20-F 1 pamform20f_2020.htm PAMFORM20F_2020
 

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, 2020

 

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:

1,451,170,791 outstanding shares of common stock, par value Ps.1.00 per share, excluding 4,330,464 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 7
Item 2. Offer Statistics and Expected Timetable 7
Item 3. Key Information 7
EXCHANGE RATES 7
RISK FACTORS 8
Item 4. Information on the Company 41
HISTORY AND DEVELOPMENT OF THE COMPANY 41
OUR BUSINESS 42
Organizational structure 53
Our Generation Business 55
Our Oil and Gas Business 64
Our Petrochemicals Business 78
Our Holding and Other Business 79
Our Distribution of Energy Business 87
Quality, Safety, Environment and Occupational Health 88
Corporate Responsibility 90
Property, Plant and Equipment 92
Insurance 92
Patents and Trademarks 92
THE ARGENTINE ENERGY SECTOR 93
Item 4A. Unresolved Staff Comments 121
Item 5. Operating and Financial Review and Prospects 121
Item 6. Directors, Senior Management and Employees 155
Item 7. Major Shareholders and Related Party Transactions 169
Item 8. Financial Information 171
CONSOLIDATED FINANCIAL STATEMENTS 171
LEGAL PROCEEDINGS 171
DIVIDENDS 175
SIGNIFICANT CHANGES 176
Item 9. The Offer and Listing 176
TRADING HISTORY 176
THE ARGENTINE SECURITIES MARKET 178
Item 10. Additional Information 183
MEMORANDUM AND ARTICLES OF ASSOCIATION 183
MATERIAL CONTRACTS 189
EXCHANGE CONTROLS 189
TAXATION 191
DOCUMENTS ON DISPLAY 199
Item 11. Quantitative and Qualitative Disclosures about Market Risk 200
Item 12. Description of Securities Other than Equity Securities 200
Item 13. Defaults, Dividend Arrearages and Delinquencies 202
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 202
Item 15. Controls and Procedures 202
Item 16A. Audit Committee Financial Expert 203
Item 16B. Code of Ethics 203
Item 16C. Principal Accountant Fees and Services 203
Item 16D. Exemptions from the Listing Standards for Audit Committees 204

 

 
 
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 205
Item 16F. Change in Registrant’s Certifying Accountant 206
Item 16G. Corporate Governance 206
Item 16H. Mine Safety Disclosure 210
Item 17. Financial Statements 211
Item 18. Financial Statements 211
Item 19.  Exhibits 211

 

 

 
 

PRESENTATION OF INFORMATION

This document comprises the annual report on Form 20-F for the year ended December 31, 2020 of Pampa, that has been approved by resolution of the Board of Directors meeting of Pampa held on April 29, 2021. 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, 2020 and 2019, and the related consolidated statements of comprehensive income, changes in equity and cash flows for each of the three years in the period ended December 31, 2020, 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 10, 2021.

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

Functional and Presentation Currency

The information included in the Consolidated Financial Statements has been recorded in the functional currency of the Company, which is the currency of the primary economic environment in which the Company operates.

 

The Company adopted the U.S. Dollar as its functional currency commencing on January 1, 2019; therefore, previous comparative figures have been restated 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. 

 

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 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”).

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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;
-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;
-further developments regarding our subsidiary

-Edenor, including our ability to consummate the sale of our controlling interest in Edenor;

-the treatment of the tariff update according to RTI;
-the evolution of Edenor’s energy losses and the impact of Edenor’s fines and penalties and uncollectable debt;
-electricity shortages;
-the potential disruption or interruption of Edenor’s service;
-the revocation or amendment of Edenor’s concession by the granting authority;
-changes in the laws and regulations applicable to the energy sector in Argentina;
-government interventions, resulting in changes in the economy, taxes, tariffs, the regulatory framework or environmental matters, or in the delay or withholding of governmental approvals;
-general economic, social and political conditions in Argentina, and other regions where we, our subsidiaries, associates or joint ventures operate, such as the rate of economic growth, fluctuations in exchange rates of the Peso or inflation;
-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;
-competition in the hydrocarbon sector and related industries;

-obsolescence of products manufactured in our petrochemical facilities;

-export limitations to our production;

-import restrictions on consumables that are key for the maintenance of our assets;

-the impact of high rates of inflation on our costs;

-the effect of steep local currency depreciation on our Peso-denominated revenues;

-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 the COVID-19 pandemic and any subsequent mandatory regulatory restrictions or containment measures imposed in response thereto; 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.

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GLOSSARY

 

Glossary of certain terms used in this Annual Report

 

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

 

·“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, among others, 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 markets 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);
·“CC”: Combined Cycle;
·“CER”: refers to the Coeficiente 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, as amended by, among others, Law 27,440;
·“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, 2020 and 2019, 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, 2020, and the notes thereto of Pampa;
·“Corporate Criminal Liability Law”: Corporate Criminal Liability Law No. 27,401;
·“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. (previously known as Parques Eólicos Argentinos S.A.);
·“CTEB”: Central Térmica Ensenada de Barragán;
·“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”;
3 
 
·“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;
·“Ecuador TLC”: EcuadorTLC S.A.;
·“Edenor”: Empresa Distribuidora y Comercializadora Norte S.A.;
·“Edesur”: Empresa Distribuidora Sur S.A.;
·“EMESA”: Empresa Mendocina de Energía Sociedad Anónima;
·“ENARGAS”: Ente Nacional Regulador del Gas or National Gas Regulatory Entity;
·“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;

·“GaffneyCline”: 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;

·“IEASA”: Integración Energética Argentina S.A. (former Energía Argentina S.A.);

·“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;
·“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;
·“MAT”: Term Market (Mercado a Término);
·“MAT ER”: Renewable Energy Term Market;
·“MBTU” : millions of British Thermal Units (BTU);
·“MDP”: Ministry of Productive Development (former SGE)
·“ME&M”: Ministry of Energy and Mining;
·“MLC”: Free Exchange Market (Mercado 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;
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·“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.;

·“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.);
·“PEMC”: Parque Eólico Mario Cebreiro;
·“PEN”: National Executive Branch (Poder Ejecutivo Nacional);
·“PEO”: Petrobras Energía Operaciones S.A.;
·“Pesos” or “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 the wellhead (Punto de Ingreso al de Sistema de Transporte);
·“Plan Gas.Ar”: the Plan to Promote Argentine Natural Gas Production;
·“Polisur”: PBB Polisur S.A;
·“PPA” or “PPAs”: relevant wholesale electricity supply agreements or power purchase agreements (Contratos de Abastecimiento Mayorista de Electricidad);
·“PP”: Pampa Participaciones S.A.U.;
·“PP II”: Pampa Participaciones II S.A.;
·“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;
·“QHSE”: Quality, Health, Safety and Environment;
·“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);
·“Reserves Report”: the year-end reserves report by Gaffney, Cline & Associates;
·“RTI”: Tariff Structure Review (Revisión 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;
·“SEE”: Subsecretariat of Electric Energy, former Secretariat of Electric Energy (Subsecretaría de Energía Eléctrica);
5 
 
·“SGE”: Former Government Secretariat of Energy (former Ministry of Energy (former ME&M)) (Ex Secretaría de Gobierno de Energía (ex Ministry of Energy (former ME&M));

·“SHC”: Undersecretary of Hydrocarbons and Fuels (Subsecretaría de Recursos Hidrocarburíferos (ex Secretaría de Recursos Hidrocarburíferos);
·“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 (Subsecretaría 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.;
·“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;
·“YPF”: YPF S.A.
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Item 1.Identity of Directors, Senior Management and Advisers

 

Not applicable.

Item 2.Offer Statistics and Expected Timetable

 

Not applicable.

Item 3.Key Information

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,          
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
2020    84.150  59.815  70.599  84.150
           
           
Month          
November 2020    81.310  78.690  79.941  81.310
December 2020    84.150  81.430  82.638  84.150
January 2021    87.330  84.700  85.976  87.330
February 2021   89.820  87.600 88.674 89.820
March 2021    92.000  90.090  91.066 92.000
April 2021(3)   93.500 92.240 92.827 93.500
           

Source: Banco Nación

(1)Represents the average of 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, 2021.

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.

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RISK FACTORS

 

The following summarizes some, but not all, of the risks provided below. Please carefully consider all of the information discussed in this Item 3.D. “Risk Factors” in this annual report for a more thorough description of these and other risks:

 

Risks Related to Argentina

·A global or regional financial crisis and unfavorable credit and market conditions may negatively affect our liquidity, customers, business and operational results
·The Argentine economy remains vulnerable to external shocks that could be caused by significant economic difficulties of Argentina’s major regional trading partners, 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
·The Argentine economy remains vulnerable and any significant decline may adversely affect our business, operational results and financial condition
·Economic and political developments in Argentina, and future policies of the Argentine Government may adversely affect the Argentine economy and the sectors in which we perform our activities
·If the high levels of inflation continue, the Argentine economy and our operational results could be adversely affected
·Fluctuations in the value of the Argentine Peso could adversely affect the Argentine economy and could, in turn, adversely affect our operational results
·The interruption of the publication of Argentine economic indexes or changes in their calculation methodologies could affect the projections made by the Company
·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
·Intervention by the Argentine Government may adversely affect the Argentine economy and, as a result, our business and operational results
·Argentine corporations may be restricted from making payments in foreign currencies or from importing certain products
·Argentine public expenditure may generate negative consequences for the Argentine economy
·The Argentine economy and finances may be adversely affected as a consequence of a decrease in the international prices of commodities
·Failure to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition.
·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
·The Argentine Government has intervened in the electricity sector in the past, and may continue intervening to adopt, among others, measures in connection with tariffs on public services
·Developments relating to the coronavirus may have a material adverse impact on our business operations, financial condition or results of operations

 

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 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
·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 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
·Our performance is largely dependent on recruiting and retaining key personnel
·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
·We and our affiliates are involved in various legal proceedings which could result in unfavorable rulings against us
·Downgrades in our credit ratings could have negative effects on our funding costs and business operations
·Cybersecurity events, such as a cyber-attack could adversely affect our business, financial condition, operational results and cash flows
·Our operations could cause environmental risks and any change in environmental laws could increase our operating costs
·CAMMESA could alter and delay payments to power generators and fuel producers
·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
·Covenants in our indebtedness could adversely restrict our financial and operating flexibility
·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
·We and our subsidiaries continue evaluating investment projects to expand our activity, which could imply an increase in our indebtedness

 

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
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·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
·Changes in certain regulations may require the adjustment of the facilities of our power plants that may require new investments or may affect the dispatch of our generators
·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
·New measures encouraging renewable energy generation projects may affect our generation sales
·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
·Penalties may be applied under our energy supply agreements with CAMMESA or for not having a concession for the use of seawater for the refrigeration of our generation units, which may adversely affect the revenues derived from such contracts or from our generation units
·A breach to our energy supply agreements with CAMMESA may, ultimately, cause the termination of such agreements, 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
·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
·Operational difficulties could limit our ability to generate electricity, which could adversely affect our operational results
·We may no longer own a controlling interest in HINISA, if the Province of Mendoza sells its participation in HINISA
·We 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
·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
·Events that affected PEPE II and PEPE III operations may not be effectively resolved or similar events may occur in our energy projects
·The national antitrust authorities could decide not to approve the acquisition of the CTEB
·If in the future we are not in a position to renew our PPAs or execute new PPAs, or if such PPAs are unilaterally modified or resolved, our results of operations and financial condition could be materially adversely affected

 

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
·Argentine oil and gas production concessions and exploration permits are subject to certain conditions and may not be renewed or could be revoked
·Oil and gas reserves in Argentina are likely to decline
·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
·Export duties and import regulations on our products negatively affected the profitability of our operations
·Oil and gas prices and sale conditions could affect our level of capital expenditures
·Limits on exports and imports of hydrocarbons and related oil products have affected and may continue to affect our 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 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
·Our failure to comply with our commitments to make certain investments could negatively affect our operational results
·Oil and gas activities are subject to significant economic, environmental and operational risks
·The Argentine Government could alter and delay payments to natural gas producers under key government programs
·Unless we replace our oil and gas reserves, such reserves and production will deplete over time
·Our estimated oil and gas reserves are based on assumptions that may prove inaccurate
·We face significant competition in the acquisition of exploratory acreage and oil and natural gas reserves
·We may incur significant costs and liabilities related to environmental, health and safety matters
·Limitations on local pricing in Argentina may adversely affect our operational results
·Our activities may be adversely affected by events in other countries in which we do business

 

Risks Relating to our Shares and ADSs

·Restrictions on the movement of capital out of Argentina may impair the ability of holders of ADSs to receive dividends and distributions, and the proceeds of any sale of, the shares underlying the ADSs, which could affect the market value of the ADSs
·ADS holders’ ability to receive cash dividends may be limited
·Under Argentine law, shareholder rights may be fewer or less well-defined than in other jurisdictions
·Holders of ADSs may be unable to exercise voting rights with respect to the common shares underlying the ADSs at our shareholders’ meetings
·Our shareholders may be subject to liability for certain votes of their securities
·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
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·There can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could subject U.S. holders of our shares or ADSs to adverse U.S. federal income tax consequences.

 

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. 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.” 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, 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 flows into 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.

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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. Additionally, financial and securities markets in Argentina are also influenced by economic and market conditions in other markets worldwide.

Furthermore, the coronavirus has caused significant social and market disruption during 2020 and is also expected to have an adverse impact in Argentina’s economy during 2021 (See “—Developments relating to the coronavirus may have a material adverse impact on our business operations, financial condition or results of operations.” below). 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, or by events in the economies of developed countries or in other emerging markets.

Finally, international investors’ perceptions to events occurring in one market may generate a “contagion” effect by which an entire region or class of investment is disfavored by international investors. Argentina could be adversely affected by negative economic or financial developments in other emerging and developed countries, which in turn may have a material adverse effect on the Argentine economy and, indirectly, on our business, financial condition and results of operations, and the market value of our ADSs and common shares.

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 macroeconomic environment, in which we operate, remains vulnerable, as reflected by the following economic conditions: (i) according to the recent data published by the INDEC in 2021, for the year ended December 31, 2020, Argentina’s real GDP decreased by 9.9% compared to the year ended December 31, 2019; (ii) continued increases in public expenditures have resulted and could continue to result in fiscal deficit and affect economic growth; (iii) inflation remains high and may continue at those levels in the future; (iv) investment as a percentage of GDP remains low to sustain the growth rate of the past decades; (v) 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; (vi) energy or natural gas supply may not be sufficient to supply increased industrial activity (thereby limiting industrial development) and consumption; (vii) unemployment and informal employment remain high; and (viii) the Argentine Government’s economic expectations may not be met and the process of restoring the confidence in the Argentine economy may take longer than anticipated.

 

As in the recent past, Argentina’s economy may be adversely affected if political and social pressures inhibit the implementation by the Argentine Government of policies designed to control inflation, generate growth and enhance consumer and investor confidence, or if policies implemented by the Argentine Government that are designed to achieve these goals are not successful. These events could materially affect our financial condition and operational results or cause the market value of our ADSs and our common shares to decline. Moreover, Argentina’s economic growth was severely impacted as a consequence of the COVID-19 pandemic.

Additionally, the Argentine Peso has been subject to significant devaluation against the U.S. Dollar in the past and may be subject to fluctuations in the future. We cannot predict whether and to what extent the value of the Peso could depreciate or appreciate against the U.S. dollar and the way in which any such fluctuations could affect our business. The value of the Peso compared to other currencies is dependent, in addition to other factors listed above, on the level of international reserves maintained by the Central Bank of the Republic of Argentina (Banco Central de la República Argentina, the “Central Bank” or “BCRA”), which have also shown significant fluctuations in recent years. As of March 31, 2021, the international reserves of the BCRA totaled US$ 39,593 million. According to the exchange rate information published by the Banco de la Nación Argentina, the Argentine Peso depreciated by 40.5% against the U.S. Dollar during the year ended December 31, 2020 (compared to 58.9%, 102.2% and 17.4% in the years ended December 31, 2020, 2019 and 2018, respectively).

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In 2019, as a result of the economic instability and uncertainty, the depreciation of the Argentine Peso and rising inflation rates, the former Argentine administration and the BCRA adopted a series of measures reinstating foreign exchange controls. Following the change in government, the new administration extended the validity of such measures and established further restrictions by means of the enacted Social Solidarity and Productive Reactivation Law, including a new tax on certain transactions involving the purchase of foreign currency by both Argentine individuals and entities. Although the official exchange rate has been practically stable since the adoption of the foreign exchange controls, we cannot assure you that the official exchange rate will not fluctuate significantly in the future. There can be no assurances regarding future modifications to exchange controls. Exchange controls could adversely affect our financial condition or results of operations and our ability to meet our foreign currency obligations and execute our financing plans. For more information, please see “Item 10. Additional Information – Exchange Controls”.

The success of these measures or other measures that the BCRA may implement in the future, are subject to uncertainty and any further depreciation of the Argentine Peso, further inflation or our inability to acquire foreign currency could have a material adverse effect on our financial condition and results of operations. We cannot predict the effectiveness of these measures. We cannot predict whether, and to what extent, the value of the Argentine Peso may depreciate or appreciate against the U.S. dollar or other foreign currencies, and how these uncertainties will affect our businesses. Furthermore, no assurance can be given that, in the future, no additional currency or foreign exchange restrictions or controls will be imposed. Existing and future measures may negatively affect Argentina’s international competitiveness, discouraging foreign investments and lending by foreign investors or increasing foreign capital outflow which could have an adverse effect on economic activity in Argentina, and which in turn could adversely affect our business and results of operations. We cannot predict how these conditions will affect our ability to meet our liabilities denominated in currencies other than the Argentine Peso. Any restrictions on transferring funds abroad imposed by the government could undermine our ability to pay dividends on our ADSs or make payments (of principal or interest) under our outstanding indebtedness in U.S. dollars, as well as to comply with any other obligation denominated in foreign currency.

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.

Economic and political developments in Argentina, and future policies of the Argentine Government may adversely affect the Argentine economy and the sectors in which we perform our activities

 

The Argentine Government has historically exercised significant influence over the economy, and our Company has operated in a highly regulated environment. The Argentine Government may promulgate numerous, far-reaching regulations affecting the economy and energy companies in particular. In the event of any economic, social or political crisis, companies operating in Argentina may face the risk of strikes, expropriation, nationalization, mandatory amendment of existing contracts, and changes in taxation policies, including tax increases and retroactive tax claims. In addition, Argentine courts have sanctioned modifications on rules related to labor matters, requiring companies to assume greater responsibility for the assumption of costs and risks associated with sub-contracted labor and the calculation of salaries, severance payments and social security contributions. Since we operate in a context in which the governing law and applicable regulations change frequently, in part as the result of changes in government administrations, it is difficult to predict if and how our activities will be affected by such changes.

 

We cannot affirm that the Argentine economic, regulatory, social and political framework or the policies or measures that the Argentine Government adopts or may adopt, will not adversely affect the market value of our ADSs, our business, financial condition and/or operational results, and will be successful to correct the energy production sector in Argentina.

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: July, August, September, October, November and December 2020 were 1.9%, 2.7%, 2.8%, 3.8%, 3.2%, 4.0%, respectively, and for January, February and March 2021 were 4.0%, 3.6%, 4.8%, respectively. For more information, please see “—The interruption of the publication of Argentine economic indexes or changes in their calculation methodologies could affect the projections made by the Company” below. The National CPI variation was 36.1% in 2020 and 53.8% in 2019. 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.

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A high inflation rate affects Argentina’s foreign competitiveness by diluting the effects of the Peso depreciation, 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.

 

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 102.2% as compared to the U.S. dollar in 2018, and approximately 58.9% in 2019, and 40.5% in 2020. 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. 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 Controls”.

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 interruption of the publication of Argentine economic indexes or changes in their calculation methodologies could affect the projections made by the Company.

In 2014 the INDEC established a new consumer price index, the CPI, which reflects a broad measurement of consumer prices, considering price information from the 24 provinces of the country, divided into six regions. Faced with the credibility of the CPI, as well as other indices published by the INDEC, being called into question, the Argentine Government declared a state of administrative emergency for the national statistical system and the INDEC on January 8, 2016, based on the 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 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, 2020 was 36.1%.

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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

 

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 in exchange offers in 2005 and again in 2010. Holders of approximately 93% of Argentina’s defaulted debt participated in the exchanges, but a number of bondholders held out from the exchange offers and pursued legal actions against Argentina. The Argentine Government settled several agreements with the defaulted bondholders, ending more than 15 years of litigation. In addition, on August 2020, the Argentine Government successfully negotiated the debt restructuring of Argentine bonds representing approximately US$65 billion owed to several bondholders.

 

As of the date of this annual report, the Argentine Government has initiated negotiations with the IMF in order to renegotiate the principal maturities of the US$ 44.1 billion disbursed between 2018 and 2019 under a Stand By Agreement (“SBA”), originally planned for the years 2021, 2022 and 2023. We cannot assure whether the Argentine Government will be successful in the negotiations with that agency, which could affect its ability to implement reforms and public policies and boost economic growth, nor the impact of the result that renegotiation will have in Argentina’s ability to access international capital markets (and indirectly in our ability to access those markets) to access international capital markets, in the Argentine economy or in our economic and financial situation or in our capacity to extend the maturity dates of our debt or other conditions that could affect our results and operations or businesses.

 

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. 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 capital 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 and cause the market value of our ADSs and our common shares to decline. For more information, please see “Item 10. Additional Information – Exchange Controls”.

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, exchange controls, 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.

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Argentine corporations may be restricted from making payments in foreign currencies or from importing certain products

There are certain restrictions in Argentina that affect corporations’ ability to access the MLC 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 MLC. In such case, the possibility of Argentine corporations to make payments outside Argentina and to comply with their obligations and duties may be affected.

 

In addition, as a result of the deepening of exchange controls, the difference between the official exchange rate, which is currently utilized for both commercial and financial operations, and other informal exchange rates that arose implicitly as a result of certain operations commonly carried out in the capital market (dollar “MEP” or “cash with liquidation”), which increased during 2020, was a gap of approximately 67% as of December 31, 2020. The Argentine Government could maintain a single official exchange rate or create multiple exchange rates for different types of transactions, substantially modifying the applicable exchange rate at which we acquire currency to service our outstanding foreign currency denominated liabilities. 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), to import certain products or goods that we use as inputs, 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 Controls”.

 

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 expenditure, 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 Argentine Government 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.

 

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). 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.

 

A sustained decrease 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.

 

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Failure to adequately address actual and perceived risks of institutional deterioration and corruption may adversely affect Argentina’s economy and financial condition.

A lack of a solid and transparent institutional framework for contracts with the Argentine Government and its agencies and corruption allegations have affected and continue to affect Argentina. Argentina ranked 66 of 180 in the Transparency International’s 2019 Corruption Perceptions Index and 119 of 190 in the World Bank’s Doing Business 2019 report.

As of the date of this annual report, there are various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Argentine Federal Prosecutor, including the largest such investigation, known as Los Cuadernos de las Coimas (the “Notebooks Investigation”) which have negatively impacted the Argentine economy and political environment. Depending on the results of these investigations and how long it takes to finalize them, companies involved in the Notebooks Investigation may be subject to, among other consequences, a decrease in their credit ratings, having claims filed against them by investors in their equity and debt securities, and may further experience restrictions on their access to financing through the capital markets, all of which will likely decrease their income. Additionally, as the criminal cases against the companies involved in the Notebooks Investigation move forward, they may be restricted from rendering services or may face new restrictions due to their customers’ internal policies and procedures. These adverse effects could restrict these companies’ ability to conduct their operating activities and to fulfill their financial obligations. Consequently, the number of suppliers available for our operations may be reduced which could in turn have an adverse effect on our commercial activities and results of operations.

 

Recognizing that the failure to address these issues could increase the risk of political instability, distort decision-making processes and adversely affect Argentina’s international reputation and ability to attract foreign investment, the Argentine Government has announced several measures aimed at strengthening Argentina’s institutions and reducing corruption. These measures include the reduction of criminal sentences in exchange for cooperation with the government in corruption investigations, increased access to public information, the seizing of assets from corrupt officials, increasing the powers of the Anticorruption Office (Oficina Anticorrupción) and submitting a bill for the issuance of a new public ethic law, among others. The government’s ability to implement these initiatives is uncertain as it would be subject to independent review by the judicial branch, as well as legislative support from opposition parties.

 

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+” by S&P and “CCC” by Fitch. On September 28, 2020, risk rating agencies decided to raise Argentina’s long-term sovereign credit rating, as a result of the closing of the debt renegotiation with private creditors and the initiation of the negotiation with the IMF for a new agreement.

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.

The Argentine Government has intervened in the electricity sector in the past, and may continue intervening to adopt, among others, measures in connection with tariffs on public services

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

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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. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.

Over the years, the Argentine Government adopted several measures in connection with tariffs on public services. Currently, the Argentine Government implied a radical change in governmental policies. One of the first measures of the current 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 (this period has been extended by Decree No. 543/2020 and Decree No. 1020/2020 until the RTI process concludes or the transitional tariff increase is put into effect). The Law also enabled the President to intervene in the activities of the regulatory authorities (ENRE and ENARGAS), which occurred in March 2020 by Decrees No. 277/2020 and 278/2020. 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, please See “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.

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.

Developments relating to the 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, causing traffic consequences for many people. Global efforts to stop the virus are also having major economic consequences.

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 (currently extended until December 31, 2021) and established a mandatory quarantine, which was extended several times, affecting our ongoing expansion projects, which were later included as an essential activity. 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”.

To date, the outbreak of the coronavirus has caused significant social and market disruption. 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. Furthermore, the crisis caused by COVID-19 has resulted in a decrease in the demand for crude oil, mainly in the second and third quarters of 2020, since industrial and domestic activity has slowed down in many countries due to control measures. 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.

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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 continue to have a significant adverse effect on the world economy, which will in turn negatively affect Argentina’s economy.

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 has further adversely affected economic growth in Argentina in 2020 and possibly will continue to affect economic growth in 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 Argentine 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 affected and 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, 2020, 46.01% 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.

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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 event occurs 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.

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 results and 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. We are exposed to an exchange rate risk of Peso-denominated trade receivables related to power generation segment’s remuneration scheme established by Resolution SE 31/2020. Additionally, we are exposed to an exchange rate risk of U.S. Dollars-denominated contracts 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. Furthermore, a significant portion of our existing financial indebtedness is denominated in U.S. Dollars. 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 have a material adverse effect on our financial condition and results of operations.

We and our affiliates are involved in various legal proceedings which could result in unfavorable rulings against us

We and our affiliates 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 DCS Software, Inc.(“DCS”). Cybersecurity risks have generally increased in recent years as a result of the proliferation of new technologies and the increased sophistication and activities of cyber-attacks. Through part of our business, we have increasingly connected equipment and systems to the internet. Furthermore, we depend on digital technology, including information systems to process financial and operating data, analyze seismic and drilling information and oil and gas reserves estimates. Due to the critical nature of our infrastructure and the increased accessibility enabled through connection to the internet, we may face a heightened risk of cybersecurity incidents such as computer break-ins, 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 experience disruption of our business operations, fraud, property damage and stolen customer information; substantial loss of revenues, response costs and other financial loss; and increased regulation, litigation and damage to our reputation.

  

In 2020, in response to the COVID-19 lockdown, we implemented several measures to guarantee the continuity of operations and communication, minimizing the limitations of remote working and making our processes more efficient. Additionally, we continued with development of the 2019 plan and given the increase of cyberattacks during the lockdown, the cybersecurity strategy was reinforced and redesigned. In this sense, corporate networks’ access management was strengthened, remote monitoring mechanisms were implemented, and possible impacts and recovery plans for cyberattacks were assessed. Also, work continued to raise all employees’ awareness of cybersecurity risks, focusing on the new remote working modality for the positions allowing it. In addition, during 2020 we implemented the following measures: (i) we executed the multi-year mitigation plan in order to position and maintain our cybersecurity on par with the best practices of the world-class industry; (ii) a cybersecurity monitoring service (SOC) was implemented for both administrative and control environments in order to visualize security events caused by devices or productive services, and thus be able to guarantee that possible security incidents are correctly identified, analyzed, investigated and reported; and (iii) the use of multi-factor authentication was implemented for all users to protect access to data and email accounts.

 

During 2020, we were the target of different fraud attempts but due to implemented infrastructure, user awareness, and the work of the information security team, no attack attempt achieved its objective. Therefore, it is not possible to ensure that we will not incur 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.

 

As part of the mitigation plan, new specialized management functions created a team composed of members from the information security area 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 pretesting 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.

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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.

 

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 to be enough to cover all of the generators and fuel producers’ claims against CAMMESA, CAMMESA’s payable account would grow over time.

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 isolation imposed due to COVID-19, distributors’ and Large Users’ payments have significantly decreased, increasing the share that would have to be covered by the Argentine Government to maintain CAMMESA’s payment rate. In that context, distribution tariffs were not adjusted since 2019 and distributors’ debt with CAMMESA has therefore significantly increased. In order to solve such situation, Law No. 27,591 and Resolution No. 40/2020 defined a scheme according to which the Argentine Government will cover up to 66% of the distributors’ debt to CAMMESA (if the distributor has no debt or it is “reasonable”, then credits will be recognized). 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 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”, “Impact of the COVID-19 outbreak on our Operations and “The Argentine Energy Sector—Electricity Regulatory Framework”.

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

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

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

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

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 their guarantee.

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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 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. Consequently, 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. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.

 

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.

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.

Changes in certain regulations may require the adjustment of the facilities of our power plants that may require new investments or may affect the dispatch of our generators

Certain regulations, particularly those related to the environment (e.g. emissions) and public safety (e.g. public roads and railway crossings), may vary from time to time which may require adjustment and work on our power plants. We cannot assure that these kind of measures or any future measure will not lead to us record lower revenues and operational results as a result of the new investments.

