Argentina’s foreign trade depends highly on exports to Brazil and Argentina’s trade balance could be significantly affected with a deterioration of economic conditions in Brazil or of its diplomatic relationships. Other political and economic crises in Brazil may have a material adverse effect on Argentina’s economy and on our business, financial condition and operational results. The Brazilian economy contracted by 3.6% during 2016. Notwithstanding, Brazil’s economy grew 1.1% in 2017 and 2018, and 0.9% in 2019. A deterioration of economic conditions in Brazil may reduce demand for Argentine exports and increase demand for Brazilian products.

Luis Alberto Lacalle Pou was elected President of the Oriental Republic of Uruguay after winning the elections on November 24, 2019. Political uncertainties may arise due to a change in the governing party after 15 years, and may adversely affect Argentina, which considers Uruguay a key ally.

Additionally, the political and economic crisis in Venezuela may adversely affect Argentina and our Business. See “-Our activities may be adversely affected by events in other countries in which we do business, particularly in Venezuela” below.

A slowdown 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 other factors, to a loss of revenues relating to tax on exports, and cause an imbalance in the country’s exchange market. Recently, the IMF issued a report warning that the economic growth expected for 2020 may be lowered due to the coronavirus outbreak.

On June 23, 2016, the United Kingdom voted in favor of exiting the European Union (the “Brexit”). Brexit became effective on February 1, 2020 and is currently undergoing a transition period ending on December 31, 2020. Brexit long-term effects still remain uncertain, but volatility in the financial markets –among other negative effects –is expected in the short and medium-term. Additionally, Brexit could lead to additional political, legal and economic instability in both the European Union and the United Kingdom, producing negative impacts on the commercial trade of Argentina with those regions, which may in turn have a material adverse effect on our business, financial condition and operational results.

13


 
 

The Argentine economy remains vulnerable and any significant decline may adversely affect our business, operational results 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 economic growth in Argentina depends 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:

·        

according to the revised calculation of 2004 GDP published by the INDEC on June 29, 2016, which forms the basis for the real GDP calculation for every year after 2004, and recent data published by the INDEC in 2020, for the year ended December 31, 2019, Argentina’s real GDP decreased by 1.7 % compared to the same period in 2018. 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;

·        

The IMF, in its World Economic Outlook issued in October 2019, projected a 3.1% contraction in Argentina’s economy in 2019 due to the loss of trust and the hardening of the conditions required to access credit and a 6.0% contraction for 2020 due to the effects of COVID19. For more information, see “Item 3. Key Information—Risk Factors— Developments relating to the novel coronavirus may have a material adverse impact on our business operations, financial condition or results of operations” and ““Item 4—Relevant Events— Measures Designed by the Argentine Government to Address the Covid-19 Outbreak” and “Impact of the COVID-19 outbreak on our Operations”;

·        

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 decades;

·        

protests or strikes may adversely affect 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 kinds 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 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 affect our financial condition and operational results, or cause the market value of our ADSs and our common shares to decline.

In recent years, 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 59% against the U.S. Dollar during the year ended December 31, 2019 (compared to 102%, 17% and 22% in the years ended December 31, 2018, 2017 and 2016, respectively).

14


 
 

Throughout 2019, the depreciation of the Peso continued, and in September 2019, as a result of the financial and economic events that took place after the open primary elections (the “PASO”), the Argentine Government issued Decree No. 609/19 that established certain regulations regarding imports and exports of goods and services, foreign exchange controls and currency transfers to other countries and access to the foreign currency market. Also, due to the remarkable and sustained decrease in the price of the Argentine national bonds, the Argentine Government issued Decree No. 596/19, which postponed the maturity of certain local-law bonds. More recently, the Argentine government announced its plans for the restructuring of its external debt, including foreign-law bonds, debt with the IMF and other international multilateral organizations and the Paris Club group of sovereign lenders. If the Argentine government is not able to restructure its outstanding debt obligations, private sector companies, such as our company, may not be able to access the international capital markets for funding on accessible terms.

We cannot affirm there will be no adverse effect on our business, financial condition or operational results or no negative impact on the market value of our ADSs and our common shares resulting from 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.

Political changes in Argentina may adversely affect the Argentine economy and the sectors in which we perform our activities

Between 2007 and 2015, the Argentine Government increased its direct intervention in the Argentine economy, including expropriations, price controls, foreign exchange controls and amendments in legislation that affected foreign trade and investments. Those policies had a material adverse effect in the private sector companies, including ourselves.

From December 2015 to December 2019, the Macri administration implemented several significant economic and policy reforms towards the de-regulation of the economy and stabilization of the main economic indicators. Those policies included (i) declaration of a state of emergency for the electricity system and reforms thereto; (ii) reforms affecting the transportation and distribution of natural gas; (iii) reforms concerning the INDEC; (iv) reforms affecting foreign exchange and foreign trade; (v) modification of Argentina’s debt policy; (vi) the correction of monetary imbalances; (vii) reform of the pension framework; (viii) Tax Reform; and (ix) the implementation of a fiscal consensus (Pacto Fiscal). Nevertheless, the high inflation rates and the Peso depreciation forced the Argentine Government to reinstate foreign exchange controls.

On August 11, 2019, the PASO were held and the resultsindicated that President Macri would not be reelected and could be replaced by the opposition candidate Alberto Fernández. As a result, the political and economic environment became subject to uncertainty. After the PASO, the Peso suffered a 30% devaluation, the Argentine stock markets fell at an average of 50% and the country-risk rate surpassed 2,000 points on August 28, 2019. On October 27, 2019, the presidential general elections were held, with the same results as the PASOs. The new administration took office on December 10, 2019, and since then has implemented –and is expected to continue implementing – several policies and reforms, mainly in the economy.

The Macri and the current administration implemented several policies pursuing a reduction in inflation and a stabilization in the foreign currency market. Those policies included:

·        

Reprofiling of the local-law debt: On December 20, 2019, the Argentine Government issued Decree No. 49/19, which established that certain debt amortization payment obligations emerging from certain Treasury Bonds (Letras del Tesoro) denominated in U.S. Dollars were deferred in full until August 31, 2020. Additionally, on February 5, 2020, the Argentine Congress passed Law No. 27.544 (the Law for the Restoration of the Sustainability of the National Debt issued under Foreign Law). This Law authorized the Executive Branch to carry out transactions regarding the administration of liabilities and/or swaps and/or restructuring of interests payments and principal amortizations of national bonds issued under foreign law. Additionally, the Executive Branch issued Decree No. 141/20 under which it deferred the payment of the amortization for national bonds in dual currency with maturity in 2020 entirely until September 30, 2020, and the interruption of the accrual of interests.

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·        

Reinstating of foreign exchange controls: On September 1, 2019, certain foreign exchange restrictions were reinstated to diminish the volatility of the Argentine Peso with respect to the U.S. Dollar. These restrictions, which were – and continue to be – further amended and complemented, regulate, among others, the purchase of external assets for Argentine citizens, the payment of financial debts outside the Argentine borders, the payment of dividends, the payment of imports of goods and services, the obligation to repatriate and settle the incomes from exports of goods and services. For more information, please see“Item 10. Additional Information – Exchange Control” below.

·        

Declaration of the state of emergency: The Social Solidarity and Productive Reactivation Law declared a state of emergency with respect to several areas: economy, finance, fiscal, administrative, pensions, tariffs, energy and social, and granted the Executive Branch several powers, allowing it to introduce exceptional measures and policies in the energy market during the state of emergency. The Social Solidarity and Productive Reactivation Law also allows the Executive Branch to intervene in theENRE and theENARGAS forup to one year, and to designate the officials who will be in charge of the decision-making processes. Additionally, the Social Solidarity and Productive Reactivation Law sets a cap at 8% for the export duty applicable to hydrocarbons, establishing that in any case such export duty shall be deducted from the base value for the calculation and payment of royalties. However, its implementation is still pending, therefore current export duty to hydrocarbons is set at 12%. By means of Decree No. 277/20, the Executive Power ordered the intervention of the ENRE until December 31, 2020.

·        

Tax reforms: Several tax reforms were completed. For more information, please see“Item 10. Additional Information – Taxation” below.

·        

Tariffs revisions: The Social Solidarity and Productive Reactivation Law freezes of natural gas and electricity tariff schedules for up to 180 days counted from the effectiveness of such law, and encourages the Argentine provinces to adhere to this policy. Additionally, the Social Solidarity and Productive Reactivation Law authorizes the Executive Branch to renegotiate tariffs under federal jurisdiction within the RTI or based on an extraordinary revision in accordance with Law N° 24,076.

·        

Tariffs on exports: The Social Solidarity and Productive Reactivation Law authorizes the Executive Branch to establish tariffs on exports that in no case can exceed 33% of the taxable value or the official FOB price. The Social Solidarity and Productive Reactivation Law caps the percentage of tariffs on exports of hydrocarbons and mining to 8% of the taxable value or the official FOB price, and establishes that in any case such export duty shall be deducted from the base value for the calculation and payment of royalties. However, its implementation is still pending, therefore current export duty to hydrocarbons is set at 12%.

·        

Double severance payment for labor termination without cause: Executive Decree No. 34/19, issued on December 13, 2019, declared a labor public emergency for the term of 180 days counted from the effectiveness of the decree. During this emergency process, in case of termination without just cause of a labor relationship started prior to the effectiveness of said decree, the employee will be entitled to receive a compensation that equals two times the severance due in accordance with applicable laws. The duplication is applicable to every item of the compensation. Decree No. 34/19 also establishes that the double severance payments will not be applicable to labor relationships that start after the effectiveness of said decree. Additionally, the Social Solidarity and Productive Reactivation Law established new percentages and mechanisms to calculate the employers’ contributions.

·        

Suspension of Section 124 of Law No. 27,467: The Social Solidarity and Productive Reactivation Law suspended the applicability of the second paragraph of section 124 of Law No. 24,467. That paragraph took away ENRE’s powers and abilities relating to the public service of electricity distribution once Edenor and Edesur were transferred to the jurisdictions of the City of Buenos Aires and the Province of Buenos Aires (for more information, please see “The Argentine Energy Sector – Regulatory Authorities”). The Social Solidarity and Productive Reactivation Law reinstated ENRE’s powers and attributions for one year.

As of the date of this annual report, the impact of the aforementioned policies cannot be predicted, and any other policy or action implemented by the Argentine Government may result in an adverse effect for the Argentine economy and/or the energy sector. Pampa does not have any control over the implementation of, and cannot predict the outcome of, the reforms of the regulatory framework that rule in the different sectors in which Pampa performs its operations, nor the effect that those reforms may have over Pampa’s business, financial condition and operations. Additionally, uncertainty over these reforms and policies may result in volatility in the prices of Argentine financial assets, especially in Argentine corporations’ debt and equity securities listed in localand/or international markets. Moreover, the uncertainty may affect the main macroeconomic indicators, such as foreign exchange, production, labor or inflation.

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Pampa cannot affirm that the Argentine economic, regulatory, social and political framework or the policies that the Argentine Government adopts or may adopt, will not adversely affectthe market value of our ADSs, our business, financial condition and/or operational results.

If the high levels of inflation continue, the Argentine economy and our operational results 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.

 

According to data published by the INDEC, CPI rates for the following months were:

CPI

2019

July

August

September

October

November

December

2.2%

4.0%

5.9%

3.3%

4.3%

3.7%

2020

January

February

March

2.3%

2.0%

 3.3%

 

 

 

 

For more information, pleasesee“—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” below.The Argentine Government 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. If the value of the Argentine Peso cannot be stabilized through fiscal and monetary policies, an increase in inflation rates could be expected.

 

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 the CER, a currency index, that is strongly correlated with inflation. Therefore, any significant increase in inflation would drive 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 Argentine Government to reduce inflation have not achieved the desired results. A continuing inflationary environment could undermine our operational results, adversely affect our ability to finance the working capital needs of our businesses on favorable terms and our operational results and cause the market value of our ADSs and our common shares to decline.

 

The inflation rates may increase in the future, and there is uncertainty regarding the effectiveness of the policies implemented by the Argentine Government to reduce and control inflation and the potential impact of those policies. An increase in inflation may adversely affect the Argentine economy, which in turn may have a negative impact in our financial condition and operational results.

 

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

The Argentine Peso suffered important fluctuations during the last four years: it depreciated by more than 22% as compared to the U.S. dollar in 2016, and approximately 17% in 2017, 102% in 2018, and 59% in 2019. 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 operational results and the market value of our ADSs, including as measured in U.S. Dollars.

On September 1, 2019, certain exchange controls and restrictions were reinstated in order to control the volatility in the currency exchange rate. The new controls and restrictionsregulate, among others, the purchase ofexternal assets for the Argentine population, the payment of financial debts outside the Argentine borders, the payment of dividends, the payment of imports of goods and services, the obligation to repatriate and settle the income from exports of goods and services.Additional volatility, appreciation or depreciation of the Peso against the U.S. dollar or reduction of the Central Bank’s reserves because 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. For more information, please see“Item 10. Additional Information – Exchange Control” below.

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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 operational results, our ability to repay our debt within the respective maturity dates and affect 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, the prices of our products, our financial condition and operational results. 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.

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.

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 temporarily 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.

 

In 2017, the INDEC began publishing a National CPI, which is based on a survey conducted by the 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, 2019 was 53.8%.

 

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 operational results 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 growth prospects. The Argentine Government may not be able to renegotiate its debt with their private creditors and/or with the IMF, affecting its capacity to obtain financing and implement public policies and reforms that foster economic growth

 

Argentina’s history of defaults on its external debt and the protracted litigation with holdout creditors 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, operational results, 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, in2005 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. 

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The Macri Administration settled several agreements with the defaulted bondholders, ending more than 15 years of litigation. On April 22, 2016, Argentina issued US$16.5 billion of new bonds, of which US$9.3 billion were applied to pay the amounts due to comply with the agreements settled with the defaulted bondholders. Since then, almost every pending claim has been settled.

In addition, certain bondholders that did not participate in the exchange offers described above, filed claims before the ICSID alleging that the emergency measures adopted by the Argentine Government in 2002 did 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 granted award against Argentina.

 

In June 2018, the Argentine Government agreed to enter into the stand-by credit facility (the “SBA”) with the IMF that granted Argentina access to financing by the IMF. The SBA granted Argentina credit for US$50 billion subject to public spending cuts and the compliance with certain fiscal and political benchmarks by the Argentine Government. After further reviews, the IMF extended the amounts granted by the SBA for a total amount of US$57.1 billion. As of the day of this annual report, the Argentine Government is trying to renegotiate the credit due to the IMF, but has not reached an agreement yet.

 

On August 28, 2019, the Macri administration issued a decree deferring the scheduled payment date for 85% of the amounts due on short-term notes maturing in the fourth quarter of 2019, governed by Argentine law and held by institutional investors. Of the deferred amounts, 30% would be repaid 90 days after the original payment date and the remaining 70% would be repaid 180 days after the original payment date, except for payments under Lecaps (“Peso denominated Treasury Bond” – “Letras del Tesoro Capitalizables en Pesos”) due 2020 held domestically, which would be repaid entirely 90 days after the original payment date. Amounts due on short-term notes held by individual investors would be paid as originally scheduled. In December 2019, the Fernández administration further extended payments of a series of short term U.S. Dollar-denominated notes which were held by institutional investors until the end of August 2020.

 

Additionally, on February 11, 2020, the Argentine Government decreed the extension of maturity to September 30, 2020 of a U.S. Dollar-linked treasury note governed by Argentine law, which had been originally subscribed to a large extent with U.S. Dollar remittances, to avoid a payment with Argentine pesos that would have required significant stabilization efforts by the monetary authority. Also, in February 2020, the Argentine Congress enacted a law enabling the government to take all necessary steps to ensure the Argentine sovereign debt governed by foreign law as sustainable. Additionally, an IMF team visited Buenos Aires in February 2020 to discuss the recent macroeconomic developments and learn more about the Argentine authorities’ economic plans and policies. On February 19, 2020 the IMF issued a statement in which, in light of recent developments and the materialization of certain risks to debt sustainability that were considered during the previous Debt Sustainability Analysis (DSA) published in July 2019, the IMF staff assessed Argentina’s debt to be unsustainable. Accordingly, the IMF staff stated that “a definitive debt operation—yielding a meaningful contribution from private creditors—is required to help restore debt sustainability with high probability”.

 

On April 5, 2020, the Executive Branch issued Decree No. 346/2020 by which the Government deferred the payment of interest and principal amortization obligations of certain sovereign debt issued under Argentine law and denominated in U.S. Dollars, until December 31, 2020, or an earlier date to be determined by the Ministry of Economy, considering the progress of the public debt’s sustainability restoring process (Proceso de Sostenibilidad de la Deuda Pública). This Decree did not affect the currency of denomination, principal or interest set forth under the original terms of the issuance. On April 21, 2020, the Argentine Government announced its offer to exchange external bonds in the aggregate amount of approximately US$64 billion for new bonds. The Argentine Government did not make the interest payment due on April 22, 2020 with respect to three of its US$-denominated bonds and availed itself of the 30-day grace period provided under the indenture. As of the date of this annual report, there is no certainty on the acceptance the exchange offer will have among the bondholders or whether further negotiations and proposals will be carried out and the consequences of such negotiations. Any new event of default by the Argentine Government could negatively affect their valuation and repayment terms, as well as have a material adverse effect on the Argentine economy and, consequently, our business and results of operations. Without renewed access to the financial market, the Argentine Government may not have the financial resources to implement reforms and boost growth, which could have a significant adverse effect on the country’s economy and, consequently, on our activities. Likewise, Argentina’s inability toobtain credit in international markets could have a direct impact on the Company’s ability to access those markets to finance its operations and its growth, including the financing of capital investments, which would negatively affect our financial condition, operational results and cash flows.

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Past situations, such as the lawsuits with creditors that did not accept 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, including as a consequence of the exchange offer not being accepted by holders, 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.

 

We cannot predict if the Argentine Government will be able to successfully renegotiate the debt held with private bondholders. There is uncertainty regarding the Argentine Government’s ability to successfully stabilize the foreign exchange market, re-establish economic growth and comply with the SBA terms. Additional depreciation of the Peso against the U.S. Dollar, a breach of the terms of the SBA and the potential failure of the Argentine Government in the renegotiation of the debt may adversely affect the Argentine economy and, in turn, our business, financial situation, operational results and the value of our ADSs and our common shares. 

 

We cannot affirm that a decrease in economic growth, an increase in the economic instability or the expansion of the economic and political policies adopted in the future by the Argentine Government to control inflation and other macroeconomic imbalances that affect us and other companies from the private sector, will not have a material adverse effect on the Argentine economy, and, in turn, on our business, operational results and our growth perspectives.

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

In the recent past, the Argentine Government directly intervened in the economy, including through the implementation of expropriation and nationalization measures, price controls and exchange controls.

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.

Additionally, between 2011 and 2015, the Kirchner administration –through a combination of exchange control and tax regulations, significantly reduced the access to the foreign currency market for individuals and entities in the private sector. Subsequently, a non-official U.S. Dollar currency market emerged, with a major difference between the official and the non-official exchange rate.

Also, the Argentine Government has historically adopted measures to control –directly or indirectly – the individuals’ and private companies’ access to the foreign trade and foreign exchange markets, such as restriction to free access, and the obligation to repatriate and settle in the local exchange market every income in foreign currency obtained from exports. Those regulations limited our ability to compensate the risks that arise from our exposure to the Dollar.

At the beginning of the Macri administration, the Argentine Government eliminated exchange restrictions implemented during the Kirchner administration. Notwithstanding, on September 1, 2019, the Argentine Government reinstated several exchange restrictions regarding the inflows and outflows of foreign currency to the country, with the intention of diminishing the volatility of foreign exchange rates. As of the date of this annual report, such exchange restrictions are still valid.

In the future, the Argentine Government may introduce new exchange controls and/or strengthen the existing ones, create restrictions on transfers to other countries, restrictions to capitals movement or other measures in response to an eventual capital flight or a significant depreciation in the Peso, measures that can, in turn, affect our ability to access the international capital markets. Such restrictions and measures may generate political and social tensions and deteriorate the Argentine Government’s public finances, as has occurred in the past, generating an adverse effect in the Argentine economic activity and, in consequence, adversely affect our business and operational results andcause the market value of our ADSs and our common shares to decline.

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Moreover, we cannot guarantee that the 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, restrictions to transfers to other countries or to capitals movement, or an important devaluation of the Peso will not have a material adverse effect on the Argentine economy and, as a consequence, adversely affect our financial condition, our operational results or cause the market value of our ADSs and our common shares to decline.

Argentine corporations may be restricted to make payments in foreign currencies

There are restrictive conditions currently applicable in Argentina that affect corporations’ ability to access the MULC to acquire foreign currency to transfer funds to other countries, service debt, make payments outside Argentina and other operations, requiring, in some cases, prior approval by the Central Bank. These restrictions may affect our operations and our expansions projects, as they require the import of services and goods for which payment may be restricted.

 

The Argentine Government may impose or create further restrictions on the access to the MULC. In such case, the possibility of Argentine corporations to make payments outside Argentina and to comply with their obligations and duties may be affected.

 

We cannot predict how such current restrictions may evolve after this annual report, mainly regarding limitations to transfer funds outside the country. The Argentine Government may impose further exchange controls or restrictions to capital transfers and modify and adopt other policies that may limit or restrict our ability to access international capital markets, to make payments of principal and interest and other additional amounts outside the country (including payments relating to our notes), or affect in other ways our business and our operational results, or cause the market value of our ADSs and our common shares to decline.

 

Exchange controls in an economic environment in which the access to local capital markets is restricted may cause an adverse effect in our activities, mainly in our ability to make payments of principal and/or interest of our notes in foreign currency. For more information, please see “Item 10.Additional Information – Exchange Control” below.

 

Argentine public expenditure may generate negative consequences for the Argentine economy

Public expenditure has significantly increased throughout the last decade in Argentina. The Argentine Government adopted several measures to finance its high public spending, including, among others, using the resources of the Central Bank and the ANSES to fund its financial needs, and implementing an expansionary monetary policy that increased inflation levels.

Primary deficit may increase in the future if public expenditure continues to increase faster than the Argentine Government’s revenues. A greater fiscal deficit may generate further complications for the Argentine Government’s ability to access the financial markets in the long term, and, at the same time, limit even more Argentine corporations’ access to those markets.

As of the date of this annual report, we cannot predict how the measures that the new administration has applied and may continue to apply will impact the Argentine economy, and, in turn, our business, our financial condition and the result of our operations.

 

There are uncertainties regarding the impact of policies that the Argentine Government will adopt in order to resolve the crisis in the energy sector

The energy sector was one of the sectors that were most damaged by the policies adopted by the Argentine Government since the 2001 crisis. In 2001, natural gas and electricity tariffs and prices were frozen, discouraging investments in the sector. The Argentine Government tried to generate incentives to attract investments by subsiding energy consumption. However, such measures failed and caused a stagnation in both oil and gas production and in the infrastructure necessary for generation, transmission and distribution of electricity; at the same time, consumption of both was growing. In 2011, the energy crisis lead to a shortage. In order to satisfy the increasing overdemand, the Argentine Government tried to resolve the issue by increasing energy imports, which had a negative outcome in the balance of trade, current accounts and the Central Bank’s international reserves.

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The Macri administration declared a state of emergency with respect to the national electric system to address the existing distortions in the sector and to attract investments. The state of emergency allowed the Argentine Government to adopt measures aiming to stabilize the supply of electricity through the country, such as eliminating certain subsidies to energy and passing the additional cost resulting from such elimination to end-users, or the implementation of important tariff reviews to reflect real cost. Nevertheless, some of those measures were questioned before the Argentine courts and resulted in rulings that limited the Administration’s initiatives (such as a ruling that halted increases in electricity and gas tariffs implemented on February 1, 2016, and instructed that non-compulsory public hearings prior to the approval of increases in tariffs prices should be held).

 

Regarding the spot price for electricity, on February 27, 2020, the Secretariat of Energy issued Resolution No. 31/20, which modified –retroactively, from February 1, 2020 onwards certain aspects of the remuneration scheme established by Resolution SRRYME No. 1/19. The new scheme turns the whole remuneration scheme from foreign currency into local currency at an exchange rate of 60 Argentine Pesos per U.S. Dollar, and establishes a restatement factor, from the second month of application and onwards, that contemplates a formula composed by CPI (60%) and WPI (40%). However, on April 8, 2020, the Secretariat of Energy instructed CAMMESA to postpone the automatic application of the adjustment formula until further notice. Additionally, Resolution No. 31/20 modified the payments for electricity and added additional remuneration for high-thermic requirement hours of every month. For more information, please see (“—The Argentine Energy Sector— Remuneration Scheme for Generation Not Covered by Contracts— SE Res. No. 31/20: Current Remuneration Scheme as from February 2020”; “—Developments relating to the novel coronavirus may have a material adverse impact on our business operations, financial condition or results of operations”) and “Item 4—Relevant Events— Measures Designed by the Argentine Government to Address the Covid-19 Outbreak” and “Impact of the COVID-19 outbreak on our Operations”.

 

The lack of action to correct the existing problems in generation, transportation and distribution in Argentina may adversely affect Argentina’s economic situation and our business, financial situation and operational results. We cannot ensure that the Argentine Government will not adopt policies and measures that may have an adverse effect over our business, and that the policies implemented by the Argentine Government will be successful to correct the energy production sector in Argentina.

 

Pampa’s business and operations may be affected by restrictions on imports of products

In February 2011, the former Argentine Ministry of Industry issued Resolution No. 45/11, which, among other things, decided to extend the applicability of non-automatic permits regarding imports of products considered as luxury goods or that compete in a non-loyal manner with domestic production, in accordance with the aforementioned Ministry’s criteria. The Argentine Government issued Resolution No. 45/11 considering that domestic production was able to satisfy the domestic demand. On January 25, 2013, the Ministry of Economy issued Decree N° 11/13 which abolished Resolution No. 45/11, ending with the system that compelled importers to request an authorization to import certain products to the country.

 

On January 8, 2020, the Secretariat of Industry, Knowledge Economy and Foreign Commercial Management (Secretaría de Industria, Economía del Conocimiento y Gestión Comercial Externa) issued Resolution No. 1/20 which: (i) incorporated new tariff items that must file for non-automatic licenses (NAL); (ii) modified the forms that needed to be presented to request import licenses; (iii) decreased the tolerance in the FOB unitary value of merchandises subject to filing for NAL; (iv) decreased the validity of the NAL from 180 days to 90 days counted from their approval in the SIMI; (v) extended the scope of merchandise imports to Isla Grande de la Tierra del Fuego (creating an exception for products entering from continental territory); and (vi) established the Sub-Secretariat of Politics and Commercial Management of the Secretariat of Industry, Knowledge Economy and Foreign Commercial Management as authority.

 

As of the date of this annual report, we cannot guarantee that the Argentine Government will not implement similar measures in the future. Those measures may affect goods that we use as inputs, causing an adverse effect on our business, our financial condition and operational results.

 

The Argentine economy and finances may be adversely affected as a consequence of a decrease in the international prices of commodities

The commodities market is characterized by its volatility. Commodities exports have contributed significantly to the revenues of the Argentine Government. Subsequently, the Argentine economy has remained relatively dependent on the price of its exports (mainly soy). This has generated a vulnerability in the Argentine economy with respect to the fluctuation of commodities’ prices. During 2018, Argentina suffered a huge drought –presumably the biggest drought in the last 50 years. The effects of the drought in the agricultural sector caused significant economic problems for Argentina, with impacts in the soy and corn harvests that generated damages of approximately US$6 billion.

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A sustained decline in the international price of the main commodities exported by Argentina, or any future climate event or condition may have an adverse effect in the agricultural sector, and therefore in the revenues of the Argentine Government and its capacity to comply with the payments of its public debt, eventually generating recessive or inflationary pressures, thus affecting our business, financial situation and the results of our operations.

 

The operating costs of the Argentine companies may increase as a result of the implementation or adoption of certain measures or policies by the Argentine Government and by pressures from unions

On several occasions, the Argentine Government implemented laws and collective bargaining agreements that compelled employers of the private sector to maintain certain salary levels and to bring additional benefits to their employees. Employers have suffered great pressure from their employees and the unions to grant increases in wages and other benefits.

 

There are possibilities that in the future, the Argentine Government may issue regulations and/or adopt policies or measures that imply increases in the minimum wage (salario mínimo, vital y móvil) and/or in benefits, indemnities, compensations and other labor costs that the employers may face. Every increase in wages or any other labor related cost may increase our costs and reduce the results of our operations. For more information, please see “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” below.

 

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 businesspersons, mainly associated with public works projects, and former government officials of the Kirchner administration are being investigated for inappropriate gifts and unlawful association. On September 17, 2018, prosecution for unlawful association began against the former president –and current Vice-president – of Argentina, Cristina Elisabet Fernández de Kirchner and several businesspersons.

 

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 projects (PPP), 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, it is not possible to predict the duration of the corruption investigations, nor which 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 operational results 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 as “Ca” by Moody’s, as “CCC-” (negative) by S&P and as “CC” by Fitch. On August 30, 2019, Moody’s downgraded Argentina’s long-term sovereign credit rating as issuer in foreign currency from “B2” to “Caa2”, and its rating was prepared for further downgrades, depicting the increasing uncertainty regarding the public policy plans expected from the Argentine Government and the consequences for the investors’ trust. Fitch mentioned that its “CC” rating for Argentina reflected its expectations of a new breach of its obligation or a debt restructuring. The sharply weaker economic activity and uncertain prospects for multi-year fiscal consolidation and market financing availability asIMF funds are utilized, constitute risks to sovereign debt sustainability. In addition, on January 21, 2020, S&P confirmed Argentina’s long-term and short-term sovereign credit ratings at “CCC-”, maintaining it negative. In a public release, S&P explained that its rating reflects the expectations of an additional restructuring of the sovereign debt while the Argentine Government discusses with debtholders, brokers and official creditors on its priorities regarding politics, economic strategy and debt reprofiling.

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We cannot guarantee 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.

Developments relating to the novel coronavirus may have a material adverse impact on our business operations, financial condition or results of operations

In late December 2019 a notice of pneumonia originating from Wuhan, Hubei province (COVID-19, caused by a novel coronavirus) was reported to the World Health Organization, with cases soon confirmed in multiple provinces in China, as well as in other countries. The virus rapidly spread globally and, as of the date of this annual report, has affected more than 150 countries and territories around the world, including Argentina, Brazil, Paraguay, Uruguay and the United States. Several measures have been undertaken by the Argentine Government and other governments around the globe, including the use of quarantine, screening at airports and other transportation hubs, travel restrictions, suspension of visas, nation-wide lockdowns, closing of public and private institutions, suspension of sport events, restrictions to museums and tourist attractions and extension of holidays, among many others.

The Executive Branch of the Argentine Government issued Decree No. 260/2020 on March 12, 2020, which declared a public health emergency for a period of one year and established a mandatory quarantine of fourteen days for the following individuals: (i) suspected cases, including individuals with fever and respiratory symptoms and individuals who had traveled in the last few days to affected areas or had been in contact with individuals who had confirmed positive or were likely positive for COVID-19, (ii) confirmed cases, (iii) those who had arrived in Argentina after March 12, 2020 having traveled through affected areas, and (iv) those who had arrived in Argentina in the last fourteen days prior to March 12, 2020 having traveled through affected areas. Incoming flights from affected areas were also prohibited for a period of 30 days.

The Executive Branch issued Decree No. 297/2020 on March 20, 2020, which established a mandatory and preventive social isolation effective as of March 20, 2020 until March 31, 2020, which, as of the date of this Annual Report, was extended until May 10, 2020, without prejudice to the possibility that the term may be extended again. The Decree expressly stated that minimal and essential movement would be allowed only for the purchase of food, medication and cleaning products. Some individuals, such as healthcare personnel, supermarket and pharmacy employees, among others, would be exempted from the isolation measure. Some essential activities, like power generation plants, oil basins, refining plants and food and medical industries, were allowed.

Moreover, on April 7, 2020, through Administrative Decision No. 468/2020, construction activities for energy infrastructure works, including our ongoing expansion projects, were included as an essential activity. However not all contractors and suppliers have been declared essential and also the arrival of expert personnel needed for the projects has not been permitted because the travel restrictions and national borders lockdown remains in force. In addition, the Argentine Goverments established special protocols that affect the development and productivity of construction work. As a result, we expect that the schedules of our ongoing projects and the estimated costs for their completion will be affected but, we cannot yet determine the magnitude of the impact. In this sense, in the case of the Cycle Closing Project at CTGEBA ((for more information, please see “Progress in the Cycle Closing Project at CTGEBA”), our best estimate, based on the information that we have as of the date of this annual report, is for the commercial commissioning of the closing-to-combined-cycle at CTGEBA Plus to be concluded around the third quarter of 2020, when the originally estimated date was the second quarter of 2020.

To date, the outbreak of the novel coronavirus has caused significant social and market disruption. For example, the Dow Jones declined by about 28% between February 11 and March 12, 2020. The long-term effects on the global economy, Argentine economy and the Company of the coronavirus pandemic, are difficult to assess or predict, and may include a decline in market prices (including the market prices of our common shares), risks to employee health and safety, collapse in the demand for our products and reduced sales in the impacted geographic locations. Any prolonged restrictive measures put in place in order to control an outbreak of a contagious disease or other adverse public health development such as the ongoing COVID-19 outbreak, may have a material and adverse effect on our business operations, financial condition or operational results.

We may also be affected by the need to implement policies limiting the efficiency and effectiveness of our operations, including home office policies. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term. Additionally, we cannot predict how the disease will evolve in Argentina, nor anticipate what additional restrictions the Argentine Government may impose. However, we expect COVID-19 to have a significant adverse effect on the world economy, which will in turn negatively affect Argentina’s economy

Furthermore, the crisis caused by COVID-19 has resulted in a decrease in the demand for crude oil, since industrial and domestic activity has slowed down in many countries due to control measures. On the other hand, in the context of the coronavirus pandemic crisis, Russia broke the agreement it had with Saudi Arabia in the internal dispute for oil production and, in response, Saudi Arabia lowered the price of oil to less than US$30per barrel, levels that have not been seen for 16 years. Moreover, the United States oil prices traded below zero for the first time ever, and producers and traders were essentially paying other market participants to take their oil. In particular, the Argentine economy was adversely affected by a lower demand from customers, interruptions in the payments chains, among other adverse effects due to control measures imposed by the Argentine Government. For more information, please see “—Substantial or extended declines and volatility in the prices of crude oil, oil products and natural gas may have an adverse effect on our operational results and financial condition”.

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The Company is currently considering available alternatives to mitigate the effects this outbreak may have on its operations and ongoing projects, as well as with regards to measures adopted by the Argentine Government, which so far have resulted in a slowdown in economic activity that will further adversely affect economic growth in Argentina in 2020 and possibly 2021, to a degree that we cannot quantify as of the date of this annual report. For more information on the measures adopted by the Argentina Government. For more information, please see “Item 4—Relevant Events—Measures Designed by the Argentine Government to Address the Covid-19 Outbreak” and “Impact of the COVID-19 outbreak on our Operations”. 

We cannot affirm that the current COVID-19 outbreak will not cause a material adverse effect in our businesses and operational results, as well as a decrease in the market value of our shares and corporate bonds.

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 operational results 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 operational results 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 generally unionized across the country. As of December 31, 2019, 43.41% of our workforce was represented by unions under collective bargaining agreements. Although our relations with trade unions have been historically stable, we cannot assure that we or our operating subsidiaries will not experience work stoppages or disruptions in the future, which could have material adverse effects on our business and revenues. A primary reason for this is that our collective bargaining agreements are negotiated on an annual basis. As such, we are unable to guarantee the continuity of current terms and conditions in subsequent collective bargaining agreements, nor 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 are subject to strikes or work stoppages, our operations, financial condition and the market value of our shares and ADSs could be materially affected in an adverse way.

In the event of an accident or other event not covered by our insurance policies, we could face significant losses that could result in a material adverse effect on our business and operational results

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 both in our ongoing businesses or in the construction stages of our ongoing or future projects. If an accident or other eventoccurs that is not covered by our current insurance policies in any of our business segments or projects, 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.

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We conduct a portion of our operations through joint ventures, and our failure to continue such joint ventures or to settle 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 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 CITELEC, which holds a controlling interest of 52.65% in Transener and CIESA which has a controlling interest of 51% in 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 operational resultsand the market value of our shares and ADSs.

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 operational results.

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. Until the issuance of Resolution SE 31/2020, power generation segment’s remuneration scheme established U.S. Dollar denominated prices and payment was 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 CAMMESA. As a result, we wereexposed to an exchange rate risk between the collection date and the payment date (in the event CAMMESA does not pay at the expiration date, see “CAMMESA could alter and delay payments to power generators and fuel 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 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 rulings against 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”.

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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 operational results could be materially and adversely affected.

Cybersecurity events, such as a cyber-attack could adversely affect our business, financial condition, operational results 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 DCSSoftware, 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, fraud, 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, fraud, 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.

 

During 2019, we have been the target of different fraud attempts and were exposed to malware infections, as other companies in the industry have, but this did not result in a significant loss or negative impact on our operations. Therefore, it is not possible to ensure that we will not incur in losses related to such attacks in the future. Our risk and exposure to these matters cannot be fully calculated or mitigated due, among other things, to the evolution and nature of these threats.

 

In 2019, we conducted an assessment of our cybersecurity in critical operational infrastructures, based on the standard applicable to electricity distributors in the United States (NERC-CIP) and the standards proposed by IEC62443.Based on the results of this evaluation, a multi-year mitigation plan was launched.

 

As part of the mitigation plan, new specialized management functions were created a team composed of members from the information security area was created to carry out the multi-year mitigation plan. At the same time, work began on the acquisition of a new cybersecurity event monitoring system to improve our ability to monitor, detect and act against cybersecurity threats to our networks, IT infrastructure and control systems.

 

Additionally, an annual cybersecurity training plan was carried out for all of our personnel, aiming to deepen awareness and learning about the risks, threats and good practices of information security. In this framework, we carried out simulations of targeted phishing and pentesting attacks, which allowed determining the degree of user compression on critical issues related to cybersecurity. Furthermore, specific industrial cybersecurity workshops were scheduled for the critical infrastructure areas of our assets.

 

In addition, while we have not experienced any material 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, operational results and financial condition.

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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 operational results 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, criminal 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 operational results 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 operational results.

CAMMESA could alter and delay payments to power generators and fuel 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 inflows from electricity distribution companies and large users and outflows payable to generation and fossil fuel production companies.

 

The Argentine Government has covered such deficit through non-reimbursable contributions from the treasury to CAMMESA. If these treasury contributions are shown not be enough to cover all of the generators and fuel producers’ claims against CAMMESA, CAMMESA’s payable account would grow over time. As of the date of this annual report, according to CAMMESA,it is estimated thatapproximately 40% of the total cost of electricity generation, is not being transferred to the end-users but covered by the Argentine Government through subsidies. We cannot assure you that the portion of the generation costs not covered by retail distributors’ end-user will not increase in the future or that CAMMESA will be able to pay the generators and fuel producers for its debts. In fact, due to the quarantine imposed due to COVID-19, Distributors and Large User’s payments had significantly decreased, increasing the share that would have to be covered by the National Government to maintain CAMMESA’s payment rate. Moreover, the Secretariat of Energy instructed CAMMESA to apply a new payment scheme for the Large Users affected by COVID-19 increasing the financial stress on CAMMESA and, ultimately, on generators if the National Government does not cover such amounts. Since November 2019, payments from CAMMESA which should be settled within 42 days from the end of the transaction month, have been raised to approximately 70 days (except for RenovAr power purchase agreements, which are paid in a timely manner and are guaranteed by FODER). The generators and fuel producers’ inability to collect their receivables from CAMMESA could have a material adverse effect on their income, working capital funding and, consequently, on their operational results and financial and liquidity condition.For more information, please see (“—Developments relating to the novel coronavirus may have a material adverse impact on our business operations, financial condition or results of operations”) and “Item 4—Relevant Events— Measures Designed by the Argentine Government to Address the Covid-19 Outbreak” and “Impact of the COVID-19 outbreak on our Operations”.

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 qualified to file for 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 allof 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 operational results and cause the market value of our ADSs to decline.

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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.

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 power generation facilities, pipelines and hydrocarbon blocks or the third-party fuel transportation or 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 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 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 facilities 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 facilities may adversely affect our financial condition or operational results and our ability to fulfill our contractual commitments, so we could be subject to fines and penalties. For example, in June 2019, Argentina suffered a general blackout which hindered the operation of our facilities. Although our power generation units, power transmission and electricity distribution grid did not suffer any damage, we cannot guarantee that any other event in the Argentine grid would not affect our units and consequently their availability to fulfill our contractual commitments and our operational results.

We and our subsidiaries continue evaluating investment projects to expand our activity, which could imply an increase in our indebtedness

Some of the investment projects of us and our subsidiaries could be guaranteed by Pampa Energía, incurring additional guaranteed debt. Therefore, if we declare bankruptcy or are liquidated, the guaranteed lenders will have priority over the claims for payment of our notes to the extent of the assets that constitute its guarantee.

If assets remain after the payment of the guaranteed lenders, those assets could be insufficient to satisfy the credits of the holders of our corporate bonds and other unsecured debt, as well as the credits of other general creditors who will be entitled to participate pro rata with the holders of our corporate bonds.

Risks Relating to Our Businesses

Risks Relating to the Electricity Sector

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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 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, prices with gas distributors began to be agreed upon in the spot market on a daily basis as from October 2018. 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 US$1.74/MBTU y US$3.98/MBTU, including the differential tariff. Moreover, on February 2019, a tender was launched for the supply of natural gas to distribution companies on a firm basis to ToP and DoP up to 70% of the maximum daily volume, for a term of 12 months with seasonality terms, and effective as from April 2019. For the Noroeste Basin, 9.4 and 3.8 million m3 per day were assigned for the winter (April – September 2019) and summer (October 2019 – April 2020), respectively, at an average tender price of US$4.35/MBTU. For the rest of basins, 36.1 and 14.4 million m3 per day were assigned for the winter and the summer, respectively, at an average tender price of US$4.62/MBTU. We submitted an application and were awarded with the bid. Producers would bill to distribution companies in Ps. pursuant to ENARGAS Resolution No. 72/19, considering BNA’s average currency nominal exchange rate for the first 15 days of the month immediately preceding the beginning of each seasonal period or, if lower, the nominal exchange rate stipulated in the agreements. However, the nominal exchange rate update which should have been implemented on October 1, 2019, applicable to the October 2019 - April 2020 summer seasonal period, was deferred on several occasions. With the entry into effect of the Social Solidarity and Productive Reactivation Law, the nominal exchange rate freeze was subjected to a maximum term of up to 180 days.

ENARGAS Resolution No. 193-199, 201-202 and 205-207 /19 established gas tariff schemes effective as from April 2019, considering an average PIST price of gas as a raw material for the following 6 months ranging between US$2.14/MBTU and US$4.69/MBTU, including the differential tariff Later, 27% and 12% discounts in the price of natural gas within the PIST were set for the months of April and May 2019, respectively, by means of subsidies and, with the purpose of reducing monetary expenses for seasonal consumption, a 22% deferral on bills issued during the July – October 2019 period was approved, to be recovered in five installments as from December 2019. Later, the tariff scheme update corresponding to October 2019 was deferred until February 1, 2020 pursuant to SGE Res. No. 521, 751 and 791 /19 and, with the entry into effect of the Social Solidarity and Productive Reactivation Law, effective as from December 23, 2019, it was determined that tariffs under federal jurisdiction would remain unchanged and a process for an extraordinary review of the RTI would be initiated for a maximum term of 180 days. 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. Furthermore, ENARGAS Resolution No. 192/19 determined a 26.0% increase on account of costs variations effective as from April 2019. This increase was calculated based on the IPIM semiannual variation for the August 2018 – February 2019 period. Later, 22% of the amount of bills issued during the July – October 2019 period was deferred, to be recoverable in five installments as from December 2019, pursuant to SGE Resolution No. 336/19. The semiannual update which, according to the RTI, should have been applied since October 1, 2019, was deferred pursuant to several regulations. Finally, the tariff increase was suspended for a maximum term of up to 180 days since the entry into force of the Social Solidarity and Productive Reactivation Law on December 23, 2019. Moreover, this Law contemplates the possibility of performing an RTI review for a term of up to 180 days. See, “Item 4. Information on the Company—Our Interest in TGS.”

In relation to the distribution of electricity, on January 31, 2018, the ENRE issued Resolution No. 33/18 which approved the tariff scheme for Edenor to be applied as from February 1, 2018. Furthermore, such resolution approved the new adjustments to own distribution costs (“CPD”) (last stage of 17% according to Resolution No 63/17, including the inflation adjustment of 11.9% for the period July 2017-December 2017 and a stimulus factor “E” of negative 2.51%) and determined the deferred income to be recovered in 48 instalments for a total amount of Ps.6,343.4 million. Additionally, it reported that the price of the average tariff reached Ps.2.4627/ KWh. See, “Item 4. Information on the Company— Our Distribution of Energy Business.”