Additionally, 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. On the other hand, the new dispatch scheme established as a consequence of Plan Gas.Ar may also affect the dispatch and variable income of our power plants. This new dispatch scheme divides the dispatch of thermal generators in five categories according to the source of the natural gas supply and modifies the previous cost-based dispatch. Consequently, our power plants dispatch may be affected. We cannot make any assurance that required investments will be made to increase the capacity of the transmission system. 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 our generation business may record lower operating profits than we anticipate and, in turn, such modifications could adversely affect our operational results and financial conditions. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.

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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. 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. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”. As described above, distribution tariffs were not adjusted since 2019 and distributors’ debt with CAMMESA has therefore significantly increased. In order to solve such situation, Law No. 27,591 and Resolution No. 40/2020 defined a scheme according to which the Argentine Government will cover up to 66% of the distributors’ debt to CAMMESA (if the distributor has no debt or it is “reasonable”, then credits will be recognized).

We cannot provide any assurance that the abovementioned measures aimed at reducing the debt of distributors and large users will have a positive effect on CAMMESA’s payments or that any new measures 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 80 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. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”. Moreover, no electricity exports are allowed to private generators, while CAMMESA does export electricity to countries such as Brazil (under certain bilateral agreements), dispatching Argentine private generators.

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. The statute also includes tax and other benefits for new renewable energy projects. As of December 31, 2020, 10% 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.

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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 are unable to purchase gas at prices that are favorable to us, if the supply of gas is reduced or if CAMMESA does 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, WEM supply agreements under SEE Resolution No. 21/16 and SEE Resolution 287/17 also require that the generator covers its fuel supply. Although our generators have recently agreed to assign their natural gas supply to cover such obligations to CAMMESA, such assignment might terminate and, 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. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.

 

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. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.

 

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 or for not having a concession for the use of seawater for the refrigeration of our generation units, which may adversely affect the revenues derived from such contracts or from our generation units

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.; (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; and (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 January 31, 2021. Despite the expiration of the extension it is estimated that it will be re-extended once CAMMESA receives the corresponding instruction from the SE.See “Item 4. Our Generation Business—Renewable Energy”.

 Additionally, in CPB we use seawater to refrigerate the generation units. According to applicable provincial law, such activity requires a concession to be granted by the provincial government. We consulted the regulatory authorities who informed us that, according to their files, no such concession has been granted to us. The penalties for such infringement may vary from the application of a maximum Ps.50,000 fine to the closing of the plant. While we consider 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. 

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. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.

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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 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 mechanism by 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 Argentine Government could mandate the implementation of broad electricity conservation programs, including mandatory reductions in electricity generation or consumption; the Argentine Government could also mandate increased production from thermal plants that use fossil fuels as their generation sources and preserve the available water resources for future electricity generation. Although such a shift in production could benefit our thermal generation plants, it would negatively affect our hydroelectric plants and any mandated reduction in electricity generation or consumption could reduce revenues in our generation business and lead to a decline in our consolidated operational results, which may have a material adverse effect on our financial condition and the market value of our shares and ADSs.

Moreover, in a case where the water level of the dams of our hydroelectric facilities decreases to the minimums established in the applicable concession contract, the local water authority (i.e. the Province of Mendoza and 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.

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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, it 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.

 

We 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 our favor 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 us. 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, we sued the Province of Buenos Aires seeking the creation of the administrative easements in our favor. We have 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, we may be exposed to judicial claims by third parties seeking compensation or damages for which we have not established a provision in our consolidated financial statements. If we were 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.

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

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.

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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 the defects, 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.

We may face competition in the electricity sector and related industries

Numerous strong and capable participants characterize the power generation markets in which we operate, many of which may have extensive and diversified developmental or operating experience and financial resources similar to or significantly greater than ours. An increase in competition could cause reductions in prices and increase acquisition prices for fuel, raw materials and existing assets and, therefore, adversely affect our results of operations and financial condition. We compete with other generation companies for the megawatt of capacity that is allocated through public auction processes. For more information, please see “Item 4. Our Generation Business”.

We and our competitors are connected to the same electrical grid that has limited capacity for transportation, which, under certain circumstances, may reach its capacity limits. Therefore, new generators may connect, or existing generators may increase, their outputs and dispatch more electric power to the same grid that would prevent us from delivering our energy to our customers. In addition, the Argentine Government might not make the necessary investments to increase the system’s capacity. If there is an increase in energy output, it would allow us and existing and new generators to dispatch our energy to the grid and our customers efficiently. As a result, an increase in competition could affect our ability to deliver our product to our customers, which would adversely affect our business, results of operations and financial condition.

Risks arise for our business from technological changes in the energy market

The energy market is subject to far-reaching technological change, both on the generation and demand sides. With respect to energy generation, examples include the development of energy storage devices (battery storage in the megawatt range) or facilities for the temporary storage of power through conversion to gas (so-called “power-to-gas-technology”), the increase in energy supply due to new technological applications such as fracking or the digitalization of generation and distribution networks. New technologies to increase energy efficiency and improve heat insulation, for the direct generation of power at the consumer level, or that will enhance refeeding (for example, by using power storage for renewable generation) may, on the demand side, lead to structural market changes in favor of energy sources with low or zero carbon dioxide emissions or in favor of decentralized power generation, (for instance, via small-scale power plants within or close to residential areas or industrial facilities).

 If our business cannot react to changes caused by new technological developments and the associated changes in market structure, these changes may have an adverse effect on our operational results.

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The national antitrust authorities could decide not to approve the acquisition of the CTEB

On May 29, 2019, the Company, after having made a joint offer, received a notification from IEASA, in which Pampa, through its subsidiary, Pacogen, and YPF, were awarded the National and International Public Bid No. CTEB 02/2019, which was launched through Resolution No. 160/19 of the Secretary of Government of Energy, regarding the sale and transfer by IEASA of the goodwill of the CTEB (the “CTB Transaction”), for which closing was on June 26, 2019. As of the date of this annual report, the CTB Transaction has not been approved by the national antitrust authorities. In the event that the CTB Transaction is not approved, the business, the financial situation and the results of the operations of the Company could be substantially and adversely affected, and the Company could even be forced to reverse and unwind the CTB Transaction and undo all its effects.

If in the future we are not in a position to renew our PPAs or execute new PPAs, or if such PPAs are unilaterally modified or resolved, our results of operations and financial condition could be materially adversely affected

We have executed several energy supply agreements with CAMMESA under SE Resolution No. 220/2007, SEE Resolution No. 21/2016, SEE Resolution 287/17 and Renovar Programs. In 2021, two of these energy supply agreements with CAMMESA will expire: (i) the 10-year term contract for CTP expires in July 2021; and (ii) the 10-year term contract for Central Térmica Loma La Lata (210 MW) expires in November 2021. Consequently, energy not committed under sales contracts with CAMMESA will be remunerated at the Spot market, currently, under SE Resolution No. 31/20. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.

We cannot assure you that we will be in a position to renew our PPAs or execute new PPAs, or that such PPAs will not be unilaterally modified or resolved or that certain other regulations or measures that may be adopted by the Argentine Government in connection with the electricity regulatory framework will not have a material adverse effect on our business, operational results and financial condition.

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 has 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 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. For more information, please see “Item 4. The Argentine Energy Sector—Oil & Gas Regulatory Framework”.

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 crude oil, oil products and natural gas sales. 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. For more information, please see “—Developments relating to the 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”.

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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 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. Additionally, since the effective date of the PEN Executive Order No. 488/20 (Barril Criollo), exports of oil, natural gas and liquefied gas have been exempt from export duties as long as the price of Brent published by the Energy Secretariat at the close of each month was equal to or lower than US$45/bbl. However, the export duty rate was subject to a gradual increase up to 8% as the reference price rose, which rate was to be applied if the price was equal to or higher than US$60/bbl. For more information, please see “Item 4. The Argentine Energy Sector—Oil & Gas Regulatory Framework”.

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 a dispute over 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 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. Currently, since the effective date of Plan Gas.Ar, the awarded bidders will be entitled to preferential rights to export on a firm basis up to a total volume of 11,000,000 m3 per day solely during the non-winter season, which can be exercised both to export natural gas through pipelines and to liquefy the gas locally and then export it as LNG. Firm permits can be obtained for 4 MM m3/d in the Neuquen basin and for 2 MM/d m3 in the Austral basin (with priorities being set according to the position held in the price competition under Plan Gas.Ar).For more information, please see “Item 4. The Argentine Energy Sector—Oil & Gas Regulatory Framework”.

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The Argentine Government measures in connection with export-import 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 could negatively affect our operational results

We have commitments to make certain investments, such as, among others, 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. For more information, please see “Item 4. The Argentine Energy Sector—Oil & Gas Regulatory Framework” and “Our Oil and Gas Business”.

In addition, several external factors may affect or delay our committed investments. Recently, and as a consequence of the forced measures carried out in the province of Neuquén that prevent the normal operation in the fields of the area, there were delays in the operation and drilling of wells by the main natural gas producers of Vaca Muerta and the province, which could imply a delay to complying with such commitments in a timely manner, which could materially adversely affect our financial condition and results of operations.

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

 

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

 

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. The Gas Plan I and the Gas Plan II of Pampa finished on December 31, 2017 and June 31, 2018 respectively. For more information, please see “Item 4. The Argentine Energy Sector—Oil & Gas Regulatory Framework”.

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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, 2020 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.

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 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.

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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. For example, in 2020, Decree No. 488/2020 (Barril Criollo) set forth that the barrel price of any crude oil deliveries made in the local market up to December 31, 2020 had to be invoiced by producers and paid by refiners and traders, using the price of US$ 45/bbl as a reference for Medanito crude oil. August 28, 2020 was the tenth consecutive day when Brent average price exceeded US$ 45/bbl, and as a result the decree ceased to be effective on that date. For more information, please see “Item 4. The Argentine Energy Sector—Oil & Gas Regulatory Framework”.

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

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.

 

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 the Ministerio 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.

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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 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.

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 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%.

Within the framework of the Electricity Rate Schedules Maintenance Agreement, in 2020, Edenor made different presentations to the ENRE with the estimates of the electricity rate schedules that were to be applied during 2020, according to the terms of the Electricity Rate Schedules Maintenance Agreement entered between the Company and the Federal Government. However, the ENRE has instructed Edenor to not apply the rates, in accordance with the Social Solidarity Productive Reactivation Law. Additionally, the freeze on electricity rates was extended until the new transitional electricity rate schedules resulting from the Transitional Tariff System come into effect.

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 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.

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In the past 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. 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. See “Item 4. Our Distribution of Energy Business—Empresa Distribuidora y Comercializadora Norte S.A. (Edenor) —Fines and Penalties”.

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. Energy losses in our distribution business amounted to 19.6% in 2020, 19.9% in 2019 and 18.2% in 2018. For more information, please see Item 4. Our Distribution of Energy Business—Empresa Distribuidora y Comercializadora Norte S.A. (Edenor). 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 Edenor cannot comply with certain obligations under the Edenor’s Concession Agreement and the provisions of the Adjustment Agreement. For more information, please see Item 4. Our Distribution of Energy Business—Empresa Distribuidora y Comercializadora Norte S.A. (Edenor).

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. 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.

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

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

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, on behalf of the Federal Government, Edenor entered into the Agreement on the Regularization of Obligations (the “Agreement on the Regularization of Obligations”) with the Energy Government Secretariat. Pursuant to this agreement, the parties agreed to end pending reciprocal claims during the 2006-2016 transitional period. 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 the Social Solidarity and Productive 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 Argentine Executive Power on September 19, 2019 (the “Electricity Rate Schedules Maintenance Agreement”) and (iii) the prevailing macroeconomic situation, aggravated by the recent effects of COVID-19 outbreak (For more information, please see (“—Developments relating to the 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 partially postponed payments to CAMMESA regarding maturities taking place in March 2020. Edenor will not have the ability to raise the funds necessary to repay its commercial debt with CAMMESA.

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

As of the date of this annual report, US$ 98 million of Edenor’s financial debt was represented by its Senior Notes due 2022. Under the indenture for the Senior Notes due 2022, certain expropriation and condemnation events with respect to Edenor may constitute an event of default, which if declared could trigger the acceleration of Edenor’s obligations under the notes and require Edenor to immediately repay all such accelerated debt. In addition, all of Edenor’s outstanding financial indebtedness contains certain events of default related to bankruptcy and voluntary reorganization proceedings (concurso preventivo). If Edenor is not able to comply with certain payment obligations as a result of its current financial situation, and if the requirements set forth in the Argentine Bankruptcy Law No. 24,522 are met, any creditor, or even Edenor, could file for its bankruptcy, or Edenor could file for voluntary concurso 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.

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.

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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.

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 solely 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 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 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 previously existed could, if reinstated, impair or prevent the conversion of dividends, distributions, or the proceeds from any sale of shares, as the case may be, from Pesos into U.S. Dollars and the remittance of such U.S. Dollars abroad. Also, certain of our indebtedness includes covenants limiting the payment of dividends. We cannot assure you that the Argentine Government will not take similar measures in the future. In such a case, the depositary for the ADSs may hold the Pesos it cannot otherwise convert for the account of the ADS holders who have not been paid. In addition, any future adoption by the Argentine Government of restrictions on the movement of capital out of Argentina may affect the ability of our foreign shareholders and holders of ADSs to obtain the full value of their shares and ADSs and may adversely affect the market value of our shares and ADSs.

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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 bylaws 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 bylaws 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.

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 bylaws may be held jointly and severally liable for damages to us or to other third parties, including other shareholders.

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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 of control of our Company, such as the requirement, upon the acquisition of a controlling interest in our capital stock, to launch a mandatory tender offer to acquire all our voting stock and any securities convertible into, or entitling the holder thereof to subscribe for or acquire, any voting shares in our capital stock. These provisions may delay, defer or prevent a transaction or a change of 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.

There can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could subject U.S. holders of our shares or ADSs to adverse U.S. federal income tax consequences.

A non-U.S. corporation will be a PFIC, if, in any particular year, either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the quarterly average value of its assets is attributable to assets that produce or are held for the production of passive income (the “asset test”). Because the PFIC tests must be applied each year, and the composition of our income and assets and the value of our assets may change, it is possible that we may be a PFIC in the current or a future year. In particular, because the value of our assets may be determined for purposes of these tests by reference to the market price of our common shares or ADSs, fluctuations in the market price of our common shares or ADSs may cause us to become a PFIC.

If we are a PFIC in any taxable year, a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) may incur significantly increased U.S. federal income tax on gain recognized on the sale or other disposition of our common shares or ADSs and on the receipt of distributions on our common shares or ADSs to the extent such gain or distribution is treated as an “excess distribution” under the relevant U.S. federal income tax rules, and such U.S. Holder may be subject to burdensome reporting requirements. Further, if we are a PFIC for any year during which a U.S. Holder holds our common shares or ADSs, we will generally continue to be treated as a PFIC for all subsequent years during which such U.S. Holder holds our common shares or ADSs, unless we cease to be a PFIC and the U.S. Holder makes a special “purging” election on IRS Form 8621.

See “Item 10. Additional Information—Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules” for more details.

 

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Item 4.Information on the Company

HISTORY AND DEVELOPMENT OF THE COMPANY

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

Since the Acquisition, we started a corporate reorganization process and have merged certain subsidiaries into Pampa, including, among others, Petrobras Argentina, Petrolera Pampa, CTG and CTLL, by way of absorption, with Pampa as the surviving company. In 2019, the Board of Directors approved the merger between Pampa as the surviving company, and PEFM, as the merged company, as from July 1, 2019. On October 15, 2019 and February 19, 2020, the respective Shareholders’ Meetings approved the merger and the CNV granted its administrative consent, respectively. As of the date of this annual report, the approval by the IGJ is still pending; this proceeding was affected by the impediments inherent in the functioning of enforcement agencies during the COVID-19 pandemic.

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 energy integrated company in Argentina, participating in the electricity and the gas value chains. As of December 31, 2020, we and our subsidiaries are engaged in the generation, distribution and transmission of electricity, oil and gas exploration and production, petrochemicals, hydrocarbon commercialization and transportation, and oil refining and distribution (for more information, please see Note 5.2 to the Consolidated Financial Statements):

 

Note: Includes 280 MW at CTEB and 15 MW at CTLL. 2. Includes PEMC. 3. Discontinued operation. 4. 2020 average production of blocks in Argentina.

 

·Generation. Our generation installed capacity reached approximately 4,955 MW as of December 31, 2020, 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 295 MW (see “—Our Generation Business—Summary of the committed expansion projects”), which would bring our total installed capacity to 5,250 MW.

 

As of December 31, 2020, we are engaged in the generation business through:

oCentral Térmica Genelba (“CTGEBA”), thermal generation plant located at the central node of the Argentine electricity grid, in Marcos Paz, in the western part of the Greater Buenos Aires area, comprised of two combined cycle gas-fired generating units, one with a 684 MW power capacity which consists of two gas turbines of 223 MW each and a 239 MW steam turbine, repowered in October 2020. The second combined cycle consists of a gas turbine with a 182 MW power capacity, known as Genelba Plus, installed in 2009 and repowered in June 2019, another gas turbine of 188 MW installed in 2019, and the 199 MW steam turbine incorporated on July 2, 2020, completing Genelba Plus’s expansion project started in 2017. CTGEBA is the largest thermal generation plant in Argentina, with an installed capacity of 1,253 MW, which represents 3% of Argentina’s installed capacity;

 

oCentral Térmica Loma de La Lata (“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, which represents 1.8% of Argentina’s installed capacity. The committed expansion projects include the incorporation of two engines into CTLL, which will increase its installed capacity by 15 MW, estimated for the second quarter of 2021;
oCentral Piedra Buena (“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, which represents 1.5% of Argentina’s installed capacity. The boilers can be fed either with fuel oil or natural gas, which is supplied through a proprietary 22 km gas pipeline operated and maintained by CPB and connecting with TGS’s main gas pipeline system. Furthermore, CPB has two tanks for the storage of fuel oil with a combined capacity of 60,000 m3;

 

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oCentral Térmica Ingeniero White (“CTIW”), a thermal gas or fuel oil-fired generation plant consists of 6 dual-fuel (natural gas or fuel oil) Wärtsilä engines located in Ingeniero White, Bahía Blanca, in the Province of Buenos Aires, with an installed capacity of 100 MW, which represents 0.2% of Argentina’s installed capacity. The engines are high efficiency, with a 46% performance rate. The plant is interconnected to the 132 kV grid through Transba substation. Liquid fuel is supplied using CPB’s unloading and storage facilities, and natural gas is also provided through CPB’s internal facilities;
oCentral Térmica Güemes (“CTG”), a thermal gas-fired generation plant located in General Güemes, in the Province of Salta, comprised of a 261 MW open cycle thermal power generation plant, and with the addition in September 2008 of a natural gas-fired turbo generator unit of 100 MW, totaling an installed capacity of 361 MW, which represents 0.9% of Argentina’s installed capacity;
oCentral Térmica Piquirenda (“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, which represents 0.1% of Argentina’s installed capacity;
oCentral Térmica Parque Pilar (“CTPP”), a thermal power generation plant at Pilar Industrial Complex, located in Pilar in the northern greater Buenos Aires area, which comprises six Wärtsilä motor generators (Wärtsilä W18V50DF) with an installed capacity of 100 MW, which represents 0.2% of Argentina’s installed capacity, and which may consume either fuel oil stored in own tanks or natural gas supplied through a dedicated gas pipeline which is connected with Transportadora de Gas del Norte S.A.’s main gas pipeline, whereas the energy is evacuated through a 132 kV line connected to the Pilar substation owned by Edenor;

 

oCentral Térmica Ensenada Barragán (“CTEB”), a thermal gas-fired generation plant located in the petrochemical complex of the City of Ensenada, Greater La Plata, Province of Buenos Aires, with an installed capacity of 567 MW, which represents 1.4% of Argentina’s installed capacity, and which is owned by CTB, an affiliate that we co-control with YPF. The committed expansion projects include the closing to combined cycle with the incorporation of a 280 MW Siemens steam turbine, estimated for the second quarter of 2022;

 

oCentral de Co-Generación EcoEnergía (“EcoEnergía”), a cogeneration thermal power plant with 14 MW of installed capacity, which represents 0.03% of Argentina’s installed capacity, located in Bahía Blanca, in the Province of Buenos Aires;
oHidroeléctrica Los Nihuiles and Hidroeléctrica Diamante, two hydroelectric power generation systems located in the Province of Mendoza, with an aggregate installed capacity of 653 MW, which represents 1.5% of Argentina’s installed capacity, through our subsidiaries HINISA and HIDISA. HINISA holds 4.6% interests in both Termoeléctrica José de San Martín S.A. and Termoeléctrica Manuel Belgrano S.A., and HIDISA holds 2.4% in each entity;
oHidroeléctrica Pichi Picún Leufu (“HPPL”), which has three electricity generating units with an installed capacity of 285 MW, which represents 0.7% of Argentina’s installed capacity, and is located in the Comahue region, in the Province of Neuquén;
oParque Eólico Ingeniero Mario Cebreiro (“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, whose only asset is PEMC. The wind farm is made up of 29 V-126 Vestas wind turbines, each with a 3.45 MW power capacity and an 87-meter hub height. PEMC has a capacity of 100 MW, which represents 0.2% of Argentina’s installed capacity;
oParque Eólico Pampa Energía (“PEPE II”), is our second wind farm located in the City of Bahía Blanca, Province of Buenos Aires, which was commissioned on May 10, 2019. It is made up of 14 V-136 Vestas wind turbines, each with a 3.8 MW power capacity and a 120-meter hub height. PEPE II contributes 53 MW of renewable energy to the national grid, which represents 0.1% of Argentina’s installed capacity; and
oParque Eólico Pampa Energía (“PEPE III”), PEPE II’s twin wind farm, is our third wind farm located in Coronel Rosales, on national route No. 3, 45 km from the City of Bahía Blanca, Province of Buenos Aires, which was also commissioned on May 10, 2019. PEPE III contributes 53 MW of renewable energy to the national grid, which represents 0.1% of Argentina’s installed capacity.
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Our generation business segment recorded US$559 million in revenue and an operating income of US$241 million for the year ended December 31, 2020.

·Distribution of Energy. We are engaged in the electricity distribution business through our subsidiary Edenor, that serves approximately 3.2 million customers, throughout an area of approximately 4,637 square kilometers comprised by the northern and northwestern metropolitan area of Buenos Aires on an exclusive basis. On December 28, 2020, we entered into a binding stock purchase agreement for the sale of our controlling interest in Edenor. See “Relevant Events—Sale of Controlling Stake in Edenor.”

As a result of the strategic divestment mentioned above, the distribution of our energy segment was classified as a discontinued operation as of December 31, 2020, and for the comparative period 2019. Our distribution of energy business segment recorded US$1,085 million in revenue from discontinued operations and an operating loss from discontinued operations of US$619 million for the year ended December 31, 2020.

·Oil and Gas. We are engaged in the oil and gas business through direct interests in oil and gas blocks in Argentina:

 

oAs of December 31, 2020, our combined crude oil and natural gas proved reserves amounted to approximately 142 million barrels of oil equivalent, 49% of which were proved developed reserves. Natural gas accounted for approximately 90% of our combined proved reserves and liquid hydrocarbons for 10%;

 

oAs of December 31, 2020, our combined oil and gas production in Argentina averaged 45.0 thousand barrels of oil equivalent per day, with operations in 13 production blocks, 5 exploratory blocks, and 858 productive wells. Crude oil accounted for approximately 4.4 thousand barrels of oil equivalent per day, while natural gas accounted for approximately 244 million standard cubic feet per day, or 40.6 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

 

oIn addition, we have (i) a direct 2.1% interest in 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 and Luján de Cuyo distilleries, all located in the pipeline’s area of influence; (ii) investments in OCP; and (iii) minority interests in four productive blocks in Venezuela, through class B shares in mixed-capital companies (Empresas Mixtas), corporations whose majority shareholder is a subsidiary of PDVSA, Corporación Venezolana de Petróleo S.A., which owns Class A shares in these mixed-capital companies and is controlled by the Bolivarian Republic of Venezuela. With respect to our minority interests in Venezuela, we have expressed to 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 Corporación Venezolana de Petróleo S.A.

 

Our oil and gas business segment recorded US$ 294 million in revenue and an operating loss of US$ 32 million for the year ended December 31, 2020.

 

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·Petrochemicals. We are engaged in the petrochemicals business through three plants that are entirely based in Argentina and produce styrene, styrene butadiene rubber (SBR) and polystyrene, with a domestic market share that ranged between 85% and 98% as of December 31, 2020. The petrochemicals division has the following assets:

 

oan 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 (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
oa 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$265 million in revenue and an operating profit of US$6 million for the year ended December 31, 2020.

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

 

oPHA SAU (“PHA”) (currently in a process of merger by absorption with Pampa as the continuing entity) owns 40% of Compañía de Inversiones de Energía S.A (“CIESA”), which in turn owns 51% of Transportadora de Gas del Sur S.A (“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 0.2% of TGS. Additionally, our wholly-owned subsidiary Pampa Comercializadora S.A. has a direct interest of 1.25% in TGS. As a result, as of December 31, 2020, we have a direct and indirect interest of 27.7% in TGS;
oWe hold a 50% interest in Compañía Inversora en Transmisión Eléctrica Citelec S.A. (“Citelec”), which holds 52.65% of the shares and votes in Compañía de Transporte de Energía Eléctrica en Alta Tensión Transener S.A. (“Transener”). As a result, we have an indirect interest of 26.33% in Transener. Additionally, Transener holds a 100% interest in Empresa de Transporte de Energía Eléctrica por Distribución Troncal de la Provincia de Buenos Aires Transba S.A. As of December 31, 2020, our electricity transmission operations covered 21,092 kilometers of high voltage transmission lines, representing approximately 85% of the high voltage system in Argentina;

oWe participate in the refining and distribution operations through our participation of 28.5% interest in Refinería del Norte S.A. (“Refinor”), which owns a refinery located at Campo Durán in the Province of Salta with an installed capacity of 25,800 oil barrels per day. As of December 31, 2020, Refinor has a commercial network of 91 gas stations located in Argentina.; and

oWe hold 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 holding and other business segment recorded US$20 million in revenue and an operating profit of US$28 million for the year ended December 31, 2020.

 

Relevant Events

Corporate Reorganization Process

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Merger of Pampa and CPB

 

On March 9, 2020, the board of directors of Pampa and CPB approved the merger between Pampa as the surviving company, and CPB, as the merged company, as from January 1, 2020. This merger was later approved by Pampa’s and CPB’s Extraordinary General Shareholders’ Meetings held on May 11, 2020. 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; this proceeding was affected by the impediments inherent in the functioning of enforcement agencies during the COVID-19 pandemic.

 

Merger of Pampa, Pampa Cogeneración and PHA

 

On June 19, 2020, the board of directors of Pampa, Pampa Cogeneración and PHA approved the merger between Pampa as the surviving company, and Pampa Cogeneración and PHA, as the merged company, as from April 1, 2020. This merger was later approved by Pampa’s, Pampa Cogeneración’s and PHA’s Extraordinary General Shareholders’ Meetings held on August 7, 2020. As of the date of this annual report, the approval by the IGJ is still pending; this proceeding was affected by the impediments inherent in the functioning of enforcement agencies during the COVID-19 pandemic.

 

 

Merger of Pampa, Transelec Argentina S.A., Pampa Participaciones S.A.U., Pampa Holding MMM S.A.U., Pampa DM Ventures S.A.U., Pampa FPK S.A.U. and Pampa QRP S.A.U.

 

On December 28, 2020, Pampa’s Board of Directors approved a corporate reorganization consisting of the merger by absorption between Pampa, as the absorbing company, and Transelec Argentina S.A., Pampa Participaciones S.A.U., Pampa Holding MMM S.A.U., Pampa DM Ventures S.A.U., Pampa FPK S.A.U. and Pampa QRP S.A.U., as absorbed companies, as from October 1, 2020 (the “Merger”). The Merger was subsequently approved by Pampa’s Ordinary and Extraordinary General Shareholders’ Meeting held on February 17, 2021. As of the date of this annual report, the registration with the public registry is still pending.

 

Generation

Commissioning of Genelba Plus’s closing to CC

 

As of July 2, 2020, CAMMESA granted the commercial clearance to the second ST (GEBATV02) at CTGEBA for a gross installed capacity of 199 MW. This commissioning marked the beginning of operations of CTGEBA’s second CC, a project in which Pampa disbursed approximately US$320 million to add 400 MW, 9% lower than the amount budgeted, and employed an average of 1,500 people during 30.5 months of works. With the completion of the expansion project, CTGEBA’s total installed capacity amounts to 1,253 MW, making it the CT with the largest power capacity in the country, with an outstanding efficiency of 55% on average and capacity to supply electricity to 2.5 million households in the Buenos Aires metro area.

 

It is worth highlighting that despite COVID-19, Pampa managed to fulfill the commitments undertaken with CAMMESA under the PPA executed pursuant to the call for tenders under SEE Res. No. 287/17.

 

In line with the Company’s strategy to develop its core businesses, this milestone adds to Pampa’s efforts over the last 12 years to increase the power generation infrastructure, which involved investments for more than US$1,500 million, hence becoming Argentina’s largest independent power producer, and operating a total 4,955 MW of installed capacity, which represents 12% of the national grid.

 

Updates to the remuneration scheme for capacity not covered by contracts

 

On February 27, 2020, SE Res. No. 31/20 was published in the BO, which modified certain aspects of the remuneration scheme set forth by SRRYME Res. No. 1/19, effective as from February 1, 2020. The new Res. converted the entire remuneration scheme to the local currency at an exchange rate of AR$60/US$, and established an update factor as from the second month of its application pursuant to a formula consisting of 60% CPI and 40% IPIM. Moreover, it modified power capacity payments and incorporated an additional monthly remuneration in the HMRT.

 

Subsequently, through SE Note NO-2020-24910606-APN-SE#MDP dated April 8, 2020, the SE instructed CAMMESA to postpone until further decision the application of the update factor. Moreover, the power capacity base price for internal combustion engines with a capacity lower than or equal to 42 MW was set at AR$312,000/MW-month. As of the date hereof, the Company has not been notified of any update.

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Assignment of fuel supply agreements for thermal power generators

 

The MDP Resolution No. 12/19, effective as from December 30, 2019, restored the centralization in CAMMESA of fuel procurement, a measure that does not cover generators with Energía Plus contracts and under SEE Res. No. 287/17.

 

Subsequently, within the framework of Plan Gas.Ar, SE Res. No. 354/20 defined the priority use of firm volumes of natural gas from different origins (Bolivian gas, Plan Gas.Ar contracts with producers, etc.) to be acquired by CAMMESA. Based on this framework, a unified dispatch scheme by CAMMESA was fixed and a priority dispatch order based on natural gas was assigned.

 

Generators under Energía Plus and PPA with CAMMESA have the option to adhere to the unified dispatch scheme and have CAMMESA provide the natural gas for the coverage of their obligations. To such effect they must maintain the necessary natural gas transportation capacity and waive their right to file claims by the SE Res. No. 354/20. Pampa endorsed contracts with CAMMESA and adhered to said unified dispatch and relinquished the operation of subscribed gas and transportation contracts. As of the date hereof, the Company has not entered into the addendum to the PPA of the CC of CTGEBA reflecting this new supply scheme.

 

Repairs at PEPEs II and III

 

After the commissioning of PEPE II and PEPE III wind farms, certain defects were found in the blades of some wind turbines, which resulted in their outages for their subsequent repair and/or replacement. As a consequence, the generation capacity of the wind farms has been partially reduced.

 

The Company submitted the corresponding claims to the wind turbines supplier Vestas and the insurance company in order to move forward with repairs and cover the incurred damages. In this sense, the Company and the supplier have performed tasks for their progressive repair. PEPE II recovered 100% of its generation capacity at the end of July 2020 and PEPE III recovered 100% of its generation capacity in October 2020. The economic impact resulting from the reduced production was immaterial, as it was covered by Vestas and the insurance company’s guarantees.

 

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Oil and Gas

Gas Plan

 

Plan Gas.Ar

 

Pursuant to DNU No. 892/20, on November 16, 2020 the Plan Gas.Ar program was created with the purpose of promoting the production of Argentine natural gas, reducing and substituting LNG and liquid fuels imports, providing supply chain predictability, and managing the impact of gas's cost on the tariff of the Priority Demand. The term for onshore production has 4 years, with an additional 4 years for offshore production, calculated as from January 2021. Beneficiaries of the Unconventional Plan Gas opting to participate in this program must have previously filed their waiver.

 

The SE instrumented a tender between producers as sellers, and CAMMESA, natural gas distributors and IEASA as purchasers, for a total base volume of 70 million m3/day, extendable for the winter period (May – September), with 100% daily DoP and 75% monthly ToP condition for CAMMESA and quarterly for gas distributors and IEASA. The DoP constitutes 70% of the awardees’ production commitment.

The maximum base price was set at US$3.7/MBTU. A 0.82 factor will adjust the award price for the non-winter period, 1.25 for the winter period, and 1.30 for the additional volume during winter. The purchasers, CAMMESA and IEASA, will pay the price awarded in the tender. In contrast, gas distributors will pay the price from the tariff scheme in force, and the Federal Government will offset the balance of the awarded price.

On December 15 and 29, 2020, the SE awarded 67.4 million m3/day of natural gas (55% destined to power plants) at an average annual base price of US$3.5/MBTU and an additional volume during the winter period of 3.6 million m3/day at US$4.7/MBTU. Pampa was awarded a base volume of 4.9 million m3/day at US$3.6 per million BTU and an additional 1.0 million m3/day volume during the winter period at US$4.7 per million BTU.

Finally, on February 22, 2021, pursuant to Resolution No. 129/2021, the SE called for a second round to award additional winter gas volumes in the Neuquina and the Austral Basins, with a daily growing DoP and a monthly 100% ToP. The first round awardees may tender up to a maximum price equivalent to the price awarded in the first round (according to SE Res. No. 169/21, a total amount of 3.3 million m3/day at US$4.7/MBTU). Pampa participated in this round and tendered 0.8 million m3/day at US$4.7/MBTU. Additionally, the awarded companies will enter into a contract with IEASA.

 

Natural gas for power generation

 

CAMMESA has launched successive tenders to cover its monthly consumption. On December 27, 2019, it launched a tender for January 2020 on an interruptible basis, at an average PIST price of US$1.73/MBTU in the Neuquina Basin. However, from February to December 2020 it tendered the gas on a partially firm basis, with a 30% DoP, resulting in an average PIST price of US$2.24/MBTU for the Neuquina Basin. Pampa participated in these tenders.

 

As from 2021, Pampa’s gas supply to CAMMESA is mostly made through Plan Gas.Ar, on account of the amounts committed under this program for a term of 4 years. SE Res. No. 354/20 published December 2, 2020, established new reference prices in the PIST for natural gas that is not comprised under Plan Gas.Ar, which is US$2.30/MBTU in summer (October – April) and US$3.50/MBTU in winter (May – September) for the Neuquina Basin.

 

However, as the awarded volume did not meet the total demand for power plants, on December 22, 2020, and January 27 and February 24, 2021, CAMMESA launched tenders for gas consumptions in the months of January, February and March 2021, respectively. The resulting average price at wellhead was US$2.30/MBTU in all three months for the Neuquina Basin. For awardees under Plan Gas.Ar, including Pampa, the tender was under an interruptible condition, whereas for the rest it has a 30% DoP. Pampa participated in these tenders.

 

Natural gas for gas distribution companies

 

On March 31, 2020 the supply agreements executed between gas producers (including Pampa) and gas distribution companies under the tenders launched in the MEGSA on February 14 and 15, 2019, expired. However, the SE issued several notes providing for the extension of such agreements until the entry into effect of the supply agreements to be executed within the framework of Plan Gas.Ar (SE NO-2020-25148550, NO-2020-39414272 and NO-2020-85912917).

 

As of the date hereof, the Company has not been served any administrative notice. However, Pampa has decided to sell gas at spot prices to certain distribution utilities. Moreover, since April 2020 the Company has received letters from certain gas distribution companies informing us of the partial payment of invoices, alleging the effects of the lockdown and the impossibility to disconnect service to certain users in case of nonpayment. Even though in 2020 sales to gas distribution companies represented less than 3% of the total segment, as of the date hereof the Company is assessing the courses of action to take and has reserved all rights under the agreements.

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Beginning 2021, Pampa was granted awards under Plan Gas.Ar, agreeing to supply fixed amounts to gas distributors and IEASA for a term of 4 years. Additionally, distributors must deposit into a bank account the amounts payable for the gas within the PIST in order to ensure payment compliance. Moreover, SE Res. No. 117/21, published on February 18, 2021, called for a public hearing on March 15, 2021, to discuss Plan Gas.Ar’s shares in the natural gas price at the PIST to be borne by the Federal Government.

 

Additionally, with regard to the difference in exchange rate between the price of gas purchased by distributors and the price recognized in final tariffs, in November 2018, PEN Executive Order No. 1053/18 was passed, which established, on an exceptional basis, that the Federal Government would bear such difference for the April 2018 – March 2019 period, in 30 monthly consecutive installments payable as from October 2019. In November 2019, ENARGAS issued Res. No. 735/19 approving the payment to producers and IEASA through gas distribution companies for a total AR$24,525 million, AR$1,219 million of which corresponded to Pampa; the Company only collected the first installment, in the amount AR$41 million, at the end of December 2019, and the remaining 29 installments plus updates are still pending. However, on December 14, 2020 Law No. 27,591 was published, which abrogated PEN Executive Order No. 1053/18. However, the Company is currently evaluating the courses of action to take, as this abrogation does not affect the rights to collect the amount owed that was undertaken by the Federal Government.

 

Gas export

 

In September 2019, the Company obtained a permit to export gas on a firm basis to Refinerías ENAP in Chile, for a maximum volume of 0.6 million m3/day or a total of 137 million m3 at a price of US$3.1/MBTU, net of export duties and transportation costs, effective until May 15, 2020.

 

In November 2020, the Company obtained new permits to export gas to several customers in Chile, on an interruptible basis, for a maximum volume of 4.4 million m3/day, at prices ranging between US$1.37 and 4.02/MBTU, net of export duties and transportation costs. Maturities operate between April 2021 and January 2022.

 

Furthermore, as an awardee under Plan Gas.Ar, Pampa has preferential access to exports in firm basis during the off-peak period, extendable to the winter period if there is an oversupply in a specific basin, with the prior approval of the applicable authority. It should be clarified that natural gas is subject to an export duty rate which, as of the date hereof, amounts to 8%.

 

If higher costs are incurred as a result of the use of alternative fuels for power companies (imported LNG, coal, FO or GO), it was determined that producers having made exports between September 15, 2019 and May 15, 2020 should pay a compensation to CAMMESA on account of such costs (SGE Res. No. 506/19).

 

Los Blancos new exploitation concession and relinquishment of the remaining area of the Chirete block

 

On October 15, 2020, the Province of Salta issued Executive Order No. 662/20, granting the Company and High Luck Group Limited an exploitation concession over Los Blancos block for a 95 km2 area and a term of 25 years as from its publication date, relinquishing the exploration permit for the 801 km2 remaining area of the Chirete block. Additionally, an investment plan was established for a total amount of US$57 million for the 2020 – 2024 five-year period.

 

Strategic Divestments

Sale of Controlling Stake in Edenor

 

On December 28, 2020, Pampa entered into a binding stock purchase agreement with Empresa de Energía del Cono Sur S.A. (“Cono Sur”), as purchaser, and Integra Capital S.A., Messrs. Daniel Eduardo Vila, Mauricio Filiberti and José Luis Manzano, for the sale of Pampa’s controlling interest in Edenor. The agreement consists of a transfer of Pampa’s total Class A shares, which represent 51% of the capital stock and voting rights of Edenor, pursuant to certain conditions precedent, including but not limited to the approval by Pampa’s shareholders’ meeting and the ENRE (the “Transaction”). The Transaction does not include the transfer of Pampa’s current Class B shares of Edenor. The closing of the Transaction is subject to compliance with certain customary closing conditions and was approved at Pampa’s Ordinary and Extraordinary General Shareholders’ Meeting held on February 17, 2021. At the closing of the Transaction, the change of control of Edenor will trigger, under certain circumstances, an obligation to make payments to certain of Edenor’s executive officers, including in connection with the termination of their employment. As of the date of this annual report, the Transaction is pending approval from the ENRE.

 

Upon the closing of the Transaction, Cono Sur will be required under Argentine securities law to conduct a mandatory tender offer open to all holders of common shares issued by Edenor, including holders of ADSs in respect of the underlying Class B common shares. In connection with the Transaction, if certain conditions are met, Pampa may be required to enter into a purchase and sale agreement with Cono Sur to purchase a portion of the Edenor Class B shares acquired by Cono Sur in the mandatory tender offer, at the same price per share acquired by Cono Sur. We cannot provide any assurance that such conditions will be satisfied or that such purchase and sale agreement in respect of the Class B shares will be executed or that any Class B shares will be purchased by Pampa.

 

The agreed purchase price consisted of (i) 21,876,856 Class B shares of Edenor, representing 2.41% of the capital stock and voting rights of Edenor; (ii) US$95 million; and (iii) a contingent payment in case of change of control of Cono Sur or Edenor during the first year after the closing of the Transaction or as long as the balance of the price is pending settlement for 50% of the profits generated.

 

The purchase price will be paid in three installments: (i) 21,876,856 Class B shares of Edenor and US$5 million, which was collected on the execution date of the agreement; (ii) US$50 million upon the closing of the Transaction, subject to the fulfillment of the conditions precedent; and (iii) US$40 million one year after the closing of the deal, except in cases of offsetting or prepayment in advance. Such balance of the price will accrue a nominal annual fixed interest rate of 10% as from the closing of the Transaction, payable quarterly.

 

Within the previously described framework and pursuant to IFRS, Pampa has reflected in its Consolidated Financial Statements an accounting impairment of US$382 million for the assets associated with its stake in Edenor, which is disclosed under discontinued operations. Moreover, as the closing of the Transaction has still not taken place, the economic result will be disclosed in our financial statements after the sale’s closing.

 

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The sale of our stake in Edenor is part of our strategic investment plan to focus on our core businesses, i.e. continuing the expansion of our power generation installed capacity and developing unconventional natural gas reserves, and in particular making the necessary investments in order to achieve excess production committed under the Plan Gas.Ar and the closing of the CTEB Combined Cycle.

 

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. 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, mainly: (i) imposition of a nation-wide mandatory lockdown, where exceptionally essential transit is permitted (“Aislamiento, Social, Preventivo y Obligatorio”) (“ASPO”), which was later superseded by a “Distanciamiento Social, Preventivo y Obligatorio”, extended on several occasions until April 30, 2021, for all people who reside or transit in urban areas and in the Argentine provinces that do not have sustained community transmission of the virus and satisfy the corresponding epidemiological and sanitary parameters; (ii) closure of activities with large crowds; (iii) prohibition of audience attendance at sporting events; (iv) stricter surveillance of Argentine borders; (v) in-person classes at schools and universities shut down (which remain open for food aid and administrative purposes); (vi) closure of Argentine borders; (vii) recognition of COVID-19 as an occupational disease; (viii) increasing the budget allocation for supporting health systems; and (ix) a vaccination campaign; among others.

 

Simultaneously, the Argentine Government has announced and is implementing several stimulus measures to limit the effects of the COVID-19 outbreak on the economy, including the following: (1) extraordinary cash payments to recipients of the universal child allowance, retirees receiving minimum benefits and health workers; (2) a cash payment to unemployed individuals and individuals employed informally, among other socially vulnerable individuals (IFE); (3) an increase in the budget allocation for critical areas; (4) extension of suspension of the following services upon certain beneficiaries who fail to pay less than six consecutive invoices: 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); (5) the suspension of certain penalties and disqualifications applicable to checking accounts with insufficient funds; (6) extension of the price freezes as of March 6, 2020, for certain essential goods such as food, personal care, medication and medical products; (7) lease prices freeze and evictions suspension; (8) creation of the ATP Program for employers and workers, which consists mainly in the postponement or reduction of up to 95% of the payment of social contributions, credits at a 0% rate for monotributistas and self-employed, a complementary salary for workers dependent on the private sector (50% by the Argentine Government), as well as a comprehensive system of unemployment benefits; (9) prohibition against dismissing employees without cause and against dismissing or suspending employees due to work slowdowns or force majeure for certain periods that were extended from time to time; (10) double compensation for those people who are dismissed without just cause (with some exceptions); (11) measures to protect production, work, and supply; (12) family support allowance for the deceased by coronavirus, applicable to the most vulnerable sectors; (13) several fiscal measures, such as: postponement of the payment of export duties; suspension of tax executions, extension of due dates of income tax, personal and cedular assets corresponding to fiscal period 2019, a new system of payment facilities for tax, customs and social security resources, and extension of the suspension of the lock of precautionary measures for MSMEs; (14 ) maximum prices for food in the basic basket and basic necessities; (15) modification of the formula for estimating electricity consumption in residential homes; (16) suspension of the automatic adjustment mechanism for the spot remuneration set by Resolution No. 31/20; (17) the Argentine Government’s imposition of an extraordinary, obligatory contribution which falls on the assets of certain individuals and undivided estates in existence at the date of entry into force of Law No. 27,605 (December 18, 2020); and (18) an extraordinary subsidy for retirees, disability pension beneficiaries, mothers of 7 or more children and other non-contributory pensions to be paid by ANSES, among others.

 

For more information regarding the measures adopted by the Argentine Government to Address the COVID-19 Outbreak, you should visit the Ministry Health’s website: https://www.argentina.gob.ar/salud. The information contained on these websites is not part of and shall not be deemed incorporated into, this annual report.

 

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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 power industry, mainly in the second and third quarters of 2020, as described below:

 

·      With respect to the generation business, in the second and third quarters of 2020 the SADI’s net demand for electricity decreased by 5.7% and 2.0% compared to the same periods of 2019, mainly due to the lower industrial and commercial activity resulting from the social lockdown. Furthermore, the tariff freeze and the social lockdown have generated delays in the electricity distribution company’s payment chain, added to deferrals in the National Treasury contributions, as a result of which CAMMESA has recorded a growing delay in payment terms to generation and hydrocarbon producers, reaching a maximum of 45 days in July 2020. Additionally, the SE instructed CAMMESA to suspend the automatic adjustment mechanism for the spot remuneration set by SE Resolution No. 31/20.

 

In the case of our generation projects, as a result of COVID-19, through Note NO-2020-37458730-APN-SE#MDP the SE instructed the temporary suspension of terms for the execution of the contracts under the RenovAr Programs (Rounds 1, 1.5, 2 and 3), former SE Resolution No. 712/09, former MEyM Resolution No. 202/16 and former SEE Resolution No. 287/17, as well as for projects within the framework of former MEyM Resolution No. 281/17. The instruction applies to projects which had not been previously commissioned as from March 12, 2020 and until September 12, 2020, both dates inclusive. Consequently, the temporary suspension of notices of non-compliance with the scheduled work progress dates was instructed, both regarding the increase in the contract performance bond and the imposition of the stipulated penalties, as applicable, under all agreements entered into pursuant to such resolutions. Furthermore, it ordered the temporary suspension of notices of breach upon failure to comply with the date scheduled for the commercial commissioning of projects with a dispatch priority under the terms of former MEyM Resolution No. 281/17, and of the collection of the amounts stipulated in the event of breach, in all cases keeping the timely granted dispatch priorities. In particular, the evolution of the measures resulting from COVID-19 has affected the execution of the works for CTB’s closing to combined cycle from the beginning. The stiffening of social lockdown measures experienced from July 1, 2020 excluded private infrastructure works from the exempted activities. Later on, pursuant to Resolutions No. 1197-MJGM-2020 and No. 1690-MJGM-2020 passed by the Buenos Aires Chief of the Cabinet of Ministers’s Office, as amended, the Company resumed the execution of construction works following their critical path as from July 20, 2020.

 

·      As for the gas business, in the second and third quarters of 2020 gas production recorded a 9.0% and 10.2% year-on-year decrease, respectively, due to the restraining effects of the social, preventive and mandatory lockdown, combined with a higher efficiency of power generation facilities as a result of the renewable and thermal energy installed over the last three years. The average price of gas at wellhead in the second and third quarters of 2020 amounted to US$2.2 and US$2.4 per MMBTU, respectively, experiencing an approximate 35% decrease compared with the same periods of 2019. This decrease is mainly due to the lower prices tendered at CAMMESA’s monthly calls, the lower industrial activity and the diluting effect of inflation on the price of gas sold to distributors.

 

·      The economic recession caused by the spread of COVID-19, the significant decline in the demand for fuels and the disagreement between producers that are members of the Organization of Oil Exporting Countries (“OPEC”) and non-OPEC (“OPEC+”) producers resulted in a supply and storage crisis of such magnitude that the oil market was greatly impacted. The WTI showed a record drop, reaching -37.63 US$/bbl, whereas the Brent price fell below 20 US$/bbl. After the cutbacks on supply implemented by the OPEC and the OPEC+ and the gradual easing of lockdown measures attempted by several countries, a recovery trend was evidenced in the listings of crude oil and its derivatives, with the Brent crude oil showing a sustained quotation above 40 US$/bbl as from mid-June. Even though domestic oil prices use international values as benchmarks, they have experienced a strong decline as a result of the collapse in demand. In this sense, on May 18, 2020, the Federal Government set a support price of 45 US$/barrel for the domestic production. However, this support price was suspended as a result of the increase in the Brent reference price.

 

·      With regards to the petrochemical business, during the second quarter of 2020 there was a significant decrease in the demand for certain products sold by the Company, such as styrene and octane bases and, to a lesser extent, polystyrene. As a result of these declines, the styrene and reforming plants halted production for 40 and 60 days, respectively, between May and June, whereas the polystyrene plant stopped production for 30 days in June. Furthermore, the production of rubber had to be suspended in the months of April and May as it was not considered an essential activity and in line with the shutdown of its main domestic customers, which impacted the recoverability of inventories of several raw materials and products for sale, generating the posting of an allowance for impairment of inventory for US$ 11 million. Sold volumes experienced a substantial improvement as from the third quarter of 2020 as a result of the recovery of the industrial activity and the international context.

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The Argentine economy was in midst of a recession process, which was deepened by the described COVID-19 pandemic, with an accumulated 11.8% year-on-year fall in the GDP as of the third quarter of 2020, a 36.1% cumulative inflation (CPI) for 2020 and a 40.5% depreciation of the Peso against the U.S. dollar according to the Banco Nación’s exchange rate. Furthermore, stricter exchange restrictions were imposed, which affect the value of the foreign currency in existing alternative markets for certain exchange transactions that are restricted in the official market.

 

Additionally, the measures implemented by the Federal Government to contain the spread of COVID-19 have impacted our results of operations mainly by affecting the recoverable value of property, plant and equipment, intangible assets and inventories (see detail in Notes 1.2 and 11.1 to our Consolidated Financial Statements).

The Company’s management is continuously monitoring the evolution of variables that affect the Company’s business to define a course of action and identify potential impacts on our financial condition and results of our operations.

 

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.

 

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

 

After declaration of the COVID-19 pandemic in March 2020, we adopted the World Health Organization recommendations, the Argentine Government’s policies and our QHSE Policy to reduce the risk of transmission of the disease and its impact and to maintain the operational continuity of our essential activities. In this sense, health and safety measures were promoted to raise our employees’ awareness of compatible symptoms and compliance with prevention protocols and plans for handling possible infections. In accordance with this, we performed the following strategic planning:

 

·On February 27, 2020, a centralized Preventive Committee was set up, which established several internal practices with the participation of different areas of the Company to have a multidisciplinary vision in accordance with the rules and recommendations of government and health authorities. In turn, a local preventive committee was appointed in each asset to implement our directives, establish specific actions, and communicate them to the entire workforce;

 

·Communication, training and support to our employees by email, Kaizala, billboards, social media, among others. Workshops with specialists were organized to address the main issues in this context, and EAP, a legal and psychological support service, was hired;

 

·Remote working, minimizing our employees’ exposure and guaranteeing operational continuity for all work positions allowing it;

 

·Our businesses' operational continuity: for activities deemed essential, work routines and shifts were modified to reduce the staff’s exposure, following a ‘bubble’ approach. Prevention and asset access protocols were updated, reinforcing hygiene measures, reorganizing the staff's transportation, and promoting the self-monitoring of symptoms. A rapid testing program was implemented at CTGEBA and CTEB and for HPPL and CTLL’s scheduled overhauls. An action worksheet and a contingency plan for suspected and confirmed COVID-19 cases were developed, establishing health corridors in each asset to offer a swift response and minimize the staff's affectation and activities. We organized training courses and action drills to verify the efficiency of protocols;

 

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·Hygiene measures: conditioning of ventilation systems, air disinfection by UV radiation, distancing in working positions, installation of alcohol dispensers, increased cleaning and disinfection frequency, delivery of personal protection and hygiene kits, among others; and

 

·Flu immunization plan: we advanced our annual flu vaccination campaign in all assets, incorporating home vaccination to prevent personnel's movement at risk. Based on a thorough sensitization, communication and awareness effort, the immunization campaign showed a 69% increase compared to 2019.

 

It is worth highlighting that, despite the restrictions resulting from the ASPO, we continued with the overhaul works, and our second CC at CTGEBA was commissioned within the committed terms.

 

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.

 

Organizational structure

The following chart sets forth our corporate structure as of December 31, 2020:

 

 

 

 

 

 

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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, 2020, 2019 and 2018. Our generation operations derive revenues from the sale of electricity in the spot market and under term contracts, including Energía 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 0.6% 0.9% 0.7% 0.2% 0.1% 0.1% 2.7%
               
Net Generation 2020 (GWh) 481 323 742 409 207 243 2,404
Market Share 0.4% 0.2% 0.6% 0.3% 0.2% 0.2% 1.8%
Sales 2020 (GWh) 482 323 737 409 207 246 2,404
               
Net Generation 2019 (GWh) 499 334 823 383 122 148 2,309

Variation Net Generation

2020-2019

-4% -3% -10% +7% +70% +64% +4%
Sales 2019(GWh) 500 334 822 383 130 159 2,328
               
Net Generation 2018 (GWh) 577 393 886 247 - - 2,102

Variation Net Generation

2019-2018

-14% -15% -7% +55% N/A N/A +10%
Sales 2018 (GWh) 577 393 886 247 - - 2,102
               
In US$/MWh              
Avg. Price 2020 21 37 16 70 76 68 39
Avg. Gross Margin 2020 8 20 7 62 65 65 29

Sources: Pampa Energía S.A. and CAMMESA.

Note: gross margin before amortization and depreciation. All figures have been subject to rounding, so figures shown as totals may not add up.

 

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 1,253 14 567 3,811 4,955
Market Share 1.8% 0.9% 0.1% 1.5% 0.2% 0.2% 3.0% 0.03% 1.4% 9.1% 11.8%
                       

Net Generation 2020 (GWh)

4,406 368 55 576 193 229 7,912 72 255 14,065 16,470
Market Share 3.3% 0.3% 0.0% 0.4% 0.1% 0.2% 5.9% 0.1% 0.2% 10.5% 12.3%
Sales 2020 (GWh) 4,399 418 55 575 193 229 7,946 89 255 14,159 16,563
                       

Net Generation 2019 (GWh)

5,096 755 53 1,106 168 312 5,550 105 128 13,273 15,582

Variation Net Generation 2020-2019

-14% -51% +4% -48% +15% -27% +43% -32% +98% +6% +6%
Sales 2019 (GWh) 5,307 893 53 1,107 168 312 5,891 83 125 13,938 16,266
                       

Net Generation 2018 (GWh)

4,748 1,674 134 753 192 274 4,859 108 - 12,743 14,845
Variation Net Generation 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 - 13,897 15,999
                       
In US$/MWh                      
Avg. Price 2020 36 42 123 43 N/A 125 27 58 N/A 47 46

Avg. Gross Margin 2020

33 13 90 12 N/A 100 17 19 N/A 36 35

Sources: Pampa Energía S.A. and CAMMESA.

Note: gross margin before amortization and depreciation. All figures have been subject to rounding, so figures shown as totals may not add up.

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Summary of the committed expansion projects

Project MW

Marketing

Currency

Date of

Commissioning

Thermal
CTLL 15 SE Resolution No. 31/20 Pesos Second Quarter of 2021 (estimated)
CTEB 280 PPA for 10 years US$ CC: Second Quarter 2022 (estimated)
Total 295      

 

Thermal Generation plants

CTLL

CTLL is located in the Province of Neuquén, which has an installed capacity of approximately 765 MW, representing approximately 1.8% 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 2020, CTLL’s average annual generation was 2,093 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 two combined cycles, one with a 684 MW installed capacity, which consists of two gas turbines of 223 MW each and a 239 MW steam turbine, repowered in October 2020. The second combined cycle consists of a gas turbine of 182 MW, known as Genelba Plus, which was commissioned in 2009 under the Energy Plus Program and repowered in June 2019, as well as a 188 MW gas turbine incorporated in 2019 under the expansion to combined cycle process and steam turbine of 199 MW which was incorporated on July 2, 2020. 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 1,253 MW, which represents 3.0% of Argentina’s installed capacity. From 2000 to 2020, CTGEBA’s historical average annual generation was 4,913 GWh, with a generation record high of 7,912 GWh in 2020, and a record low of 3,438 GWh in 2001.

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.

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CPB is an open-cycle thermal generation plant with an installed capacity of 620 MW, consisting of two identical conventional units (Unit 29 and Unit 30) with an installed capacity of 310 MW each, which represents 1.5% 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 2020, CPB’s average annual generation was 1,987 GWh, with a generation record high of 3,434 GWh in 2011, 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 the Energy Plus Program, which accounts for 0.9% of Argentina’s installed capacity. From 1993 to 2020, its average annual generation was 1,702 GWh, with a generation record high of 1,903 GWh in 1996, and a record low of 368 GWh in 2020.

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, which accounts for 0.1% of Argentina’s installed capacity. From 2011 to 2020, its average annual generation was 114 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, which accounts for 0.03% of Argentina’s installed capacity. The plant sells electricity in the Energía Plus market. From 2011 to 2020, EcoEnergía’s average annual generation amounted to 87 GWh, with a generation record high of 108 GWh in 2018, and a record low of 20 GWh in 2011.

 

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, which accounts for 0.2% of Argentina’s installed capacity. 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 2020 was 184 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.

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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, which accounts for 0.2% of Argentina’s installed capacity. 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 2020 was 272 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 2020, the average annual generation amounted to 1,327 GWh, with a high generation record of 2,093 GWh in 2016, and a low record of 255 GWh in 2020.

 

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, which represents 0.6% of the installed capacity in Argentina, 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 manage the system’s water flow for irrigation purposes. The Nihuiles System covers a total distance of approximately 40 km with the grid’s height ranging from 440 m to 480 m. In addition, HINISA owns 4.6% of the capital stock of TJSM and 4.6% of the capital stock of TMB. From 1990 to 2020, the average annual generation was 807 GWh, with the highest level of generation (1,250 GWh) recorded in 2006 and the lowest level (481 GWh) recorded in 2020.