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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 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. On March 22, 2019, the ENRE issued Res. No. 67/19 and No. 68/19 updating Transener and Transba’s remunerations by 78.41% and 81.26%, respectively, for the December 2016 – December 2018 period, effective as from February 1, 2019. On September 25, 2019, the ENRE issued Res. No. 269/19 and No. 267/19 updating Transener and Transba’s remunerations by 112.41% and 115.75%, respectively, for the December 2016 – June 2019 period, retroactively to August 1, 2019.

Notwithstanding the measures adopted by the Macri administration, the change of administration implied a radical change in governmental policies. One of the first measures of the Fernandez administration was to enact the Social Solidarity and Productive Reactivation Law, which, among other measures, established a 180-day freeze in energy and natural gas tariffs and the relaunching of RTIs and enabled the President to intervene before the regulatory authorities (ENRE and ENARGAS). Moreover, Resolution SE 31/2020 modified the power generation segment’s remuneration scheme and established prices denominated in Argentine Pesos (formerly denominated in U.S. Dollars) and reduced such prices in different proportions according to the technology employed. For more information, pleaseSee “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.

Therefore, there is uncertainty as to what other 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 and, consequently, on our business or operational results.

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 No. 25,561 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 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 January 27, 2017, the 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—Remuneration Scheme for Generation Not Covered by Contracts—SEE Resolution No. 19/2017: February 2017 - February 2019”. In 2019, the 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 supplyof fuel and, when dispatched, lacked such fuel. We cannot assure that future remuneration scheme will not have an adverse effect on our operational results. Regarding the spot price for electricity power, on February 27, 2020, the Secretariat of Energy issued Resolution No. 31/20, which modifiedretroactively, from February 1, 2020 onwards certain aspects of the remuneration scheme established by Resolution (SRRYME) No. 1/19.

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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. However, the aforementioned Social Solidarity and Productive Reactivation Law (Law 27,541) established a new tariff revision.

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 operational results or on the market value of our shares and ADSs or that the Argentine Government will not adopt further emergency legislation, 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 operational results and cause the market value of our ADSs and our common shares to decline.

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 US$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 revenues being in Pesos), 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 under the Macri administration 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 —Remuneration Scheme for Generation Not Covered by Contracts —SEE Resolution No. 19/2017: February 2017 - February 2019”and “SRRYME Resolution No. 1/19: March 2019 - January 2020” and “Item 5. Operating and Financial Review and Prospects—Factors Affecting Our Operational results—Electricity prices and tariffs”), the different measures taken by the Fernandez administration described in the previous risk factors imply a return of the direct intervention of the Argentine Government in the energy sector. We cannot affirm that new emergency or intervention measures will not be issued or the depth of their impact on our financial condition and operational results. Furthermore, we cannot assure 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 operational results.

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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 assurances that tariff increases made under the previous administration 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 that these measures or any future measure will not lead electricity companies, like Edenor, to record lower revenues and operational results, 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

Until 2016, 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 and distribution system to guarantee the delivery of electricity to the users and reduce the frequency of interruptions.

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 operational results could be affected, as well as our financial condition.

Additionally, according to Argentine law, distribution companies such as Edenor are responsible towards 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 (which resulted from an increase in demand for electricity). We cannot affirm 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 operational results 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 operational results and financial condition and the market value of our shares and ADSs.

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

Pursuant to Note No. 5,129/13, the former 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 operational results 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 operational results

Electricity generators, including ourselves 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 owed to the WEM or failed to pay in a timely manner to CAMMESA (see “Edenor may not have the ability to raise the funds necessary to repay its commercial debt with CAMMESA, its 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.

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 the 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. In fact, since November 2019, payments from CAMMESA, which should be settled within 42 days from the end of the month have been delayed and have been settled within approximately 70 days instead (except for RenovAr agreements which are paid in a timely manner and have FODER’s guarantee).

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 operational results and financial condition and the market value of our shares and ADSs.

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

 Law No. 27,191 was enacted on October 15, 2015, determining, among other things, that 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.

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The statute also includes tax and other benefits for new renewable energy projects. As of December 31, 2019, 6% 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 operational results 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 operational results

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 in the event of a shortage in domestic production.

 

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 (given the recent measures that returned to a centralized natural gas supply by CAMMESA), 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 under SE Resolution No. 220/2007, and both regulations require the generator to ensure the committed capacity with its own fuels through the execution of firm natural gas and transport contracts.

 

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 operational results.

 

 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 remained in charge of the commercial management and the dispatch of fuels for power generators which ‘do not or cannot’ make use of such capacity. However, SE Resolution No. 12/2019 abrogated SGE Resolution No. 70/2018 and returned to the CAMMESA centralized fuel supply scheme as established in SE Resolution No. 95/2013, as amended.

 

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

 

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 that 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

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penalties that may adversely impact the revenues derived from such agreements, which in turn may adversely affect our operational results. If the delay in the entry into commercial operations extends for more than 180 days from the specified date, the relevant PPAs may be automatically terminated by CAMMESA who may enforce the performance guarantee granted under such contract. In such event the project will be remunerated according to the general WEM remuneration scheme and therefore could negatively impact our operational results.

(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 IV obligations to enter into commercial operations by the committed date in the process for obtaining the priority dispatch 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. On November 2019, CAMMESA initiated the enforcement procedure. However, the parties have reached an agreement to suspend such procedure until April 30, 2020. See “Item 4. Our Generation Business—Renewable Energy”.

 

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

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 loses 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 operational results.

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

Greenwind, PEPE II and PEPE III’s energy generation depends on the prevailing meteorological conditions. Meteorological conditions that result in lower winds could lead to a breach of our sales commitments with CAMMESA (in the case of Greenwind) and WEM Large Users (PEPE II and PEPE III). 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 PEPE II and PEPE III’s client).

 

Moreover, PEPE II and PEPE III depend on their ability to have their estimated energy generation fully contracted with WEM Large Users and for each project to maintain its priority dispatch. If a project loses its priority dispatch, 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 31/20 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 operational results.

 

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

Prevailing hydrological conditions could adversely affect the operations of our hydroelectric generation plants owned by HINISA, HIDISA and 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 ArgentineGovernment 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 operational results, which may have a material adverse effect on our financial condition and the market value of our shares and ADSs.

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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 the Interjurisdictional Authority (“Autoridad Interjurisdiccional de Cuenca” or “AIC”) 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 operational results

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 operational results 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 operational results 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 operational results 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.

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 ordamages 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 operational results and cause the market value of our ADSs to decline.

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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. 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 to the spot market, 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 SE Resolution 31/2020).

In Note No. 567/07, as amended, the SE established the CMIEE as a maximum fee for 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 to GUMAs and GUMEs is equal to the higher between 1200 Ps./MWh or the temporary dispatch surcharge and for GUDIs of 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.

The guarantees granted by the Company to its affiliates could be enforced, which could have an adverse effect on results of our operations.

The Company has guaranteed in due time and form the fulfillment of payment obligations and commercial obligations of some of its affiliates. In the event that the affiliates do not comply with the obligations assumed, the guarantees granted by the Company could be enforced in accordance with their terms and conditions.

As of the date of this annual report, no breaches have occurred that triggered the guarantees, but the Company cannot assure that they will not occur in the future. Such breaches may have an adverse effect on our operational results.

Events that affected PEPE II and PEPE III operations may not be effectively resolved or similar events may occur in our energy projects.

After PEPE II and PEPE III began their commercial operations, certain defects were evident in the blades of their wind turbines, which led to their inability to be used. Many of the blades had to be replaced. Although the Company and the wind turbine supplier are taking all necessary measures to replace and repair thedefects, we cannot assure the full effectiveness of such repairs or that such defects or other defects do not arise in the future, which in turn may affect the operations of the Company's wind farms and have an adverse effect on the business, our financial condition, operational results or our ability to pay our debts.

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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 Adjustment Agreement and as required by the Argentine Government, 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.

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 requested adjustments 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.

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. 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%. For more information, see “Item 4. Our Distribution of Energy Business”.

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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 and 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 operational results 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 operational results, 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 operational results

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, 2019 and 2018, our accrued fines and penalties totaled US$121 million and US$187 million, respectively (considering 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”.

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. 123,091 be modified to reflect the amounts contained in theEdenor’s Concession Agreement.As of the date of this annual report, Edenor has 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 asof 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.

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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.

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 operational results, and the market value of our ADSs and our common shares.

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

Edenor’s distribution concession does not allow our energy distribution business to pass on 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 19.9% in 2019, 18.2% in 2018 and 17.1% in 2017. We cannot affirm 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 operational results and the market value of our shares or our ADSs.

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

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·        

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 Energía S.A.) and EDF International S.A. (“EDFI”) withdrew their ICSID claim, and on March 28, 2017, the ICSID acknowledged the discontinuance of the procedure.

In 2019, our fines and penalties remained below 10% 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 operational results 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 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 Argentine Government, 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.

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 exchange controls established by the Argentine Government and future restrictions on imports that may be adopted in the future 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, Edenor is obligated to satisfy all of the demand for electricity originated in our 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, operational results 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, 2019, 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 thosecurrently 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 operational results, financial conditions and the market value of our ADSs and common shares could be materially adversely affected.

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

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, 2019, Edenor had approximately5,588third-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 operational results 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 operational results

As of December 31, 2019, Edenor’s physical assets were insured for up to US$1,604.3 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 operational results and the market value of our shares and ADSs.

 

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 operational results and the market value of our shares and ADSs.

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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 operational results 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, its major supplier

On May 10, 2019, Edenor entered into with the Energy Government Secretariat, on behalf of the Federal Government, the Agreement on the Regularization of Obligations, pursuant to which the parties agreed to end pending reciprocal claims during the 2006-2016 transitional period (the “Agreement on the Regularization of Obligations”). Accordingly, pending obligations with the MEM for electrical energy purchases during such period were fully compensated. However, as a result of (i) the enactment of theSocial Solidarity andProductive Reactivation Law (in the framework of the public emergency), (ii) the subsequent instruction to Edenor to refrain from applying, as from January 1, 2020, the Electricity Rate Schedules Maintenance Agreement entered into between Edenor and the National State on September 19, 2019 and (iii) the prevailing macroeconomic situation, aggravated by the recent effects of COVID-19 outbreak (SeeFor more information, please see (“—Developments relating to the novel coronavirus may have a material adverse impact on our business operations, financial condition or results of operations”) and “Item 4—Relevant Events— Measures Designed by the Argentine Government to Address the Covid-19 Outbreak” and “Impact of the COVID-19 outbreak on our Operations”., Edenor will not have the ability to raise the funds necessary to repay its commercial deb with CAMMESA.

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, US$132.6 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 forconcurso 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 operational results 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, US$132.6 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 theaggregate 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 operational results could be adversely affected and the market value of our ADSs and common shares could decline.

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

Edenor revenues are mainly collected in Pesos. Although (i) the remuneration scheme set forth by the Electric Energy Secretariat (“SEE”) Resolution No. 1/19, establishes U.S. Dollar-denominated prices, the payment is made in Pesos by applying the Central Bank’s exchange rate effective on the day before the expiration date (although this remuneration scheme was significantly altered by the Energy Secretariat Resolution No. 31/20 which came into force in February 2020 and converted the remuneration scheme applied to energy sold in the Argentine spot market into pesos), and (ii) the remuneration scheme for other contracts with CAMMESA established U.S. Dollar -denominated prices but the payment is made in Pesos by applying the Central Bank’s exchange rate effective on the last business day of the month of the applicable transaction, adjusted through credit or debit notes, as appropriate, to consider the Central Bank’s exchange rate of the day before the expiration date, in accordance with CAMMESA’s procedures. As a result, we are exposed to an exchange rate risk between the collection date and the payment date (in the event CAMMESA does not pay at the expiration date) of U.S. Dollars-denominated financial indebtedness. In addition, a significant portion of our existing financial indebtedness is denominated in U.S. Dollars, which exposes Edenor to the risk of loss from the depreciation of the Peso. During 2019, Edenor’s hedging contracts did not cover all of its exposure to such depreciation. If Edenor is not able to effectively hedge all or a significant portion of its currency risk exposure, a depreciation of the Peso, may significantly increase Edenor’s debt service burden, which, in turn, may have a material adverse effect on our financial condition and results of operations.

The New York Stock Exchange and/or the Buenos Aires Stock Exchange 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 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.

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 operational results by causing significant demand increases, which Edenor may be unable to meet without a significant increase in operatingcosts. This could strongly impact the continuity of Edenor’s services and its quality indicators. 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, operational results and cash flows could therefore be negatively affected by changes in weather conditions and severe weather.

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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, (i) the continuation of the existing Concession Agreement as is; (ii) whether the federal legal and regulatory framework shall continue to apply or not; and (iii) the resolution of claims and debts between Edenor and the Argentine Government resulting from the contractual transition period ended on January 31, 2016. However, on December 21, 2019, the Argentine Congress passed the Social Solidarity and Productive Reactivation Law which, among other things, suspended the transfer of Edenor’s jurisdiction to the jurisdiction of the Province of Buenos Aires and the City of Buenos Aires, with the ENRE reassuming the jurisdiction over the public service of electricity distribution provided by Edenor and Edesur.Although as of the date of this annual report such transfer is suspended, 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 oil and gas business. 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

 

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 ten 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 is of the province 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 the 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 operational results 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. The exploration can only be carried out if the economic and operational prospects are feasible, such as pricing, demand, terms and conditions of sale, environmental impact, among other important factors.

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 operational results 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 operational results 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; storage capacity and global and local conflicts or acts of terrorism. We have no control over these factors. Although crude oil prices had maintained an increasing trend in recent years, at the beginning of 2020 the conflict between Saudi Arabia and Russia, which was magnified with the effects of the global crisis caused by the COVID-19, resulted in a collapse of crude oil prices. The Brent registered the worst decline of the last three decades with a 30% decrease, and the West Intermediate Texas traded at negative prices.For more information, please see (“—Developments relating to the novel coronavirus may have a material adverse impact on our business operations, financial condition or results of operations”) and “Item 4—Relevant Events— Measures Designed by the Argentine Government to Address the Covid-19 Outbreak” and “Impact of the COVID-19 outbreak on our Operations”.

As a result, we cannot assure that substantial or extended declines in international prices of crude oil and related oil products will not have a material adverse effect on our business, operational results and financial condition and the value of our proven reserves. In addition, significant decreases in the prices of crude oil and related oil products may require the incurrence of 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.

Export duties and import regulations on our products negatively affected the profitability of our operations

On March 1, 2002, the Argentine Government imposed a withholding tax on exports of hydrocarbons, initially lasting five years, which was subsequently extended 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 operational results. On January 6, 2017, the Argentine Government did not extend the resolutions that imposed a withholding tax on exports of hydrocarbons.

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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.

Afterwards, 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 US$1.00 worth of exports, with a maximum tax rate of 12% on the value of exports.

Thereafter, the Social Solidarity and Productive Reactivation Law modified the prior exportation duties for hydrocarbons that are commercialized in the external market.

We cannot affirm that the Argentine Government will not create new export and import regulations or amend the ones currently in place. We cannot predict the impact that any such changes may have on our operational results and financial condition.

Oil and gas prices and sale conditions 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 and development activities, and as a result, the timing and amount of our projected capital expenditures for such purposes. We budget capital expenditures by considering, 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 operational results.

In the context of the coronavirus pandemic crisis, Russia broke the agreement it had with Saudi Arabia in the internal dispute for oil production and, in response, Saudi Arabia lowered the price of oil to less than US$30 per barrel, levels that have not been seen for 16 years. Moreover, the United States oil prices traded below zero for the first time ever, and producers and traders were essentially paying other market participants to take their oil. For more information, please see (“—Developments relating to the novel coronavirus may have a material adverse impact on our business operations, financial condition or results of operations”) and “Item 4—Relevant Events— Measures Designed by the Argentine Government to Address the Covid-19 Outbreak” and “Impact of the COVID-19 outbreak on our Operations”. ”. 

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

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 operational results 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. Companies seeking to export must first demonstrate that the local demand 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 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 the MinEn before the import took place. This regime exempted any import by CAMMESA in order to supply power plants with the main purpose of technical supply to the SADI. On November 24, 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 prior 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, later modified by Res. SSHC 284/19 through which the operative procedure of natural gas exports is approved, effective until September 30, 2021 (See“Item4. The Argentine Energy Sector—OIL & GAS REGULATORY FRAMEWORK—Regulations Specifically Applicable to the Gas Market ”).

 

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 operational results.

 

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 operational results.

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 operations, which, in turn, could negatively affect our financial condition and operational results.

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

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 operational results.

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 considered.

 

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

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 Base Volume to be sold at a fixed Base Price and receive between US$4.00 and US$7.50 per million BTU (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 US$7.50 per million BTU 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 as of December 2017, 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 for the issuance of Natural Gas Program Bonds denominated in US$, issued on February 27, 2019, for a term of two years and four 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 ten 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” and Relevant Events— Oil and Gas—Modifications to the Unconventional Gas Plan - Resolution No.46-E/17). 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.

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 operational results.

Unless we replace our oil and gas reserves, such reserves and production will deplete 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 operational results could be negatively affected, as well as our financial condition and operational results.

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

We estimate our oil and gas reserves at least once a year. Our oil and gas reserves estimation as of December 31, 2019 was audited by Gaffney, Cline & Associates, as the Independent Reserves Engineers Firm, based on in its year-end Reserves Report. 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 the Reserves 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 Executive Director of Oil and Gas. 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 estimate, this could have a material adverse impact on our operational results. For more information, please see “Item 4.—Our Oil and Gas Business—Reserves”.

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 block, 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 IEASA, YPF and other provincial companies (such as Gas y Petróleo de 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 operational results. 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 operational results.

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 operational results.

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 complying with applicable regulations. 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 operational results

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 August 15, 2019, Decree No. 566/19 established that, for a period of ninety days: (i) deliveries of crude oil in the local market must be invoiced and paid by applying a reference exchange rate of Ps.45.19/US$ and a reference price of Brent crude oil of US$59/barrel; (ii) the prices of gasoline and diesel sold locally cannot exceed the current price as of August 9, 2019; and (iii) hydrocarbon producing companies, refineries and retail companies must supply the national demand for crude oil and liquid fuels, respectively, at the established prices.

 

Regarding natural gas, revenues we obtain as a result of selling natural gas in Argentina are subject to government regulations and could be negatively affected, particularly considering the evolution of gas prices for residential consumers, which in turn are still subject to subsidies, and the evolution of sale price to electric generation plants. This situation, in addition to CAMMESA’s bidding processes, which promoted strong competition in the demand of power generation plants, had a sensitive effect on the demand for the remaining segments, generating a lower quantity of firm commitments and/or contracts for shorter terms.

 

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 operational results. Similarly, we cannot affirm 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 operational results.

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

Although we have investments in Ecuador and Venezuela, most of our operations and activities are concentrated in Argentina. Latin America 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-capital 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-capital 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 operational results, 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 zero, we cannot assure that such intervention will not continue or increase, which could adversely affect our future business, operational results 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 requested change of indirect control. 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-capital companies has ceased and that we are willing to negotiate the transfer of our shares to CVP.              

 Risks Relating to our Shares and ADSs

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

The Argentine Government has reestablished restrictions on the conversion of Argentine currency into foreign currencies and on the remittance to foreign investors of proceeds from their investments in Argentina. Conversion of dividends, distributions, or the proceeds from any sale of shares from Pesos into U.S. Dollars, as well as the transfer of those funds abroad is strongly limited (See “Item 10. Additional Information—Exchange Controls”). Future restrictions on the movement of capital to and from Argentina such as those that previouslyexisted 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.

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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 BCL, 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 BCL 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, there are 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 impair 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 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 its current principal shareholders 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 PPSL, 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, CTG and CTLL, by way of absorption, with Pampa as the surviving company.

 The SEC 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 SEC.

 

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—Relevant Events—Strategic Divestments.

 

 

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OUR BUSINESS

Overview

We are the largest independent integrated energy company in Argentina. As of December 31, 2019, we were engaged in the electricity and gas value chain (not including discontinued operations; for more information, please see Note 5.2 to the Consolidated Financial Statements):

 

·        

Generation.Our generation installed capacity reached approximately 4,751 MW, which represents approximately 12% of Argentina’s installed capacity. In addition, we have committed to develop projects that we expect will increase our installed capacity by 471 MW, which would bring our total installed capacity to 5,222 MW (see “Our Generation Business–Summary of the committed expansion projects”). We are engaged in the generation business through:

 

o

CTGEBA, thermal generation plant located at the central node of the Argentine electricity grid, in Marcos Paz, in the Western Greater Buenos Aires, comprised by a 674 MW combined cycle gas-fired generating unit, a 169 MW open-cycle gas turbine which was granted an additional power capacity of 19 MW, effective as of June 1, 2019, as well as a new open-cycle gas turbine of 188 MW under the expansion to CC process, totaling 1,050 MW of installed capacity. The committed expansion projects include the closing to combined cycle at CTGEBA for 383 MW, of which 207 MWwere commissioned in June 2019, estimated for the third quarter of 2020. Upon the commissioning of the closing to CC, CTGEBA will increase its installed capacity to 1.2 MW;

o

CTLL, a gas-fired 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. The committed expansion projects include the incorporation into CTLL of, two engines, which will increase its installed capacity by 15 MW, estimated for the second quarter of 2020;

o

CPB, a thermal gas or fuel oil-fired generation plant located in Ingeniero White, Bahía Blanca, in the Province of Buenos Aires, with an installed capacity of 620 MW;

o

CTIW, a thermal gas or fuel oil-fired generation plant located in Ingeniero White, Bahía Blanca, in the Province of Buenos Aires, with an installed capacity of 100 MW;

 

 

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o

CTG, a thermal gas-fired generation plant located in General Güemes, in the Province of Salta, with an installed capacity of 361 MW;

o

CTP, a thermal gas-fired generation plant located at Piquirenda, General San Martin, in the Province of Salta, with an installed capacity of 30 MW;

o

CTPP, a thermal power generation plant at Pilar Industrial Park, located in Pilar, Northern Greater Buenos Aires, which comprises six Wärtsilä motor generators (Wärtsilä W18V50DF) with an installed capacity of 100 MW and which runs on natural gas and fuel oil;

o

CTEB, a thermal gas-fired generation plant located in the petrochemical complex of the City Ensenada, Greater La Plata, Province of Buenos Aires, with an installed capacity of 567 MW and which is owned by CTB, an affiliate that we co-control through our subsidiary Pampa Cogeneración, with YPF;

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 Los 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 TJSM and 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 jointly control with Viento Solutions SL. Greenwind was created for the main purpose of developing PEMC, which has a capacity of 100 MW.;

o

PEPE II: on May 10, 2019, CAMMESA granted the commercial commissioning of our second wind farm in the City of Bahía Blanca, Province of Buenos Aires. PEPE II contributes 53 MW of renewable energy to the national grid;

o

PEPE III: on May 10, 2019, CAMMESA granted the commercial commissioning of our third wind farm in the City of Bahía Blanca, Province of Buenos Aires. PEPE III contributes 53 MW of renewable energy to the national grid; and

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 US$819 million in revenue and an operating profit of US$273 million for the year ended December 31, 2019.

 

·        

Distribution of Energy.We are engaged in the electricity distribution business through our subsidiary Edenor, that serves on exclusive basis to approximately 3.1 million customers, throughout an area of approximately 4,637 square kilometers comprised by 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 whether in terms of number of customers and electricity sold (in terms of GWh and revenues) in 2019, based on publicly available figures released by electricity distribution companies in Argentina.

 

Our distribution of energy business segment recorded US$1,502 million in revenue and an operating profit of US$342 million for the year ended December 31, 2019.

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·        

Oil and Gas.We are engaged in the oil and gas business through:

o   

Direct interest in oil and gas blocks in Argentina where, as of December 31, our combined crude oil and natural gas proved reserves amounted approximately 135.4 million barrels of oil equivalent, 52% of which were proved developed reserves. Natural gas accounted for approximately 90% of our combined proved reserves and liquid hydrocarbons for 10%;

o   

our combined oil and gas production in Argentina averaged 48.2 thousand barrels of oil equivalent per day, considering continued operations (see Note 5.2.1 to the Consolidated Financial Statements), with operations in 12 production blocks and 885 production wells. Crude oil accounted for approximately 5.0 thousand barrels of oil equivalent per day, while natural gas accounted for approximately 259 million standard cubic feet per day, or 43.2 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; and

o   

Direct interest in (i) our2.1% 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; (ii) our investments in Oleoductos de Crudos Pesados Ltd. (“OCP”); and (iii) minor interests in four productive blocks in Venezuela, through mixed-capital 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—Others—Venezuela”.

Our oil and gas business segment recorded US$444million in revenue from continuing operations and an operating profit from continuing operations of US$71 million for the year ended December 31, 2019.

 

·        

Petrochemicals.Our petrochemicals operations are entirely based in Argentina. We own three plants producing styrene, styrene butadiene rubber (SBR) and polystyrene, with a domestic market share ranged between 89% and 100% as of December 31, 2019. 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 US$321 million in revenue and an operating profit of US$5 million for the year ended December 31, 2019.

 

·        

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

o   

PHA 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, PHA has a direct interest of 0.79% in TGS and we directly own 10% of CIESA and 0.91% of TGS. As a result, we have a direct and indirect interest of 27.2% in TGS;

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. As of December 31, 2019, our electricity transmission operations covered 20,981 kilometers of high voltage transmission lines, representing approximately 85% of the high voltage system in Argentina; and

 

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o   

We participate in the refining and distribution operations through our participation of 28.5% interest in Refinor, which owns a refinery located at Campo Durán in the Province of Salta with an installed capacity of 25,800 oil barrels per day and a commercial network of 90 gas stations located in Argentina.

CIESA, CITELEC Refinor, CT Barragán S.A. and Greenwind are accounted for using the equity method.

Our holding and other business segment recorded US$20 million in revenue and an operating profit of US$60 million for the year ended December 31, 2019.

 

Relevant Events

Corporate Reorganization Process

Merger of Pampa and 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 retroactive effects from January 1, 2019. However, the shareholders’ meetings of Pampa and PEA held on May 29, 2019 resolved to leave without effect the proposed merger between Pampa and PEA.

 

Merger of Pampa and PEFM

 

On August 30, 2019, the board of directors of Pampa and PEFM approved the merger between Pampa as the surviving company, and PEFM, as the merged company, as from July 1, 2019. This merger was later approved by Pampa’s Extraordinary General Shareholders’ Meetings held on October 15, 2019. As of the date of this annual report, the approval by the City of Buenos Aires’s Public Registry of Commerce (IGJ) is still pending.

 

Merger of Pampa and CPB

 

On October 8, 2019, our Board of Directors instructed management to assess the benefits of a merger between Pampa, as the surviving company, and CPB, as the merged company, establishing January 1, 2020 as the potential effective merger date. On March 9, 2020 our Board of Directors resolved to approve such merger. As of the date of this annual report, the definitive merger agreement had not been executed.

 

Merger of Pampa, Pampa Cogeneración and PHA

 

On March 26, 2020, our Board of Directors instructed management to assess the benefits of a merger between Pampa, as the surviving company, and Pampa Cogeneración and PHA as the merged companies, establishing April 1, 2020 as the effective merger date. As of the date of this annual report, the definitive merger agreement had not been executed.

 

Generation

Fuel Self-Procurement by Power Generators

 

Pursuant to Resolution SGE No. 70/18, since November 2018, power generators were authorized to acquire fuel required for their own power generation. Should power generators chose this option, CAMMESA would then value and pay to power generators their fuel costs through a standardized mechanism. CAMMESA remained, however, in charge of the commercial management and the dispatch of fuels for power generators which could not or would not make use of such option. On November 12, 2018, Pampa decided to use this option, allocating a significant portion of its gas production for the dispatch of its thermal units.

 

However, as of December 30, 2019, through Resolution MDP No. 12/19, Section 8 of Resolution SE No. 95/13 and Section 4 of Resolution SE No. 529/14 were reinstated. As a result, fuel supply is again being centralized by CAMMESA (other than power generators with Energy Plus). Resolution SGE No. 70/1836F was therefore repealed.

 

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Commissioning of Two New Wind Farms

 

On May 10, 2019, CAMMESA granted the commercial commissioning of PEPE II and III, each with 53 MW of installed capacity. The commissioning of PEPE II and III was achieved within the scheduled timeframe set forth in the awarding of priority dispatch.

 

PEPE II is located in the area known as Corti, 20 kilometers away from the City of Bahía Blanca, Province of Buenos Aires, nearby PEMC, whereas PEPE III is located in the City of Coronel Rosales, 25 kilometers away from the City of Bahía Blanca.

 

Both wind farms consist of 14 wind turbines each. Each turbine is made up of four tower sections, a nacelle and three blades driving the turbine with a total diameter of 136 meters. Furthermore, through Resolution No. 281-E/2017 enacted by the former Ministry of Energy and Mining (MEyM) PEPE II and III were awarded the Renewable Energy Term Market (MAT ER) and were destined to meet the demand by large electricity consumption users through PPAs between private parties. The wind farms demanded a final estimated investment of US$130 million.

 

Progress in the Cycle Closing Project at CTGEBA

 

CAMMESA granted the commercial commissioning to CTGEBA’s Gas Turbine 04 as from June 12, 2019, for an installed capacity of 188 MW. Moreover, CAMMESA granted the commissioning to the capacity enhancement of the already existing Gas Turbine 03, also known as Genelba Plus, for an additional power capacity of 19 MW, effective as from June 1, 2019.

 

These units, which contributed an additional 207 MW capacity to the grid, are part of Genelba Plus’ closing-to-combined-cycle project, which will include the entry into service of a steam turbine, estimated to be completed by the third quarter of 2020. Upon the commissioning of the closing-to-combined-cycle at CTGEBA Plus, which will require a total estimated investment of US$350 million, the PPA executed with CAMMESA will come into effect for a 15-year period, and CTGEBA will have two combined cycles with a total installed capacity of approximately 1.2 GW.

 

Joint Acquisition of CTEB

 

After submitting a joint bid, on May 29, 2019, IEASA notified that Pampa, through its subsidiary Pampa Cogeneración, and YPF were awarded the tender for the sale and transfer by IEASA of CTEB. On June 26, 2019, the transaction was completed, subject, however, to the sale and transfer to CTB (the “Acquiring Company”), a company co-controlled by YPF and Pampa.

 

CTEB is located in the petrochemical complex of the City of Ensenada, Greater La Plata, Province of Buenos Aires, and consists of two open-cycle gas turbines with an installed capacity of 567 MW. As part of the transaction, the Acquiring Company should complete, within a 30-month period, the necessary works to convert CTEB into a combined cycle, which will result in the expansion of its installed capacity to 847 MW and derive in higher efficiency, as it will generate 50% more electricity with the same amount of fuel (gas). Once the combined cycle works are completed, it is estimated that CTEB will be one of the most efficient thermal power units among the country’s power grid.

 

Both CTEB’s open and closed cycles are subject to PPAs executed with CAMMESA pursuant to Resolution No. 220/07 issued by the former Secretariat of Energy (SE). The open cycle’s PPA is effective as of March 26, 2009 and expires on April 27, 2022, and the closed cycle’s PPA was executed on March 26, 2013 and expires in 10 years from the date of the commissioning of the combined cycle.

 

CTEB’s acquisition price amounted to US$282 million, which also accounted for the purchase price of a certain amount of debt securities (VRDs) issued under the trust agreement called “Contrato suplementario del programa global de fideicomisos financieros y de administración para la ejecución de obras de infraestructura energética -Serie 1- ENARSA (Barragán)” (Trust). For the payment of the acquisition price, the Acquiring Company received a US$200 million contribution from its co-controlling shareholders, and executed a US$170 million loan with a syndicate of banks. The banks have no recourse against Pampa and YPF.

 

Furthermore, it is estimated that the investment for the closing to combined cycle will be of approximately US$200 million. CTEB’s acquisition also involved the assignment to the Acquiring Company of the trustee’s contractual status under the Trust. The VRDs debt (excluding the VRDs acquired by CTB) amountedto approximately US$229 million as of the transaction date and is estimated to be repaid with CTEB’s operation cash flow proceeds.

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Pampa will be responsible for CTEB’s operating management until 2023 and YPF, through its subsidiary YPF Energía Eléctrica S.A., will supervise the necessary works for CTEB’s conversion into combined cycle. YPF and Pampa will be in charge of CTEB’s operating management on an alternate basis, for periods of four years.

 

Agreement for the Regularization and Settlement of Receivables with the WEM (CAMMESA Agreement)

 

Pursuant to the call made to generators under the instructions of the Government Secretariat of Energy (SGE), on August 5, 2019 Pampa and certain subsidiaries executed with CAMMESA an agreement for the Regularization and Settlement of Receivables with the WEM whereby CAMMESA committed to disburse the Sales Settlements with maturity date to be defined (LVFVD) in arrears, after offsetting debts undertaken with the WEM under financing agreements, loan agreements and assignment of receivables executed with generators, and applying an 18% reduction on the balance. Pampa and certain subsidiaries agreed on a net amount for all items associated with the outstanding LVFVD, including interests as of July 31, 2019, as well as the above-mentioned debt reduction, which amounted to Ps.2,123 million before any applicable withholding.

 

On August 7, 2019, the corresponding offsetting was completed and the LVFVD’s remaining balance was collected. In furtherance of the undertaken commitments, Pampa and certain subsidiaries have waived all submitted claims and have irrevocably dismissed their rights to file any claim against the Federal Government, SGE and/or CAMMESA regarding the outstanding LVFVD. As a result of the agreement, we recorded sales revenues for Ps. 260 million and financial net gains for Ps.3,119 million.

 

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 the SGE to 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.

 

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 above mentioned projects was rejected.

 

Amendment to the Natural Gas Exports’ Authorization Procedure

On July 26, 2019, SGE Resolution No. 417/2019 amended the previous procedures for the authorization of natural gas exports, effective as from its publication in the Official Gazette. Exports can be agreed under firm, interruptible, operational exchanges or support agreements, provided that the supply to the Argentine domestic market is secured in all cases. Furthermore, in the case of projects under the Encouragement Program for the Investment in Development of Natural Gas Production from Unconventional Reservoirs, approved by Resolutions No. 46, 419, 447 /17 and 12/18 of former MEyM (“Unconventional Gas Plan”), exported natural gas shall not be eligible as part of and/or within the production applicable to such program. Later, in October 2019, this Res. was supplemented by SHC Provision No. 284/19.

If higher costs are incurred by the WEM as a result of the use of alternative fuels for power generation (imported LNG, coal, fuel oil or gas oil), which costs would be borne by the Federal Government, exporting companies may pay a compensation to CAMMESA (SGE Res. No. 506/19). Furthermore, as from September2018 a duty on gas export was established, with a maximum 12% tax rate, which was modified as from December 2019 with the entry into effect of the Social Solidarity and Productive Reactivation Law, setting a rate lower than or equal to 8% of the taxable value or the FOB price. However, the latter has not yet been formally implemented, therefore export duty still stands at 12%.

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Export of Natural Gas on a Firm Basis During the Summer Period

SGE Resolution No. 252/18 passed on December 12, 2018 authorized Pampa to export gas to Chile, on an interruptible basis, to Colbún S.A. at a PIST price of US$4.2/MBTU, for a maximum volume of 2 million m3/day until November 15, 2019, or until meeting the equivalent total maximum quantity, whichever occurs first. SGE Resolution No. 12/19 of January 22, 2019 authorized Pampa to export gas to Uruguay, on an interruptible basis, to Uruguay’s Power Plants and Transmissions state-owned company, at a PIST price of US$4/MBTU, for a maximum volume of 600 dam3/day until May 1, 2019 or for the equivalent total maximum quantity.

On August 21, 2019, Disposition No. 168/2019 issued by the Undersecretariat of Hydrocarbon and Fuels (SHC) was published in the Official Gazette, approving the terms and conditions for the export of natural gas to Chile on a firm basis, and permitting exports during the period between September 15, 2019 and May 15, 2020 with a maximum aggregate volume of 353 million cubic feet/day, divided as follows: 65% from the Argentine Central-Western area, 25% from the South and 10% from Northwest area; provided, that the Argentine domestic market is fully supplied.

In September 2019, we obtained a permit to export gas on a firm basis (from our production at the Neuquina Basin) to ENAP Refineries in Chile for a maximum volume of 0.6 million cubic meters/day or a total 136.8 million cubic meters at a price of US$3.11/MBTU, net of export duties and transportation costs until May 15, 2020. In December 2019, the maximum volume was increased to 0.9 million cubic meters/day or a total of 188.7 million cubic meters.

Investment in OCP

On December 5, 2018, through our subsidiary PEB, we entered into an agreement with Agip Oleoducto de Crudos Pesados BV (AGIP) for the acquisition of 4.49% of the capital stock of OCP and the credit that AGIP held with respect to the subordinated debt issued by OCP. On March 8, 2019, the agreement was approved by the Ecuadorian State and executed on June 20, 2019. This acquisition increased our interest in OCP to 15.91%. If the aforementioned credit is collected by PEB in advance of its maturity in 2021, PEB should reimburse AGIP 50% or 25% of the amount collected in 2019 or 2020, respectively.

The closing of the transaction resulted in the recognition of a gain of US$25 million in our Consolidated Financial Statements. On the other hand, as of December 31, 2019, PEB recorded an impairment loss on its previous participation in OCP (11.42%) for an amount of US$6.7 million.

Exploration Permits

The extension of 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 in April 2019. Pampa holds a 42.5% interest in the Parva Negra Este block.

 

On March 29, 2019, GyP requested to the Province of Neuquén that thewhole Parva Negra Este block should be classified as an “evaluation lot” for a period of 3 years. The approval is still pending.

 

On February 22, 2019, Salta’s Provincial Executive Order No. 249/19 was issued, extending the exploratory term for a 12-month period effective as from November 18, 2018. We have a 50% interest in the Chirete area, located in the province of Salta, operated by High Luck Group Limited. On April 26, 2019 an exploitation concession was requested on the lot called “Los Blancos”, with an area of 95 square km. Additionally, on April 30, 2019, the extension of the third exploratory period over the remaining area was requested for three years, considering an exploratory potential that will require additional studies after the discovery of oil.

 

The exploration permits for Río Atuel, a block located in the Province of Mendoza and operated by Petrolera El Trébol, expired in September 2018, and the term was extended until March 13, 2019 pursuant toAdministrative Decision No. 19/18 issued by the Department of Hydrocarbons of Mendoza. We hold a 33.33% interest in the Río Atuel block. Then December 7, 2019 was determined as the new expiration date of the second exploratory period, and on December 18, 2019 the third exploratory period entered into force for a period of one year, reversing 50% of the total area of 998 square km.

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Additionally, we had duly communicated to our partners of the Enarsa 1 and Enarsa 3 areas our decision to not participate in the conversion of those areas into exploration permits according to Law No. 27,007. On April 15, 2019, Resolution SGE No. 195/19 and 196/19 were published informing the reversal and transfer to the National State of the Enarsa 3 area, the partial conversion of the Enarsa 1 area into an exploration permit in favor of YPF and the reversion and transfer to the National State of the remaining surface of the Enarsa area 1. As a result, we no longer hold any participation in these areas.

 

Strategic Divestments

Closing of Dock Sud Terminal Sale

 

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 US$19.5 million plus an additional amount of US$2.0 million for terminal’s products. The transaction resulted in a profit before income tax in the amount of Ps.45 million.

 

Measures Designed by the Argentine Government to Address the Covid-19 Outbreak

 

In late December 2019, a notice of a pneumonia originating from Wuhan, Hubei province (Covid-19, caused by a novel coronavirus) was reported to the World Health Organization, with cases soon confirmed in multiple provinces in China, as well as in other countries. Since December 2019, the virus has spread globally and, as of the date of this annual report, affected almost every country around the world, including Argentina. As of April 29, 2020, Argentina identified 4,285 confirmed cases of coronavirus, of which 214 were fatal. Argentina has adopted several measures in response to the Covid-19 outbreak in the country aimed at preventing massive infections of Argentine residents and the congestion of the Argentine health service, which include:

 

·        

February 26— March 12, 2020: screening of passengers at airports; mandatory isolation for 14 days of individuals with suspected or confirmed cases of Covid-19, individuals in close contact with suspected or confirmed cases of Covid-19 and individuals arriving or recently arrived from affected zones; closure of activities with large crowds; prohibition of audience attendance to sport events;

·        

March 13— March 15, 2020: stricter surveillance of Argentine borders; suspension of flights by various airlines and adoption of regulations to coordinate repatriation flights for Argentine residents abroad; prohibition of access to national parks and protected areas; schools and universities shutdown (which remain open for food aid and administrative purposes);

·        

March 16— March 18, 2020: closure of Argentine borders; suspension of domestic flights and long-distance trains and buses operations; suspension of the national soccer league; temporary work leaves for pregnant women, individuals older than 60 years and other persons considered at special risk upon infection; authorization for federal public employees to work remotely (except for employees providing essential services); promotion of home office policies in the private sector and beginning of construction of eight modular hospitals;

·        

March 19, 2020: imposition of a nation-wide mandatory lockdown, where exceptionally essential transit is permitted; deployment of security forces for lockdown enforcement;

·        

March 20 - April 11, 2020 – April 26, 2020: assistance to Argentine residents abroad; extension of nation-wide lockdown until May 10, 2020 inclusive.

 

Simultaneously, the Argentine Government has announced and is implementing a several stimulus measures to limit the effects of the Covid-19 outbreak on the economy, including the following:

 

·        

a one-time Ps.3,100 cash payment to recipients of the universal child allowance;

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·        

a one-time Ps.3,000 cash payment to retirees receiving minimum benefits (currently Ps.15,892) and those that receive above the minimum but less than Ps.18,892 which covers approximately 4.6 million retirees;

·        

a one-time Ps.10,000 cash payment which will be granted to approximately 7,785,000 to unemployed individuals and individuals employed informally, among other socially vulnerable individuals;

·        

a capital spending program on infrastructure, education and tourism for approximately Ps.100 billion;

·        

a payment exemption of employers’ contributions for companies in vulnerable industries, and an increase of unemployment insurance and salaries subsidies;

·        

subsidized loansfor working capital to small- and medium-sized companies of approximately Ps.30 billion via the financial system;

·        

a 40% increase in the budget allocation for capital expenditures, mainly in road infrastructure, housing and school construction; and

·        

a financial assistance program for the provinces for an amount up to Ps. 120 billion (Programa Para la Emergencia Financiera Provincial) created to provide financial relief to the provinces.

 

Other measures adopted by the Argentine Government to mitigate the effects of the Covid-19 outbreak in the economy include the following:

 

·        

a 180-day period waiver of suspension of the following services upon certain beneficiaries’, who fail to pay less than three consecutive invoices from March 1, 2020: electric energy, natural gas through pipeline, water and sewage, landline and mobile telephony, internet and cable television services. This measure is only applicable to certain users identified in the decree.Specifically, regarding electric energy, users that have prepaid systems, shall be provided with the service even if they fail to make the corresponding recharges; additionally, through Resolution No.173/2020, in force as of April 18, 2020, the Ministry of Productive Development sets forth that electricity distribution services, among others, shall be payable in 30 monthly, equal and consecutive installments, the first one being due on September 30, 2020 (notwithstanding the possibility for customers to pay invoices before or through a smaller number of installments). This resolution is of limited application to a specific group of clients detailed in the resolution. Furthermore, the financing can also be applied to the purchase of energy that the Company makes to the MEM associated with these consumptions.

·        

the suspension of certain penalties and disqualifications applicable to checking accounts with insufficient funds until April 30, 2020;

·        

the prices freezes as of March 6, 2020, for certain essential goods such as food, personal care, medication and medical products for a 30-day period;

·        

lease prices freeze and evictions suspension until September 30, 2020;

·        

prohibition to dismiss employees without cause and dismiss and suspend employees due to work slowdown or force majeure for a 60-day period beginning March 31, 2020.

·        

On April 8, 2020, the Secretariat of Energy instructed CAMMESA to implement an extraordinary payment mechanism for WEM Agents affected by the COVID-19 related quarantine. According to such mechanisms, WEM Agents may partially cancel their energy supply according to the impact on their sales, and postpone the payment of the remaining balance for a period between 15 days to 6 months. Such amounts shall not accrue charges nor interest. This mechanism applies to the energy supplies due from April 1, 2020 to 60 days after therescindment of the COVID-19 isolation.

 

Measures Designed by the Company to Address the Covid-19 Outbreak

 

In this regard, and by virtue of the current public health emergency, we have implemented a Contingency Plan in order to minimize the risk of contagion from our employees and ensure business continuity. On February 27, 2020, a special multidisciplinary preventive committee was created, which established and coordinated different internal practices to be implemented in our facilities. Due to the mandatory and preventive social isolation effective as from March 20, 2020, we implemented mandatory home office for our employees, provided that their tasks allow it. Those individuals involved in activities and services that have been declared essential during the public health emergency according to the applicable regulations, must comply with the security and prevention measures imposed by the authorities and the Company, thus allowing the continuity of most of our activities.