The Province of Mendoza, through EMESA, currently owns Class D shares representing 10.20% of the capital stock of HINISA and Class C shares representing 37.76% 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 37.76% interest in HINISA, and consequently we are required to sell our Class B shares (representing 20,41% 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.

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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, which represents 0.9% of the installed capacity in Argentina, 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 2020, the average annual generation has been 545 GWh, with the highest level of generation (943 GWh) recorded in 2006 and the lowest level (322 GWh) recorded in 2014.

Summary of HINISA and HIDISA concessions

 

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

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

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

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.

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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 the Organismo 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.

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.

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

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

HPPL

A 30-year concession 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 2020, HPPL’s average annual generation was 950 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. 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.

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.

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

Renewable Energy

PEMC

On April 18, 2016, we acquired 100% of Greenwind, for an amount of 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 taken 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 capacity and an 87-meter hub height. The PEMC contributes 100 MW of renewable energy to the national Argentine grid, which represents 0.2% of the installed capacity in Argentina.

 

On June 8, 2018, CAMMESA granted the commercial commissioning of PEMC, which was obtained before the date originally stipulated in the PPA executed with CAMMESA under the RenovAr Program (for more information, please see “The Argentine Energy Sector – RenovAr Program”). Since 2018, PEMC generated 346 GWh.

 

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.

 

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PEPE II has an installed capacity of 53 MW, which represents 0.1% of the installed capacity in Argentina. During 2020, PEPE II generated 207 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. During 2020, PEPE II generated 243 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 agreement term was extended until January 31, 2021. Despite the expiration of the extension it is contemplated that it will be re-extended once CAMMESA receives the corresponding instruction from the SE.

 

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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: (i) development and monetization of unconventional gas reserves; (ii) exploration for reserves replacement; and (iii) 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, 2020:

 

·our combined crude oil and natural gas proved reserves were 141.8 million barrels of oil equivalent, 49% 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 45.0 thousands of barrels of oil equivalent per day, considering continuing operations. Crude oil accounted for approximately 4.4 thousands of barrels of oil equivalent per day, while natural gas accounted for approximately 244 million standard cubic feet per day, or 40.6 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 and Luján de Cuyo distilleries located in the pipeline’s area of influence.

During 2020, according to the ME&M, gas gross production in Argentina decreased by 7% (4.4 billion cubic feet per day on average), whereas oil gross production decreased 7% and stood at 484 thousand barrels per day (on average).

In December 2020, 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 Gas Business—Others—Venezuela”.

Key Information Relating to Oil and Gas

As of December 31, 2020, we had interests in 18 areas, joint operations (UTEs) and agreements in Argentina: 13 oil and gas production areas and 5 exploration blocks located within exploration areas or pending authorization for production. As of December 31, 2020, we were directly the contractual operator of eight of the 18 blocks in which we hold equity interest.

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Acreage

As of December 31, 2020, 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(4)   Net (3)   Gross(4)   Net (3)
    (in thousands of acres)
Argentina   1,122   385   223   98

(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.

(4) Does not include Borde del Limay, Los Vértices, Aguada Pavón and Río Limay Este areas, which are in the process of relinquishment.

(*) 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, 2020, 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

 

  463 149 395 184 858 333

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

(1) Refers to the 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 2020, our investment plans were highly affected by the COVID-19 pandemic and the imposed restrictions.

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

 

    Year ended December 31,
    2020   2019   2018
    Argentina
Gross wells drilled:            
Production:            
Development wells:            
Oil   14   39   31
Gas   1   9   31
Dry wells            
Total   15   48   62
             
Exploration:            
Discovery wells:            
Oil   0   1   2
Gas   0   2   2
Dry wells   -   -   -
Total   0   3   5
             
Net wells drilled:            
Production:            
Development wells:            
Oil   4   11   8
Gas   0   5   17
Dry wells   -   -   -
Total   4   16   25
             
Exploration:            
Discovery wells:            
Oil   0   1   1
Gas   0   2   1
Dry wells   -   -   -
Total   0   3   1

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

 

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In 2020, the COVID-19 pandemic and the imposed restrictions limited the drilling and development activity that was planned originally, affecting production goals. Nevertheless, overall gas production fell only 6%, mainly due to the production growth of 8% in El Mangrullo field, which accounts for 65% of our production. This was achieved due to the successful 2019 drilling campaigns, together with the expansion of the gas evacuation facilities.

Drilling activities in the main gas fields were postponed due to the pandemic and the imposed restrictions. The main drilling activity was concentrated in the oil fields of El Tordillo, in the Golfo San Jorge Basin, and Gobernador Ayala, in the Neuquén Basin. El Tordillo drilled 3 wells before the imposed restrictions, in the first quarter of 2020. Gobernador Ayala drilled 11 wells in the first and fourth quarters of the year, when the imposed restrictions had not been in place or had been lightened.

Oil and Gas Production

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

During 2020, our production was concentrated in three basins: the Neuquén, San Jorge and Noroeste. In Argentina, we own 483,000 net acres, and in the Neuquén basin — the most important basin in the country in terms of oil and gas production —we own approximately 369,000 net acres (representing 77% 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, 2020, we lifted hydrocarbons from 858 productive wells in Argentina.

For the year 2020, our average daily production was 4,418 barrels of crude oil and 244 million cubic feet of natural gas. Argentine oil production decreased by 11% and gas production decreased 6% compared to 2019 average.

The following table sets forth our oil and gas production during 2020. 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, 2020. 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.

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2020 Production    
Production Blocks Location Basin Oil (1) Gas (2)

Oil 
Equivalent 

(3)

Operator Direct and Indirect Interest Expiration
                 
El Mangrullo Neuquén NQN 17 58,338 9,740 Pampa 100.00 % 2053
Sierra Chata Neuquén NQN 29 6,312 1,082 Pampa 45.55% 2053
Río Neuquén Neuquén/Río Negro NQN 169 11,788 2,133 YPF 33.07%(4)/31.42%(5) 2027/2051
Rincón del Mangrullo (6) Neuquén NQN 23 9,836 1,662 YPF 50.00% 2052
Estación Fernández Oro Río Negro NQN 3 174 32 YPF 15.00%(7) 2026
Anticlinal Campamento Neuquén NQN - 83 14 Oilstone 15.00%(8) 2026
Río Limay Este (Ex Senillosa) Neuquén NQN - - - Pampa 85.00% 2040
Aguaragüe(9) Salta NOA 91 2,286 472 Tecpetrol 15.00% 2023/2027
El Tordillo Chubut CGSJ 866 298 915 Tecpetrol 35.67% 2027
La Tapera – Puesto Quiroga Chubut CGSJ 19 - 19 Tecpetrol 35.67% 2027
Gobernador Ayala Neuquén NQN 287 - 287 Pluspetrol 22.51% 2036
Veta Escondida - Rincón de Aranda Neuquén NQN 28 - 28 Pampa 55.00% 2027
Los Blancos(10) Salta  NOA 86 - 86 High Luck 50,00% 2045
Total     1,617 89,117 16,470      

 

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) Province of Neuquén.

(5) Province of Río Negro.

(6) Does not include Vaca Muerta formation.

(7) Over 13 wells.

(8) Over nine wells.

(9) Includes San Antonio Sur, expiring in 2023, and Aguaragüe, expiring in 2027.

(10) Exploitation concession as from October 15, 2020.

 

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

        Year ended December 31,
  2020   2019   2018
Argentina Oil (1)   Gas (2)   Oil (1)   Gas (2)   Oil (1)   Gas (2)
                       
Río Neuquén (3) 169   11,788   216   15,287   260   15,813
El Mangrullo (3) 17   58,338   23   53,631   27   35,841
Rincón del Mangrullo (3) 23   9,836   46   14,991   67   23,414
Other blocks 1,409   9,154   1,475   10,574   1,494   12,333
                       
Total 1,617   89,117   1,760   94,483   1,848   87,401

 

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

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

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

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

 

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.

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The following table lists our exploration blocks, joint operations and permits in Argentina as of December 31, 2020, the location and basin of each area, our net working interest and the expiration date for the exploration authorization.

 

          2020 Production            
Blocks/UTE   Location Basin   Oil kbbl Gas mcf Total kboe   Operator   Interest   Expiration
Parva Negra Este   Neuquén NQN   - 96 16   Pampa   42,50%   2019(1)
Rio Atuel   Mendoza NQN   - - -   Petrolera El Trébol   33,33%   2020(1)
Las Tacanas Norte   Neuquén NQN   - - -   Pampa   90,00%   2023
Borde del Limay   Neuquén NQN   - - -   Pampa   85,00%   2015(2)
Los Vértices   Neuquén NQN   - - -   Pampa   85,00%   2015(2)
Total Exploration Blocks          0 96 16            
Total Production in Argentina         1,613 88,969 16,441            

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

(1) Under extension process.

(2) Relinquishment process.

 

As of December 31, 2020, we held interests in approximately 323,000 gross exploration acres in Argentina. Due to the COVID-19 pandemic and the imposed restrictions, no exploratory wells were drilled in 2020.

 

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, 2020, 2019 and 2018. This table includes our net share of production, joint operations and associates.

 

    Year ended December 31,
Argentina 2020 2019 2018
    (in US$ per barrel of oil equivalent)
         
Production cost   6 8 6
Royalties   2 3 4
Depreciation     7 6 4
Total     15 17 14

 

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, 2020, 2019 and 2018.

    Year ended December 31,
    2020 2019 2018(*)
Argentina        
    (in millions of US$)
         
Oil   64 98 148
Gas   219 342 434
Others   11 8 5
Total   294 448 587

 

(*) Includes discontinued operations.

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, 2020, 2019 and 2018.

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    Year ended December 31,
Average price of sale for barrel of Oil and for million cubic feet of Gas   2020   2019   2018
Argentina            
Oil (In US$ per barrel of Oil)   40   54   23
Gas (In US$ per thousand cubic feet)   2   4   4

 

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.

Under the Plan Gas.Ar tender launched at the end of 2020 by the Argentine Government, Pampa committed to produce at least 7.0 million m3/day of base production, of which 70% are at Plan Gas.Ar price of 3.6 dollars per million BTU, plus 1.8 million m3/day of additional production during the winter, 100% at Plan Gas.Ar price of 4.7 million dollars per million BTU.

The remaining committed volume will be allocated to CAMMESA’s monthly tenders, exports, industries and the spot market.

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. GaffneyCline performed an independent audit of 98% of our estimated proved reserves as of December 31, 2020. We provided all information required during the course of the audit process to the satisfaction of GaffneyCline. See the Reserves Report by GaffneyCline, dated February 2, 2021 included as Exhibit 13.2 to this annual report. As of December 31, 2020, 2019 and 2018, 98%, 94% and 83%, respectively, of our estimated proved reserves were audited by GaffneyCline.

 As of December 31, 2020, our liquid hydrocarbon and natural gas proved developed and undeveloped reserves totaled 141.8 million boe (13.5 million boe of liquid hydrocarbons and 769.5 billion cubic feet, or 128.3 million boe, of natural gas), of which 743.1 billion cubic feet were estimated to be sales gas and 26.4 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, 2020. The reserves outside Argentina (Venezuela) were reclassified as contingent in December 2016, due to profitability and the economic situation of Venezuela.

As of December 31, 2020, proved developed reserves of crude oil equivalent represented 49% of our total proved reserves of crude oil equivalent and we had proved reserves equal to approximately nine years of production at 2020 volumes.

The following table sets forth our estimated net proved developed and undeveloped reserves of crude oil and natural gas as of December 31, 2020, including joint operations and associates.

 

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Reserves as of

December 31, 2020

Reserves Category   Crude oil,
condensate
and natural gas liquids
(millions of barrels)
Natural Gas
(billions cubic feet)
Oil Equivalent
(million boe)
         
         
Proved Developed   7.8 372.0 69.8
Proved Undeveloped   5.8 397.5 72.0
         
Total proved reserves 13.5 769.5 141.8
         

 

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, 2020, 2019 and 2018.

 

  2020   2019   2018
  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 69.8   49.2%   70.8   52.3%   77.5   59.4%
Proved undeveloped reserves 72.0   50.8%   64.6   47.7%   52.8   40.6%
                       
Total Proved Reserves 141.8   100%   135.4   100%   130.3   100%

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

Throughout the first quarter of 2020, nine wells were drilled in El Tordillo, Gobernador Ayala and Aguaragüe areas to change from proven undeveloped reserves to proven developed reserves. Afterwards, the activities were suspended due to prevention measures related to Covid-19. On October 15, 2020, the Province of Salta issued Executive Order No. 662/20, granting Pampa and High Luck Group Limited an exploitation concession over Los Blancos’ block for a 95 km2 area and a term of 25 years as from its publication date, and relinquishing the exploration permit for the 801 km2 remaining area of the Chirete block. In El Mangrullo area, the compression facilities were improved in order to increase the gas recovery factor and proven undeveloped reserves were added due to the production performance of Vaca Muerta’s shale gas wells.

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, 2020, 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.

 

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    Crude oil, condensate and natural gas liquids Natural gas  
         
    Argentina   Combined
    (in thousands of barrels) (in millions of cubic feet)   (in million boe) (1)
Total proved developed and undeveloped reserves as of December 31, 2018   14,997 691,965   130.3
Proved developed reserves as of December 31, 2018   9,179 409,782   77.5
Increase (decrease) originated in:          
Revisions of previous estimates   -645 1,247   -0.4
Improved recovery   - 3,530   0.6
Extensions and discoveries   970 128,832   22.4
Year’s production   -1,771 -94,491   -17.5
Total proved developed and undeveloped reserves as of December 31, 2019   13,551 731,082   135.4
Proved developed reserves as of December 31, 2019   8,805 372,000   70.8
Increase (decrease) originated in:          
Revisions of previous estimates   152 25,633   4.4
Improved recovery   44 57,119   9.6
Extensions and discoveries   1,406 44,824   8.9
Year’s production   -1,627 -89,140   -16.5
Total proved developed and undeveloped reserves as of December 31, 2020   13,526 769,519   141.8
Proved developed reserves as of December 31, 2020   7,761 371,999   69.8

(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, 2020, our liquid hydrocarbon and natural gas proved developed and undeveloped reserves totaled 141.8 million boe (13.5 million boe of liquid hydrocarbons and 769.5 billion cubic feet, or 128.3 million boe, of natural gas), representing a 5% increase compared to proved reserves as of December 31, 2019 (a decrease of 0.2% and an increase of 5% for liquid hydrocarbons and natural gas, respectively).

During 2020, previous estimates of our fields located in Argentina were subject to revisions representing an increase of 4.4 million boe mainly attributable to better production performance in the El Mangrullo area and to adjustments of production estimates in Aguaragüe, Rincón del Mangrullo, Sierra Chata, Río Neuquén and Rincón de Aranda areas, extension and discoveries increased by 8.9 million boe through drilling activities, mostly in El Mangrullo, Chirete-Los Blancos, and El Tordillo areas. In addition, an increase of 9.6 million boe was attributable to improved recovery in El Mangrullo area.

As of December 31, 2020, 49% of our proved reserves were developed, while 51% were undeveloped. Proved developed reserves were 69.8 million barrels of oil equivalent. During 2020, we invested US$ 5.8 million to convert approximately 2.8 million barrels of oil equivalent of proved undeveloped reserves to proved developed reserves.

 

The 11% increase in our proved undeveloped reserves in 2020 compared to 2019 was mainly attributable to:

 

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(1)the conversion of approximately 2.8 million boe of proved undeveloped reserves to proved developed reserves, mainly through drilling and workovers activities performed in our production areas in the Neuquén basin, mainly in El Mangrullo, and Gobernador Ayala areas, Aguaragüe in the Northwestern basin and El Tordillo area in the Golfo San Jorge basin;

 

(2)extensions and discoveries, through additional drilling activities, mainly in the El Mangrullo area and the Gobernador Ayala area in the Neuquén basin, in Chirete–Los Blancos area in the Northwestern basin and El Tordillo area in the Golfo San Jorge basin, which resulted in the addition of 8.5 million boe of proved undeveloped reserves. The drilling activities of proved undeveloped reserves shale gas added in El Mangrullo area belong to Vaca Muerta’s reservoirs; and

 

(3)an increase of 1.7 million boe of proved undeveloped reserves, came from positive revisions of previous estimates and adjustments to production estimates based on performance of drilling activities, mainly in El Mangrullo, Rincón del Mangrullo and Gobernador Ayala areas, and came from negative revisions mainly in Sierra Chata area.

 

The activities described in items (1), (2), and (3) above resulted in a net increase of 7.4 million boe in our proved undeveloped reserves in 2020 compared to 2019.

As of December 31, 2020, our proved undeveloped reserves were 72.0 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 96% of these proved undeveloped reserves into production through activities to be implemented over the next five years. The balance of 4% 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 2.5 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 or RC), 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, 2020. Thus, they are subject to revisions, upward or downward, as a result of future operations or as additional information becomes available.

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

There are many uncertainties in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including certain factors that are beyond our control. The reserves data set forth in this annual report solely represents estimates of our proved oil and gas reserves. Reserves engineering is a subjective process of estimating underground accumulations of crude oil and natural gas that cannot be precisely measured. The accuracy of reserves estimates 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.

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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

 

GaffneyCline 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. GaffneyCline 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 GaffneyCline’s business. GaffneyCline is fully familiar with the SEC regulations regarding oil and gas reserves (17 CFR Part 210 Rule 4-10 (a)). GaffneyCline 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 98% of our estimated total proved reserves. In connection with the preparation of the Reserves Report, the Independent Reserves Engineers Firm prepared its own estimates of our proved reserves. In the process of the reserves evaluation, the Independent Reserves Engineers Firm did 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 of the Independent Reserves Engineers Firm that brought into question the validity or sufficiency of any such information or data, the Independent Reserves Engineers Firm did 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 Firm independently 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 Engineers Firm’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, and the Independent Reserves Engineers Firm used all methods and procedures as it considered necessary under the circumstances to prepare such reports.

 

Technology used in reserves estimation

 

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

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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, 2020 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-capital companies operated by PDVSA: Petroritupano S.A., Petroven-Bras S.A., Petrowayú S.A. and Petrokariña S.A.

 

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

 

As of the date of this annual report, we have not obtained the authorizations of the Government of Venezuela related to the change of indirect control requested in a timely manner. However, we have presented the technical, legal and financial information required in due time, as well as development plans and financing proposals that were submitted to the majority of the mixed-capital companies, 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 the Ministerio del Poder Popular de Petróleo de la República Bolivariana of Venezuela, which have not yet been communicated to us.

 

We have expressed with the authorities of the Government of Venezuela that our interest in making investments and/or financing proposals in the mixed-capital companies has ceased and that we are willing to negotiate the transfer of our shares to CVP. As a result, we are currently unable to obtain accurate information about the mixed-capital companies in Venezuela and, consequently, have not disclosed information on oil and gas activities regarding Venezuela for the years ended December 31, 2018, 2019 and 2020.

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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.

 

During 2018, EcuadorTLC collected the agreed amount and 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.

 

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.

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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 became 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. As of the date of this Annual Report, we have a 15.91% equity interest in OCP.  

 

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 in 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 to certain 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$182 million 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.

 

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.

 

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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.

 

On April 8, 2020, a force majeure event occurred, consisting of the sinking and landslide in the San Rafael sector, on the border of the provinces of Sucumbíos and Napo, Ecuador, which caused the rupture of the “Oleoducto de Crudos Pesados” pipeline. This event also affected the “SOTE” Trans-Ecuadorian Pipeline System and the Shushufindi-Quito Pipeline. On May 7, 2020, OCP S.A. restarted operations and resumed the provision of the crude oil transportation service after completing the construction of a variant that allowed the restoration of the crude oil pipeline system.

As of December 31, 2020, OCP recorded a total of US$ 33 million as environmental cleanup and remediation costs, of which it expects to recover US$ 13 million from insurance companies. As of the date of this annual report, OCP has filed the claims with the applicable insurance companies and has received the first disbursement for US$ 2 million.

Additionally, on June 4, 2020, a contract for the implementation of the specific mutual support agreement was entered into between Petroecuador and OCP, which stipulated that the costs incurred in mitigating and remediating the social and environmental effects resulting from the force majeure event would be reimbursed by the other party proportionately to the spilled hydrocarbon volumes. To such effect, the Agency for the Regulation and Control of Energy and Non-Renewable Natural Resources established a 43% percentage for OCP.

The Company has performed recoverable amount tests for its investment in OCP as of December 31, 2020, considering the present value of the future cash flows it expects to obtain through the collection of dividends during the concession term, which extends until 2023, and a 15.01% discount rate, generating recognition of a US$ 0.1 million reversal in the recognized impairment loss.

Contingent liabilities in OCP

On January 16, 2020, OCP was served notice of an arbitration claim filed by Oxy Oleoducto SOP LLC (Oxy) requesting a compensation. On March 9, 2020, OCP S.A. answered the notice by rejecting the claims and filing a counterclaim. On November 24, 2020, Oxy and OCP entered into an agreement terminating, effective December 1, 2020 and by means of a joint waiver, the arbitration proceeding heard before the International Centre for Settlement of Investment Disputes regarding the Transportation Agreement known as ISTA.

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Furthermore, upon the occurrence of the above described force majeure event, several organizations and natural persons filed a constitutional protection complaint against OCP, as well as the Ministry of Energy, the Ministry of the Environment and Water, Petroecuador and the Ministry of Health, alleging the infringement of several constitutional rights. The safeguard action has been disallowed in the first instance by Orellana’s Provincial Court of Justice. As of the date of this annual report, this proceeding is pending resolution. Even though there is a low probability that this claim will be upheld, a second-instance judgment may only make a declaration of constitutional rights, which would not involve the recognition of any economic value.

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 and Luján de Cuyo distilleries, all located in the pipeline’s area of influence.

Our Petrochemicals Business

Our petrochemical operations are entirely based in Argentina where we own three high-complexity plants producing styrene, SBR and polystyrene, with a domestic market share ranging between 85% and 98%. 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 (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 petrochemical’s division in Argentina for the fiscal year ended December 31, 2020 and 2019:

 

  2020 2019
Technical Information    
Sales (in thousand ton):    
Styrene (incl. propylene y ethylene) 47 55
SBR 37 27
Polystyrene 47 44
Others 205 217
     
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Styrene Division

 

As of December 31, 2020, monomer styrene sales volumes totaled 39 thousand tons, representing a decrease of 13% compared to 2019 and polystyrene sales volumes totaled 47 thousand tons, experiencing a 6% increase compared to 2019 in domestic sales associated with the market downsize, and a 12% decrease in exports.

 

In 2020, rubber sales totaled 37 thousand tons and the sales volume increased by 39% compared to 2019, due to an increase of exports to Brazil.

 

Reforming Gasoline Division

 

 

Sales of intermediate gasoline and naphtha during 2020 totaled 140 thousand tons, decreasing by 11% compared to 2019, associated with the drop in fuel consumption resulting from the lockdown.

 

Sales of aromatics, hexane and paraffinic solvents during 2020 totaled 52 thousand tons, which represented a 6% increase compared to 2019, partially offset by the lower dispatched volume of octane bases. Propellant gas (LPG included) sales totaled 9 thousand tons in 2020, representing a 7% decrease compared to 2019.

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 6.6 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 91 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, 2020, Pampa holds a 27.7% interest in TGS.

 

Description of TGS’s Business Segments

Regulated Segment: Gas Transportation

In 2020, revenues from this business segment amounted to Ps.23,502 million, evidencing a 24% decrease compared to the Ps.30,796 million recorded in 2019. This decrease is mainly due to the deferral of the semiannual update which should have applied since October 2019, April and October 2020, compared to inflation’s evolution. These effects were partially offset by the higher deliveries of natural gas on an interruptible basis. 

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 2020, 81% of TGS’s 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, 2020, the total capacity hired on a firm basis amounted to 82.4 million m3/day with a weighted average life of 11.5 years. In 2020, the daily average injection of natural gas into the gas pipeline system operated by TGS amounted to 68.2 million m3/day, a volume 8% lower compared to 2019, mainly due to lower activity as a result of the decline in prices and a lower demand of the impact of the COVID-19. In this scenario, TGS’s gas pipeline system was fairly responsive to meet demand needs.

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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 2020, this segment’s revenues accounted for 49% of TGS’s total revenues. In 2020, revenues from sales amounted to Ps.27,597 million (in real terms, 12% lower than in 2019). The decrease in revenues from sales is mainly attributable to the decline in international reference prices as a result of the COVID-19 pandemic 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 ethane, 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 2020, total sales volumes reached 1,145,375 tons, 10% higher than in 2019, 33% of which were destined to exports. Out of the total sales to the domestic market, 77% were made at US$-denominated prices. With respect to the foreign market, in 2020 average sales prices for natural gasoline, butane and propane experienced 31%, 16% and 15% decreases, respectively, mainly as a result of the decline in international reference prices from the beginning of the COVID-19 pandemic.

Furthermore, pursuant to the PEN Executive Orders No. 793, 865/18 and 488/20 a duty was imposed on the export of LNG, among other products.

In the domestic market, during 2020, 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 198,127 tons of propane and 34,504 tons of butane, mainly to the reseller market, and, to a lower extent, to the industrial, propellant and automotive market.

Furthermore, in 2020, 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. During fiscal year 2020, there was a significant increase in the volume of ethane sold to Polisur, which amounted to 360,870 tons under the current agreement, 27% higher than in 2019, due to the June 2019 accident that prevented the customer from processing the product in its plant during this period, with sales returning to normal in October 2019.

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 9% of TGS’s total income in 2020. Revenues from sales, increased by 25% in real terms as compared to 2019, which is mainly due to more transports and refurbishment services of natural gas in Vaca Muerta and to the effect of the Peso devaluation under the sales in U.S. Dollars, which were partially offset by lower construction, compression and treatment services. 

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The construction of the 147-km gathering pipeline in the Vaca Muerta formation initiated in April 2019, and its commissioning was successfully concluded throughout 2019, 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.

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 December 31, 2017, 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. From 2002 to 2015, TGS only had two tariff increases: 20% as from April 2014, as a result of the implementation of the transitory agreement entered in 2008; and, in May 2015, a 44.3% increase in the natural gas transportation tariff and a 73.2% increase in the CAU. 

 

To normalize the segment, on February 24, 2016 TGS entered into a transitory agreement with the Federal Government and, consequently, 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, on March 31, 2016 ENARGAS passed Res. No. 3724/16 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 Supreme Court of Justice of the Argentine Nation established the obligation to perform a public hearing for setting tariffs and prices without market intervention, and declared the nullity of MEyM 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 took place on October 6, 2016. Consequently, ENARGAS approved a 200.1% transitory tariff increase effective from October 7, 2016, executing the investment plan and restricting dividend distribution (Resolution No. 4054/16).

 

 

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In December 2016, the public hearing required for the RTI process took place. On March 30, 2017, under ENARGAS Res. No. I-4362/17, a transitory tariff scheme was approved, with a 214.2% and a 37% increase in the natural gas transportation utility service and the CAU, respectively, applicable as of April 1, 2017. The RTI contemplates a semiannual non-automatic tariff adjustment mechanism subject to the IPIM published by the INDEC. As a result, TGS executed the 2017 Comprehensive Memorandum of Understanding and the 2017 Transitory Agreement to implement the tariff update; to such effect, ENARGAS Res. No. 4362/17 was issued, 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.

The RTI considered the needed income to execute a Five-Year Investments Plan between April 2017 and March 2022 for AR$6,787 million, expressed as of December 2016 values, which are essential to operate and maintain the main gas pipelines under TGS’s concession, and 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 costs variations occurred on November 14, 2017, and under 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 set in the RTI for the January – October 2017 period. This increase was deemed charged against the amounts resulting from the Comprehensive Renegotiation Memorandum of Understanding for the License executed by TGS on March 30, 2017.

The Comprehensive Renegotiation Memorandum of Understanding was ratified by the Argentine Government on March 28, 2018 (PEN Executive Order No. 250/18). Hence, it ended the RTI process launched in April 2016, and, as a result, on June 26, 2018, TGS voluntarily dismissed the arbitration proceeding it had brought before the ICSID. Moreover, 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 IPIM variations for the November 2017 – February 2018 period, and a compensation for the programmed deferral of the increase payable in installments.

For the February – August 2018 period costs variations applicable from October 2018, TGS requested an approximate 30% tariff increase based on the IPIM variation. However, on September 27, 2018 ENARGAS issued Res. No. 265/2018 setting a 19.7% increase based on the simple average of the IPIM, the Construction Cost Index and the Salary Variation Index (provisional as of June 2018). The ENARGAS alleged that according to the RTI, under certain macroeconomic conditions and circumstances, given that the semiannual update is a non-automatic adjustment mechanism, it may use other indexes different from the IPIM to determine the tariff increase.

ENARGAS Res. No. 192/19 determined a 26.0% increase in 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 bills issued during the July – October 2019 period were deferred, to be recoverable in five installments from December 2019, under SGE Res. No. 336/19. Residential users could opt out of this benefit.

According to several regulations, the semiannual update that should have been applied since October 1, 2019 was deferred. With the entry into force of the Solidarity Law and its supplementary regulations, it was established that gas tariffs under federal jurisdiction would remain unchanged for a maximum term of 450 days or until the entry into effect of the new transitory tariff schemes. The PEN was vested with the power to begin an extraordinary review of the current RTI.

Consequently, TGS has not received instructions by ENARGAS for the semiannual remuneration update which, according to the RTI, should have applied on October 1, 2019, and April 1 and October 1, 2020. Additionally, on December 17, 2020, DNU No. 1020/20 was published, launching the RTI renegotiation for a term that could not exceed two years from its publication. Finally, ENARGAS called for a public hearing for March 16, 2021 to consider the transitory tariff regime.