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The ongoing circumstances of the current coronavirus outbreak (COVID-19), among others, will be key in determining the depth and the duration of the economic crisis in the world and in Argentina in particular, and therefore in our strategy, financial situation and results of operations.

 

As of the date of this annual report, although the early development of the coronavirus pandemic has not yet had any significant impact on the Company, we cannot reasonably quantify to what extent the COVID-19, and in particular, the measures taken by the Government to prevent its spread have affected and will affect our businesses and results of operations. We are evaluating the impacts in relation to the items’ valuation of property, plant and equipment and the impairment of our financial assets. For more information, please see “—Developments relating to the novel coronavirus may have a material adverse impact on our business operations, financial condition or results of operations”).

 

Impact of the COVID-19 outbreak on our Operations

 

 

As aforementioned, the Argentine Government and several governments have adopted drastic measures in response to the Covid-19 outbreak, which have affected the Argentine energy industry, as described below:

 

•    With respect to the generation business, the electric demand in the SADI has decreased an average of 26% since the start of the lockdown. Also, due to significant delays on its collections from distribution companies and large users, CAMMESA has extended the payment date for generators and producers by more than 30 days, and it is possible there may be even greater delays. It has also suffered delays in receiving contributions from the National Treasury. Additionally, the SE instructed CAMMESA to suspend the automatic adjustment mechanism for spot remuneration in SE Resolution No. 31/20. These measures directly affect the financial situation of the electric business, and will continue deteriorating if the payment chain is compromised, hindering the maintenance and risking the availability of the generation park.

•   As for the gas business, although the local production volume is aligned to its historical average, the total demand has also been affected with a 30% decrease mainly due to the fact that CAMMESA has lowered the electric dispatch and, in consequence, there is a lower demand for thermic electric generation. Also, the lockdown of all non-essential activities and consumer seasonality have contributed to a lower demand. In consequence, the prices obtained in recent CAMMESA auctions have shown a tendency to be lower to those obtained prior to the lockdown. Moreover, an agreement has not been reached for the contracts with the distributors that have expired on March 31, 2020.

•    Demand for hydrocarbons has significantly diminished due to a lower demand for refined products and it is not certain how it will evolve in the near future.  Particularly, crude oil storage capacity has reached its limit at a local and global scale. Also, the local oil prices, that have International prices as a reference, have suffered a big decrease and their future is uncertain.  It is expected that the Argentine Government will intervene in order to fix a price for the locally produced barrel (usually known as “barril criollo”) as has occured in past crises. However, to the date of this form, no rule has been issued, and it is not possible to estimate the price that may be fixed.

•    With regards to the petrochemical business, there has been a significant reduction in the local demand for some products like styrene and octane bases for gasoline. Also, our rubber production was suspended due to the fact that it was not considered an essential activity, in accordance with our clients activities.

•    As for the electric distribution business, there has been a decrease in the demand, due mainly to lower non-essential commercial and industrial activity, compensated by an increase in residential demand. Also, the lockdown had an impact on the collection businesses and the consumers’ income, which has produced a significant decrease in their earnings and cash flows. On March 25, 2020, the PEN issued the Decree No. 311/20 suspending for 180 days the energy power cuts due to lack of or delay in payment for certain socially vulnerable clients. Due to the continuous increase in the costs associated with the service and the need to invest in order to maintain the quality of service, Edenor was forced to partially postpone payments to CAMMESA for the energy acquired in the MEM with maturities as from March 2020.

 

The Company’s management is monitoring the situation and implementing all necessary measures to assure the sanitary well-being of its employees, continue with its operations and preserve its financial situation. This includes a home office scheme, except for those working positions that must inevitably attend their working place. For the cases, there was an implementation of a preventive protocol. Also, investments have been rescheduled and we have negotiated with banks in order to obtain new credit lines, among other measures.    

 

We are also evaluating the impact of the measures implemented by the Argentine Government in relation to the valuation of the recoverability of our properties, plants, equipment, inventories and financial assets.

 

The final scope of the outbreak of the novel coronavirus and its impact on Argentina’s economy is unknown and impossible to reasonably predict. However, although there have been significant adverse effects in the short term, it is not estimated that the continuity of the business of the Company will be affected.

 

Due to our financial solidity, we estimate we will satisfy our financial commitments in the next twelve months.

 

Notwithstanding the aforementioned, due to the recently adopted governmental measures, it is not possible to accurately quantify the duration of the restrictions, their evolution, their impact on the economy and, especially, how our business and the results of our operations will be affected in the future. If the measures were to be extended for a long period of time, we may have to recognize losses in the future due to the deterioration of the registered value of our assets or renegotiate the maturities of our commercial and financial debts. 

 

Organizational structure

 

The following chart sets forth our corporate structure as of December 31, 2019.

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Our Generation Business

Our power generation assets include: CTG, CTP, CTPP, CTLL, CTIW, CPB, CTGEBA, HPPL, EcoEnergía, PEPE II, PEPE III and interests in HINISA, HIDISA, PEMC y CTEB.

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, 2019, 2018 and 2017.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

Wind

Subtotal Hydro + Wind

HINISA

HIDISA

HPPL

PEMC

PEPE II

PEPE III

Installed Capacity (MW)

265

388

285

100

53

53

1,144

Market Share

0.7%

1.0%

0.7%

0.3%

0.1%

0.1%

2.9%

 

 

 

 

 

 

 

 

Net Generation2019 (GWh)

498

334

823

383

122

148

2,309

Market Share

0.4%

0.3%

0.6%

0.3%

0.1%

0.1%

1.8%

Sales 2019(GWh)

498

334

823

383

129

154

2,321

 

 

 

 

 

 

 

 

Net Generation2018 (GWh)

577

393

886

247

-

-

2,103

Variation NetGeneration  2019-2018

-14%

-15%

-7%

+55%

N/A

N/A

+10%

Sales 2018 (GWh)

577

393

886

247

-

-

2,103

 

 

 

 

 

 

 

 

Net Generation2017 (GWh)

751

480

760

-

-

-

1,991

Variation NetGeneration  2018-2017

-23%

-18%

17%

N/A

-

-

-24%

Sales 2017 (GWh)In US$/MWh

751

480

760

-

-

-

1,991

Avg. Price 2019

38

58

23

69

62

65

44

Avg. Price 2018

31

46

22

80

N/A

N/A

36

Avg. Gross Margin  2019

23

42

15

59

53

55

33

Avg. Gross Margin  2018

20

32

15

71

N/A

N/A

26

Sources: Pampa Energía S.A. and CAMMESA.

Note: gross margin before amortization and depreciation. Exchange rate Ps./US$: 2019 – 48.23; 2018 – 28.13.

 

 

Summary of Electricity
Generation Assets

Thermal

 

 

 

CTLL

CTG

CTP

CPB

CTPP

CTIW

CTGEBA

ECO-ENERGÍA

CTEB

Subtotal

Total

Installed Capacity (MW)

765

361

30

620

100

100

1,050

14

567

3,607

4,751

Market Share

1.9%

0.9%

0.1%

1.6%

0.3%

0.3%

2.6%

0.04%

1.4%

1,453

1,659

 

 

 

 

 

 

 

 

 

 

 

 

Net Generation2019 (GWh)

5,096

755

53

1,106

168

312

5,550

105

128

13,273

15,582

Market Share

3.9%

0.6%

0.0%

0.8%

0.1%

0.2%

4.2%

0.1%

0.1%

10.1%

12.0%

Sales 2019 (GWh)

5,096

891

53

1,106

168

312

5,887

110

128

13,751

16,072

 

 

 

 

 

 

 

 

 

 

 

 

Net Generation2018 (GWh)

4,748

1,674

134

753

192

274

4,859

108

-

12,743

14,845

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Variation NetGeneration  2019-2018

+7%

-55%

-61%

+47%

-13%

+14%

+14%

-3%

N/A

+4%

+5%

Sales 2018 (GWh)

4,748

2,227

134

753

192

274

5,457

110

-

13,751

16,072

 

 

 

 

 

 

 

 

 

 

 

 

Net Generation2017 (GWh)

3,864

1,772

156

1,453

142

23

4,685

100

-

12,195

14,186

Variation NetGeneration  2018-2017

23%

-6%

-14%

-48%

+35%

N/A

+4%

+8%

-

2%

+5%

Sales 2017 (GWh)In US$/MWh

3,864

2,358

156

1,453

142

23

5,424

103

-

13,523

15,514

Avg. Price 2019

55

45

113

62

N/A

107

46

47

N/A

61

58

Avg. Price 2018

43

35

59

88

N/A

107

36

57

N/A

45

44

Avg. Gross Margin  2019

31

29

N/A

23

N/A

80

17

7

N/A

33

33

Avg. Gross Margin2018

37

20

N/A

46

N/A

85

18

15

N/A

30

29

Sources: Pampa Energía S.A. and CAMMESA.

Note: gross margin before amortization and depreciation. Exchange rate Ps./US$: 2019 – 48.23; 2018 – 28.13.

 

 

Summary of the committed expansion projects

 

Project

MW

Equipment

Provider

Marketing

Date of

Commissioning

Thermal

CTLL

15

MAN

SE Resolution No. 31/20

Second Quarter of 2020

CTGEBA

176

Siemens

Agreement in US$ for 15 years

CC1:Third Quarter of 2020

CTEB

280

Siemens

Agreement in US$ for 10 years

CC1:2022

Total

471

 

 

 

 

Thermal Generation plants

CTLL

CTLL is located in the Province of Neuquén, which has an installed capacity of approximately 765 MW, representing approximately 1.9% of Argentina’s installed capacity. The plant was built in 1994 and consists of three gas turbines with an installed capacity of 375 MW, a 180 MW Siemens steam turbine installed in 2011 for its closing to combined cycle and repowered in January 2018, a 105 MW General Electric aeroderivative gas turbine installed in May 2016 and the incorporation in August 2017 of a 105 MW General Electric gas turbine. CTLL has a privileged location due to its proximity to one of the largest gas fields in Latin America, also named Loma de la Lata.From 1997 to 2019, CTLL’s average annual generation was 1,993 GWh, with a generation record high of 5,096 GWh in 2019, and a record low of 272 GWh in 2002.

CTGEBA

CTGEBA is located in Marcos Paz, Province of Buenos Aires. The plant began operating in 1999 and has a combined cycle with a 674 MW installed capacity, which consists of two gas turbines of 219 MW each and a 236 MW steam turbine. On the same lot, there is a gas turbine with a 169 MW power capacity known as Genelba Plus, which was repowered by 19 MW in June 2019, known as Genelba Plus, was commissioned in 2009 under theEnergyPlus Programand is currently under expansion (for more information, please see “Progress in the Cycle Closing Project at CTGEBA”), as well as a 188 MW gas turbine incorporated in June 2019 under the expansion to combined cycle process. CTGEBA’s combined cycle is sold in the spot market, whereas Genelba Plus’ gas turbine energy is sold under Energía Plus, and the new gas turbine incorporated in 2019 is sold in the spot market until the commissioning of the combined cycle, when it will start to be sold under a PPA. Currently, the total installed capacity of the CTGEBA complex amounts to 1,050 MW, which represents 2.6% of Argentina’s installed capacity. From 2000 to 2019, CTGEBA’s historical average annual generation was 4,763 GWh, with a generation record high of 5,550 GWh in 2019, and a record low of 3,438 GWh in 2001.

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CPB

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

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, which represents 1.6% of Argentina’s installed capacity. 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 2019, CPB’s average annual generation was 2,048 GWh, with a generation record high of 3,434 GWh in 2012, and a record low of 189 GWh in 2002.

CTG

CTG 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 (i) 261 MW from steam generation units and (ii) 100 MW from a gas combustion turbine under theEnergy Plus Program, which accounts for 0.9% of Argentina’s installed capacity. From 1993 to 2019, its average annual generation was 1,751 GWh, with a generation record high of 1,903 GWh in 1996, and a record low of 755 GWh in 2019.

Royalty assignment agreement

In June 2007, we entered into a royalty assignment agreement with the Province of Salta 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 2019, its average annual generation was 121 GWh, with a generation record high of 156 GWh in 2017, and a record low of 53 GWh in 2019.

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 2019, EcoEnergía’s average annual generation amounted to 89 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 six cutting-edge Wärtsilä engines with an approximate 43% performance rate. The annual average energy generation for the period from 2018 to 2019 was 180 GWh. 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 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 six 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 kV 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). The annual average energy generation for the period from 2018 to 2019 was 293 GWh.

 

CTEB

CTEB is located in the City of Ensenada, Province of Buenos Aires, owned by CTB, a company that we jointly control, through our subsidiary Pampa Cogeneración, with YPF. The plant began its operations in 2012 and is composed of two open cycle gas turbines with a total installed capacity of 567 MW, which represents 1.4% of the installed capacity in Argentina. CTEB is currently under expansion to close the cycle, which will increase its installed capacity to 847 MW.

 

CTEB is a thermal plant with dual fuel, natural gas or gas oil. From 2012 to 2019, the average annual generation amounted to 1,461 GWh, with a high generation record of 2,093 GWh in 2018, and a low record of 564 GWh in 2019.

 

Pampa will be responsible for CTEB’s operating management until 2023 and YPF, through its subsidiary YPF Energía Eléctrica S.A., will supervise the necessary works for CTEB’s conversion into combined cycle. YPF and Pampa will be in charge of CTEB’s operating management on an alternate basis, for periods of four years.

 

 

Hydroelectric Generation Plants

We hold interests in two hydroelectric generation plants Hidroeléctrica Los Nihuiles (through our subsidiary HINISA) and Hidroeléctrica Diamante (through our subsidiary HIDISA), and fully own 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 Los 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 managethe 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 2019, the average annual generation was 818 GWh, with the highest level of generation (1,250 GWh) recorded in 2006 and the lowest level (498 GWh) recorded in 2019.

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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 2019, the average annual generation has been 553 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 certainmonth, 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 US$/MW per month to 4,500 US$/MW per month.

In February 2019, the remuneration scheme was modified by Resolution SEE 1/19 which was then amended by Resolution SE 31/2020 on February 27, 2020, with effects as from February 2020 (See “The Argentine Energy Sector—Electricity Regulatory Framework”).

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 US$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 = US$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 US$1.3 million and US$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 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 guarantees.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.

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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, (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. In case of termination pursuant to item (i), 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 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 HINISA or HIDISA, as applicable, as the only compensation for the transfer of the concessions.

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 fully-owned by Pampa, it 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 2019, HPPL’s average annual generation was 961 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

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, 2019, 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 US$5 million that are not covered by their respective insurance policies.

Performance guarantees. 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.

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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 power generation, dam safety, water management, environmental protection, and non-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.

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 US$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 awardees of the RenovAr 1 Program Tender. On January 23, 2017, we were awarded a PPA 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 US$11.2 million. In addition, the Buyer has acquired shares of Greenwind owned by PP for US$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 jointly control Greenwind with Viento Solutions SL.

The PEMC is located at Corti, 12 miles from the City of Bahía Blanca, Province of Buenos Aires. The PEMC consists 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 CAMMESAunder the RenovAr Program (for more information, please see “The Argentine Energy Sector – RenovAr Program”). Since its commercial commissioning and during 2018, PEMC generated 247 GWh.

 

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PEPE II

PEPE II is located in the area known as Corti, 20 kilometers away from the City of Bahía Blanca, in the Province of Buenos Aires, near PEMC. PEPE II consists of 14 wind turbines; each turbine is made up of four tower sections, a nacelle and three blades driving the turbine with a total diameter of 136 meters.  

 

PEPE II was commissioned on May 10, 2019 under Res. No. 281-E/2017, which was passed by the former MEyM for the Renewable Energy Term Market (MAT ER), and sells its energy to large electricity consumption users through PPAs between private parties.

 

PEPE II has an installed capacity of 53 MW, which represents 0.1% of the installed capacity in Argentina. Since its commercial commissioning and during 2019, PEPE II generated 122 GWh.

 

PEPE III

PEPE III is located in the City of Coronel Rosales, 25 kilometers away from the City of Bahía Blanca. PEPE III consists of 14 wind turbines; each turbine is made up of four tower sections, a nacelle and three blades driving the turbine with a total diameter of 136 meters.  

 

PEPE III was commissioned on May 10, 2019 under Res. No. 281-E/2017, which was passed by the former MEyM for the MAT ER, and sells its energy to large electricity consumption users through PPAs executed between private parties.

 

PEPE III has an installed capacity of 53 MW, which represents 0.1% of the installed capacity in Argentina. Since its commercial commissioning and during 2019, PEPE II generated 148 GWh.

 

PEPE IV

The PEPE IV project was announced on May 23, 2018. This project was to be located at the Las Armas area, in the Municipality of Maipú, Province of Buenos Aires, with a gross power capacity of 53 MW. PEPE IV obtained the dispatch priority as established in Resolution ME&M No. 281-E/17 and committed to begin its commercial operations in June 2019.

However, as a result of events occurred during 2019, including the devaluation of the peso and the increase in interest rates, which resulted in macroeconomic instability, the Company requested an extension of the term to initiate the commercial operations, in order to (i) evaluate the feasibility of the project under the new economic conditions and (ii) negotiate certain changes proposed by work contractors and equipment suppliers. In this context, and based on a thorough evaluation of the renewable projects in progress, on September 11, 2019 the SSERyEE instructed CAMMESA to temporarily suspend the claims for non-compliance, and demanded the Company to extend the validity of the US$12.5 million guarantee for a term of 180 days. On October 4, 2019, the Company complied with the requested extension. On October 9, 2019, the SSERyEE cancelled the suspension. On October 30, 2019, CAMMESA served the Company with a formal claim for the payment of certain amounts associated with the postponement of the commercial commissioning of the project and its relocation, and alternatively would enforce the guaranty if such payments were not performed. The Company rejected the claim served by CAMMESA awaiting SGE’s consideration of the extension request, and, on December 9, 2019 it entered into an agreement with CAMMESA establishing a negotiation period until January 31, 2020, during which CAMMESA should suspend the guarantee’s execution. The negotiation period was then extended until April 30, 2020.

 

Others

ENECOR

Pampa holds a 70% interest in Enecor, an independent power 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 expires in 2088.

 

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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 2019. 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 9 million people. As of December 31, 2019, Edenor served 3.1 million users.

 

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 company, 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 term of the concession is divided into management periods: a first period of 15 years and subsequent periods of ten years each. In addition, at 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) are the highest bidder or if our bid matches the highest bid, we will retain 51% of Edenor’s stock, no funds will be owed 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. The first management period commenced on February 1, 2017 and ends on March 1, 2022.

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 transfer 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.

Under such agreement, on May 9, 2019, the Federal Government, the City of Buenos Aires and the Province of Buenos Aires entered into the Transfer Agreement, which became effective on October 2, 2019, after obtaining the approval of the legislature of the City of Buenos Aires and the Provincial Executive Branch, pursuant to which the City of Buenos Aires and the Province of Buenos Aires jointly assumed, as from the date of effectiveness, the regulation, control and the capacity as grantors over the distribution service granted to Edenor under the Concession Agreement. Furthermore, it is provided that (i) the Concession Agreement and also the national regulations issued byboth the Energy Secretariat and the ENRE will remain in full force and effect until the effective date of the transfer occurs pursuant to the applicable regulatory framework; and (ii) that the pledge of the Class “A” shares, duly pledged as collateral to secure the performance of the obligations assumed by the holder of the concession and/or the majority shareholders under the Concession Agreement, is assigned on an undivided basis by the Federal Government to the City of Buenos Aires and the Province of Buenos Aires.

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Edenor was notified of and assented to the arrangement made by the Federal Government and the new grantors of the concession with respect to the Transfer Agreement and undertook both to indemnify them against any claims and to obtain the agreement of the majority of its shareholders. The Transfer Agreement was ratified by the Provincial Executive Power and the City of Buenos Aires’ Legislative Power.

Further, with the enactment of theSocial Solidarity and Productive Reactivation Law and the suspension of the transfer of the jurisdiction, the ENRE retained its jurisdiction over the public service of electricity distribution during the term of the emergency as set forth in such law.

Finally, in the framework of theSocial Solidarity and Productive Reactivation Law, the Federal Executive Power was authorized to assume the administrative control of the ENRE and the ENARGAS for a term of one year and, consequently, on March 16, 2020, by means of Decree N° 277/20, the Executive Power intervened the ENRE until December 31, 2020.

Edenor is subject to the terms of its concession agreement and the provisions of the regulatory framework comprised by Laws Nos. 14,772, 15,336 and 24,065, resolutions and regulatory and supplementary standards issued by certain authorities. Thus, Edenor is responsible for the distribution and sale of electricity as a public service with a satisfactory quality level pursuant to the requirements set forth in the aforementioned concession agreement and regulatory framework.

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 network installations that it considers to be 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.

As of December 31, 2019, total accrued fines and penalties imposed on Edenor amounted to US$121 million.

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”).

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Revocation of concession. The Argentine Government has the right to revoke the concession if Edenor files for 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 of 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 – see below) are composed of:

·        

the cost of electricity 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 energy purchases. 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. 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.

For more information, please see “Item 4. The Argentine Energy Sector—Distribution of Energy”.

 

Users.As of December 31, 2019, Edenor served 3,119,279 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 2019, this category accounted for approximately 43.1% of Edenor’s electricity sales.

·      

Small commercial (T1-G1 to T1-G3): commercial users whose peak capacity demand is less than 10kW. In 2019, this category accounted for approximately 8.7% 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 2019, this category accounted for approximately 8% of Edenor’s electricity sales.

·      

Industrial (T3): industrial 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 different 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 2019, this category accounted for approximately 18% of Edenor’s electricity sales. This category does not include users who purchase their electricity directly through the WEM under the wheeling system.

·      

Wheeling System: large users who purchase their electricity directly from generation or broker companies through the WEM. These tariffs follow the same structure as those applied under the Industrial category described above. As of December 31, 2019, the total number of such large users was 684, and this category represented approximately 18.3% of Edenor’s electricity sales.

·      

Others: public lighting (T1-PL) and shantytown users whose peak capacity demand is less than 10kW. In 2019 this category accounted for approximately 3.7% of Edenor’s electricity sales.

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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 the 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.

In the past, the term of the Framework Agreement was repeatedly extended. Furthermore, within the framework of the transfer of jurisdiction of the public service of electricity distribution that had been determined by Law No. 27,467, the Government of the Province of Buenos Aires enacted Law No. 15,078 on the General Budget, pursuant to which established (i) that the Province of Buenos Aires would pay as from January 1, 2019 the same compensation paid in 2018 for the low-income areas and shantytowns’ electricity consumption, and (ii) that any amount in excess of the compensation provided item (i) would have to be borne by Municipalities in whose territories each shantytown is located. Such consumption has to be previously approved by the regulatory agencies or local authorities having jurisdiction in each area. In this regard, on November 27, 2019, the Municipality of General San Martín filed a petition with the Supreme Court to obtain a provisional remedy, claiming that section 104 of Law No. 15,078 that refers to this matter is unconstitutional. As of December 31, 2019, Edenor did not recognize revenues for this concept.

Finally, in light of the recent measures adopted by national and provincial authorities as of the date of this annual report (namely theSocial Solidarity and Productive Reactivation Law), Edenor is not aware of the guidelines to be followed concerning the electricity consumption by low-income areas and shantytowns in connection with periods that have not been recognized, as well as future periods.

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%.

The following table illustrates Edenor’s estimates of the approximate breakdown between technical and non-technical energy losses experienced in its service area for the periods indicated:

 

Year ended on December 31,

 

2019

 2018

 

 2017

Technical Losses

9.6%

 

 8.4% 8.8%

Non Technical Loses

10.3%

 

 9.8%

 

 8.3%

Total Loses

19.9%

 

 18.2%

 

 17.1%

 

Termination of agreement on real estate property

In November 2015, Edenor entered into an agreement with Ribera Desarrollos S.A. (“RDSA” or the “Seller”) for the purchase and construction of real estate property for a total of US$46 million, equivalent to Ps.439.3 million, according to the effective exchange rate time of the agreement’s execution. Edenor purchased the real estateproperty to centralize its functions, reduce rental costs and to mitigate the risk of potential rent increases. In addition, Edenor obtained a surety bond from Aseguradores de Cauciones S.A. (“Aseguradores de Cauciones”) for US$46 million, plus the private banks’ BADLAR rate in dollars + 2%, to guarantee payment of liquidated damages in the event of the Seller’s default.

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Pursuant to the agreement, RDSA was obligated to deliver the property on June 1, 2018, and failed to perform. As a result, Edenor declared the RDSA in breach, notified Aseguradores de Cauciones of such breach and subsequently collected US$502,800 in fines accrued during the term of the agreement and duly deposited as bond by the Seller for failing to meet the construction project milestones of the agreement.

With regards to the legal actions brought by Edenor against RDSA and the insurance company, on September 30, 2019, Edenor entered into a settlement agreement pursuant to which the insurance company will pay to the Company a compensation of US$15 million and assign it the insurer’s subrogation right for the amount paid to RDSA.

As of December 31, 2019, Edenor has collected US$14 million. The remaining balance will be paid in six quarterly installments (the first of which was due on April 21, 2020). As of the date of this annual report Edenor has not received payment.

Furthermore, the claim filed by Edenor with the Arbitral Tribunal of the Buenos Aires Stock Exchange against RDSA in order for the latter to refund the price paid for the undelivered real property was suspended so that the claim could be admitted in RDSA’s insolvency proceeding. Such claim was admitted by the court hearing the case for the sum of Ps.2,125.9 million. Additionally, an ancillary proceeding for review of the amount rejected by the court was initiated for an additional amount of Ps.895.7 million.

Regulatory Framework of our Distribution of Energy Business

Memorandum of Understanding with the Federal Government

On February 13, 2006, Edenor entered into the Adjustment Agreement, which established, effective as from November 2005, (i) a 23% increase in the average VAD and (ii) a 5% additional VAD increase to fund specified capital expenditures we are required to make under the Adjustment Agreement. Furthermore, it provided for the inclusion of a social tariff, quality standards for the service to be rendered and a minimum investment plan in the electricity grid to be performed by Edenor, as well as the performance of an RTI. Upon the failure to perform the RTI, the SE and the ENRE passed several transitory measures seeking to reduce Edenor’s operating and asset deterioration which resulted from the tariff freeze. The background and the current tariff situation are disclosed below.

SE Res. No. 250/13

Since May 2013, the SE provided for the recognition of costs owed to Edenor resulting from the partial application of the MMC, the result of which was lower than the actual increase stipulated in the 2007 Contractual Renegotiation Agreement, which was not duly passed on to tariffs. This measure was implemented with the passing of SE Res. No. 250/13 and its subsequent extensions, which allowed for the offsetting of this recognition with Edenor’s debts under PUREE and with CAMMESA for energy purchases. However, in February 2016 the SE issued Res. No. 6/16 abrogating the MMC.

ENRE Res. No. 347/12

ENRE Res. No. 347/12 applied a differential fixed amount to each of the different tariff categories, with the exception of customers exempt from paying the tariff scheme provided for by ENRE Res. No. 628/08. Such amounts —which continued to be deposited in a special account and were used exclusively for the execution of infrastructure and corrective maintenance works in Edenor’s facilities within the concession area— were managed by the FOCEDE. ENRE Res. No. 2/16 terminated the FOCEDE trust on January 31, 2016 and established a new system for the funds collected pursuant to ENRE Res. No. 347/12, which were managed by Edenor. With the implementation of the RTI in February 2017, these amounts ceased to be charged as a special item on customer bills.

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Loan Agreements – Extraordinary Investments Plan

Due to the delay in obtaining the RTI, the Federal Government granted Edenor loans for to conduct the corresponding investments under the investment plan it may deem appropriate. Pursuant to MEyM Res. No. 7/16, CAMMESA suspended, as from February 2016 and until receiving further instructions, all the effects arising from the executed loan agreements and the transfer of resources to distribution companies on behalf of the FOCEDE trust and, therefore, the new work plan would be financed exclusively with tariff proceeds. The amounts owed by Edenor under loan agreements were offset by the Federal Government pursuant to the Agreement on the Regularization  of Obligations executed on May 10, 2019.

SE Res. No. 32/15

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

However, in January 2016 ENRE Res. No. 7/16 ordered the performance of all necessary acts to conduct Edenor’s RTI, annul the tariff schemes resulting from SE Res. No. 32/15, and adjust the VAD to be charged against the RTI, thus canceling the PUREE and suspending the investments loan agreements entered into with Edenor. Consequently, the ENRE issued Res. No. 1/16 and 2/16 granting a new tariff scheme values for Edenor effective from February 2016. In September 2016, Edenor filed its tariff proposal for the RTI, expressing that it does not contemplate the value Edenor assigns to damages resulting from the failure to timely and properly implement the Memorandum of Understanding or the collection of income necessary to face the liabilities Edenor has incurred as a result.

RTI

ENRE Res. No. 63/17, as amended, established the final tariff schemes, the review of costs, required quality levels and other rights and obligations by Edenor for the five-year period starting February 2017. A 42% cap was set in the VAD increase resulting from the RTI as from February 2017, and the remaining increases would be applied in November 2017 and February 2018. The VAD difference resulting from the gradual application was updated in real terms and incorporated in 48 installments payable as from February 2018. The tariff schemes included the prices established in the seasonal programming for the February - April 2017 period under SEE Res. No. 20/17.

However, both the CPD update contemplated for August 2017 and the VAD increase scheduled for November 2017 were deferred to December 2017, when tariff schemes were fixed pursuant to ENRE Res. No. 603/17 for the two-month period between December 2017 - January 2018, also contemplating the 18% VAD increase and the 11.6% CPD update, adjusted retroactively as of the dates they should have been implemented.

On January 31, 2018, the ENRE issued Resolution No. 33/18 which approved the new distribution cost for Edenor to be applied as from February 1, 2018 and the new tariff scheme.

Furthermore, such resolution approved the new CPD adjustments (last stage of 17% according to Resolution. No 63/17, including the inflation adjustment of 11.9% for the period July 2017-December 2017 and a stimulus factor “E” of negative 2.51%) and determined the deferred income to be recovered in 48 instalments for a total amount of Ps.6,343.4 million. Additionally, it reported that the price of the average tariff reached Ps.2.4627/ kWh.

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 the Company 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.

Furthermore, SEE Provisions No. 75/18 and 97/18 established, for the August 2018 – January 2019 period, the power capacity reference price at Ps.10,000/MW-month, the stabilized price for transmission in the extra highvoltage system at Ps.64/MWh, and a price for main distribution based on the distribution company which, in the case of Edenor, amounted to Ps.0/MWh. Furthermore, energy reference prices were set at Ps.2,283/MWh for GUDI and at Ps.1,470/MWh for the remaining users. Regarding the social tariff, SEE Res. No. 1091/17’s criteria regarding subsidies to users and discounts for savings remained in effect.

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Effective as from February 2019, SGE Res. No. 366/18 abrogated SEE Res. No. 1091/17 and, consequently, the Federal Government’s social tariffs and the savings discount scheme, and also fixed a power capacity reference price of Ps.80,000/MW per month, with 25% and 20% increases to be applied in May and August, respectively, effective until October 2019. The stabilized price for transmission in the extra high voltage system and the distributor-based main distribution price remained unchanged. Energy reference prices were set at Ps.2,762/MWh for GUDI for the February – October 2019 period, and at Ps.1,852/MWh for the remaining users as from February 2019, with 5% increases to be applied in May and August, effective until October 2019.

ENRE Res. No. 25/19 approved the tariff scheme which became effective in February 2019. It reflected the new seasonal prices described in SGE Res. No. 366/18, and the ENRE Res. No. 27/19, issued in March 2019 established the 24% CPD update corresponding to the July 2018 – January 2019 period, retroactive as of February 2019, and a 7.925% increase which was timely deferred in August 2018, retroactive as of that date. Compensatory retroactive amounts were collected in five installments.

In April 2019, SGE Res. No. 366/18 was partially amended by SRRYME Res. No. 14/19 which suspended the increases planned for May and August 2019 for the power capacity reference price and increases contemplated for residential users, whereas energy reference prices increased by 5% in May and August 2019 for GUDI, and by 7% in May and August 2019 for the rest of non-residential users. Furthermore, SRRYME Res. No. 26/19 and 38/19 approved the seasonal programming for the August – October 2019 and November 2019 – April 2020 periods, respectively, prices remaining unaltered until April 2020. However, as of the date of this annual report, these increases in seasonal prices for non-residential users have not been passed on to new tariff schemes.

On September 19, 201,9 Edenor agreed with the Federal Government to postpone the 19.05% CPD update for August 1, 2019 until January 1, 2020. Furthermore, the continuity of retroactive amounts applied throughout the period from March 2019 to July 2019 for the timely deferred CPD was allowed, the balance being recoverable in seven monthly consecutive installments from January 2020. Besides, the payment of penalties by Edenor was postponed until March 1, 2020 in six monthly installments. However, with the entry into effect of the Social Solidarity and Productive Reactivation Law, on December 27, 2019 the ENRE instructed Edenor to maintain the current tariff schemes until June 2020, suspending all projected updates both in the CPD and in the seasonal price. It also contemplates the possibility of performing an RTI review for up to 180 days as from the Law’s effective date.

Regularization of Liabilities and Transfer of Concession Jurisdiction

On February 28, 2019, the Federal Government entered into an agreement with the Province of Buenos Aires and the City of Buenos Aires 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. The Province of Buenos Aires and the City of Buenos Aires agreed to set up a new bipartite agency in charge of the regulation and control of the distribution service, and the Federal Government agreed to take the necessary steps and carry out the necessary administrative procedures to provide a solution to the pending claims with the distribution company such as the breach of the 2006 Memorandum of Understanding, among others. Until such transfer is perfected, the national regulatory framework would apply.

Furthermore, on May 10, 2019, Edenor and the Energy Government Secretariat, on behalf of the Federal Government, entered into the Agreement on the Regularization of Obligations. By virtue of this Agreement, Edenor (i) undertook to pay users certain penalty and compensation amounts relating to the period between 2006 and 2016; and (ii) agreed to make investments, in addition to those agreed upon in the RTI, aimed at contributing to improving the reliability and safety of the service. In return, the Federal Government partially recognized the claim duly made by Edenor, by fully offsetting pending obligations, cancelling penalties payable to the National Treasury, among others. However, pursuant to the Social Solidarity and Productive Reactivation Law, as from December 23, 2019, the ENRE was appointed as Edenor’s regulatory body until December 31, 2020. Edenor is currently unaware of the guidelines to follow regarding consumptions of shantytowns with community meters for non-recognized and future periods.

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Finally, in accordance with the provisions of the electricity rate schedule maintenance agreement, within the framework of the Economic Emergency Law No. 27,541 on Social Solidarity and Production Reactivation, Edenor agreed to maintain the quality of the service and comply with the quality parameters set forth in the Concession Agreement, and that the payment of any penalty would be postponed until March 1, 2020 and paid in 6 installments at its original value plus any adjustments that may apply at the time of payment.

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:

·        development and monetization of unconventional gas reserves;

·        exploration for reserves replacement; and

·        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.

 

As of December 31, 2019:

 

·        

our combined crude oil and natural gas proved reserves were 135.4 million barrels of oil equivalent, 52% of which were proved developed reserves. Natural gas accounted for approximately 90% of our combined proved reserves and liquid hydrocarbons for 10%;

·        

our combined oil and gas production in Argentina averaged 48.2 thousand of barrels of oil equivalent per day, considering continuing operations. Crude oil accounted for approximately 5.0 thousand of barrels of oil equivalent per day, while natural gas accounted for approximately 259 million standard cubic feet per day, or 43.2 thousands of barrels of oil equivalent per day based on a measure of conversion of 6,000 cubic feet of gas per barrel of oil equivalent; and

·        

we hold a 2.1% direct 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 evacuation 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 distillery located in the pipelines area of influence

During 2019, according to the ME&M, gas gross production in Argentina increased by 5% (4.8 billion cubic feet per day on average), whereas oil gross production increased 4.1% and stood at 509 thousand barrels per day (on average).

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In December 2019, according to the ME&M, our consolidated oil and gas production accounted for approximately 1% and 6% of total oil production and gas production in Argentina, respectively.

We are also 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-capital companies,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—Others—Venezuela”.

Key Information Relating to Oil and Gas

As of December 31, 2019, we had interests in 18 areas, joint operations (UTEs) and agreements in Argentina: 12 oil and gas production areas and 6 exploration blocks located within exploration areas or pending authorization for production. As of December 31, 2019, we were directly or indirectly the contractual operator of eight of the 18 blocks in which we hold equity interest.

Acreage

As of December 31, 2019, our total production and exploration acreage, both gross and net, was as follows. The table includes the total production and exploration acreage by the Company, its subsidiaries, joint operations and associates.

  

Acreage (*)

  

Production (1)

 

Exploration (2)

  

Gross

 

Net (3)

 

Gross

 

Net (3)

 

 

(in thousands of acres)

Argentina

 

1,098

 

373

 

445

 

208

 

(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
Adjusted at our working interest ownership 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, 2019, our total gross and net productive wells were as follows. The table includes the total gross and net productive wells by the Company and its subsidiaries, joint operations and associates.

 

 

Oil

Gas

Total (3)

 

 

Gross (1)

Net (2)

Gross (1)

Net (2)

Gross (1)

Net (2)

 

 

      

 

Argentina

 

472

154

413

193

885

348

 

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

(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 2019, we carried out investment plans aligned with our reserves replacement and production goals, as a means to achieve sustainable growth.

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 the Company, joint operations and associates (includes ourdiscontinued operations). We are currently unable to obtain accurate information about the mixed-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and 2019. The following table sets forth the number of total wells we drilled in Argentina and the results for the relevant periods.

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Year ended December 31,

 

 

2019

 

2018

 

2017

 

 

Argentina

 

Venezuela

 

Argentina

 

Venezuela

 

Argentina

 

Venezuela

Gross wells drilled:

 

 

 

 

 

 

 

 

 

 

 

 

Production:

 

 

 

 

 

 

 

 

 

 

 

 

Development wells:

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

39

 

-

 

31

 

-

 

35

 

-

Gas

 

9

 

-

 

31

 

-

 

36

 

-

Dry wells

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

48

 

-

 

62

 

-

 

72

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration:

 

 

 

 

 

 

 

 

 

 

 

 

Discovery wells:

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

1

 

-

 

2

 

-

 

2

 

-

Gas

 

2

 

-

 

3

 

-

 

1

 

-

Dry wells

 

-

 

-

 

-

 

-

 

-

 

-

Total

 

3

 

-

 

5

 

-

 

3

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Net wells drilled:

 

 

 

 

 

 

 

 

 

 

 

 

Production:

 

 

 

 

 

 

 

 

 

 

 

 

Development wells:

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

11

 

-

 

8

 

-

 

19

 

-

Gas

 

5

 

-

 

17

 

-

 

21

 

-

Dry wells

 

-

 

-

 

-

 

-

 

1

 

-

Total

 

16

 

-

 

25

 

-

 

41

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Exploration:

 

 

 

 

 

 

 

 

 

 

 

 

Discovery wells:

 

 

 

 

 

 

 

 

 

 

 

 

Oil

 

1

 

-

 

1

 

-

 

1

 

-

Gas

 

2

 

-

 

1

 

-

 

-

 

-

Dry wells

 

-

 

-

 

-

 

-

 

-

 

-

Total

 

3

 

-

 

1

 

-

 

1

 

-

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

 

In 2019, 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 and Sierra Chata. Our investment plan included the drilling and completion of 51 producing and injector’s wells.

In the Neuquén Basin, Pampa concentrated its natural gas drilling activity in El Mangrullo and Sierra Chata areas. Also, we completed the first horizontal shale oil well in Rincon de Aranda and continued with the development in the Gobernador Ayala field and drilled 26 wells. Additionally, 12 wells were drilled in El Tordillo, in the Golfo de San Jorge Basin and one gas well was drilled in the Aguaragüe field in Noroeste basin.

 

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 productionduring temporary unavailability of the pipeline systems, for example, due to, maintenance requirements or temporary emergencies.

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During 2019, our production was concentrated in three basins: the Neuquén, San Jorge and Noroeste. In Argentina, we own 581,000 net acres, and in the Neuquén basin — the most important basin in the country in terms of oil and gas production —we own approximately 411,000 net acres (representing 71% 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, 2019, we lifted hydrocarbons from 885 productive wells in Argentina.

For the year 2019, our average daily production was 4,990 barrels of crude oil and 259 million cubic feet of natural gas. Considering continuing operations, oil production decreased by 1.4% and gas production increased 8.7%, compared to 2018 average.

The following table sets forth our oil and gas production during 2019. Production figures represent our working interest in production (and are therefore net to the Company). 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, 2019. 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-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and 2019.

 

 

 

 

2019 Production

 

 

Production Blocks

Location

Basin

Oil(1)

Gas(2)

Oil 
Equivalent 

(3)

Operator

Direct and Indirect Interest

Expiration

 

 

 

 

 

 

 

 

 

El Mangrullo

Neuquén

NQN

23

53,631

8,961

Pampa

100.00 %

2053

Sierra Chata

Neuquén

NQN

24

7,240

1,231

Pampa

45.55%

2053

Río Neuquén

Neuquén/Río Negro

NQN

216

15,287

2,764

YPF

33.07%/31.42%

2027/2051

Rincón del Mangrullo

Neuquén

NQN

46

14,991

2,544

YPF

50.00%

2052

Estación Fernández Oro

Río Negro

NQN

1

151

26

YPF

15.00%

2026(4)

Anticlinal Campamento

Neuquén

NQN

-

113

19

Oilstone

15.00%

2026(5)

Río Limay Este (Ex Senillosa) (8)

Neuquén

NQN

-

-

-

Pampa

85.00%

2040

Aguaragüe(6)

Salta

NOA

74

2,531

496

Tecpetrol

15.00%

2023/2027

El Tordillo

Chubut

CGSJ

1,043

539

1,113

Tecpetrol

35.67%

2027

La Tapera – Puesto Quiroga   

Chubut

CGSJ

25

-

25

Tecpetrol

35.67%

2027

Gobernador Ayala

Neuquén

NQN

293

-

293

Pluspetrol

22.51%

2036

Veta Escondida - Rincón de Aranda

Neuquén

NQN

15

-

15

Pampa

55.00%

2027(7)

Total

 

 

1,760

94,483

17,487

 

 

 

         
 

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

(1)    In thousands of barrels of oil equivalent.

(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)    Corresponds to production of 13 wells and to a 15% in association with YPF.

(5)    Corresponds to production of nine wells and to a 15% in association with Oilstone.

(6)    It includes San Antonio Sur, expiring in 2023, and Aguaragüe, expiring in 2027.

(7)    Productive field with production associated with Exploration Fields.

(8)    In the process of being transferred to GyP.

 

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

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      Year ended December 31,

 

2019

 

2018

 

2017

Argentina

Oil(1)

 

Gas(2)

 

Oil(1)

 

Gas(2)

 

Oil(1)

 

Gas(2)

 

 

 

 

 

       

Río Neuquén(3)

216

 

15,287

 

260

 

15,813

 

234

 

13,966

El Mangrullo(3)

23

 

53,631

 

27

 

35,841

 

21

 

31,881

Rincón del Mangrullo(3)

46

 

14,991

 

67

 

23,414

 

85

 

31,308

Other blocks

1,475

 

10,574

 

1,494

 

12,333

 

6,807

 

25,885

Venezuela(4) (5)

-

 

-

 

-

 

-

 

465

 

-

 

 

 

 

 

       

Total

1,760

 

94,483

 

1,848

 

87,401

 

7,612

 

103,040

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

(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 million 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-capital companies.

(5)We are currently unable to obtain accurate information about the mixed-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and 2019.

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 unconventional 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, 2019, the location and basin of each area, our net working interest and the expiration date for the exploration authorization.

 

 

 

 

 

2019 Production

 

 

 

 

 

 

Blocks/UTE

 

Location

Basin

 

Oil kbbl

Gas mcf

Total kboe

 

Operator

 

Interest

 

Expiration

Parva Negra Este

 

Neuquén

NQN

 

-

176

29

 

Pampa

 

42,50%

 

2019(1)

Chirete

 

Salta

NOA

 

61

-

61

 

High Luck

 

50,00%

 

2019(2)

Rio Atuel

 

Neuquén

NQN

 

-

-

-

 

Petrolera El Trébol

 

33,33%

 

2018

Las Tacanas Norte

 

Neuquén

NQN

 

-

-

-

 

Pampa

 

90,00%

 

2022(3)

Borde del Limay

 

Neuquén

NQN

 

-

-

-

 

Pampa

 

85,00%

 

2015(4)

Los Vértices

 

Neuquén

NQN

 

-

-

-

 

Pampa

 

85,00%

 

2015(4)

Total Exploration Blocks 

 

 

 

 

61

176

90

 

 

 

 

 

 

Total Production in Argentina

 

 

 

 

1,821

94,659

17,577

 

 

 

 

 

 

 

(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 Neuquén. The approval still remains pending.