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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 City of Tratayén, in the Province of Neuquén, with the City 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 provided for a Temporary Special Regime 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 would be in effect. Moreover, the license agreement provides for an irrevocable transportation offer of 10 million m3 per day to CAMMESA for 15 years.

The for the opening of tenders was successively postponed, and on December 30, 2020 SE Res. No. 448/20 was published, which renders this call for tenders ineffective, and instructs the Undersecretariat of Hydrocarbons to evaluate other alternatives for constructing a new gas pipeline and/or extending transportation capacities.

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 14,488 km and 58 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 6,604 km and 107 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 2020, the peak voltage had not exceeded the previously highest historical peak voltage of 26,320 MW recorded in 2018.

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Despite the great number of power grid solicitations, in 2020 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 0.29 failures per each 100 kilometer-line, which is consistent with international parameters accepted for companies that operate and maintain extra high-voltage transmission systems.

Business Development

 

Engineering Services

 

Taking into consideration its electrical system projects, Transener has focused on projects with competitive advantages by giving priority to those within the 500kV and 132kV systems.

The development of an important works program for the generation of renewable energies has entailed the demand for other services, such as the preparation of bidding documents, electricity studies, the implementation of power generation and demand monitoring systems (Automatic Export Demand and Generation Disconnection systems), and the testing and commissioning of transforming stations. Transener’s expertise has been a key factor for customers to entrust it with critical works’ performance. 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 utility 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, optical fiber 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 2020, 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 on public utilities, such as Transener and its subsidiary Transba, the obligation to renegotiate their agreements in force with the Government while continuing to supply electricity services. This scenario has significantly affected Transener and Transba’s economic and financial situation.

 

In May 2005, Transener and Transba entered into a Memorandum of Understanding with the UNIREN stipulating the terms and conditions for updating the Concession Agreements. The parties agreed to perform an RTI before the ENRE and to establish of a new tariff regime for Transener and Transba, which should have come into force in 2006, and to stipulate a recognition of variations in operating costs incurred until the entry into effect of the new tariff regime resulting from the RTI.

 

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Since 2006, Transener and Transba have repeatedly requested the ENRE to regularize compliance with the commitments stipulated in the Memorandum of Understanding, expressing the demand to launch the RTI process. Moreover, Transener and Transba filed their respective tariff claims for their assessment, holding a public hearing and the definition of the new tariff scheme.

 

Instrumental Agreement

 

In December 2010, Transener and Transba entered into an Instrumental Agreement, UNIREN’s Memorandum of Understanding, with the SE and the ENRE, which mainly recognized a credit claim in favor of Transener and Transba for cost fluctuations incurred between June 2005 – November 2010 and calculated as per the Cost Variation Index established in the Memorandum of Understanding. These receivables were assigned in consideration of disbursements by CAMMESA, which were executed through loan agreements.

 

Upon collecting these receivables and still without the RTI, in May 2013 Transener and Transba, respectively, executed with the SE and the ENRE a Renewal Agreement, effective until December 31, 2015, which, among other provisions, acknowledged a credit claim for cost variations recorded during the December 2010 – December 2012 period. Given the repeated delays in implementing the Memorandum of Understanding’s RTI, the SE and ENRE successively extended the recognition of higher costs up to and including November 2015. The Renewal Agreement expired in May 2016 and, without any pending recognized receivables, Transener and Transba continued collecting the loans granted by CAMMESA, which were disclosed as liabilities. Finally, on December 26, 2016, Transener executed the final agreement with the SE and the ENRE, which recognized credits for cost variations in favor of Transener and Transba for the December 2015 - January 2017 period. On June 19, 2017, CAMMESA made the last disbursement, thus offsetting all receivables for cost variations.

 

 

RTI

 

ENRE Res. No. 66/17 and No. 73/17 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 collectible by Transener and Transba during the whole RTI’s five-year period. The adjustment formula considers 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 deviation 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; but deferred until December 15, 2017, when ENRE issued Res. No. 627/17 and No. 628/17 updating Transener and Transba’s remunerations by 11.35% and 10.96%, respectively, for the December 2016 – June 2017 period, retroactively to August 1, 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 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, retroactively to 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.

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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, for a maximum term of 450 days or until new transitory tariff schemes are in force. The PEN was vested with the power to begin an extraordinary review of the current RTI. The ENRE has not instructed CAMMESA regarding Transener’s semiannual update, which according to the RTI, should have been applied on February 1 and August 1, 2020, and February 1, 2021. On the other hand, on December 17, 2020, DNU No. 1020/20 was published, launching the RTI renegotiation for a term that could not exceed two years from its publication. Finally, on March 3, 2021, the ENRE called for a public hearing to consider Transener and Transba’s transitory tariff regime, which took place on March 29, 2021 (Res. No. 54 and 55/21, respectively). As of the date of this annual report, the determination of Transener and Transba’s transitory tariff regime is still pending.

 

 

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 distributing costs associated with the remuneration of transmission companies among its users (distributors, GU, self-generators and generators). These costs are allocated based on the demand and/or contribution of energy by each WEM agent directly and/or indirectly associated with 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 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 monthly. In the case of WEM GU not directly associated with the high-voltage transmission and/or DisTro, the applicable monthly value will correspond to the connecting agent.

 

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 2020, the average daily processing of crude oil amounted to 4,085 barrels. In turn, gas processing reached a daily average of 1.8 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.

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As of December 31, 2020, Refinor had a commercial network of 91 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 2020, sales of gasoline, gasoil, raw naphtha and other liquid fuels amounted to 363 thousand cubic meters, which represented a 24% decrease compared to 2019. LPG sales amounted to approximately 47 thousand tons, representing a 37% decrease compared to 2019.

 

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.

 

 

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 is the largest electricity distribution company in Argentina in terms of number of customers and electricity sold (both in GWh and in monetary terms). Edenor holds a concession until 2087 to distribute electricity on an exclusive basis to the northern and northwestern metropolitan area of Buenos Aires, comprising an area of 4,637 square kilometers and a population of approximately 9 million people. As of December 31, 2020, Edenor served 3.2 million users.

 

On December 28, 2020, we entered into a binding stock purchase agreement for the sale of our controlling interest in Edenor. See “Relevant Events—Sale of Controlling Stake in Edenor.” As a result of the strategic divestment mentioned above, the distribution of energy segment was classified as discontinued operation as of December 31, 2020, and for the comparative period 2019.

 

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.

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. Under the concession, Edenor is obligated to supply electricity upon request of the owner or occupant of any premises in its service area, among other obligations. 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. Additionally, 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. As well, 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 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”).

In addition, 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. Likewise, 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.

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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: (i) 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); (ii) Edenor’s regulated distribution margin, which is known as the value-added for distribution, or VAD; and (iii) any taxes imposed by the Province of Buenos Aires or the City of Buenos Aires, which may differ in each jurisdiction. In this regard, on January 19, 2021, the ENRE passed Resolution No. 16 and 17/21 launching the proceeding for the transitory adjustment of tariffs of Edenor and Transener, respectively, until reaching a Final Renegotiation Agreement, and summoned Edenor and Transener to take part in it. To this end, the ENRE requested Edenor to submit certain financial information, as well as information on the 2021 – 2022 investment plan in accordance with the provisions of the 2017 RTI.

Regarding the energy losses, during 2020 technical and non-technical energy losses experienced in Edenor’s service area were 19.6%. The 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.

On January 19, 2021 Edenor expressed its consent to the Agreement on the Joint Exercise of the Electricity Distribution Public Utility entered into by the Federal Government, the Province of Buenos Aires and the City of Buenos Aires. This agreement acknowledges that the title and capacity of the electricity distribution public utility’s Granting Authority in Edenor’s concession area remains vested in the Federal Government, agreeing to overrule a series of instruments associated with the transfer of said utility to the local jurisdictions and the commitment to create a tripartite body for the regulation and control of the activity.

Quality, Health, Safety and Environment

We are committed to developing our businesses to observe the highest quality, safety, environmental, and labor health standards, prioritizing personal welfare, environmental care, and energy efficiency. We want to meet current needs without compromising future generations.

 

Considering the context of our industry, our experience, the best practices, and international norms and standards, a QHSE Policy was established in 2017 with ten guidelines that constitute a simple and agile roadmap towards the sustainable development of our businesses and their implementation.

 

In 2020, despite the pandemic context that demanded special attention by the entire Company, Pampa continued moving forward with management programs in all its operations, allocating resources to staff training under and integrated and aligned strategy, strengthening Pampa’s culture on QHSE issues.

 

 

Quality

 

We further our management quality using international ISO standards and the Argentine National Quality Prize model as references, seeking the continuous improvement of all our activities. The primary Management Quality methodologies applied are the integrated assessments —adjustment to QHSE guidelines, operational Risk Management Matrix (RMM) and QHSE performance—, the administration of certified management systems and daily management quality.

 

We apply the RMM to reduce risks inherent in our operations. After its redesign in 2019, the first assessment cycle was conducted in all our assets in 2020, promoting improvement plans to handle deviations and opportunities.

 

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We evaluate QHSE performance based on the systematic monitoring and measurement in our QHSE asset indicator dashboard, developed on the QlikView platform, making real-time decisions and assessing their evolution. Furthermore, we continued improving the QHSE dashboard with the incorporation of new legal compliance indicators.

In 2020 we maintained the zero significant anomalies goal and met most strategic goals set for the year, which were even stricter than in 2019. Moreover, we completed the maintenance and recertification program under ISO international standards, showing efficiency in our stakeholders’ achievement and commitment. We also continued with the certification process under the new ISO 45001:2018 standard (which replaces the OHSAS 18001 standard in most of our assets), expected to be completed in 2021.

 

Furthermore, the management of anomalies, audits, and actions was unified in the new integrated practice, ‘findings and improvements management,’ with the development of a new procedure and the IT support tool's redesign on the SharePoint platform. Moreover, the TERV application was also implemented; this is an IT tool that effectively manages and views legal compliance of environmental, hygiene, health, and safety aspects in all our businesses and the Pampa Building.

 

Additionally, since 2013 the Company’s outstanding improvement practices have been selected to take part in the annual national meeting of the Argentine Society for Continuous Improvement (Sociedad Argentina Pro Mejoramiento Continuo) and we have been able to share our experiences and knowledge. In the 25th annual meeting in 2020, with 28,000 visitors from 31 countries, we submitted the work ‘Coronavirus: health in times of lockdown’ prepared by CPB.

 

 

Safety

 

We have moved forward with the definition and periodic monitoring of our safety goals through the QHSE indicator board and the development of initiatives to improve each asset’s safety management and performance in each of our facilities. Additionally, we have reviewed the change management process and implemented it in the generation business.

 

Regarding industrial hygiene, we continued working on the improvement of chemical, physical and ergonomic risk maps. We also implemented the Carcinogenic Compounds and Substances Monitoring System set by the Superintendence of Labor Risks.

 

 

Environment

 

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

 

In 2020, we worked to develop the Environmental Principles, consolidating Pampa’s culture and ensuring compliance with the commitments undertaken through our QHSE Policy, which are aligned with the SDG.

 

In line with the country’s energy needs and within our Environmental Principles framework, we seek to reduce air emissions and foster responsible energy use in our activities. In 2020, despite the pandemic, we completed the closing to combined cycle at CTGEBA, thus becoming the largest and one of the most efficient thermal power plants in the country. At CTEB, we continued with the expansion to combined cycle project, which is expected to be completed in 2022.

 

Response to Emergency

 

Although we endeavor to prevent undesirable events, we are and is prepared to provide a prompt and effective response to emergencies. We have continued making periodic emergency response simulations, promoting established practices and specific improvements incorporated into the integrated management system.

 

In 2020 we conducted training and practice programs per the Emergency Response Plans to develop skills and competencies and coordinate the necessary activities if an undesired event occurs. In 2020, we moved forward with assessing and updating critical emergency scenarios in all our businesses.

 

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Moreover, we continued assessing the condition of fire detection and suppression systems, evaluating and ensuring their proper working condition and response capacity. We also implemented the Incidents Command System, an emergency response methodology.

 

Occupational Health

 

In 2020, we continued implementing our policy on the use of alcohol, drugs and psychoactive substances . In addition, we also maintained the Preventive Labor Environments certification requirements at all assets operated by Pampa, recognizing the preventive actions committed to employees’ welfare and operations safety. This certification is granted by SEDRONAR (“Secretaría de Políticas Integrales sobre Drogas de la Nación Argentina”) and COPOLAD (“Programa de Cooperación entre América Latina, el Caribe y la Unión Europea en Políticas sobre Drogas”).

 

Aiming to foster all Pampa members’ health, we continued advancing Labor Health Management though epidemiological monitoring in 2020. The performance of occupational medical exams for the granting of Certificates of Physical Fitness was limited because of COVID-19, following the Superintendencia de Riesgos del Trabajo recommendations.

 

As regards prevention, Pampa continued implementing the physical activity program and flu and tetanus immunization campaigns. We reinforced the healthy eating program in all our assets with nutritionists’ assistance to improve awareness of the importance of body mass index, one of the health risk factors for COVID-19.

 

Despite the COVID-19 pandemic, together with the Foundation, a blood donation campaign was conducted through the implementation of voluntary blood donation drives. This practice continues to be organized systematically in all our assets, strengthening the bonds between Pampa, its employees 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 our business’s economic, social and environmental impacts through our social investments and our employees’ voluntary support, 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. SDG 17 (partnerships for the goals) cross-cuts all our initiatives.

 

To support the development of the community and set clear, measurable and assessable goals and intervention modalities, we have framed our social investment strategy on three axes: education, employment and social inclusion. Set forth below is a brief description of our programs.

 

Education and Labor Placement Training

 

We believe that education is the key to development and social and labor market inclusion, strengthening knowledge to expand horizons. Therefore, we seek to provide equal opportunities to children and young people in vulnerable situations.

 

We seek to support the completion of technical secondary education studies and the entry into university and college of teenagers living in the Provinces of Neuquén, Salta, Mendoza, Buenos Aires and Santa Fe. Young people participating in our program receive monthly financial assistance and personalized support, training and educational trips. Our scholarship grantees can get acquainted with formal work environments and perform activities so that they may envision concrete employment possibilities in the future.

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In 2020, we supported 1,389 students, 1,025 of whom were attending the last three years of technical secondary education, and 364 university and college students, of whom 261 secondary students and ten university students graduated from courses of study associated with our businesses, mainly engineering. In addition, four scholarship grantees who were children of Pampa’s employees completed the program. Moreover, in the pandemic context, we developed different activities complementary to those offered by the program.

 

While seeking to improve students’ learning, in 2020 we offered 20 workshops to 204 second-cycle teachers at 146 primary schools, reaching out to 44 towns in Neuquén, Mendoza, Buenos Aires and Santa Fe under the Energy Researchers project (Investigadores de la Energía), dealing with topics associated with energy, its sources, efficiency and benefits. The tools incorporated by teachers were implemented with 2,390 children.

 

Additionally, we launched the Pampa Foundation Schools Network program, which supports 18 technical schools at 11 towns of Mendoza, Santa Fe, Buenos Aires and Salta, providing teacher training and better institutional management tools. In 2020, 84 school authorities and teachers participated in the program and implemented the curriculum with 1,882 students of the schools where we grant secondary school scholarships.

 

As part of our commitment to education and community institutions’ improvement, we performed refurbishments and donated equipment to schools, universities, and training and community centers of the communities where we operate. In 2020, we invested more than AR$13 million. Among the contributions made, we donated P-DS-1 portable drilling and well control simulator —the first of its kind in the country— to the Municipality of Cutral Có, Neuquén to improve the professional quality workforce and enhance the labor placement. The training program will be administered by the Neuquén Regional School of the National Technological University.

 

Additionally, we conducted professionalizing practices and first job workshops to consolidate, integrate and develop knowledge and capabilities matching the professional profile that secondary, college and university students are developing in order to increase their employability.

 

We continued fostering professional practices for young students in their final year of technical school. In 2020, we adapted the program to a 100-hour virtual modality, which allowed us to launch the program with 230 young students. Under the AcercaRSE program, we held Technician Day’s Annual Meeting for 200 students from Zárate, Campana, and other neighboring towns and addressed first employment and entrepreneurship topics.

 

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 dialogue 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 2020, thanks to the more than 40 meetings with 96 leaders and heads of different Pampa areas, we developed a strategic map to set the direction and priorities to address concerning each stakeholder. We prioritized nine analysis matrices to define the target audiences with which we will develop action plans starting in 2021. We have accompanied 14 institutions for sustainable development throughout the country, both at corporate social responsibility tables and work groups and through funding. Moreover, we design and execute local development projects in coordination with municipalities and civil organizations. In 2020, the following were the most relevant:

 

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 our assets. Through the Volunteering Committees, we seek that our employees may draw up proposals contributing to solving social difficulties identified at the local level and allowing, in turn, to reinforce each asset’s links with the community. Hence, Pampa can contribute to its socio-economic and community development, and strengthen the organizational culture and the employees’ sense of belonging.

 

 

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Through periodic meetings, the committee members in each asset define action plans for volunteering activities and their coordination with strategic partners at a local level. In response to the COVID-19 pandemic, we held four meetings this year to provide training on virtual volunteering, with 70 members of the Volunteering Committees and the participation of 43 employees. Out of the 8 hours of training, ten concrete initiatives came up, and we were able to contact 47 organizations in our communities to continue working together. In 2020 we fostered 38 actions, with 1,159 volunteers, dedicating more than 5,000 hours to humanitarian activities. We currently have ten active Volunteering Committees.

 

 

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, 2020, the total generation assets covered under these policies are valued at US$5,603 million.

 

In our oil & gas business, we carry full insurance, including business interruption and general liability insurance. As of December 31, 2020, the total oil & gas assets covered under these insurance policies are valued at US$296 million.

 

In our petrochemical business and distribution business, we also carry full insurance, including business interruption and general liability insurance. As of December 31, 2020, the total assets covered under insurance policies are valued at US$1,297 million.

 

Patents and Trademarks

Certain portions of our commercial activities are conducted under licenses granted by third parties. Royalties related to sales associated with such commercial activities are paid under the relevant licenses.

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THE ARGENTINE ENERGY SECTOR

Electricity Regulatory Framework

Overview

Until 1990, virtually all of the electricity supply in Argentina was controlled by the public sector. In 1991, the Argentine Government undertook the privatization of state-owned electricity generation, transmission and distribution companies. In January 1992, the Argentine Congress enacted Law No. 24,065 (the “Regulatory Framework Law”), which established guidelines for the restructuring and privatization of the electricity sector. The Regulatory Framework Law, which continues to provide the framework for regulation of the electricity sector, distinguished between the generation, transmission and distribution of electricity as separate businesses and made each subject to its own regulatory framework.

The ultimate objective of the privatization process was to reduce rates paid by users and improve the quality of the electricity supply service through competition. The privatization process commenced in February 1992 with the sale of several large thermal generation facilities, and continued with the sale of transmission and distribution facilities (some of which we currently own) and additional thermoelectric and hydroelectric generation facilities.

The Public Emergency Law combined with the devaluation of the Peso and high rates of inflation had a severe effect on public utilities in Argentina. Because public utilities were no longer able to increase tariffs, inflation led to decreases in their revenues in real terms and a deterioration of their operating performance and financial condition. Most public utilities had also incurred large amounts of foreign currency indebtedness under the Convertibility Law regime and, following the devaluation of the Peso, the debt service burden of these companies increased sharply, which led many of them to suspend payments on their foreign currency debt in 2002. This situation caused many Argentine electricity generators, transmission companies and distributors to defer making further investments in their networks. As a result, Argentine electricity market participants, particularly generators, are currently operating at near full capacity, which could lead to insufficient supply to meet a growing national energy demand.

To address the electricity crisis, the Argentine Government has repeatedly intervened in and modified the rules of the WEM since 2002. These modifications included the imposition of caps on the prices paid by distributors for electricity power purchases (pursuant to SE Resolution No. 8/02) and the requirement that all prices charged by generators be calculated based on the price of natural gas (which is also regulated by the Argentine Government), regardless of the fuel actually used in generation activities (pursuant to SE Resolution No. 240/03), which together created a huge structural deficit in the operation of the WEM.

In December 2004, the Argentine Government adopted new rules for the electricity market (pursuant to SE Resolutions Nos. 826/04 and 712/04), which come into effect once the construction of two new 800 MW combined cycle generators had been completed. These two generators commenced commercial operations in open cycle during 2008 and in combined cycle during the first quarter of 2010. Construction was partially financed with credit balances of generators resulting from the spread between the sales price of energy and generation variable cost, which were transferred to the FONINVEMEM.

Electricity generators accepted the opportunity under SE Resolution No. 1,427/04 to participate in the FONINVEMEM projects.

 

The construction of these new generators evidenced a decision by the Argentine Government to take a more active role in promoting energy investments in Argentina. In addition to these projects, in April 2006 the Argentine Congress enacted a law that authorized the Argentine Government to create a special fund to finance infrastructure improvements in the Argentine energy sector through the expansion of generation, distribution and transmission infrastructure relating to natural gas, propane and electricity. Contributions to this fund were made through specific charges passed on to customers as an item on their energy bills.

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In 2006, the SE implemented the Energy Plus Program (pursuant to SE Resolution No. 1,281/06) to create an incentive for increased electricity generation. Projects implemented under the Energy Plus Program are not subject to market regulations regarding prices. Instead, prices can be freely negotiated between generators and users within the cap authorized by the former Ministerio de Planificación Federal, Inversión Pública y Servicios.

The Energy Plus Program sought to increase electricity generation and satisfy domestic demand. For that purpose, CAMMESA requires that all large users (those consuming more than 300 kW) purchase their incremental demand (any volumes exceeding their 2005 consumption) from new generators under the Energy Plus Program.

Through Law No. 26,350, it also modified the official time zone for the summer periods, in order to promote a decrease in the use of electric power.

In order to increase the electric power supply, the Argentine Government also established a program called Delivered Electric Energy, through the supply of small transportable thermal plants and/or embarked power plants. The investment was made by a private investor with a power purchase agreement with IEASA. The generator in the WEM was IEASA. As of the date of this annual report almost every generator installed within this scheme, has become a “generator” in the WEM and the contracts with IEASA have been terminated.

The Argentine Government additionally continued to implement various measures in order to regulate the operation of the WEM and of the intervening agents. SE Resolution No. 95/13, established values for the remuneration of fixed and variable costs to be paid to generators, co-generators and self-generators for energy sales, and an additional remuneration was added. These values were not applicable to bi-national hydroelectric power plants, nuclear generation or to generation committed in contracts regulated by the SE, such as those under the Energy Plus Program. Such resolution temporarily suspended new contracts under the WEM Term Market, other than those regulated by the SE, and it provided that upon the termination of existing contracts in the Term Market, large users must purchase their energy demand from CAMMESA. In addition, the resolution provides that commercial management and fuel delivery to the WEM plants will be centralized in CAMMESA. Resolution No. 95/2013 of the SE, as amended by Resolution No. 529/2014 of the SE, was updated on several occasions to reflect increases to the remuneration of generators. Moreover, SEE Resolution No. 19/2017 modified the entire generation remuneration regime (see “—The Argentine Energy Sector— Remuneration Scheme for Generation Not Covered by Contracts—SEE Resolution No. 19/2017: February 2017 - February 2019”). As of the date of this Annual Report, the current remuneration scheme as from February 2020 is established by SE Res. No. 31/20 (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”).

In December 2015, through Decree No. 134/2015, the Argentine Government declared a state of emergency with respect to the national electricity system that remained in effect until December 31, 2017. The state of emergency allowed the Argentine Government to take actions designed to guarantee the supply of electricity in Argentina such as instructing the ME&M to elaborate and implement, with the cooperation of all federal public entities, a coordinated program to guarantee the quality and security of the electricity system and rationalize public entities’ consumption of energy. In spite of the fact that the emergency was not extended, the Argentine Government continued its intervention in the energy sector and measures allowing its return to normal are still pending.

In 2019, SEE Resolution No. 1/2019, amended the remuneration scheme established in SEE Resolution No. 19/2017. The SEE Resolution No. 1/2019 was recently amended by SE Resolution No. 31/2020 which 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 on Resolution No. SEE 1/19 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”).

In December 2019, the Social Solidarity and Productive Reactivation Law was enacted, which, among other measures, established a 180-day freeze in energy and natural gas tariffs and the relaunching of RTI (this period has been extended by Decree No. 543/2020 and Decree No. 1020/2020 until the RTI process concludes or the transitional tariff increase is put into effect) and enabled the President to intervene the regulatory authorities (ENRE and ENARGAS). On March 16, 2021, a public hearing was held to discuss the transitory tariff increases. As of the date of this annual report, the determination of the new tariffs is still pending.

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Regulatory Authorities

As of the date of this annual report, the principal regulatory authorities responsible for the Argentine electricity market are:

(1) the MDP, which assumed the responsibility of the ME&M and the SE;

(2) the ENRE; and

(3) CAMMESA.

The SE advised the Argentine Government on matters related to the electricity sector and was responsible for the application of the policies concerning the Argentine electricity industry. On December 10, 2019, Decree No. 7/2019 modified the Ministries Law No. 22,520. Among other changes, it created the MDP, which assumed the functions and is responsible for the execution of the national policies in relation with the energy sector. The responsibilities of the MDP include participating “in the management of the State’s shareholdings in the corporations and companies operating in the area of its competence.” Later, in September 2020, Decree No. 706/2020 and Decree No. 743/2020 modified the functions of the Ministry of Economy and transferred the SE from the MDP to the Ministry of Economy (ME).

The ENRE is an autonomous agency created by the Regulatory Framework Law. The ENRE has a variety of regulatory and jurisdictional powers, including, among others:

·enforcement of the Regulatory Framework Law and related regulations;
·control of the delivery of electric services and enforcement of the terms of concessions;
·adoption of rules applicable to generators, transmitters, distributors, electricity users and other related parties concerning safety, technical procedures, measurement and billing of electricity consumption, interruption and reconnection of supplies, third-party access to real estate used in the electricity industry and quality of services offered;
·prevention of anticompetitive, monopolistic and discriminatory conduct between participants in the electricity industry;
·imposition of penalties for violations of concessions or other related regulations; and
·arbitration of conflicts between electricity sector participants.

Until the ENRE intervention pursuant to Decree No. 277/2020, the ENRE was managed by a five-member board of directors appointed by the Argentine Government. Two of these members were nominated by the CFEE. The CFEE is funded with a percentage of revenues collected by CAMMESA for each MWh sold in the market. Sixty percent of the funds received by the CFEE are reserved for the Fondo Subsidiario para Compensaciones Regionales de Tarifas a Usuarios Finales (regional tariff subsidy fund for end users), from which the CFEE makes distributions to provinces that have met certain specified tariff provisions. The remaining forty percent are used for investments related to the development of electrical services in the interior of Argentina.

The Annual Budget Law for 2019, established the transfer of the ENRE’s jurisdiction over Edenor and Edesur to the local authorities (City of Buenos Aires and the Province of Buenos Aires). However, the Social Solidarity and Productive Reactivation Law, established that during the term of the emergency declared therein, the tariffs shall continue to be defined by the ENRE.

On March 16, 2020, the Executive Branch ordered the intervention of the ENRE as authorized by the Social Solidarity and Productive Reactivation Law (Decree No. 277/2020). On December 16, 2020, the Executive Branch extended the ENRE’s intervention until December 31, 2021 or until the end of the RTI, whichever occurs first.

 

The creation of the WEM made it necessary to create an entity in charge of the management of the WEM and the dispatch of electricity into the National Interconnection System (the “SIN”). The duties were entrusted to CAMMESA, a private company created for this purpose.

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CAMMESA is in charge of:

·the dispatch of electricity into the SIN, maximizing the SIN’s safety and the quality of electricity supplied and minimizing wholesale prices in the spot market;
·planning energy capacity needs and optimizing energy use in accordance with the rules set forth from time to time by the SE;
·monitoring the operation of the term market and administering the technical dispatch of electricity under agreements entered into in that market;
·acting as agent of the various WEM agents and carrying out the duties entrusted to it in connection with the electricity industry, including billing and collecting payments for transactions between WEM agents (upon enactment of SE Resolution No. 95/2013, this was limited to the contracts then in force and, thereafter, to those contracts executed under Energy Plus Program);
·purchasing and/or selling power from abroad or to other countries by performing the relevant import/export transactions; 
·purchasing and administering of fuels for the WEM generators (according to section 8 of SE Resolution No.95/2013 and section 4 of SE Resolution No. 529/2014, as amended); and
·providing consulting and other related services.

Five groups of entities each hold 20% of the capital stock of CAMMESA. The five groups are the Argentine Government, the associations that represent: (i) the generation companies, (ii) the transmission companies, (iii) the distribution companies and (iv) the large users.

CAMMESA is managed by a board formed by representatives of its shareholders. The board of CAMMESA is composed of ten regular and ten alternate directors. Each of the associations that represent generation companies, transmission companies, distribution companies and large users are entitled to appoint two regular and two alternate directors of CAMMESA. The other directors of CAMMESA are under the SE, who is the board chairman and an independent member, who acts as vice chairman. The decisions adopted by the board of directors require the affirmative vote of the board’s chairman. CAMMESA’s operating costs are financed through mandatory contributions by the WEM agents.

Key Participants

Generators

Generators are companies with electricity generating plants that sell output either partially or wholly through the SIN. Generators are subjected to the scheduling and dispatch rules set out in the regulations and managed by CAMMESA. Privately owned generators may also enter into direct contracts with distributors or large users. However, this possibility was suspended by SE Resolution No. 95/2013, which in this respect, remains in effect except for the Energy Plus Program and, as of 2017, renewable energy supply contracts. As of December 31, 2020, Argentina had a nominal installed capacity as reported by CAMMESA of 41.9 GWh. In 2020, thermal generation generated 82,333 GWh (62%), hydroelectrically energy generated 28,505 GWh (21%), renewable energy generated 12,734 GWh (10%) and the nuclear energy generated 10,011 GWh (7%). In 2020, imports amounted to 1,204 GWh and exports to 3,089 GWh.

Transmitters

Transmission companies hold a concession to transmit electric energy from the bulk supply point to electricity distributors. The transmission activity in Argentina is subdivided into two systems: the High Voltage Transmission System (“STEEAT”), which operates at 500 kV and transports electricity between regions, and the regional distribution system (“STEEDT”) which operates at 132/220 kV and connects generators, distributors and large users within the same region. Transener is the only company in charge of the STEEAT, and six regional companies operate within the STEEDT (Transcomahue, EPEN, Transnoa, Transnea, Transpa, Transba and Distrocuyo). In addition to these companies, there are also independent transmission companies that operate under a technical license provided by the STEEAT or STEEDT companies.

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Transmission and distribution services are carried out through concessions. These concessions are re-distributed periodically based on a re-bidding process. Transmission companies are responsible for the operation and maintenance of their networks, but not for the expansion of the system. The transmission concessions operate under the technical, safety and reliability standards established by the ENRE. Penalties are applied whenever a transmission concessionaire fails to meet these criteria, particularly those regarding outages and grid downtime. Generators can only build lines to connect to the grid, or directly to customers. Users pay for new transmission capacity undertaken by them or on their behalf. A public hearing process for these projects is conducted by the ENRE, which issues a “Certificate of Public Convenience and Necessity.” Transmission or distribution networks connected to an integrated system must provide open access to third parties under a regulated toll system unless there is a capacity constraint.

Distributors

Distributors are companies holding a concession to distribute electricity to consumers. Distributors are required to supply any and all demand of electricity in their exclusive areas of concession, at prices (tariffs) and conditions set forth in regulations. Penalties for non-supply are included in the concession’s agreements. The three distribution companies divested from SEGBA (Edenor, Edesur and Edelap) represent more than 41% of the electricity market in Argentina. Only a few distribution companies (i.e., Empresa Provincial de Energía de Córdoba, Empresa de Energía de Santa Fe and Energía de Misiones) remain in the hands of the provincial governments and cooperatives. Edelap has been transferred to the jurisdiction of the Province of Buenos Aires.

The Organismo de Control de Energía Eléctrica de la Provincia de Buenos Aires (“OCEBA”) monitors compliance by the Province of Buenos Aires distributors, including Eden, Edes and Edea as well as the municipal distributors with the provisions of their respective concession agreements. We and Edesur are the largest distribution companies and, together with Edelap, originally comprised SEGBA, which was divided into three distribution companies at the time of its privatization in 1992.

Concessions were issued for distribution and retail sale, with specific terms for the concessionaire stated in the contract. The concession periods are divided into “management periods” that allow the concessionaire to give up the concession at certain intervals.

Large users

The WEM classifies large users of energy into three categories: (1) GUMAs, (2) GUMEs and, (3) Grandes Usuarios Particulares (Major Particular Users or “GUPAs”).

Each of these categories of users has different requirements with respect to purchases of their energy demand. For example, GUMAs are required to purchase 50% of their demand through supply contracts and the remainder in the spot market, while GUMEs and GUPAs are required to purchase all of their demand through supply contracts.

Limits and restrictions

To preserve competition in the electricity market, participants in the electricity sector are subject to vertical and horizontal restrictions, depending on the market segment in which they operate.

Vertical restrictions

The vertical restrictions apply to companies that intend to participate simultaneously in different sub-sectors of the electricity market. These vertical restrictions were imposed by Law No. 24,065, and apply differently according to each sub-sector as follows:

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Generators

·Under Section 31 of Law No. 24,065, neither a generation company nor any of its controlled companies or its controlling company, can be the owner or a majority shareholder of a transmitter company or the controlling entity of a transmitter company; and
·Under Section 9 of Decree No. 1,398/1992, since a distribution company cannot own generation units, a holder of generation units cannot own distributions concessions. However, the shareholders of the electricity generator may own an entity that holds distribution units, either by themselves or through any other entity created with the purpose of owning or controlling distribution units.

Transmitters

·Under Section 31 of Law No. 24,065, neither a transmission company nor any of its controlled companies or its controlling entity, can be the owner or majority shareholder or the controlling company of a generation company;
·Under Section 31 of Law No. 24,065, neither a transmission company nor any of its controlled companies nor its controlling company, can be the owner or majority shareholder or the controlling company of a distribution company; and
·Under Section 30 of Law No. 24,065, transmission companies cannot buy or sell electric energy.

Distributors

·Under Section 31 of Law No. 24,065, neither a distribution company, nor any of its controlled companies or its controlling company, can be the owner or majority shareholder or the controlling company of a transmission company; and
·Under Section 9 of Decree No. 1,398/1992, a distribution company cannot own generation units. However, the shareholders of the electricity distributor may own generation units, either by themselves or through any other entity created with the purpose of owning or controlling generation units.

Definition of control

The term “control” referred to in Section 31 of Law No. 24,065 (which establishes the vertical restrictions), is not defined in the Regulatory Framework. Section 33 of the BCL states that “companies are considered as controlled by others when the holding company, either directly or through another company: (1) holds an interest, under any circumstance, that grants the necessary votes to control the corporate will in board meetings or ordinary shareholders’ meetings; or (2) exercises a dominant influence as a consequence of holding shares, quotas or equity interest or due to special linkage between the companies.” We cannot assure you, however, that the electricity regulators will apply this standard of control in implementing the restrictions described above.

The regulatory framework outlined above prohibits the concurrent ownership or control of (1) generation and transmission companies, and (2) distribution and transmission companies. Although we are a fully integrated electricity company engaged in the generation, transmission and distribution of electricity in Argentina, we are in compliance with these legal restrictions, as we do not hold a controlling interest, either directly or indirectly, in Transener.

Horizontal restrictions

In addition to the vertical restrictions described above, distribution and transmission companies are subject to horizontal restrictions, as described below.

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Transmitters

·According to Section 32 of Law No. 24,065, two or more transmission companies can merge or be part of the same economic group only if they obtain an express approval from the ENRE. Such approval is also necessary when a transmission company intends to acquire shares of another electricity transmission company;
·Pursuant to the concession agreements that govern the services rendered by private companies operating transmission lines above 132Kw and below 140Kw, the service is rendered by the concessionaire on an exclusive basis over certain areas indicated in the concession agreement; and
·Pursuant to the concession agreements that govern the services rendered by the private company operating the high-tension transmission services equal to or higher than 220Kw, the company must render the service on an exclusive basis and is entitled to render the service throughout the entire country, without territorial limitations.

Distributors

·Two or more distribution companies can merge or be part of the same economic group only if they obtain an express approval from the ENRE. Such approval is necessary when a distribution company intends to acquire shares of another electricity transmission or distribution company; and
·Pursuant to the concession agreements that govern the services rendered by private companies operating distribution networks, the service is rendered by the concessionaire on an exclusive basis over certain areas indicated in the concession agreement.

GENERATION

Electricity Prices

Spot prices

The emergency regulations enacted after the Argentine crisis in 2001 had a significant impact on energy prices. Among the measures implemented pursuant to the emergency regulations were the pesification of prices in the WEM, known as the spot market, and the requirement that all spot prices be calculated based on the price of natural gas, even in circumstances where alternative fuel such as diesel is purchased to meet demand due to the lack of supply of natural gas.

Prior to the crisis, energy prices in the spot market were set by CAMMESA, which determined the price charged by generators for energy sold in the spot market of the WEM on an hourly basis. The spot price reflected supply and demand in the WEM at any given time, which CAMMESA determined using different supply and demand scenarios that dispatched the optimum amount of available supply, taking into account the restrictions of the transmission grid, in such a way as to meet demand requirements while seeking to minimize the production cost and the cost associated with reducing risk of system failure. The spot price set by CAMMESA compensated generators according to the cost of the next unit to be dispatched as measured at the Ezeiza 500 kV substation, which is the system’s load center and is in close proximity to the City of Buenos Aires. Dispatch order was determined by plant efficiency and the marginal cost of providing energy. In determining the spot price, CAMMESA also would consider the different costs incurred by generators outside the province of Buenos Aires.

In addition to energy payments for actual output at the prevailing spot market prices, generators would receive compensation for capacity placed at the disposal of the spot market, including stand-by capacity, additional stand-by capacity (for system capacity shortages) and ancillary services (such as frequency regulation and voltage control).

In October 2019, through SEERRYM No. 38/19, the spot price at the WEM was established at 720 Ps./MWh

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With respect to the remuneration for legacy generation capacity, the remuneration scheme established by SEE Res. No. 19/17 remained in force until February 28, 2019. From March 1, 2019 to January 31, 2020 SRRYME Res. No. 1/19 was in effect, and, as from February 1, 2020, SE Res. No. 31/20 has come into in effect.

Upon the entry into force of Plan Gas.Ar, Resolution SE No. 354/2020 established that the thermal power plants should cover the costs related to the supply of the natural gas volumes under such scheme and other associated costs including the costs of the “take or pay” obligations under natural gas supply contracts, import costs and duties, and transport costs, among others. 

Power plants dispatch

Upon the entry into force of Plan Gas.Ar, Resolution SE No. 354/2020 changed the dispatch of thermal power plants establishing five categories according to the source of the natural gas supply. This scheme modifies the previous cost-based dispatch. It also defined a “unified dispatch” by CAMMESA taking into account the following categories: (1) Generators whose natural gas supply comes from the contract that IEASA has in force with Bolivia up to the “take or pay” volumes; (2) Generators whose natural gas supply is assigned by CAMMESA from the natural gas contracts executed under the Plan GasAr regime up to the “take or pay” volumes; (3) Generators whose natural gas supply is assigned by CAMMESA from the natural gas contracts executed under the Plan GasAr regime over the “take or pay” volumes and up to the maximum daily volume; (4) Generators whose natural gas supply is assigned by CAMMESA from LNG contracts or other firm contracts executed by CAMMESA; and (5) Generators whose natural gas supply comes from contracts with natural gas producers not assigned to CAMMESA, spot natural gas supply or other. Within each category the dispatch shall follow the production costs declared by each generator.

The generators excluded from the centralized fuel supply by CAMMESA (i.e. power plants under the Energy Plus Program or with PPAs under Resolution SEE 287/17) may operatively assign the volumes and transport capacity that they have contracted. If they proceed with such assignment they will enter in the third category, on the contrary if they don’t execute the assignment, they will enter in the fifth category.

Seasonal prices

The emergency regulations also made significant changes to the seasonal prices charged to distributors in the WEM, including the implementation of a cap (which varies depending on the category of customer) on the cost of electricity charged by CAMMESA to distributors at a price significantly below the spot price charged by generators. These prices did not change from January 2005 until November 2008. See “Item 5. Operating and Financial Review and Prospects—Electricity Prices and Tariffs.

Prior to implementation of the emergency regulations, seasonal prices were regulated by CAMMESA as follows:

·prices charged by CAMMESA to distributors changed only twice per year (in summer and winter), with interim quarterly revisions in case of significant changes in the spot energy price, despite prices charged by generators in the WEM fluctuating constantly;
·prices were determined by CAMMESA based on the average cost of providing one MWh of additional energy (its marginal cost), as well as the costs associated with the failure of the system and several other factors; and
·CAMMESA would use seasonal database and optimization models in determining the seasonal prices and would consider both anticipated energy supplies and demand as follows: (i) in determining supply, CAMMESA would consider energy supplies provided by generators based on their expected availability, committed imports of electricity and the availability declared by generators; and (ii) • in determining demand, CAMMESA included the requirements of distributors and large users purchasing in the WEM as well as committed exports.
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On January 25, 2016, the ME&M issued Resolution No.6/2016, approving the seasonal WEM prices for each category of users for the period from February 2016 through April 2016. Such resolution readjusted the seasonal prices set forth in the regulatory framework. Energy prices in the spot market had been set by CAMMESA, which determined the price charged by generators for energy sold in the spot market of the WEM on an hourly basis. The WEM prices resulted in the elimination of most energy subsidies and a substantial increase in electricity rates for individuals. Resolution No. 6/2016 introduced different prices according to the customers’ categories. Such resolution also contemplated a social tariff for residential customers who comply with certain consumption requirements, which includes a full exemption for monthly consumptions below or equal to 150 kWh and preferential tariffs for customers who exceed such consumption level but achieve a monthly consumption lower than that of the same period in the immediately preceding year. This resolution also established tariff benefits addressed to residential customers for reducing their consumption. SEE Resolution No. 41/16 approved the winter seasonal prices in line with the prices included in SEE Resolution No. 6/16. During the Macri administration, the SGE issued various resolutions by means of which increased the portion of the generation cost to be paid by end users. However, there is still a portion of the generation costs, of approximately 40% for the quarter Feb/20- Apr/20 according to CAMMESA estimates, that it is not transferred to the end users and it is covered by the Argentine Government. This situation led to a delay in CAMMESA’s payments to generators which together with delayed payments from distributors have a negative impact in generator’s operations.

Moreover, SEE Resolution 20/17 allowed the Provinces to collect the royalties to be paid by hydroelectric generators in kind in order to compensate for the debt of provincial distributors.

Resolution SEE 1085/17 established a new scheme for the distribution of the energy transport cost to the final user and generators. Moreover, SRRYME, through Resolutions No. 2/19 and No.7/19, defined the methodology for such distribution and its inclusion in the seasonal price. As of the date of this annual report, seasonal prices approved by the SE do not cover all sector costs.

Term market

Generators may also enter into agreements in the term market to supply energy and capacity to distributors and large users. Distributors are able to purchase energy through agreements in the term market instead of purchasing energy in the spot market. Term agreements typically stipulate a price based on the spot price plus a margin. Prices in the term market have sometimes been lower than the seasonal price that distributors are required to pay in the spot market. However, as a result of the emergency regulations, prices in the term market are currently higher than seasonal prices, particularly with respect to residential tariffs, making it unattractive to distributors to purchase energy under term contracts while prices remain at their current levels.

The term market was suspended by SE Resolution No. 95/2013 which, in this aspect, remains in effect except for the Energy Plus Program and, as of 2017, renewable energy supply contracts.

Situation at TMB and TJSM

The PPAs entered into between CAMMESA and the Bice Fideicomisos S.A. (“BICE”), in its capacity as trustee and acting on behalf of the Trusts, for the purchase and sale of energy produced by TMB and TJSM, terminated on January 6 and February 2, 2020, respectively. Consequently, as from these dates, the remuneration collectable by such power plants are those stipulated for capacity without contracts.

Simultaneously, the respective Trust agreements were terminated. As a consequence, this triggered the process for the incorporation of the Government as a shareholder of TMB and TJSM; once completed, the Trustee will transfer the trust assets —including such power plants— to the beneficiary of the Trust, which are the managing companies, including Pampa. As of the date of this Annual Report, the incorporation of the Government as a shareholder of TMB and TJSM remains pending.

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As TMB and TJSM’s operating and maintenance contracts also terminated on the above-mentioned dates, on January 3, 2020, the applicable amendments to the management contracts were executed extending their validity until the actual transfer of each Trust’s liquidation assets, setting a new remuneration for such management.

Revenues from the Electric Power Generation Activity

Our revenues from the electric power generation activity come from: (i) sales to the Spot market pursuant to the provisions applicable within the WEM administered by CAMMESA (SEE Resolution No. 19/17, from February 2017, SRRYME Resolution No. 1/19 from March 2019 and SE Resolution No. 31/20 from February 2020); (ii) sales contracts with large users within the MAT (Resolutions No. 1,281/06 and No. 281/17); and (iii) supply agreements with CAMMESA (Resolutions No. 220/07, No. 21/16, No. 287/17 and RenovAr Programs). Furthermore, energy not committed under sales contracts with large users within the MAT and with CAMMESA are remunerated at the Spot market.

Remuneration Scheme for Generation Not Covered by Contracts

SEE Resolution No. 19/2017: February 2017 - February 2019

 

The SEE Resolution No. 19/17 issued on February 2, 2017, established a remuneration scheme for legacy capacity which was applied from January 1 to February 28, 2019, when it was amended by SRRYME Res. No. 1/19, which entered into effect on March 1, 2019.

Res. No. 19/17 provided for remunerative items based on technology and scale, establishing U.S. Dollar-denominated prices payable in Argentine Pesos, by applying Central Bank’s exchange rate effective on the last business day of the month of the transaction’s maturity date, according to CAMMESA’s Procedures. 

Thermal Power Generators

The resolution provides for a minimum remuneration for power capacity based on technology and scale and allows generating, co-generating and self-generating agents owning conventional thermal power stations to offer Guaranteed Availability Commitments for the energy and power capacity generated by their units not committed under the Energía Plus service modality or under a WEM Supply Agreement pursuant to SE Resolution No. 220/07.

Availability Commitments for each unit should be declared for a term of three years, together with information for the Summer Seasonal Program (except for 2017, where information may be submitted within the term for the winter seasonal period), with the possibility of offering different availability values for summer and winter six-month periods.

Finally, generators will enter into a Guaranteed Availability Commitment Agreement with CAMMESA, which may assign it to the demand as defined by the SE. The committed thermal generators’ remuneration for power capacity will be proportional to their compliance.

Minimum Remuneration

Applicable to generators with no Availability Commitments:

Technology / Scale Minimum Price (US$/ MW-month)
Large CC Capacity > 150 MW 3,050
Large ST Capacity > 100 MW 4,350
Small ST Capacity ≤ 100 MW 5,700
Large GT Capacity > 50 MW 3,550

 

Base Remuneration

Applicable to generators with Availability Commitments:

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Period Base Price (US$/MW- month)
May 2017 – October 2017 6,000
November 2017 onwards 7,000

 

Additional Remuneration

Additional remuneration is paid for the additional available power capacity aiming to encourage Availability Commitments for such periods with higher energy demand. CAMMESA will define a Monthly Thermal Generation Goal for the set of qualified generators on a bi-monthly basis and will call for additional power capacity availability offers with prices not exceeding the additional price.

Period Additional Price (US$/MW-month)
May 2017 – October 2017 1,000
November 2017 onwards 2,000

 

Hydroelectric Generators

In the case of hydroelectric power plants, a base remuneration and an additional remuneration for power capacity were established. Power capacity availability is determined independently of the reservoir level, the contributions made, or the expenses incurred. Furthermore, in the case of pumping hydroelectric power plants, the following is considered to calculate availability: (i) the operation as turbine at all hours within the period, and (ii) the availability as pump at off-peak hours every day and on non-business days.

Base Remuneration

Determined by the actual power capacity plus that under programmed and/or agreed maintenance:

Classification Base Price (US$/MW- month)
Medium HI Capacity > 120 ≤ 300 MW 3,000
Small HI Capacity > 50 ≤ 120 MW 4,500
Large Pumped HI Capacity > 120 ≤ 300 MW 2,000
Renewable HI Capacity ≤ 50 MW 8,000

Similarly, to the provisions of SE Resolution No. 22/2016, in the case of hydroelectric power plants maintaining control structures on river courses and not having an associated power plant, a 1.20 factor will be applied to the plant at the headwaters.

Additional Remuneration

Applicable to power plants of any scale for their actual availability and based on the applicable period:

Type of Power Plant Period

Additional Price

(US$/MW-month)

Conventional May 2017 – October 2017 500
November 2017 onwards 1,000
Pumped May 2017 – October 2017 -
November 2017 onwards 500

As from November 2017, the allocation and collection of 50% of the additional remuneration will be conditional upon the generator taking out insurance, to CAMMESA’s satisfaction, to cover for major incidents on critical equipment, and the progressive updating of the plant's control systems pursuant to an investment plan to be submitted based on criteria to be defined by the SGE.

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Other Technologies: Wind Power

The remuneration is comprised of a base price of US$7.5/MWh and an additional price of US$17.5/MWh, which is associated with the availability of the installed equipment with an operating permanence longer than 12 months as from the beginning of the Summer Seasonal Programming.

Remuneration for Generated and Operated Energy

The remuneration for Generated Energy is valued at variable prices according to the type of fuel:

Technology / Scale In US$/MWh
Natural Gas Hydrocarbons
Large CC Capacity > 150 MW 5.0 8.0
Large ST Capacity > 100 MW 5.0 8.0
Small ST Capacity ≤ 100 MW 5.0 8.0
Large GT Capacity > 50 MW 5.0 8.0
Internal Combustion Engines 7.0 10.0

 

The remuneration for Operated Energy applies to the integration of hourly power capacities for the period, and is valued at US$2.0/MWh for any type of fuel. In the case of hydroelectric plants, prices for Generated and Operated Energy are as follows:

 

Technology / Scale In US$/MWh
Generated Energy Operated Energy
Medium HI Capacity > 120 ≤ 300 MW 3.5 1.4
Small HI Capacity > 50 ≤ 120 MW 3.5 1.4
Large Pumped HI Capacity > 120 ≤ 300 MW 3.5 1.4
Renewable HI Capacity ≤ 50 MW 3.5 1.4

 

Additional Remuneration for Low-Use Thermal Generators

The resolution provides for an additional remuneration for low-use thermal generators having frequent startups based on the monthly generated energy for a price of US$2.6/MWh multiplied by the usage/startup factor.

The usage factor is based on the Rated Power Use Factor recorded during the last rolling year, which will have a 0.5 value for thermal units with a usage factor lower than 30% and a 1.0 value for units with a usage factor lower than 15%. In all other cases, the factor will equal 0.0.

 

Additional Remuneration for Thermal Generators having Frequent Startups

The startup factor is established based on startups recorded during the last rolling year for issues associated with the economic dispatch made by CAMMESA. It will have a 0.0 value for units with up to 74 startups, a 0.1 value for units recording between 75 and 149 startups, and a 0.2 value for units recording more than 150 startups. In all other cases, the factor will equal 0.

Repayment of Overhaul Financing

The resolution abrogates the Maintenance Remuneration and provides that, with respect to the repayment of outstanding loans applicable to thermal and hydroelectric generators, credits already accrued and/or committed to the cancellation of such maintenance works will be applied first. The balance will be repaid by discounting US$1/MWh for the energy generated until the total cancellation of the financing.

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SRRYME Resolution No. 1/19: March 2019 - January 2020

The SRRYME Res. No. 1/19 was published on March 1, 2019, modifying certain aspects of the remuneration scheme previously defined by SEE Res. No. 19/17.

Thermal Power Generators

The remuneration under SRRYME Resolution No. 1/19 is comprised of a payment for power capacity and a payment for energy (generated and operated energy).

For DIGO generators, the following power capacity base prices apply:

 

Technology / Scale Minimum Price (US$/ MW-month)
Large CC Capacity > 150 MW 3,050
Small CC Capacity > 150 MW 3,400
Large ST Capacity > 100 MW 4,350

 

Small ST Capacity > 100 MW, Internal combustion engineer

 

5,200
Large GT Capacity > 50 MW 3,550
Small GT Capacity ≤ 50 MW 4,600

Furthermore, SRRYME Resolution No. 1/19 provides for a DIGO offer scheme for quarterly periods: (a) summer (December, January and February); (b) winter (June, July and August), and (c) ‘Other’, which comprises two quarters (March, April and May; and September, October and November).

For agents declaring DIGO, the guaranteed power capacity price will apply, which will equal US$7,000/MW-month in the summer and winter quarters, and US$5,500/MW-month in the “Other” quarters.

Additionally, the power capacity remuneration ―whether or not the agent declares DIGO― will be affected by a utilization factor equivalent to the average dispatch factor for the generating unit during the rolling year prior to the calculation month, applying a coefficient range between 70% and 100% of the power capacity price; in this sense, if the usage factor is: (i) higher than 70%, 100% of the power capacity remuneration is paid; (ii) lower than 30%, 70% of the power capacity remuneration is paid; and (iii) equal to or higher than 30% and lower than 70%, the power capacity remuneration is linearly associated with between 70% and 100% of the power capacity remuneration.

Generated Energy remuneration values have decreased by US$1/MWh for all technologies except for Internal Combustion Engines, in which the decrease amounted to US$3/MWh. The Operated Energy remuneration value was reduced from US$2/MWh to US$1.4/MWh.

In case the generator has opted to use its own fuels for generation (pursuant to the option set forth by SGE Resolution No. 70/18) and does not have such availability upon dispatch, the power capacity availability calculation will be reduced to 50% of the actual availability. Similarly, the generator will lose its priority dispatch, and in case the OED assigns it fuel for generation, the Generated Energy will be remunerated at just 50% of the approved non-fuel variable costs.

The additional remuneration scheme to encourage DIGO offered during the periods with a higher demand of the system and the additional remuneration of efficiency-based generation variable costs were eliminated. Furthermore, the additional remuneration for low-use thermal generators was also eliminated.

Hydrological Generators

SRRYME Resolution No. 1/19 maintained the power capacity base prices established by SEE Resolution No. 19/17, as well as remuneration values for Generated Energy and Operated Energy. However, with respect to the power capacity payment, as from March 1, 2019, the hours during which a hydroelectric generator is not available due to programmed and/or agreed maintenance will no longer be computed for the calculation of the power capacity remuneration.

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Similarly to SEE Resolution No. 19/17, in the event that a hydraulic generator operates and maintains facilities that control the course of the river with no hydraulic generation facility directly associated to it, then the capacity remuneration for the main hydraulic generator shall be affected by a factor equal to 1.2.

The energy remuneration for hydraulic generation is equal to US$3.5/MWh for the generated energy and US$1.4/MWh for the operated energy.

Other Items

 

With respect to generation from unconventional sources (wind and photovoltaic solar energy, biomass, biogas from urban solid waste), a single remuneration value for Generated Energy is established at US$28/MWh, irrespective of the source. Energy produced by generators from unconventional sources prior to their commissioning by the OED will be remunerated at 50% of the above-mentioned remuneration.

With respect to refunds to generators under the loan agreements for the execution of overhauls in their units, the Resolution established, firstly, the application of all receivables accrued in favor of generators for settlement, and secondly, a discount scheme in the generator’s revenues equivalent to US$1/MWh for each generated MW, or US$700/MW-month for the unit’s actual availability, whichever is higher.

SE Res. No. 31/20: Current Remuneration Scheme as from February 2020

SE Res. No. 31/20 was published on February 27, 2020, modifying certain aspects of the remuneration scheme set forth by SRRYME Res. No. 1/19, effective as from February 1, 2020. The new resolution converts the entire remuneration scheme into local currency at an exchange rate of Ps.60/US$, and establishes an update factor as from the second month of its application, which follows a formula consisting of 60% CPI and 40% IPIM. However, on April 8, 2020, the SE instructed CAMMESA to postpone the automatic application of the above-mentioned adjustment formula until further notice.

Thermal Power Generators

SE Res. No. 31/20 reduces the power capacity remuneration, whether base or guaranteed, depending on the technology used. However, for thermal generation plants with a total installed power capacity lower than or equal to 42 MW, the base power capacity values set out by SRRYME Res. No. 1/19 remain in effect:

Technology / Scale

Capacity’s Base Price

(Ps./MW-month)

Variation vs. SRRYME Res. No. 1/19*
Large CC Capacity > 150 MW 100,650 -45%
Small CC Capacity ≤ 150 MW 112,200 -45%
Large ST Capacity > 100 MW 143,550 -45%
Small ST Capacity ≤ 100 MW,
Internal Combustion Engines Capacity > 42 MW
171,600 -45%
Large GT Capacity > 50 MW 117,150 -45%
Small GT Capacity ≤ 50 MW 151,800 -45%
Small CC Capacity ≤ 15MW 204,000 -
Small ST Capacity ≤ 15MW 312,000 -
Small GT Capacity ≤ 15MW 276,000 -
Internal Combustion Engines Capacity ≤ 42 MW 312,000 -

Note: * Assumes an exchange rate of Ps.60/US$.

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With regards to the remuneration for the offered guaranteed power capacity, the following scheme remains in effect:

Period

Capacity’s Base Price

(Ps-/MW-month)

Variation vs. SRRYME Res.
No. 1/19*
Summer (December - February) and Winter (June - August) 360,000 -14%
Other (March - May and September - November) 270,000 -18%
Internal Combustion Engines ≤ 42 MW, summer/winter 420,000 -
Internal Combustion Engines ≤ 42 MW, other 330,000 -

Note: * Assumes an exchange rate of Ps. 60/US$.

As is the case for the SRRYME Res. No. 1/19, the SE Res. No. 31/20 provides for the application of a coefficient which results from the unit’s average utilization factor during the last twelve months to the power capacity remuneration. Although the formula remained unchanged for internal combustion engines ≤ 42 MW, in all other cases, if the usage factor is lower than 30%, then 60% of the power capacity payment is collected.

With respect to the additional remuneration in the hours with a HMRT, which consists of the 50 recorded hours with the highest thermal generation dispatch each month, grouped in two-25 hours blocks each, the following will be applied to the average generated capacity during such hours:

Period, in Ps./MW-HMRT First 25 HMRT hours Second 25 HMRT hours
Summer (December - February) and Winter (June - August) 45,000 22,500
Other (March - May and September - November) 7,500 -

 

With respect to the remuneration for generated and operated energy, they remained unchanged in US$ at an exchange rate of Ps.60/US$, but had been set at Ps.240/MWh with natural gas, Ps.420/MWh with fuel oil, Ps.600 with biofuels (except for internal combustion engines, Ps.720/MWh) and Ps.720/MWh with mineral coal. The remuneration for operated energy was set at Ps.84/MWh.