(2) On April 6, 2017, the Secretary of Energy of the Province of Salta granted us an extension of the third exploration period in the Chirete concession area for a period of one year. As of the date of this annual report, we requested the Secretary of Energy of the Province of Salta to extend the concession until November 2022 and its approval remains pending.

(3) Optional extension until November2022.

(4) Relinquishment Process.

 

As of December 31, 2019, we held interests in approximately445,000 gross exploration acres in Argentina.

 

Our exploratory investments in gas in 2019 focused on the completion of two Shale Gas Pilot Wells in El Mangrullo, targeting the Vaca Muerta Reservoir. Also, we drilled one Shale Gas Pilot Well in Sierra Chata, targeting Vaca Muerta, which is expected to be completed during 2020.

In respect of oil investments, during 2019, we drilled and completed one exploratory well in Rincon de Aranda Field targeting Vaca Muerta formation. During the second semester of 2019, the well was tested with promising results, and is currently in production.

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In addition to the abovementioned exploratory investments, we also drilled one gas exploratory well in Rincón del Mangrullo field and one oil exploratory well in Río Atuel field.

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, 2019, 2018 and 2017. This table includes our net share of production, joint operations and associates. We are currently unable to obtain accurate information about the mixed-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and 2019.

 

 

 

Year ended December 31,

Argentina

2019

2018

2017 

 

 

(in US$ per barrel of oil equivalent)

 

 

 

 

 

Production cost

 

8

6

12

Royalties

 

3

4

4

Depreciation

 

6

4

7

Total

 

17

14

23

 

 

 

 

 

  Venezuela (1)

 

 

 

 

 

 

 

 

 

Production cost

 

-

-

90

Royalties

 

-

-

8

Depreciation

 

-

-

18

Total               

 

-

-

116

(1) We are currently unable to obtain accurate information about the mixed-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and December 31, 2019.

 

 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, 2019, 2018 and 2017. We are currently unable to obtain accurate information about the mixed-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and 2019.

 

 

 

Year ended December 31,

 

 

2019

2018

2017

Argentina (*)

 

 

 

 

  

(in million of US$)

  

 

 

 

Oil

 

98

148

385

Gas

 

342

434

306

Others

 

4

5

30

Total

 

444

587

721

    

Venezuela(1)

 

 

 

 

  

 

 

 

Oil

 

-

-

15

Gas

 

-

-

-

Total

 

-

-

15

 

      (*) Includes discontinued operations.

(1) We are currently unable to obtain accurate information about the mixed-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and December 31, 2019.

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, 2019, 2018 and 2017. We are currently unable to obtainaccurate information about the mixed-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and December 31, 2019.
 

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Year ended December 31,

 

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

 

2019

 

2018

 

2017

Argentina

 

 

 

 

  

Oil (In US$ per barrel of Oil)

 

54

 

23

 

52

Gas (In US$ per thousand cubic feet)

 

4

 

4

 

3

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

 

2019

 

2018

 

2017

Venezuela(1)

 

 

 

 

 

 

Oil (In US$ per barrel of Oil)

 

-

 

-

 

32

 

(1)  We are currently unable to obtain accurate information about the mixed-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and 2019.

 

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, 2019, we were contractually committed to deliver approximately1.5million mcm per day of natural gas in 2022. According to our estimates as of December 31, 2019, our contractual delivery commitments that do not extend beyond 2020, could be met with our own production and, if necessary, with purchases from third parties.

 

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 right to 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 the Company. The proved oil and natural gas reserves 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 94% of our estimated proved reserves as of December 31, 2019. We provided all information required during the course of the audit process to the satisfaction of GCA. See the Reserves Report byGCA, datedMarch 5, 2020 included as Exhibit 13.2 to this annual report.

As of December 31, 2019, 2018 and 2017, 94%, 83% and 100%, respectively, of our estimated proved reserves were audited byGCA.

As of December 31, 2019, our liquid hydrocarbon and natural gas proved developed and undeveloped reserves totaled 135.4 million boe (13.6 million boe of liquid hydrocarbons and 731.1 billion cubic feet, or 121.8 million boe, of natural gas), of which 704.5 billion cubic feet were estimated to be sales gas and 26.6 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 10% and 90%, respectively, of our total proved reserves as of December 31, 2019. The reserves outside Argentina (Venezuela) were reclassified as contingent in December 2016, due to profitability and the economic situation of Venezuela.

89


 
 

As of December 31, 2019, proved developed reserves of crude oil equivalent represented 52% of our total proved reserves of crude oil equivalent and we had proved reserves equal to approximately eight years of production at 2019 volumes.

The following table sets forth our estimated net proved developed and undeveloped reserves of crude oil and natural gas as of December 31, 2019, including joint operations and associates.

 

  

Reserves as of

December 31, 2019

Reserves Category

 

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

Natural Gas
(billions cubic feet)

Oil Equivalent
(million boe)

 

 

 

 

 

  

 

 

 

Proved Developed

 

8.8

372.0

70.8

Proved Undeveloped

 

4.7

359.1

64.6

 

 

 

 

 

Total proved reserves

13.6

731.1

135.4

     

 

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, 2019, 2018 and 2017.

 

 

 

2019

 

2018

 

2017

 

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

70.8

 

52.3%

 

77.5

 

59.4%

 

107.4

 

64.3%

Proved undeveloped reserves

64.6

 

47.7%

 

52.8

 

40.6%

 

59.7

 

35.7%

     

 

 

 

 

 

 

 

Total Proved Reserves

135.4

 

100%

 

130.3

 

100%

 

167.1

 

100%

 

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

 

We prioritize the development of new business opportunities associated with unconventional gas reserves in Argentina. During 2019, we drilled ten wells in the El Mangrullo area, two wells in the Sierra Chata area and one well in the Rincón de Aranda area aimed at developing unconventional gas reserves in the Punta Rosada and Mulichinco tight reservoirs and Vaca Muerta shale gas and shale oil 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, 2019, 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-capital companies in Venezuela and, consequently, have not disclosed information regarding Venezuela for the year ended December 31, 2018 and 2019. 

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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 million boe) (1)

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

Increase (decrease) originated in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revisions of previous estimates

 

-645

 

-

 

-645

 

1,247

 

-

 

1,247

 

-0.4

Improved recovery

 

-

 

-

 

-

 

3,530

 

-

 

3,530

 

0.6

Extensions and discoveries

 

970

 

-

 

970

 

128,832

 

-

 

128,832

 

22.4

Purchase of proved reserves in place

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Sale of proved reserves in place

 

-

 

-

 

-

 

-

 

-

 

-

 

-

Year’s production

 

-1,771

 

-

 

-1,771

 

-94,491

 

-

 

-94,491

 

-17.5

Total proved developed and undeveloped reserves as of December 31, 2019

 

13,551

 

-

 

13,551

 

731,082

 

-

 

731,082

 

135.4

Proved developed reserves as of December 31, 2019

 

8,805

 

-

 

8,805

 

372,000

 

-

 

372,000

 

70.8

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

As of December 31, 2019, our liquid hydrocarbon and natural gas proved developed and undeveloped reserves totaled 135.4 million boe (13.6 million boe of liquid hydrocarbons and 731.1 billion cubic feet, or 121.8 million boe, of natural gas), representing a 4% increase compared to proved reserves as of December 31, 2018 (a decrease of 10% and an increase of 6% for liquid hydrocarbons and natural gas, respectively).

During 2019, previous estimates of our fields located in Argentina were subject to revisions representing a decrease of 0.4 million boe mainly attributable to adjustments of production estimates inAguaragüe, Rincón delMangrullo and Río Neuquén and performance of drilling activities in El Mangrullo and El Tordillo areas, extension and discoveries increased by 22.4 million boe through drilling activities, mostly in El Mangrullo, Rincón de Aranda, Gobernador Ayala and Sierra Chata areas. In addition, an increase of 0.6 million boe was attributable to improved recovery in Rincón del Mangrullo and the Aguaragüe areas.

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As of December 31, 2019, 52% of our proved reserves were developed, while 48% were undeveloped. Proved developed reserves were 70.8 million of barrels of oil equivalent. During 2019, we invested US$29 million to convert approximately 4.1 million barrels of oil equivalent of proved undeveloped reserves to proved developed reserves.

The 22% decrease in our proved undeveloped reserves in 2019 compared to 2018 was mainly attributable to:

(1)     

the conversion of approximately 4.1 million boe of proved undeveloped reserves to proved developed reserves, mainly through drilling activities in our production areas in the Neuquén basin, mainly in El Mangrullo, Río Neuquén and Sierra Chata areas and El Tordillo area in the Golfo San Jorge basin;

(2)     

extensions and discoveries, through the drilling activities, mainly in El Mangrullo area and the Gobernador Ayala area in the Neuquén basin, which resulted in the addition of 14.0 million boe of proved undeveloped reserves;

(3)     

an increase of 1.2 million boe 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 El Mangrullo and El Tordillo areas; and

(4)   

the improved recovery in Rincón del Mangrullo and Aguaragüe areas, caused an addition of 0.6 million boe in our proved undeveloped reserves.

 

The activities described in items (1), (2), (3) and (4) above resulted in a net increase of 11.7 million boe in our proved undeveloped reserves in 2019 compared to 2018.

 

As of December 31, 2019, our proved undeveloped reserves were 64.6 million boe, 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 91% of these proved undeveloped reserves into production through activities to be implemented over the next five years. The balance of 9% 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 5.7 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, 2019. 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.

92


 
 

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 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

 

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 94% 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.

93


 
 

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, 2019 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 utilized also 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.

 

Others

 

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-capitalcompanies 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-capitalcompanies 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-capitalcompanies, shareholder CVP 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.

94


 
 

We have expressed with the authorities of the Government of Venezuela that our interest in making investments and/or financing proposals in the mixed-capitalcompanies 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-capital companies in Venezuela and, consequently, have not disclosed information on oil and gas activities regarding Venezuela for the years ended December 31, 2017, 2018 and 2019.

Ecuador

On October 31, 2008, Ecuador TLC, 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, Ecuador TLC, 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 began 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 US$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 US$132 million, and (ii) an additional compensation of US$54 million, which was paid by the end of first half of 2018 (including the recovery of granted guarantees). 

 

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

 

As of May 3, 2018, EcuadorTLC has collected the three installments and has waived (without this implying an admission of facts or rights) the proceedings brought in the Ecuadorian Internal Revenue System Claims, and the Ecuadorian Government has made the withholding to cancel all tax debts. On September 20, 2019, through an official letter issued by the Ministry of Labor, EcuadorTLC was notified of the payment on employee participation profits from 2002 to 2010, to the former consortium workers.

95


 
 

Crude Oil Transportation OCP Agreement

 

On November 10, 2003, Ecuador TLC, 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 “OCP Agreement”).

Under the OCP Agreement, Ecuador TLC 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 ENOPSA a transportation capacity of 10,000 barrels per day. As a result, Ecuador TLC will pay to PEO US$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, Ecuador TLC assigned to Trenerec S.A. (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 OCP Agreement 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, 2019, 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.

 

Our subsidiary, Ecuador TLC, 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“—Others—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 US$182million was established for all concepts, of which: (i) US$64 million corresponded to credits for income tax withholdings made by OCP in the following periods: 2004-2005 and 2007-2014; (i) US$7 million was offset by a payment previously made by OCP related to a tax determination for the fiscal period 2003; and (iii) US$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.

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As a result of this agreement, OCP recorded a gain of US$387 million. We have resumed the recognition of our equity interest in OCP, through our subsidiary PEB, after recognizing previously unrecognized losses and, therefore, we recognized a gain for our equity interest in OCP of US$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.

On June 20, 2019, upon satisfaction all conditions precedent, the transaction was closed and registered with the Shareholders’ Registry Book, including the notification received by OCP on March 19, 2019 regarding the authorization by the Ecuadorian Government on March 8, 2019.

Pursuant to the agreement, if PEB collected such financial credit before its maturity in 2021, PEB should reimburse AGIP 50% or 25% of the collected amount if collection occurred in 2019 or 2020, respectively.

Taking into consideration the timeline of the agreement with AGIP – which was executed prior to the reversal of the above-mentioned situation –  the closing of the transaction resulted in the recognition of a profit of US$25 million according to IAS 28.

In order to estimate the 4.49% share in the fair value of identifiable assets and liabilities assumed in OCP, PEB has calculated the present value of future cash flows expected to be obtained through the collection of dividends considering the concession term that extends until 2023 and a discount rate of 15.3%.

 

Furthermore, as of December 31, 2019, PEB recorded an impairment loss regarding the 11.42% interest in OCP (before the acquisition of the aforementioned additional 4.49%) of US$6.7 million in connection with the present value of future cash flows expected to be obtained from such interest. Thus, the book value does not exceed the investment’s recoverable value.

 

As of the date of this Annual Report, we have a 15.91% equity interest in OCP, an oil pipeline in Ecuador that has a transportation capacity of 450,000 barrels/day. 

 

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. 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.

In 2019, oil volumes transported by Oldelval from Allen to Puerto Rosales averaged 24,809 cubic meters per day, while oil transportation to the refineries located in the Province of Neuquén totaled an average 2,355 cubic meters per day. Total transportation volume was 28,045 cubic meters per day, equivalent to 64.4 million barrels transported in 2019, representing a 16.2% increase compared to 2018. In addition, the transportation of crude oil’s service was provided without interruptions, ensuring operational continuity and a reliable pumping system.

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Our Petrochemicals Business

Our petrochemical operations are entirely based in Argentina where we own three high-complexity plants producing styrene, styrene butadiene rubber (SBR) and polystyrene, with a domestic market share ranging between 89% and 100%. 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.

 

The petrochemicals division has the following assets:

 

·        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

·        a polystyrene plant located in the city of Zárate, 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, 2019 and 2018:

 

 

2019

2018

Technical Information

 

 

Sales (in thousand ton):

 

 

Styrene (incl. propylene y ethylene)

55

64

SBR

27

26

Polystyrene (incl. BOPS)

44

50

Others

217

213

 

 

 

Styrene Division

 

As of December 31, 2019, monomer styrene sales volumes totaled 45 thousand tons, representing a decrease of 9% compared to 2018 and polystyrene sales volumes totaled 44 thousand tons,experiencing a 13% decrease in domestic sales associated with the market downsize, and a 46% increase in exports. 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 remains temporarily stopped.

 

In 2019, rubber sales totaled 27 thousand tons, of which 11.8 thousand tons were attributable to the domestic market and 15.1 thousand tons to exports. In 2019, the sales volume increased by 4% compared to 2018.

 

Reforming Gasoline Division

 

 

Sales of intermediate gasoline and naphtha during 2019 totaled 158 thousand tons, increasing by 5% compared to 2018. During 2019, 28 thousand tons of Virgin Naphtha owned by YPF was processed through a processing agreement, obtaining 15 thousand tons of gasoline and naphtha that were returned to YPF, the remaining products obtained from such processing agreement were purchased by us.

 

Sales of aromatics, hexane and paraffinic solvents during 2019 totaled 49.4 thousand tons, which represented a 6% decrease compared to 2018. Propellant gas (LPG included) sales totaled 9.2 thousand tons in 2019, representing a 11% decrease compared to 2018 associated with lower production volumes.

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As of December 31, 2019, our estimated market share of the following products in Argentina were 100% for styrene, 89% for polystyrene and 89% for SBR.

Our Holding and Other Business

Our holding and other business segment is comprised, among other holdings, of our direct and indirect interest in TGS, Argentina’s major gas transportation company, which owns a 9,231 km-long gas pipeline network and a gas fuel processing plant, General Cerri, with an output capacity of one million tons a year. Furthermore, we jointly control Transener with IEASA. Transener is 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. In addition, we participate in the refining and distribution operations through Refinor, which owns a refinery located at Campo Durán in the Province of Salta with an installed capacity of 25.8 thousand oil barrels per day and a commercial network of 90 gas stations.

 

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 acted in the telecommunications area through its controlled company Telcosur. As of December 31, 2019, Pampa holds a 27.2% interest in TGS through CIESA.

 

Description of TGS’s Business Segments

Regulated Segment: Gas Transportation

In 2019, revenues from this business segment amounted to Ps.22,620 million, evidencing a 5% decrease compared to the Ps.23,786 million recorded in 2018. This decrease is mainly due to the deferral of the semiannual update which should have applied since October 2019, the mismatch between the costs variation adjustment and the inflation reflected in the restated financial information, and the lower deliveries of natural gas on an interruptible basis, where the transportation of natural gas is subject to the gas pipeline’s available capacity. These effects were partially offset by the full application of the tariff increase resulting from the RTI granted by Res. ENARGAS No. 310/18 as from April 2018, as well as the increases granted pursuant to ENARGAS Res. No. 265/18 and 192/19 as from October 2018 and April 2019, respectively.

Revenues from this business segment result mainly from firm natural gas transportation agreements, whereby the gas pipeline capacity is reserved and paid for regardless of its actual use. TGS also provides services on an interruptible basis. Moreover, TGS provides operation and maintenance services for assets allocated to the natural gas transportation service for the expansions incentivized by the Federal Government and held under trusts created to such effect. For this service, TGS receives from customers with incremental natural gas transportation capacities the CAU established by ENARGAS, which remained unchanged since its creation in 2005 until its first update in May 2015.

In 2019, 79% of TGSs average daily deliveries of natural gas were made under firm transportation agreements, whereas the rest were made under interruptible service, and exchange and displacement agreements. Furthermore, as of December 31, 2019, the total capacity hired on a firm basis amounted to 81.5 million m3/day with a weighted average life of 13.6 years. In 2019, the daily average injection of natural gas into the gas pipeline system operated by TGS amounted to 73.8 million m3/day, a volume 6% higher compared to 2018. In this scenario, TGSs gas pipeline system was fairly responsive to meet demand needs.

Regarding trade, during 2019, TGS launched an open tender which allowed for the renewal of the total firm capacity of agreements terminating in 2020 and 2021 (which represented an approximate amount of 12.7 million m3/day), achieving an average additional term of 12 years. Additionally, in July 2019 a call for bids was launched for the construction and provision of a transportation service connecting the Vaca Muerta formation with the Province of Buenos Aires. Within the 35 years of concession, a Temporary Special Regime (RET) is contemplated for the first 17 years aiming to make the repayment of the construction feasible. As of the date of this annual report, although the Argentine Government has not confirmed its intentions to conduct the project, TGS is currently analyzing its participation.

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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 2019, this segment’s revenues accounted for 48% of TGS’s total revenues. In 2019, revenues from sales amounted to Ps.23,138 million (in real terms, 10% lower than in 2018). The decrease in revenues from sales is mainly attributable to the decline in international reference prices, the decrease in the dispatch of ethane, due to Polisur’s impossibility to process the product in its plant after the accident which took place in 2019, and the mismatch between the inflation reflected in the restated financial information and the devaluation during the period over US$-denominated sales. These effects were partially offset by higher propane and butane sales.

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. In the Cerri Complex, ethane, LPG and natural gasoline are extracted from natural gas, which arrives through our three main pipelines from the Neuquina and Austral natural gas basins. 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 performed at current international market prices. Ethane is sold to Polisur at a price mutually agreed by the parties.

During fiscal year 2019, the production of liquids was 1,022,914 short tons, lower than 2018. It should be noted that no production restrictions were recorded during the winter period on account of the higher supply of domestic gas from unconventional gas developments, as well as the lower demand resulting from the economic recession, Furthermore, in 2019 total sales volumes reached 1,040,393 tons, 38% of which were destined to exports. Out of the total sales to the domestic market, 75% were made at US$-denominated prices.

With respect to the foreign market, in 2019 average sales prices for propane, butane and natural gasoline experienced 28.5%, 23.3% and 17.0% decreases, respectively, mainly as a result of the decline in international reference prices in the first semester of 2019. International reference prices have initiated a recovery since August 2019.

Furthermore, pursuant to the PEN Executive Orders No. 793 and 865/18, as from September 2018 a duty was imposed on the export of LNG, among other products, with a maximum 12% rate, which was limited to up to 8% as from the entry into effect of theSocial Solidarity and Productive Reactivation Law.

It is worth highlighting that TGS has entered into agreements for the export of NGL for the 2018/2019 summer period which not only allowed for an improvement in prices compared to the expired agreements, but also brought short-term certainty for its sales. Furthermore, TGS also exports by land through transportation via trucks to Chile, Paraguay and Brazil which, despite being lower volumes than those exported by sea, allow TGS to capitalize on a higher operating margin.

In the domestic market, during 2019, TGS continued participating in the Household Gas Bottles Program and the Propane for Grids Agreement, which prices are regulated by a set of resolutions, provisions and agreements. The participation in these programs forces TGS to sell at prices ostensibly lower than market prices, which, under certain conditions, results in negative operating margins. Furthermore, as a result of the participation in these programs, the Federal Government has to reimburse to TGS an economic compensation denominated in Argentine pesos, which is currently being collected with delays. Outside these programs, TGS sold 184,941 tons of propane and 14,736 tons of butane, mainly to the reseller market, and, to a lower extent, to the industrial, propellant and automotive market.

Furthermore, in 2019, TGS continued selling ethane under the long-term agreement entered into with Polisur in September 2018. This agreement stipulates commercial guidelines with improvements in the TOP clause, which guarantees for TGS a gradual increase in sales volumes over the first five years of the contract. However, during fiscal year 2019, there was a significant decrease in the volume of ethane sold to Polisur, which amounted to 283,635 tons under the current agreement, 29% lower than in 2018, due to the customers impossibility to process the product in its plant after the accident which took place in June 2019. After the accident, Polisur returned to its normal operations in October 2019.

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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 in 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 6% of TGS’s total income in 2019. Revenues from sales, decreased by 8% in real terms as compared to 2018, which is mainly due to the mismatch between the inflation reflected in the restated financial information and the peso devaluation during the period ended on December 31, 2019 over sales denominated in U.S. Dollars, as well as lower construction, operation and maintenance services, which were partially offset by the commissioning of Vaca Muerta’s gathering pipeline.

The construction of the 147-km gathering pipeline in the Vaca Muerta formation initiated in April 2019, and its commissioning was successfully concluded throughout the year, with a total transportation capacity of 60 million m3 per day and a conditioning plant with an initial capacity of 5 million m3 per day. This pipeline required an investment of US$260 million, and the execution of long-term gas transportation and conditioning agreements with gas producers were key to its development. Additionally, in February 2020, TGS approved the expansion of the conditioning plant with an additional investment of US$15 million.