Hydrological Generators

SE Res. No. 31/20 adjusted the power capacity remuneration and added a new HMRT remuneration. The 1.05 factor over the power capacity is maintained to compensate the impact of programmed maintenance, as well as the 1.20 factor for units maintaining control structures on river courses and not having an associated power plant.

Scale Capacity’s Base Price (Ps./MW-month) Variation vs. SRRYME Res.
No. 1/19*
Large HI Capacity > 300 MW 99,000 -45%
Medium HI Capacity > 120 ≤ 300 MW 132,000 -45%
Small HI Capacity > 50 ≤ 120 MW 181,500 -45%
Renewable HI Capacity ≤ 50 MW 297,000 -45%
Large Pumped HI Capacity > 300 MW 99,000 +10%
Medium Pumped HI Capacity > 120 ≤ 300 MW 132,000 -12%

Note: * Assumes an exchange rate of Ps. 60/US$.

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With respect to the HMRT additional remuneration, the following will be applied to the average operated power capacity:

Scale

Capacity’s HMRT Price

Ps./MW-HMRT

Large HI Capacity > 300 MW 27,500
Medium HI Capacity > 120 ≤ 300 MW 32,500
Small HI Capacity >50 ≤ 120 MW 32,500
Renewable HI Capacity ≤ 50 MW 32,500
Large Pumped HI Capacity > 300 MW 27,500
Medium Pumped HI Capacity > 120 ≤ 300 32,500

 

Weighted by the following coefficients:

HMRT December - February, June - August Other
First 25 HMRT hours 1.2 0.2
Second 25 HMRT hours 0.6 -

 

The prices for generated and operated energy have remained unchanged in US$ at an exchange rate of Ps.60/US$, but have been set at Ps.210/MWh and Ps.84/MWh, respectively. The remuneration for operated energy should correspond to the grid’s optimal dispatch. The provision does not indicate, as it does for thermal generators, which would be the consequence for failing to do so.

Other Considerations

For energy generated from any unconventional source, SE Res. No. 31/20 provides for a single remuneration value of Ps.1,680/MWh, which equals the previous remuneration at an exchange rate of Ps.60/US$, or 50% of this value if it is generated prior to commercial commissioning.

Furthermore, SE Res. No. 31/2020 provides for the application of all receivables accrued in favor of generators for settlement to the repayment of loans for the execution of overhauls, and sets a discount scheme in the generator’s revenues equivalent to Ps.60/MWh, or Ps.42,000/MW-month for the unit’s actual availability, whichever is higher. It is worth highlighting that all overhauls financing owed by Pampa were canceled under the CAMMESA Agreement for the Regularization and Settlement of Receivables with the WEM.

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Differential Remuneration for Conventional Energy

SE Resolution No. 1,281/06: Energy Plus Program

In September 2006, the SEE issued Resolution No. 1281/2006 in an effort to respond to the sustained increase in energy demand following Argentina’s economic recovery after the crisis. This resolution sought to create incentives for energy generation plants in order to meet increasing energy needs. The resolution’s principal objective is to ensure that energy available in the market is used primarily to service residential users and industrial and commercial users whose energy demand is equal to or below 300 kW and who do not have access to other viable energy alternatives. To achieve this, the resolution provided that:

·large users in the wholesale electricity market and large customers of distribution companies (in both cases above 300 kilowatts), will be authorized to secure energy supply up to their “base demand” (equal to their demand in 2005) by entering into term contracts; and
·large users in the wholesale electricity market and large customers of distribution companies (in both cases above 300 kilowatts) must satisfy any consumption in excess of their base demand with energy from the Energía Plus system at prices that had to be approved by the ME&M. The Energía Plus system consists of the supply of additional energy generation from new generation and/or generating agents, co-generators or auto-generators that are not agents of the electricity market or who as of the date of the resolution were not part of the WEM.

The resolution also established the price large users were required to pay for excess demand, if not previously contracted under Energía Plus, a price closer to the marginal cost of operations. This marginal cost is equal to the generation cost of the last generation unit transmitted to supply the incremental demand for electricity at any given time. The SEE established certain temporary price caps to be paid by large users for any excess demand (as of the date of this annual report, Ps.1200 for GUMEs and GUMAs and Ps.0 per MWh for GUDIs).

For information about our projects aimed at taking advantage of Energía Plus Program. See “—Our Business—Our Generation Business.

WEM Supply Agreements under SE Resolution No. 220/2007

Aiming to modify the market conditions to encourage new investments and increase the generation supply, the SE passed Res. No. 220/07, which empowers CAMMESA to enter into ‘WEM Supply Commitment Agreements’ with WEM Generating Agents for the energy produced with new generation equipment. These are long-term U.S. Dollar-denominated PPAs, and the price payable by CAMMESA should compensate the investment made by the agent at a rate of return to be accepted by the SE. CTLL, CTP and CTEB have entered into agreements with CAMMESA under this Resolution, which account for a gross power capacity of 856 MW. Furthermore, CTEB has an ongoing expansion project to add 280 MW.

It is worth highlighting that the 10-year term of the PPA for CTP (30 MW) and CTLL’s TV01 (180 MW) expires in July and November 2021, respectively. On the other hand, CTEB has an expansion project underway to add 280 MW under this scheme, for which commissioning is estimated for the first quarter of 2022.

WEM Supply Agreements under SEE Res. No. 21/16

As a result of the state of emergency in the national electricity sector declared by PEN Executive Order No. 134/15, on March 22, 2016 the SEE issued Res. No. 21/16 launching a call for bids for new thermal power generation capacity with the commitment to making it available through the WEM for the 2016/2017 summer, 2017 winter, and 2017/2018 summer periods. Awarded bidders entered into PPAs for a fixed price (in US$/MW-month) and a variable price excluding fuels (in US$/MWh) with CAMMESA, which acted on behalf of distributors and WEM’s GU.

We were awarded the installation of GT05 in CTLL for 105 MW and the construction of CTIW for a 100 MW capacity, both of which have been in service since August and December 2017, respectively. Furthermore, we acquired and developed CTPP for a 100 MW capacity, which was commissioned for service in August 2017.

SEE Resolution No. 287/17: Co-generation and Combined Cycle Projects

On May 10, 2017 the SEE issued Res. No. 287/17 launching a call for bids for co-generation projects and the closing to combined cycle over existing equipment. The projects should have low specific consumption (lower than 1,680 kcal/kWh operating on natural gas and 1,820 kcal/kWh operating with alternative liquid fuels), and the new capacity should not increase electricity transmission needs beyond the existing capacity; otherwise, the cost of the necessary extensions would be borne by the bidder.

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Awarded projects were remunerated under a PPA for a term of 15 years. The remuneration is made up of the available power capacity price plus the variable non-fuel cost for the delivered energy and the fuel cost (if offered), less penalties and fuel surpluses. Power capacity surpluses would be remunerated as legacy capacity.

Within this framework, in September 2017, the SEE issued Res. No. 820/17 awarding only three co-generation projects for a 506 MW power capacity, and, in October 2017, pursuant to Res. No. 926/17, it awarded projects for a total 1,304 MW power capacity, where Pampa was awarded with Genelba Plus’ closing to combined cycle for a 383 MW capacity. Commercial operations at open cycle started in June 2019, and its commissioning at closed cycle started in July 2020. 

Thereafter, SRRYME Resolution No. 25/19 authorized awardees of projects under SEE Resolution No. 287/17 to submit a new scheduled commissioning date, which will operate as the new committed commissioning date under the PPAs, with a limit of 180 days as from the originally committed commissioning date. However, Pampa ratified Genelba Plus CC's commercial commissioning date. For further information on the project to the closing of the combined cycle at Genelba conducted under this resolution, see “Item 4. Information on the Company – Generation – Progress in the Cycle Closing Project at CTGEBA”.

As described above, SE Resolution No. 354/2020 allows generators with PPAs under SEE Resolution 287/17 to assign the operation of the natural gas volumes and transport capacity of their contracts for the supply of the power plants with contracts under the latter resolution. The Company proceeded with such assignment, and an amendment to the PPA must therefore be executed.

Differential Remuneration for Renewable Energy

Measures for the Promotion of Renewable Energy Projects

In October 2015, Law No. 27,191 (regulated by Decree No. 531/16) was passed, which amends Law No. 26,190 on the promotion of renewable sources of energy. Among others, it provided that by December 31, 2025, 20% of the total demand for energy in Argentina should be covered with renewable sources of energy. To meet such objective, WEM’s GU and CAMMESA should cover 8% of their demand with such sources by December 31, 2017, the percentage rising every two years until the objective is met. The agreements entered into with GU and GUDI may not have an average price exceeding US$113/MWh.

Additionally, the Law provides for several incentives to encourage the construction of renewable energy projects, including tax benefits (advance VAT return, accelerated depreciation on the income tax return, import duty exemptions, etc.) and the creation of the FODER, which is destined, among other objectives, to the granting of loans, capital contributions, etc. for the financing of these projects.

RenovAr Program

ME&M Resolution No. 71/16 issued in May 2016 launched the RenovAr (Round 1) Program’s open call for tenders. In October 2016 and pursuant to Resolution No. 213/16, the ME&M awarded 29 projects for a total 1,142 MW (97% of which were wind and solar energy projects), including our 100 MW PEMC project in the Province of Buenos Aires, which was commissioned for service in June 2018. Additionally, in October 2016 ME&M Resolution No. 252/16 was issued launching the RenovAr (Round 1.5) Program’s call for tenders, and the following month ME&M Resolution No. 281/16 was issued, whereby 30 projects for a total 1,281.5 MW (100% which use wind and solar energy projects) were awarded.

Furthermore, in August 2017 ME&M Resolution No. 275/17 was issued launching the RenovAr (Round 2) Program’s call for tenders, and in December 2017 ME&M Resolutions No. 473/17 and 488/17 were issued, whereby 88 projects for a total 2,043 MW (89% of them wind and solar energy projects) were awarded. Finally, in November 2018, SGE Resolution No. 100/18 launched the RenovAr MiniRen (Round 3) Program’s call for tenders for smaller-scope renewable projects (between 0.5 and 10 MW) contemplating its connection to the facilities of the distribution company corresponding to the location, with a maximum 400 MW facility, of which 350 MW are wind and solar energy projects. SSEERR Resolution No. 91/19 awarded projects for a total capacity of 246MW under RenovAr round 3.

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In all projects under the RenovAr rounds, any and all reductions of greenhouse-gas emissions resulting from the power capacity installed throughout the national territory, including that resulting from any other project accounted for to reach the WEM’s renewable power capacity goals set in Law No. 27,191, will be recognized by the Argentine Government towards the fulfillment of the contribution goal under the United Nations Framework Convention on Climate Change and the Paris Agreement.

MAT ER

ME&M Resolution No. 281/17 issued on August 18, 2017 regulated the MAT ER regime, which set the conditions for WEM GU and GUDI to meet their demand supply obligation from renewable sources through the individual purchase within the MAT ER or through self-generation from renewable sources. Furthermore, this Resolution regulates the conditions applicable to renewable power generation projects. Specifically, it created the RENPER, where such projects will be registered.

Projects destined to supply the MAT ER may not be committed under other remuneration mechanisms (e.g., the Renovar program). Surplus energy exceeding commitments with CAMMESA are remunerated until 10% of the generation at the minimum price for the technology covered by the RenovAr Program, and the balance, at the remuneration value for that type of technology set in SEE Resolution No. 19/17.

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

 

We registered the PEPE II, III and IV projects with the RENPER. We also requested the corresponding priority dispatch under ME&M Resolution No. 281/17, which was granted for the whole 160 MW installed capacity of the three projects.

 

Regarding the PEPE IV project, even though it was announced on May 23, 2018, the volatility of the economy and changes in the applicable legislation adversely affected the project (for more information, please see “Our Generation Business”).

 

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WEM Agents payments to CAMMESA

SRRYME Resolution No. 29/19 relaxed the charges and interest rates applicable to WEM agent in default with CAMMESA.

i. Punitive charges: to those WEM agents with no outstanding balance against CAMMESA in the last three months, the charge for default will be equal to 1% of the debt for each day with a cap.

ii. Default Interests rates: If the WEM agent have duly paid the last three payments to CAMMESA prior to the month in default, no punitive charges shall apply and the interest rate shall be equal to that fixed by Banco de la Nación Argentina for its 30 day discount operations, provided that the payment is made within 15 days from its due date.

iii. Compensations: in the case of delays not exceeding 5 days in a certain month, compensations without the application of compensatory interest are allowed by advancing the payment of the following invoice by 2 days per each day of delay.

iv. Charges reduction extension: SRRYME Resolution No. 29/19 extended the 50% reduction in the charges applicable to WEM agents with outstanding debt against CAMMESA until April 30, 2020. SE Resolution No. 148/2020 extended the application of SRRYME Resolution No. 29/19 until December 31, 2020.

Additionally, 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 the abrogation of the COVID-19 isolation. During 2020, there was no adjustment to the prices set forth in Resolution No. 31/2020. For more information, please see (“—Developments relating to the coronavirus may have a material adverse impact on our business operations, financial condition or results of operations”).

Moreover, Law No. 27,591 and SE Resolution No. 40/2020 defined a scheme according to which the Argentine Government will cover up to 66% of the distributors’ debt to CAMMESA. The remaining amounts will be cancelled in 60 monthly installments with a 6-months grace period and a reduced interest rate (50% of the WEM’s interest rate). In order to apply for such scheme, the distributor, together with its relevant regulatory body, shall execute an agreement with the SE in which, among other obligations, it shall guarantee a scheme that allows the distributor to regularly pay the amounts due to CAMMESA in 2021 and provide adequate guarantees (e.g. assignment of the amounts owed to the distributor by its clients). 

In case the distributor has no debt, or if it is “reasonable”, then credits will be recognized. Such credits might be designated for infrastructure investments or widening the distribution network, among other examples. These distributors shall regularly pay the amounts due to CAMMESA. 

The credits to be recognized under both schemes will be funded by loans from the Unified Fund to the Stabilization Fund, but given that such fund is deficient, it is expected to be covered by transfers from the Argentine Government. However, these schemes tend to regularize the energy sector cash flow.

Oil & Gas Regulatory Framework

The Argentine Hydrocarbons Law

 

On October 29, 2014, the National Congress enacted Law No. 27,007 amending Hydrocarbons Law No. 17,319, which considered new drilling techniques in the industry and mainly introduced changes to terms and extensions of exploration permits and exploitation concessions, levies and royalty rates, the incorporation of concepts for on and off-shore unconventional exploration and exploitation, and a promotion regime pursuant to Executive Order No. 929/13, among others. The main changes introduced by Law No. 27,007 are detailed below: 

 

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Unconventional Hydrocarbons Exploitation

 

The Law conferred legal status to the concept of “Unconventional Hydrocarbon Exploitation Concession” created by Executive Order No. 929/13. The term unconventional hydrocarbon exploitation is defined as the extraction of liquid and/or gaseous hydrocarbons by unconventional stimulation techniques applied in reservoirs situated in geological formations of schist rock or slate (shale gas or shale oil), tight sandstone (tight sands, tight gas, tight oil), coal bed methane and/or deposits characterized, in general, by the presence of low permeability rocks.

 

Holders of exploration permits and/or hydrocarbon exploitation concessions will be entitled to request a unconventional hydrocarbon exploitation concession to the enforcement authority pursuant to the following terms:

 

·The exploitation concessionaire may request, within its block, the subdivision of the existing block into new unconventional hydrocarbon exploitation blocks and the granting of an unconventional hydrocarbon exploitation concession. Such request will be based on the development of a pilot plan aiming at the commercial exploitation of the discovered reservoir pursuant to acceptable technical and economic criteria.
·Holders of an unconventional hydrocarbon exploitation concession that are also holders of a preexisting and adjacent exploitation concession may request the unification of both blocks as a single unconventional hydrocarbon exploitation concession, provided they duly demonstrate the geological continuity of these blocks. Such request should be based on the development of a pilot plan.

 

Terms for Exploitation Concessions and Permits

 

The terms for the exploration permits will be established in each tender issued by the enforcement authority according to the exploration’s purpose (conventional or unconventional):

 

i.Conventional exploration: the basic term is divided into two periods of up to three years each, plus an optional extension of up to five years. In this way, the maximum extension for exploration permits is reduced from fourteen to eleven years;
ii.Unconventional exploration: the basic term is divided into two periods of four years each, plus an optional extension of up to five years, that is, up to a maximum of 13 years; and
iii.On and off-shore exploration: the basic term is divided into two periods of three years each, plus an optional extension of one year each.

 

Upon the expiration of the first period of the basic term, the d permit holder will decide whether to continue exploring the block or to transfer it back in whole to the Government. The whole originally-granted block may be kept provided the obligations arising from the permit have been appropriately met. Upon the expiration of the basic term, the holder of the exploration permit will revert the whole block, unless it exercises its right to extend the period, in which case the reversion will be limited to 50% of the remaining block.

 

Exploitation concessions will be granted for the following terms, which will be computed as from the granting resolution’s date:

 

i.Conventional exploitation concession: 25 years;
ii.Unconventional exploitation concession: 35 years; and
iii.Continental shelf and off-shore exploitation concession: 30 years.

 

Moreover, the holder of an exploitation concession may, with a minimum one-year notice before the concession’s expiration, request indefinite extensions for a 10-year term each, provided that it has adequately met its obligations as exploitation concessionaire, hydrocarbons are produced in said block and files an investment plan consistent with the development of the concession.

 

 

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Awarding of Areas

 

Law No. 27,007 proposes drafting of a standard bid form that will be jointly prepared by the SE and the provincial authorities, to which all calls for tenders launched by law enforcement authorities should adjust, and introduces specific criteria for the awarding of permits and concessions by incorporating the specific parameter of “greater investment or exploitation activity” as a tie-breaker, at the PEN or the Provincial Executive Branch’s duly justified discretion, as applicable.

 

·Levies and Royalties

 

The amended Argentine Hydrocarbons Law updated the values related to the exploration and exploitation levy established by Executive Order No. 1,454/07; such values may, in turn, be generally updated by the PEN. The current values for each levy and royalty are detailed below.

 

-Levy

 

Law No. 27,007 set the levy values per km2 or fraction to be paid annually and in advance by the permit holder. The exploitation permit will amount to Ps.4,500. In contrast, for the exploration permit, the following values will apply: Ps.250 in the first period and Ps.1,000 in the second period of the basic term; and Ps.17,500 during the first year of the extension, with a 25% annual cumulative increase.

 

The amount payable for the second period of the basic term and the extension period may be readjusted by offsetting it with exploration investments made until reaching 10% of the levy per km2 applicable for the period.

 

On September 26, 2019, the Province of Neuquén published new levy values per km2 or fraction effective for the said province as from 2020. The exploitation levy was set at Ps.22,410, and the exploration levy at Ps.1,245 for the first period, Ps.4,980 for the second period, Ps.7,470 for the third period, and Ps.87,150 for the extension period (Executive Order No. 2032/19).

 

As of 2021, PEN Executive Order No. 771/20 set a maximum levy in Ps. equivalent to a certain volume of oil at the average domestic market price , at the Banco Nación’s FX rate effective last business day before payment. This scheme is applicable nationwide (including the Province of Neuquén). The exploitation concession amounts to 8.28 barrels. The exploration permit applies 0.46 barrels in the first period and 1.84 barrels in the second period of the basic term; and 32.22 barrels during the extension period.

 

Royalties

 

Royalties are defined as the only revenue the jurisdictions holding title to the hydrocarbons will collect, in their capacity as grantors, from the production of hydrocarbons.

 

The percentage that the exploitation concessionaire should pay on a monthly basis to the grantor as royalties remains at 12% of the proceeds derived from liquid hydrocarbons production extracted at the wellhead. The production of natural gas will bear a similar percentage of the value of extracted and actually used volumes, and will be payable on a monthly basis. In the case of extension, up to 3% additional royalties payment is applicable upon the first extension but limited to an 18% rate.

 

For the conduction of hydrocarbon conventional exploitation complementary activities, as from the granted concession’s expiration and within the unconventional hydrocarbons’ exploitation concession, the enforcement authority may fix additional royalties of up to 3% above the current royalties, up to a maximum of 18%, as applicable.

 

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The PEN or the Provincial Executive Branch, as applicable, acting in its capacity as granting authority, may reduce by up to 25% the amount corresponding to royalties applicable to the production of hydrocarbons during a term often years after the conclusion of the pilot project in favor of companies requesting a hydrocarbon unconventional exploitation concession within a term of 36 months as from Law No. 27,007’s effective date.

 

-Extension Bond

 

For exploitation concession extensions, Law No. 27,007 empowers the enforcement authority to establish the payment of an extension bond, capped by the amount resulting from multiplying the remaining proven reserves at the expiration of the concession by 2% of the average basin price applicable to the specific hydrocarbon during a term of two years before the granting of the extension.

 

-Exploitation Bond

 

The enforcement authority may establish the payment of an exploitation bond, capped by the amount resulting from multiplying the remaining proven reserves associated with the exploitation of conventional hydrocarbons at the expiration of the granted concession by 2% of the average basin price applicable to the specific hydrocarbons for the two years prior to the granting of the hydrocarbon unconventional exploitation concession.

 

-Transportation Concessions

 

Transportation concessions (so far granted for 35 years) will be granted for the same term granted for the originating exploitation concession, with the possibility of receiving subsequent extensions of up to 10 years each. Thus, transportation concessions originating in a conventional exploitation concession will have a basic 25-year term. In contrast, an unconventional exploitation concession will have a basic 35-year term, each in addition to any granted extension term. After these terms expire, title to the facilities will be transferred back to the Federal or Provincial Government, as applicable, by operation of law and without any charges or encumbrances.

 

-Uniform Legislation

 

Law No. 27,007 provides for two types of non-binding commitments between the Federal Government and the provinces regarding tax and environmental issues:

 

i.Environmental Legislation: Provides that the Federal Government and the provinces will seek to establish a uniform environmental legislation primarily aiming to apply the best environmental management practices to hydrocarbon exploration, exploitation and/or transportation with the purpose of furthering the development of the activity while properly protecting the environment.
ii.Tax System: Provides that the Federal Government and the provinces will seek to adopt a uniform fiscal treatment encouraging the development of hydrocarbon activities in their corresponding territories in adherence with the following guidelines:

 

·The gross receipts tax rate applicable to the extraction of hydrocarbons will not exceed 3%;
·The freezing of the current stamp tax rate and the commitment not to charge with it any financial contracts executed in order to structure investment projects, guarantee and/or warrant investments; and
·The commitment by the provinces and its municipalities not to impose new taxes —or increase the existing ones— on permit and concession holders, except for service compensation rates, improvement contributions and general tax increases.

 

Restrictions on the Reservation of Blocks to National or Provincial Government-Controlled Companies

 

The amendment to the Argentine Hydrocarbons Law restricts the Federal Government and the provinces from reserving new blocks in the future in favor of public or mixed-capital companies or entities, irrespective of their legal form. However, contracts entered by local companies for the exploration and development of reserved blocks before this amendment are safeguarded.

 

 

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Regarding blocks that have already been reserved in favor of public companies and that have not yet been awarded under joint venture agreements with third parties, associative schemes may be used, in which case the participation of such companies during the development stage will be proportional to their investments. Thus, the “carry” system during the blocks’ development or exploitation stage has been eliminated. Such system has not been prohibited for the exploration stage. 

 

Conventional and Unconventional Hydrocarbon Investment Promotion Regime

 

On July 11, 2013, the PEN issued Executive Order No. 929/13, which created the Investment Promotion Regime for the Exploitation of Hydrocarbons —both conventional and unconventional— to encourage investments and the concept of unconventional exploitation concession.

 

Law No. 27,007 extended the benefits of the Promotion Regime to hydrocarbon projects involving a minimum US$250 million foreign currency direct investment, assessed at the time the hydrocarbon exploitation investment project is presented, to be invested during its first three years. Before the amendment, the Promotion Regime benefits reached investment projects denominated in foreign currency for a minimum of US$1,000 million amount during a term of five years.

 

Holders of exploration permits and/or hydrocarbon exploitation concessions, and/or third parties associated and registered with the National Registry of Hydrocarbon Investments submitting this kind of projects will enjoy, as from the third year of execution, the right to freely sell abroad 20% and 60% of the liquid and gaseous hydrocarbon production in the case of conventional and unconventional exploitation projects and offshore projects, respectively, with a 0% export duty, if applicable. Moreover, they will have free availability of 100% of the foreign currency derived from the exportation of these hydrocarbons, provided the applicable projects have involved a minimum of US$250 million of foreign currency entering into the Argentine financial market.

 

During periods in which the national production of hydrocarbons is insufficient to meet domestic needs pursuant to Section 6 of the Argentine Hydrocarbons Law, those covered by the Promotion Regime will have, as from the third year following the execution of their respective investment projects, the right to obtain a price which shall not be lower than the reference export price (without computing the incidence of any applicable withholdings) from the exportable liquid and gaseous hydrocarbon percentage produced under such projects.

 

According to these investment projects, Law No. 27,007 provides for two contributions payable to the producing provinces, where the investment project is developed: (i) 2.5% of the investment amount paid by the project holder, destined to corporate social responsibility projects; and (ii) an amount determined by the Hydrocarbon Investments Committee paid by the Federal Government, based on the size and scope of the investment project, destined to infrastructure projects.

 

 

Regulations Specifically Applicable to the Gas Market

 

 

Plan Gas.Ar

 

According to Decree No. 892/20, on November 16, 2020, Plan Gas.Ar program was created to promote Argentine natural gas production, reduce and replace LNG and liquid fuels imports, provide supply chain predictability, and manage the impact of the cost of gas on the tariff of the priority demand. The on-shore production term is four years, with an additional four years for offshore production, as from January 2021. Beneficiaries of the Unconventional Plan Gas opting to participate in this program should first file their waiver.

 

Tender methodology and purchasing conditions

 

The SE instrumented a tender between producers as sellers, and CAMMESA, gas distributors and IEASA (in the case of Patagonia, Malargüe and the Puna), as purchasers, for a total base volume of 70 million m3/day (67% for the Neuquina Basin), extendable for the winter period (May – September), with 100% daily DoP and 75% monthly ToP condition for CAMMESA and quarterly for gas distributors and IEASA. The maximum base price for the Neuquina Basin to tender was US$3.7/MBTU. Moreover, the awarded price will be adjusted by a 0.82 factor for the non-winter period, 1.25 for the winter period, and 1.30 for the additional volume during winter.

 

The producer commits a minimum production per basin and per month as from January 2021 equivalent to the base injection (average between May and July 2020), and a maximum production lower than or equal to 70% of the production committed for the May – July 2021 period in the case of onshore production, and May - July 2020 for offshore production. Additionally, producers must submit an investment plan to maintain the committed production and a national added-value commitment providing the development of direct local, regional and national suppliers.

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If the injection in the months of June, July and/or August is lower than that committed, the producer may offset the shortfall with: (i) own production from another basin or acquired from another signatory producer, as long as there is available transportation capacity; (ii) imports on its own account; (iii) a payment equivalent to 2 times the shortfall volume at the tendered price with a 1.25 adjustment factor.

 

Moreover, participating producers may export on a firm basis, with a preferential order for those tendering lower prices, up to the aggregate volume of 11 million m3/day (64% Neuquina Basin) during the non-winter period, extendable to the winter period provided there is an oversupply in a specific basin.

 

Regarding the price payable, purchasers CAMMESA and IEASA will make the payment at the price awarded under the Plan Gas.Ar call for tenders, whereas gas producers will pay the amount established in the tariff scheme in force, and the difference in the awarded price will be compensated by the Argentine Government. According to the concession, this compensation will be subject to withholding according to the province and/or the Argentine Government’s royalties rate. As long as the producer submits the production’s affidavit within 30 days after the closing of the injection month, they will receive a provisional payment of 75% of the compensation net of royalties within the following 30 days, and the adjusted payment for the balance within 60 days as from the presentation of the affidavit certified by independent auditors, considering Banco Nación’s selling exchange rate on the last business day of the injection month.

 

Additionally, according to the Plan Gas.Ar framework, the Argentine Government created a guarantee system to secure compensation, notwithstanding other mechanisms, based on the recognition of fiscal credits, in accordance with the applicable legislation and as regulated by the enforcement authority and/or AFIP. Such mechanism was regulated by SE Resolution No. 125/2021, which instrumented electronic certifications in foreign currency that producers may directly apply to fulfill fiscal liabilities in Plan Gas.Ar default by the Argentine Government. Moreover, the SE will be empowered to make the awardees’ guarantee enforceable before the AFIP. The AFIP instruments said system on March 4, 2021.

 

Finally, the BCRA should establish appropriate mechanisms to facilitate access to the MLC, as long as the funds have been admitted by the MLC and subsequently to the coming into effect of the DNU, and destined to the financing of projects under the Plan Gas.Ar.

 

Tender award

 

On December 15 and 29, 2020, the SE awarded 67.4 million m3/day of natural gas (55% of which was destined to power plants) at an average annual base price of US$3.5/MBTU, as well as an additional volume of 3.6 million m3/day during the winter period at a price of US$4.7/MBTU. Pampa was awarded a base volume of 4.9 million m3/day at US$3.6 per million BTU and an additional volume of 1.0 million m3/day during the winter period at a price of US$4.7 per million BTU.

 

Moreover, Pampa was one of the three producers tendering additional volume during the winter period, being awarded 1 million m3/day for US$4.68 per million BTU. Out of the 4.9 million m3/day of the base tender, 56% will be destined to power plants and the balance to gas distributors or IEASA. In contrast, the additional winter volume will be destined to gas distributors or IEASA.

 

Hence, Pampa achieved the highest growth in tendered production, with the winter peak injection 20% higher than average output between May and July 2020, with an approximate investment of US$250 million during the four years of Plan Gas.Ar. This winter volume is critical to support the highly seasonal gas demand, reduce gas imports and alternative fuels consumption, and moderate foreign currency reserves.