Furthermore, as of the date hereof, TGS has a portfolio of projects under assessment which will contribute to the development of unconventional resources in Vaca Muerta. In 2019, TGS conducted a pre-feasibility study for the development of a liquefaction plant in the City of Bahía Blanca aiming to increase export opportunities and reduce import needs in the winter period. This project is now subject to the final investment decision. TGS has also made progress on the pre-feasibility study for the construction of a new liquid processing plant in the town of Tratayén, province of Neuquén, which will allow for the enhancement and growth of the liquids business.

However, as a consequence of the COVID-19 TGS adapted its business plan to the economic expectations of Argentina. TGS has implemented a reduction in its investment plans, without affecting those safety works, which allow TGS to guarantee normal business continuity.

Regulatory Framework of Midstream

 

Regulations Specifically Applicable to Gas Main Pipeline Transportation

 

RTI

 

Public Emergency and Exchange Rate Regime Reform Law No. 25,561, enacted in January 2002 and extended on several occasions until January 2018, provided for the conversion into Pesos of utility service tariffs; consequently, the transportation tariff remained unchanged in Pesos as from 1999, despite the sharp increase in price indexes and operating costs. This mismatch directly affected the operating costs of this business segment, deteriorating its economic and financial condition.

 

On March 29, 2016, the MEyM issued Res. No. 31/16 which, among other measures, instructed ENARGAS to conduct the RTI process and to grant a transitory tariff increase to be charged against the RTI. Within this framework, ENARGAS passed Res. No. 3724/16 on March 31, 2016 approving a 200.1% increase in tariff schemes effective as from April 1, 2016, applicable to the natural gas transportation utility service and the CAU. However, on August 18, 2016, the CSJN established the obligation to hold non-binding public hearings to set the tariffs and prices without market intervention, and declared the nullity of MEyM’s Res. No. 28/16 and 31/16 regarding residential users; therefore, 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 approved 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 (Res. No. 4054/16).

 

In December 2016, the public hearing required for the RTI process was held. On March 30, 2017, pursuant to ENARGAS Res. No. I-4362/17, a transitory tariff scheme was approved, with a 214.2% and 37% increase in the natural gas transportation utility service and the CAU, respectively, applicable as from April 1, 2017. The RTI contemplates 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 the 2017 Transitory Agreement with the purpose of implementing the tariff update; to such effect, ENARGAS Res. No. 4362/17 wasissued, which applied the tariff increase resulting from the RTI in three stages, 58% in April 2017, and the remaining in December 2017 and April 2018.

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The RTI considered the income necessary to execute a Five-Year Investments Plan between April 2017 and March 2022 for Ps.6,787 million, expressed as of December 2016 values, which are essential for the operations and maintenance of the main gas pipelines under TGS’s concession, as well as to guarantee the safety and continuity of the gas transportation utility service to meet the system’s expected higher demand resulting from the development of reserves.

 

The public hearing to present cost variations was held on November 14, 2017, and pursuant to ENARGAS Res. 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 established in the RTI for the January – October 2017 period. This increase was deemed as charged against the amounts resulting from the Comprehensive Renegotiation Memorandum of Understanding for the License executed by TGS on March 30, 2017.

 

The Comprehensive Renegotiation Memorandum of Understanding was ratified by the Federal Government on March 28, 2018 (PEN Executive Order No. 250/18), thus concluding the RTI process initiated in April 2016, and, as a result, on June 26, 2018, TGS voluntarily dismissed the arbitration proceeding it had brought before the ICSID related to the redenomination of tariffs in pesos (pesificación) and other unilateral changes to TGS’s regulatory structure affected by the Public Emergency Law and related laws and decrees violated the requirement of fair and equitable treatment under the treaty. Furthermore, ENARGAS issued Res. No. 310/18 approving, effective as from April 1, 2018, the last installment of the tariff increase established by Res. No. 4362/17, equivalent to a 50% increase in tariff schemes, including a 13% recognition on account of PPI variations for the November 2017 – February 2018 period, and a compensation for the programmed deferral of the increase payable in installments.

 

For the calculation of costs variations for the February – August 2018 period applicable as from October 2018, TGS requested an approximate 30% tariff increase based on the variation in the PPI; however, on September 27, 2018 ENARGAS issued Res. No. 265/2018 setting a 19.7% increase based on the simple average of the PPI, the Construction Cost Index and the Salary Variation Index (provisional as of June 2018). The regulatory entity alleged that, according to the RTI, under certain macroeconomic conditions and circumstances, such as the significant peso devaluation which occurred in April 2018, and taking into consideration that the semiannual update is a non-automatic adjustment mechanism, it may use other indexes different from the PPI to determine tariff increases.

 

ENARGAS Res. No. 192/19 determined a 26.0% increase on account of costs variations effective as from April 2019. This increase was calculated based on the PPI semiannual variation for the August 2018 – February 2019 period. Later, 22% of the amount of the bills issued during the July – October 2019 period was deferred, to be recoverable in five installments as from December 2019, pursuant to SGE Res. No. 336/19.

 

The semiannual update which, according to the RTI, should have applied since October 1, 2019, was deferred pursuant to several regulations. Finally, the tariff increase has been suspended for a maximum term of up to 180 days since the entry into force of the Solidarity Law on December 23, 2019. Furthermore, this Law contemplates the possibility of performing an RTI review for a term of up to 180 days.

 

Public Tender for the Litoral Main Gas Pipeline

 

SGE Res. No. 437/19 issued on July 30, 2019 launched a national and international public tender for the award of a gas transportation license to connect the town of Tratayén, in the Province of Neuquén, with the town of Salliqueló, in the Province of Buenos Aires (phase 1), and Salliqueló with the City of San Nicolás de los Arroyos, in the Province of Buenos Aires (phase 2).

 

The new license provides for a RET for the first 17 years of the total 35-year concession term for the repayment of the construction and, for the rest of the concession period, Gas Law No. 24,076 will apply. Furthermore, the license agreement provides for an irrevocable transportation offer of 10 million m3/day to CAMMESA for a 15-year period.

 

The date for the opening of tenders was successively postponed until March 31, 2020. As of the issuance of this Annual Report, although the new Government has not expressed itself on this matter, TGS is analyzing the bid terms and its participation.

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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 utility service of high voltage electricity transmission in Argentina, which directly operates 85% of the high voltage lines of the country. 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 and 57 transforming substations.

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 6,492 km and 104 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

The Extra High Voltage Electricity Transmission System operated and maintained by Transener is subject to increasingly higher load conditions every year. In 2019, the peak voltage had not exceeded the previously highest historical peak voltage of 26,320 MW recorded in 2018.

Despite the great number of power grid solicitations, in 2019 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.

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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. Transeners technical team extensive expertise has been a key factor in the customers’ decision to entrust it with the performance of critical works. Bidding documents for the expansion of the transmission system under the RenovAr I and II Programs, as well as other expansions to be executed by different WEM agents have been prepared. Among the most important projects, we can mention the 132-kV expansion works for power input from 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 utiliy 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 2019, 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.

 

 

Regulatory Framework of Transmission

Transener’s Tariff Situation

 

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 Government while continuing to provide electricity services. This situation has significantly affected Transener and Transba’s economic and financial condition.

 

In May 2005, Transener and Transba entered into a Memorandum of Understanding with the UNIREN stipulating the terms and conditions to update the Concession Agreements. The guidelines of this Memorandum of Understanding provided for the performance of an RTI before the ENRE and the determination of a new tariff regime for 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.

 

Since 2006, Transener and Transba have repeatedly requested the ENRE to 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 assessment, 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, in connection with 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 ofUnderstanding. These receivables were assigned in consideration of disbursements by CAMMESA pursuant to loan agreements.

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RTI

 

ENRE Res. No. 66/17 and No. 73/17 passed in February 2017, as amended, established the tariffs for 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. In October 2017, the ENRE issued Res. No. 516/17 and No. 517/17 partially upholding the Motions for Reconsideration filed by Transener and Transba and establishing, retroactively as of February 2017, a Ps.8,629 million and Ps.3,575 million recognized capital base and Ps.3,534 million and Ps.1,604 million annual regulated income for Transener and Transba, respectively.

 

The purpose of the semiannual 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 PPI – “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 the 2017-2021 period in the RTI. This mechanism contemplates a trigger clause that weighs the PPI and the CPI semiannual variations published by the INDEC, ascertained at a variation equal to or higher than 5%.

 

For the December 2016 – June 2017 period, the trigger clause reached 9.02%, and, therefore, the semiannual adjustment for Transener and Transba remuneration was activated; however, its application was deferred until December 15, 2017, when ENRE issued Res. No. 627/17 and No. 628/17 updating Transener and Transba’s compensation by 11.35% and 10.96%, respectively, for the December 2016 – June 2017 period, retroactively to August 1, 2017.

 

ENRE Res. No. 37/18 and No. 38/18, issued on February 19, 2018 and later amended by ENRE Res. No. 99/18 and 100/18 on April 5, 2018, updated Transener and Transba’s remunerations by 24.15% and 23.39%, respectively, for the December 2016 – December 2017 period, effective as from February 1, 2018. On November 16, 2018, the ENRE issued Res. 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, effective as from August 1, 2018.

 

On March 22, 2019, the ENRE issued Res. No. 67/19 and No. 68/19 updating Transener and Transba’s remunerations by 78.41% and 81.26%, respectively, for the December 2016 – December 2018 period, effective as from February 1, 2019. On September 25, 2019, the ENRE issued Res. No. 269/19 and No. 267/19 updating Transener and Transba’s remunerations by 112.41% and 115.75%, respectively, for the December 2016 – June 2019 period, effective as from August 1, 2019.

 

The Social Solidarity and Productive Reactivation Law, which entered into effect on December 23, 2019, provided that electricity tariffs under federal jurisdiction would remain unchanged, and contemplates the possibility to perform an extraordinary review of the current RTI for a maximum term of up to 180 days. As of the date hereof, Transener has received no instructions by the ENRE on the semiannual remuneration update which, according to the RTI, should have applied as from February 1, 2020 corresponding to the December 2016 – December 2019 period.

 

 

Distribution of Transmission Costs among WEM Users

 

SEE Res. No. 1085/17 issued on November 28, 2017 (effective as from December 1, 2017) established the methodology for the distribution of costs associated with the remuneration of transmission companies among its users (distributors, GU, self-generators and generators). These costs are distributed based on the demand and/or contribution of energy by each WEM agent directly and/or indirectly associated to the DisTro, after discounting costs assigned to generating agents as operational and maintenance costs for connection and transformation equipment.

 

It is worth highlighting that prices payable by distribution companies in consideration of 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, their demand’s percentage corresponding to each DisTro will be established, 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 thehigh-voltage transmission and/or DisTro, the applicable monthly value will be that corresponding to the connecting agent.

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Our interest in 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 barrels per day and its natural gas processing capacity is 20.3 million cubic meters of gas per day (“mcm/d”).

 

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 2019, the average daily processing of crude oil amounted to 5,852 barrels. In turn, gas processing reached a daily average of 6.9 million cubic meters.

 

Refinor entered into an agreement with IEASA in 2012 to supply the compression gas service, which IEASA was importing from Bolivia. In 2019, this agreement was amended to extend: (i) the compression’s capacity up to 21 mcm of gas per day; and (ii) the term of the agreement to April 2021.

 

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 motonaphtas for automotive use, butane and propane.

 

As of December 31, 2019, Refinor had a commercial network of 90 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, including: Premium Max (97 octanes), Super Max (95 octanes) Eco Diesel Max and Eco Diesel Premium Max.

 

In 2019, sales of gasoline, gasoil, raw naphtha and other liquid fuels amounted to 478 thousand cubic meters, which represented a 10% decrease compared to 2018. LPG sales amounted to approximately 74 thousand tons, representing a 62% decrease compared to 2018.

 

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, the community, suppliers and supervisory bodies, with a focus on quality personal health and safety, environmental care and energy efficiency.

 

Pampa applies its quality, safety, environment and health (QSELH) policy in all its business segments through guidelines establishing good practices, ensuring compliance with regulations, and pointing the way towards continuous improvement in QSELH. In 2019, Pampa completed the first QSELH guidelines assessment and improvement program in all its facilities, and its results were used as a reference for 2019 and 2020 planning.

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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 QSELH culture through an integrated and aligned QSELH management.

 

Quality

 

We improved our management quality by 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.

 

In 2019, the QSELH risk management matrix was updated to facilitate the integrated assessment of the most relevant risks, and the first evaluation cycle, scheduled to be conducted from December 2019 to April 2020, was launched in all the facilities.

 

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 2019, we started the certification process for the new ISO 45001:2018 standard, which replaces OHSAS 18001, reinforcing safety and health management at the workplace. Seven induction workshops were offered, and certifications are expected to be completed between 2020 and early 2021. CTGEBA was certified under the new standard, and also received the Efficient Argentina award, granted by the National Undersecretariat of Renewable Energies and Energy Efficiency, in the Energy Management category.

 

With respect to quality standards in daily management, in early 2019 the anomalies management process was reviewed and among other actions, it was decided to strengthen contractors’ control and performance improvement. In July 2019, a global QSELH improvement project for applications operating in the SharePoint and Qlikview platforms was launched, offering a more agile, modern and customized solution for Pampa’s needs.

 

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

 

We have moved forward with the definition and periodic monitoring of our safety goals through the QSELH indicator board, as well as with the development of different initiatives to improve safety management and performance in each of our facilities. In 2019, we worked with the Health and Safety Golden Rules, which are targeted to all Pampa employees to protect individuals performing high-risk tasks. These rules are mandatory, and are part of the daily activities.

 

Along the same lines, a Work Permits System Manual was drawn up focusing on a comprehensive risk analysis during the planning stage of tasks. In 2019, four workshops were organized for specialists of each of our businesses to meet their specific needs.

 

In terms of human behavior, which is one of the pillars of QSELH management, a comprehensive review of the Behavioral Preventive Observations tool was made focusing on the approach to people, seeking commitment, and increased awareness on prevention and compliance with the golden rules during such observations.

 

With regards to industrial hygiene, we continued focusing on quality improvements in hygiene risk maps, covering chemical, physical and ergonomic risks. Assessments were conducted, and metrics of both work environments and individual dosimetry were optimized, resulting in several plant improvements geared at minimizing risks.

 

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Environment

 

Our operations are conducted within a context of sustainable development. We are committed to the protection of the environment and endeavor to use natural resources rationally in each of our projects by applying proper and economically viable technologies.

 

We continue managing environmental risks to prevent the occurrence of undesirable events and/or to minimize their impact by developing actions and programs, for example, for the integrity of aerial and underground pipelines and tanks. The Risk Management Matrix (MGR-QSELH), a tool to be implemented in 2020 through ad hoc technical teams, will focus, among other aspects, on anything that may pose a potential risk of damage to verify the proper implementation of the corrective measures. In addition, monitoring and environmental studies are performed to become acquainted with different environmental situations.

 

In line with the countrys energy requirements and aiming to have an active participation in the diversification of the Argentine energy matrix, in 2019 we started operations of PEPE II and III, with a total installed power capacity of 106 MW, and important progresses were made at CTGEBAs cycle closing, which are expected to become operative by mid-2020 and will add 383 MW to the matrix. In June 2019, we acquired CTEB in partnership with YPF, and will operate the power plant over the next four years, with a 567 MW capacity, participating in its cycle closing, which will add an additional 280 MW of power capacity.

 

Response to Emergency

 

Although we endeavor to prevent undesirable events, we 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 capabilities necessary to set up emergency plans and coordinate the necessary activities to be deployed should an undesirable event occur.

 

Should an undesirable event occur, practices and trainings are performed based on the roles established in the Emergency Response Plans in order to develop all the necessary skills and capabilities to execute emergency plans and coordinate the necessary activities. In 2019, critical emergency scenarios in the power generation business were identified and updated, and this process will be extended to the rest of the businesses in 2020.

 

Furthermore, in 2019 we started a survey on the condition of fire detection and suppression systems with the purpose of assessing their proper working condition and response capacity. We also provided basic training on the emergency response methodology known as Incident Command System, which will be applied to each business during 2020.

 

Occupational Health

 

In 2019, we continued implementing our alcohol, drugs and psychoactive substances’ policy. In addition, the Preventive Labor Environments certification granted by SEDRONAR and COPOLAD (“Programa de Cooperación entre América Latina, el Caribe y la Unión Europea en Políticas sobre Drogas”) was obtained in all facilities operated by us. These certifications aim to recognize the implementation of preventive programs in work environments, which involve the development of the preventive and effective actions policy based on the employees’ welfare.

 

Aiming to promote the biopsychosocial health of all our members, in 2019 we continued advancing our Labor Health Management program. Occupational and risk medical exams were performed on more than 2,000 employees, and individual feedback was provided for the granting of the Certificate of Physical Fitness. Furthermore, the Labor Health qualification for contractors was completed.

 

With regards to prevention, we continued implementing the physical activity program, as well as flu and tetanus immunization campaigns. Furthermore, the cardio-protection program continued, which aims to train staff to be able to provide immediate assistance through Cardiopulmonary Resuscitation (CPR) and the use of the automated external defibrillator (AED). In 2019 and jointly with Experta ART, CPR courses were given in all of our facilities with the use of AED and First Aid training, and we achieved the certification as a cardiac-safe company.

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On the other hand, together with theFoundation, a blood donation campaign was conducted through the implementation of voluntary blood donation drives, collecting 158 blood bags. This practice is organized on a systematic basis in all our facilities to strengthen the bonds among Pampa, its staff and the community.

 

Corporate Responsibility 

Programs and social investment actions performed by Pampa are embedded in a strategic relational model with our stakeholders led jointly with the Foundation. With a strong commitment to the community, we develop programs oriented towards improving the quality of life of individuals, and strengthening the capabilities of the institutions of the communities where we operate.

 

As a company committed to managing the economic, social and environmental impacts of our business, through our social investments and the voluntary support of our employees, we intend to contribute to the Sustainable Development Goals (SDG) in which we can contribute the most to the common good, through our different programs: SDG 4 (quality education), SDG 7 (affordable and clean energy), SDG 8 (decent work and economic growth) and SDG 12 (responsible consumption and production). We strongly rely on the background and the importance of the efforts by social organizations and public entities. In this context, we have partnered with them for the development of social investment initiatives. We have developed program SDG 17 (partnerships for the goals) which is cross-cutting to all our initiatives.

 

In 2019, we continued reinforcing our strategic social programs with emphasis on education, employment and social inclusion. Set forth below a brief description of our programs.

 

Education and Labor Placement Training

 

We believe that education is key to development and social and labor market inclusion. Therefore, we seek to provide equal opportunities to vulnerable boys and girls.

 

Through the granting of scholarships and the development of soft skills, we support the completion of technical secondary education studies and the entrance into universities of teenagers living in the Provinces of Neuquén, Salta, Mendoza, Buenos Aires and Santa Fe. In 2019, we supported 1,082 students in the last three years of technical secondary education and 349 university students. In addition, there were 421 secondary education graduates and 25 university graduates from academic courses associated with our businesses, mainly engineering.

 

Furthermore, we continued supporting the Learning Schools Network, a program fostered by the Ministry of Education of the Government of the Province of Buenos Aires that provides training to 1,914 principals and 7,214 teachers throughout the province; and we granted 15 scholarships for the Bachelors Degree in Educational Management atEscuela Superior de Economía y Administración de Empresas (Higher School of Economy and Business Administration). At the secondary level, together with the National Institute of Technical Education, we conducted the “Trainers Training Program”, an initiative that provided tools to 310 teachers for the planning and implementation of the students professional practices. We organized 12 meetings in the Provinces of Mendoza, Neuquén and Salta.

 

Regarding the Labor Placement Training, we conducted professional practices and first job workshops so that secondary and university students may consolidate, integrate and develop knowledge and capabilities matching the professional profile they are developing and to increase their employability opportunities.

 

In 2019 we continued fostering professional practices for more than 191 students attending the final grades at different technical schools, who performed practices at Pampa and the Groups subsidiaries, as well as in projects in association with other institutions, totaling more than 20,000 practice hours; 49% of these students were also part of our secondary school scholarships program. In turn, at the university level, 30 interns performed professional practices and internships and, since the beginning of the Educational Paths Escort Program, 19 interns have been hired in different arms of the Pampa Group. In the Provinces of Buenos Aires and Salta, we conducted eight first-job workshops with the attendance of 1,270 near graduates from secondary school.

 

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Local Assessment and Development of Community Impact Projects

 

We believe in the creation of shared value, and we design and execute local development projects in coordination with municipalities and civil organizations. These projects arise from dialog and mapping processes with our stakeholders, whereby we identify different problems affecting each community and define strategic courses of action related to our business.

 

We understand that the relationship between the Company and its stakeholders is cross-cutting throughout the business. In 2019, we worked with leaders and heads of different Company areas to incorporate a strategic view and define the direction, scope, priorities and issues to address with respect to each interest group. We organized five workshops, provided training to 56 employees and developed six analysis matrices aiming to move forward with the action plan in 2020, including the following: (i) Sustainable Energy; (ii) Skills Training and Support to Productive Undertakings; and (iii) Enhancement of Local Organizations.

 

Volunteering Actions

 

We are convinced that our employees are our main asset, and that we are responsible for the creation of shared value in and with the communities where we operate. With ‘Pampa Volunteering’, we seek to generate a space where, through the Volunteering Committees, employees may identify social problems at the local level and draw up proposals which may contribute to solve them. This allows each employee to reinforce its relationship with the community, contribute to its socio-economic and community development, and strengthen the organizational culture and the employees’ sense of belonging.

 

We hold periodical meetings to discuss the volunteering intervention strategies. The committee members at each facility define action plans for volunteering activities and their coordination with strategic partners at a local level. In 2019 we fostered 49 actions, with the participation of more than 1,300 volunteers who dedicated more than 19,000 hours to humanitarian activities. We currently have nine active volunteering committees, of which three new committees are in the process of being established.

 

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 Operational results -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

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, 2019, the total generation assets covered under these policies are valued at US$4,558 million.

 

In our oil & gas business, we carry full insurance, including business interruption and general liability insurance. As of December 31, 2019, the total oil & gas assets covered under these insurance policies are valued at US$449 million.

 

 In our petrochemical business and distribution business, we also carry full insurance, including business interruption and general liability insurance. As of December 31, 2019, the total assets covered under insurance policies are valued at US$1,217 million.

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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 2019, we used the name “Petrobras” with the permission of Petrobras and 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.

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