 

Finally, on February 22, 2021, pursuant to Resolution No. 129/2021, the SE called for a second round to award additional winter gas volumes at Neuquina and Austral Basins, with a daily DoP between 75% and 100% for 2021 and 100% for 2022-2024, and 75% monthly ToP. The maximum bidding price was equivalent to the awarded price on the first round. Through SE Resolution No. 169/21, a total average volume of 3.3 million m3/day at US$4.7 per MBTU, is to be delivered as of June 2021. Pampa participated in said round, being awarded 0.8 million m3/day at US$4.7 per MBTU. Additionally, the awarded companies will have to enter into a contract with IEASA.

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Natural Gas for the Residential and CNG Segment

 

-Priority Demand and CEE

 

In June 2016, criteria were established to guarantee the Priority Demand's meeting through the CEE in case of operational emergencies that may affect its regular operation (MEyM Res. No. 89/16, as amended). In June 2017, the procedure for the administration of dispatch in the CEE was approved (ENARGAS Res. No. 4502/17). If the CEE did not reach an agreement, ENARGAS defines the required supply considering each producer’s available quantities, deducting the amounts previously contracted to meet the Priority Demand, with a progressive allocation until matching the proportional quota of each producer/importer in the Priority Demand.

 

-Natural Gas Price within the PIST

 

In December 2017, the extension period set forth by Law No. 27,200 to the public emergency declared in 2002 terminated. Therefore, Law No. 24,076 was reinstated, which provides that the price of natural gas supply should be determined by the free interaction of supply and demand.

 

In mid-February 2019, a call for tenders 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 and for a term of 12 months starting April 2019. For the Noroeste Basin, 9.4 and 3.8 million m3 per day were assigned for the winter (April-2 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. Pampa participated and was awarded in this tender.

 

Producers billed to distribution companies in Pesos considering Banco Nación’s average exchange rate for the first 15 days of the month immediately preceding the beginning of each seasonal period or, if lower, the exchange rate stipulated in the agreements (ENARGAS Res. No. 72/19). However, the 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. These agreements expired on March 31, 2020. Given the devaluation of the Ps. added to the tariff freeze (Solidarity Law), as from April 2020 pricing agreements began to be based on the range recognized by ENARGAS in the tariff schemes.

 

In December 2020 the tender under Plan Gas.Ar was conducted, agreeing on the supply to gas distributors and power plants for the 2021-2024 period for a total of 67.4 million m3/day, 35% of which will be destined to distributors. The average tendered annual base price was US$3.5/MBTU, and an additional winter volume of 3.6 million m3/day was awarded at an average annual base price of US$4.7/MBTU to be exclusively destined to the Priority Demand. Pampa participated and was awarded in this tender.

 

Further, PEN Executive Order No. 1053/18 provided that the Federal Government would bear the difference between the price of gas purchased by distributors and that recognized in final tariffs between April 2018 and March 2019. As of the date of this annual report, Pampa has collected the first installment of Ps. 41 million. However, on December 14, 2020 Law No. 27,591 was published, which abrogated this executive order. Pampa is evaluating the courses of action to take.

 

It is worth highlighting that as from 2021 and pursuant to SE Res. No. 354/20, the new reference price at the PIST was set for natural gas production out of Plan Gas.Ar, at US$2.30/MBTU in the summer (October – April) and US$3.50/MBTU in the winter (May – September) for the Neuquina Basin.

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·Natural Gas for Power Generation

 

From December 30, 2019, the supply of fuel for power plants was again centralized in CAMMESA (except for generators covered by Energía Plus contracts and under SEE Res. No. 287/17). CAMMESA has launched successive tenders to cover its monthly consumption. On December 27, 2019, it called for tenders for January 2020 on an interruptible basis, at an average PIST price of US$1.73/MBTU in the Neuquina Basin. However, from February to December 2020, CAMMESA launched a tender for the purchase of gas on a partially firm basis, with a 30% DoP, the resulting average PIST price being US$2.24/MBTU for the Neuquina Basin. Pampa participated in these tenders.

 

As of 2021, most of Pampa’s gas to CAMMESA is channeled through the Plan Gas.Ar, for the volumes committed under this program for a term of 4 years. Pampa participated and was awarded in this tender. However, CAMMESA’s monthly tender mechanism is still in force, complementary to the Plan Gas.Ar and, therefore, on December 22, 2020, and January 27 and February 24, 2021, CAMMESA launched tenders for gas consumption in the months of January, February and March 2021, respectively. The resulting average price at the wellhead for the three months was US$2.30/MBTU for Neuquina Basin, respectively. For producers not awarded under Plan Gas.Ar, the tender was under a 30% DoP condition, whereas for beneficiaries of Plan Gas.Ar, it was on an interruptible basis. Pampa participated in these tenders.

 

Generators covered by Energía Plus and SEE Res. No. 287/17 contracts had the option of assigning the natural gas operation and transportation to CAMMESA.

 

·Natural Gas Export

 

SGE Res. No. 417/19 passed in July 2019 established the procedure for the authorization of natural gas exports, with the security of supply to the Argentine domestic market being a condition in all cases. It is worth highlighting that the exported volume does not qualify for calculating the incentive for domestic production encouragement programs.

 

In this sense, in September 2019 Pampa obtained a permit to export natural gas on a firm basis to Refinerías ENAP in Chile until May 15, 2020. In November 2020 it obtained new permits to export gas to several customers in Chile, on an interruptible basis, expiring between April 2021 and January 2022.

 

Furthermore, awardees tendering lower prices under Plan Gas.Ar have preferential access to firm exports during the summer period, extendable to the winter period when there is an oversupply in a specific basin, and with the prior approval of the applicable authority.

 

In the case of higher costs incurred by the Federal Government as a result of the use of alternative fuels for the WEM’s power generation (imported LNG, coal, FO, or GO), between September 15, 2019, and May 15, 2020, exporting companies should compensate CAMMESA (SGE Res. No. 506/19). The range between US$0.1 and 0.2/MBTU was set for the exported volume, which could be offset by receivables from CAMMESA held by each exporter for the sale of gas in the domestic market. Said compensation would be included in the cost of electricity in the WEM.

 

Finally, there was an export duty of Ps.4 per exported US$ in effect as from September 2018, with a maximum 12% rate (PEN Executive Orders No. 793/18 and 865/18). The Solidarity Law provided that, effective as from December 23, 2019, this rate may not exceed 8% of the taxable value or the FOB price. However, until its regulation, PEN Executive Orders No. 793/18 and 865/18 continued to apply. PEN Executive Order No. 488/20, issued on May 19, 2020, provided for an export duty exemption as long as the international Brent price was equal to or below US$45/bbl. The rate could rise to 8% proportionally with the international reference price, the cap to be recognized when the reference price equals or exceeds US$60/bbl. As of the date of this annual report, the rate amounts to 8%.

 

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Regulations Specifically Applicable to the Crude Oil Market

 

·Crude Oil Commercialization in the Domestic Market

 

In response to the sharp drop in international reference prices and the domestic demand resulting from the ASPO, Executive Order No. 488/20 established a local commercialization reference price for Medanito-type crude oil of US$45/bbl, effective from May 19 to December 31, 2020. This measure was rendered ineffective on August 28, 2020, date on which the reference Brent price exceeded US$45/bbl for 10 consecutive calendar days. The Executive Order also established the obligation of producers to maintain the activity and/or production levels reported during 2019, taking into consideration the current situation caused by the COVID-19 pandemic.

 

·Liquid Hydrocarbons Export Duty

 

As for natural gas exports, as from September 2018 there was an export duty of AR$4 per exported US$, with a maximum 12% rate (PEN Executive Orders No. 793/18 and 865/18). The Solidarity Law provided that, effective as from December 23, 2019, this rate may not exceed 8% of the taxable value or the FOB price. However, until its regulation, PEN Executive Orders No. 793/18 and 865/18 continued to apply. PEN Executive Order No. 488/20, issued on May 19, 2020, provided for an export duty exemption as long as the international Brent price was equal to or below US$45/bbl, rising gradually as the international reference price increased until reaching 8%, the cap to be recognized when the reference price equals or exceeds US$60/bbl. As of the date of this annual report, the rate amounts to 8%.

 

Midstream

 

·Regulations Specifically Applicable to the LPG Business

 

-Household Gas Bottles’ Program and Propane for Grids Agreement

 

The program for the supply of butane for gas bottles at subsidized prices, created by PEN Executive Order No. 470/15 and encompassed under the Household Gas Bottles’ Program (SRH Resolution No. 56/17, as amended), is currently in force, and provides for the supply of a defined quota of LPG to fractionation companies, under a maximum reference price, to benefit low-income residential users. The sales price for butane and propane sold under the Household Gas Bottles’ Program is determined by the SRH, which set a price of Ps. 9,895/ton for butane and Ps. 9,656/ton for propane as from July 1, 2019 (SHC Provisions No. 104/19). Later, prices were updated to Ps. 10,885/ton for both products effective as from October 19, 2020 (SE Resolution No. 30/20). Consequently, the participation in this program forces TGS and Refinor to produce and sell LPG at prices ostensibly lower than market prices, which entails adopting the necessary mechanisms to minimize its negative impact.

 

With respect to the Agreement for the Supply of Propane Gas for Undiluted Propane Gas Distribution Grids, on May 30, 2018, TGS executed the 16th extension to the agreement, which set a new methodology for the determination of the price and volumes to be sold under this program for the April 1, 2018 -December 31, 2019 period. On January 14, 2020 TGS received the SE’s instruction to proceed with the deliveries pursuant to such extension. On August 25, 2020, TGS executed the seventeenth extension to the Propane for Grids Agreement, effective until December 31, 2020. As of the date of release of this Annual Report, this program has not been postponed.

 

Both the Household Gas Bottles’ Program and the Propane for Grids Agreement provide for a compensation payable by the Federal Government to participants, which is calculated as the difference between the sale price under such agreement and the export parity published by the SRH on a monthly basis, although with significant delays in collection terms.

 

-Natural Gas Import Financing Charges

 

Regarding Res. I-1,982/11 and I-1,991/11 issued by ENARGAS, which at the time provided for an approximate 700% increase in the natural gas import financing charge (created by PEN Executive Order No. 2,067/08), on March 26, 2019, TGS was served notice of the first-instance ruling upholding its claim for unconstitutionality and nullity of the above-mentioned provisions. The Federal Government appealed this ruling on March 29, 2019; the appeal was granted on April 3, 2019, and has not been resolved as of the date hereof.

 

On December 1, 2020, the Court hearing the case resolved, taking into consideration the ruling and in view of the reasons alleged by TGS, to extend the validity of the granted injunction for a term of six months in such ordinary proceeding and/or until a final and conclusive ruling is issued.

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-Export Duty

 

As for hydrocarbon exports, as from September 2018 there was an export duty of Ps. 4 per exported US$ for propane, butane and LPG, with a maximum 12% rate (PEN Executive Orders No. 793/18 and 865/18). The Solidarity Law provided that, effective as from December 23, 2019, this rate may not exceed 8% of the taxable value or the FOB price. However, until its regulation, PEN Executive Orders No. 793/18 and 865/18 continued to apply. PEN Executive Order No. 488/20, issued on May 19, 2020, provided for an export duty exemption as long as the international Brent price was equal to or below US$45/bbl, rising gradually as the reference price increases up to 8%, the cap to be recognized when the Brent equals or exceeds US$60/bbl. As of the date of this annual report, the rate amounts to 8%.

 

·Regulations Specifically Applicable to Crude Oil Transportation

 

In June 2016, OldelVal requested the performance of the RTI to the MEyM as tariffs were insufficient to develop a maintenance and investment plan that may guarantee the integrity, efficiency and reliability of the facilities and transportation service. Consequently, on March 10, 2017, a new US$-denominated tariff scheme was published, providing for an average 34% increase, effective for a term of 5 years as from March 2017 (MEyM Res. No. 49/17). In November 2018 Pampa divested 21% of Oldelval’s capital stock to ExxonMobil Exploration Argentina S.R.L., keeping a 2.1% equity interest in OldelVal.  

 

 

Item 4A.Unresolved Staff Comments

Not applicable.

Item 5.Operating and Financial Review and Prospects

 

This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Forward-Looking Statements” and “Item 3. Key Information—Risk Factors” and the matters set forth in this annual report generally.

The following discussion is based on, and should be read in conjunction with our Consolidated Financial Statements and related notes contained in this annual report.

Sources of Revenues

Generation

Our generation operations derive revenues from the sale of electricity sales contracts with large users within the MAT, supply agreements with CAMMESA and sales to the spot market.

 

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Distribution of Energy

 

On account of the execution of the contract for the sale of our 51% interest in Edenor (see detail in Note 5.3.1 to our Consolidated Financial Statements and Item 4. “Relevant Events—Sale of Controlling Stake in Edenor.”), Edenor’s revenues mainly from electricity sales to users in our distribution service area (on the basis of applicable tariffs), were disclosed within discontinued operations.

Oil & Gas

Our oil and gas operations derive revenues from the sale of natural gas to generators and industrial clients. Regarding crude oil, we sell our production mainly in the domestic market.

Petrochemicals

Our petrochemicals operations generate revenues from the sale of styrene, polystyrene and elastomers, and plastics derived from oil production. 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. These revenues are recognized when the possession of the product is transferred.

Holding and others segment

Our holding and others segment generate revenues from contracts with customers in relation to advisory services to related companies.

Factors Affecting Our Results of Operations

Our results of operations are principally affected by economic conditions and inflation in Argentina, changes in local and international crude oil prices, natural gas prices and international petrochemical product’s prices, fluctuations in demand for oil related products, natural gas and electricity in Argentina, costs of sales and operating expenses.

The measures implemented by the Federal Government to contain the spread of COVID-19 have impacted our results of operations mainly by affecting the recoverable value of property, plant and equipment, intangible assets and inventories (see detail in Notes 1.2 and 11.1 to our Consolidated Financial Statements).

The Company adopted the U.S. Dollar as its functional currency commencing on January 1, 2019; therefore, previous comparative figures were restated 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, and were translated into U.S. Dollars using the exchange rate as of that date.

Additionally, results of operations related to the divestment, during 2018, of our refining and distribution segment’s main assets and certain oil and gas assets, have been disclosed within discontinued operations in the consolidated statement of comprehensive income.

Finally, commercial interests presented in comparative form have been reclassified from financial income to other operating income to maintain consistency with present period’s figures in accordance with the change of policy detailed in Note 4 to our Consolidated Financial Statements.

Argentine Economic Conditions and Inflation

Because most of our operations, facilities and customers are located in Argentina, we are affected by general economic conditions in the country. In particular, the general performance of the Argentine economy affects demand for energy, and inflation and fluctuations in currency exchange rates affect our costs and our margins. Inflation primarily affects our business by increasing operating costs, while reducing our revenues in real terms.

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In December 2001, Argentina experienced an unprecedented crisis that virtually paralyzed the country’s economy through most of 2002 and led to radical changes in the Argentine Government’s policies. The crisis and the Argentine Government’s policies during this period severely affected the energy sector, as described below. Although over the following years the Argentine economy recovered significantly from the crisis, and the business and political environment was largely stabilized, the Argentine Government has only recently begun to address the difficulties experienced by the Argentine electricity sector as a result of the crisis and its aftermath.

The following table sets forth key economic indicators in Argentina during the years indicated:

  Year ended December 31,
  2020   2019   2018
Real GDP (% change) -9.9%   -2.1%   -2.5%
Nominal GDP (in millions of Pesos) 27,021,238   21,447,250   14,605,790
Real Consumption (% change) -13.1%   -6.6%   -2.4%
Real Investment (% change) -13.0%   -16.0%   -5.8%
Industrial Production (% change) -7.6%   -6.3%   -5.0%
Consumer Price Index 36.1%   53.8%   47.6%
Nominal Exchange Rate (in Ps. /US$ at year end) 84.15   59.90   37.81
Exports (in millions of US$) 54,884   65,115   61,782
Imports (in millions of US$) 42,356   49,125   65,483
Trade Balance (in millions of US$) 12,528   15,990   -3,701
Current Account (% of GDP) 0.8%   -0.9%   -5.4%
Reserves (in millions of US$) 39.4   44.8   65.8
Tax Collection (in millions of Pesos)  7,237,410,240    5,473,537,926    3,713,409
Primary Surplus (in millions of Pesos) -1,749,957,278   -95,122   -338,987
Public Debt (% of GDP at December 31) * 104.5%   90.2%   86.2%
Public Debt Service (% of GDP) 2.0%   3.4%   2.7%
External Debt (% of GDP at December 31) 84.5%   77.8%   72.1%

Sources: INDEC; Central Bank; Ministry of Treasury.

*Includes hold-outs

 

Economic Recovery and Outlook

 

In 2018, additional volatility occurred in the exchange market due to a lack of predictability generated by the SBA with the IMF. After a financial crisis during the first half of 2018, the wholesale Peso exchange rate devalued 54% as of June 2018 compared to December 2017. In August 2018, economic volatility intensified as a result of the exchange rate increasing to approximately Ps.40 per US$1.00. During 2018, economic factors such as the increase in the exchange rate and the Argentine Government’s decision not to renew the LEBACs, which had strongly increased the monetary base, contributed to the increase of inflation.

 

In response to increased inflation, the Central Bank applied a restrictive monetary policy and increased reference interest rates which caused a reduction in economic activity. In September 2018, the Central Bank modified the monetary policy with a focus on monetary-aggregates targets and maintaining the monetary base constant until mid-2019. Such monetary policy measures combatted inflation directly and contributed to a decrease in economic activity in the construction, commerce and manufacturing sectors.

 

In 2018, due to the external crisis and its domestic impact, which resulted in a fiscal and exchange rate crisis, cumulative economic activity decreased approximately 2.6%, as compared to 2017. Public consumption decreased by approximately 3.0%, while exports, net of imports, decreased by approximately 7.5%, compared to 2017. The contraction in economic activity negatively impacted 13 of the 16 economic sectors, with decreases in manufacturing (14.2%), wholesale and retail sales and repairs (15.7%) and construction (12.7%). However, such economic activity decreases were partially offset by increases in the agriculture, livestock, hunting and forestry (4.7%), Education (1%) and Health and social services (0.4%) sectors.

 

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In 2018, the Cost of Living Index published by the INDEC showed a variation of 47.6%. The greatest variations in the index were increases in the following sectors: transportation (66.8%), communications (55.3%), and basic goods and services (53.2%). The least affected sectors were alcoholic beverages and tobacco (28.3%), clothing and footwear (33.1%) and education (32.1%). Wages measured by the Permanent Workers’ Average Taxable Remuneration (Remuneración Imponible Promedio de los Trabajadores Estables or “RIPTE”), increased by 29% between December 2018 and December 2017.

According to the INDEC, the estimated current account deficit in December 2018 totaled US$3.8 billion (which represented 4.7% of the GDP). In 2018, FOB value estimated exports totaled US$61.6 billion, whereas the CIF value of estimated imports amounted to US$65.4 billion. In December 2018, exports of primary products increased approximately 36.9%, whereas exports of agricultural manufacturing and industrial manufacturing increased by approximately 11.8% and 9.9% respectively. Fuel and energy exports recorded an estimated decrease of 13.5%, amounting to US$4 billion. As for imports, capital goods decreased approximately 38% comprising fuel and lubricants 33.9%, parts and accessories for capital goods 22.9%, consumer goods 33.7%, passenger motor vehicles 62.8%. Imports of intermediate goods increased approximately 0.2%.

In 2018, the non-financial public sector’s tax accounts recorded a cumulative primary and total deficit of 2.5% and 5.3% of GDP, respectively. Tax revenues increased 30.7% as compared to 2017. Moreover, primary expenditures showed a year-on-year variation of 22.4%, as compared to that of 2017.

Central Bank’s US$ wholesale exchange rate (Resolution A3500) was Ps.37.81/US$ as of December 31, 2018, showing a cumulative 101.4% increase compared to the end of 2017 and a 69.6% average year-on-year variation. Central Bank’s international reserves stock amounted to US$65.8 billion at closing, which represents a US$10.7 billion increase compared to the previous year. Moreover, the monetary base reached Ps.1,409 billion, showing a 40.7% increase at the closing of 2018 compared to the previous year. Furthermore, Central Bank’s debt stock in issued bonds amounted to US$19.4 billion as of the closing of 2018, which represents a 69% year-on-year contraction.

As of the third quarter of 2019, the economic activity recorded an accumulated 2.5% decrease compared to the same period of the previous year, mainly as a result of the 7.8%, 1.1% and 17.8% decreases in private and public consumption, and investment, respectively. The activity contraction affected 10 out of 16 identified sectors of the Argentine economy, the most affected being financial intermediation (-12.4%), wholesale and retail business and repairs (-9.4%) and manufacturing industry (-7.6%). These declines were partially offset by increases in agriculture, livestock, hunting and forestry (+26.3%), private households with domestic service (+5.8%) and mining and quarrying (+1.1%), among others. These declines were also partially offset by a 77.1% year-on-year increase in exports net of imports.

 

With regards to the evolution of prices, the National Cost of Living Index published by the INDEC showed a 53.8% variation in 2019. The most important variations were recorded in health (+72.1%), communications (+63.9%) and household equipment and maintenance (+63.7%). The sectors affected to a lower extent were housing, water, electricity and other fuels (+39.4%), education (+47.1%) and leisure and culture (+48.5%). Furthermore, salaries, as measured by the registry of the Stable Workers’ Average Taxable Remuneration (RIPTE) experienced a 44.4% year-on-year increase between December 2019 and the same month of the previous year.

 

Moreover, as of December 2019 the non-financial public sector’s fiscal accounts accumulated a 0.5% and 4.0% primary and total deficit to GDP, respectively. The annual variation in aggregated tax revenues, measured in Pesos based on figures published by the Federal Administration of Public Revenue, ended 2019 with a 47.4% increase compared to 2018. Besides, in 2019 primary expenditures by the National Treasury showed a 37.2% year-on year variation.

With respect to the financial situation, the Central Bank’s U.S. Dollar currency wholesale exchange rate (Res. A3500) closed at Ps.59.90/US$ on December 31, 2019, showing a cumulative 58.4% increase compared to the end of 2018 and a 71.7% average year-on-year variation. The Central Bank’s international reserves amounted to US$44.8 billion at year-end, which represents a US$20.9 billion decrease compared to the previous year. Moreover, the monetary base reached Ps.1,895 billion, showing a 34.5% increase at the closing of 2019 compared to the previous year. Furthermore, the Central Bank’s debt stock in issued bonds totaled an equivalent amount expressed in dollars of US$17.8 billion as of the closing of 2019, which represents a 9% year-on-year contraction.

 

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Finally, at the external level, as of the third quarter of 2019 the cumulative current account deficit amounted to US$6.5 billion according to INDEC’s data, which represents 1.4% of the GDP. However, in the first three quarters of 2019, the trade balance recorded a surplus of US$1.5 billion, whereas Free on Board value exports reached US$48.0 billion, and Cost, Insurance and Freight value imports amounted to US$38.5 billion. Primary exports increased by 26.3% during this period, as well as agricultural manufactures exports, which experienced a 2.6% increase, while industrial manufactures exports experienced a 7.1% contraction. Fuel and energy exports experienced a 5.9% increase, reaching US$3.2 billion. Imports showed a contraction compared to the same period of 2018 in the automotive (-56.5%), capital goods (-34.3%), fuels and lubricants (-33.2%), consumables goods (-28.6%), parts and accessories (-19.1%) and intermediate goods (-13.5%).

 

As of the fourth quarter of 2020, the economic activity recorded an accumulated 9.9% decrease compared to the same period of the previous year, mainly as a result of the 13.1%, 4.7% and 13.0% decreases in private and public consumption, and investment, respectively. The activity contraction affected 14 out of 16 identified sectors of the Argentine economy, the most affected being hotels and restaurants (-49.2%), other community, social and personal activities (-39.9%), construction (-22.6%) and phishing (-20.9%), while financial brokerage and electricity, gas and water experienced a 2.1% and 0.9% increase, respectively. These declines were also partially offset by an increase in exports net of imports of 27.9%.

 

With regards to the evolution of prices, the National Cost of Living Index published by the INDEC showed a 36.1% variation in 2020. The most important variations were recorded in clothes and footwear (+60%), leisure and culture (+48.0%) and food and beverage (+42.1%). The sectors affected to a lower extent were communications (+7.6%), housing, water, electricity and other fuels (+17.6%) and education (+20.1%). Furthermore, salaries, as measured by the registry of the Stable Workers’ Average Taxable Remuneration (RIPTE) experienced a 34.9% year-on-year increase between December 2020 and the same month of the previous year.

 

Moreover, as of December 2020 the non-financial public sector’s fiscal accounts accumulated a 6.5% and 8.5% primary and total deficit to GDP, respectively. The annual variation in aggregated tax revenues, measured in Pesos based on figures published by the Federal Administration of Public Revenue, ended 2020 with a 32.2%. Besides, in 2020 primary expenditures by the National Treasury showed a 63.5% year-on year variation.

With respect to the financial situation, the Central Bank’s U.S. Dollar currency wholesale exchange rate (Res. A3500) closed at Ps.84.15/US$ on December 31, 2020, showing a cumulative 40.5% increase compared to the end of 2019 and a 46.3% average year-on-year variation. The Central Bank’s international reserves amounted to US$39.4 billion at year-end, which represents a US$5.5 billion decrease compared to the previous year. Moreover, the monetary base reached Ps.2,470 billion, showing an increase of 30.3% compared to the previous year. Furthermore, the Central Bank’s debt stock in issued bonds totaled an equivalent amount expressed in dollars of US$35.0 billion as of the closing of 2020, which represents a 97% year-on-year variation.

 

Finally, at the external level, as of the fourth quarter of 2020 the cumulative current account deficit amounted to US$12.5 billion according to INDEC’s data, which represents 1.5% of the GDP. During this period Free on Board value exports reached US$54.9 billion, and Cost, Insurance and Freight value imports amounted to US$42.4 billion. Primary exports and agricultural exports decreased by 7.5% and 9.1% respectively during this period, while industrial manufactures exports experienced a 30.7% contraction. Fuel and energy exports experienced a decrease of 19.7%. Imports showed a contraction compared to the same period of 2019 in the automotive (-31.7%), capital goods (-13.0%), fuels and lubricants (-40.7%), consumables goods (-4.7%), parts and accessories (-25.0%) and intermediate goods (-2.1%).

 

 

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Electricity prices and tariffs

Our revenues and margins in our electricity generation and distribution businesses are substantially dependent on the prices we are able to charge for the electricity sold by our generation plants, as well as the composition of our transmission and distribution tariffs (including the tariff setting and adjustment process contemplated by Edenor’s distribution concessions).

For more information about the electricity prices, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.

Tariffs

Distribution

 

See “Item 4. Our Distribution of Energy Business—Empresa Distribuidora y Comercializadora Norte S.A. (Edenor) —Tariffs”.

 

Electricity demand and supply

Electricity demand depends to a significant extent on economic and political conditions prevailing from time to time in Argentina, as well as seasonal factors. In general, the demand for electricity varies depending on the performance of the Argentine economy, as businesses and individuals generally consume more energy and are better able to pay their bills during periods of economic stability or growth. As a result, energy demand is affected by Argentine Governmental actions concerning the economy, including with respect to inflation, interest rates, price controls, foreign exchange controls, taxes and energy tariffs.

During 2020, the electricity demand decreased by 1.3% compared to 2019 as a result of the impact of the COVID-19, with a total electricity demand volume of 127,306 GWh and 128,946 GWh for 2020 and 2019, respectively.

Peak Demand Records

  2020 2019 2018
Power Capacity (MW) 25,791 26,113 26,320
Date 2/4/2020 1/29/2019 2/8/2018
Temperature (°C) 29.5 34.0 30.2
Time 2:57 PM 2:25 PM 3:35 PM

Source: CAMMESA.

 

Generation of electricity increased by 2% in 2020, with 133,584 GWh and 130,804 GWh volumes for the years 2020 and 2019, respectively, mainly due to the increase in exports, which was partially offset by the effects of the COVID-19.

 

Thermal power generation remained as the main resource to meet the electricity demand, fired with natural gas or liquid fuels (GO and GO) and mineral coal, supplying an electricity volume of 82,333 GWh (62%), followed by hydroelectric power generation, which contributed 28,505 GWh net of pumping (21%), renewable power generation with 12,734 GWh (10%), and nuclear power generation, with 10,011 GWh (7%) Additionally, there were imports for 1,204 GWh (56% lower than in 2019), exports for 3,089 GWh (higher than the 261 GWh recorded in 2019), and losses for 4,392 GWh (1% higher than in 2019).

 

Hydroelectric power generation net of pumping decreased its contribution volume by 18% compared to 2019, mainly due to the droughts that affected the Yacyretá and Salto Grande dams. This decrease was partially offset by the increase in renewable (64%), thermal (3%) and nuclear (26%) generation compared to 2019, mainly on account of the commissioning of the PPA under RenovAr, MAT ER and MEyM Resolution No. 287/17, added to the higher nuclear generation as from the start-up of Central Nuclear Embalse’s reconditioning at the end of the first quarter of 2019.

 

The following chart shows the development of electricity generation by type of generation (thermal, hydro, nuclear and renewable):

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Generation by Type of Power Plant

In %, 2011 – 2020

 

 

During 2020 generation facilities recorded an increase in their installed capacity compared to the previous year, totaling 41,951 MW (+2,247 MW compared to 2019). This increase was mainly due to the commissioning of renewable units under the RenovAr and MAT ER programs for 1,408 MW. In the thermal area, 817 MW were commissioned, mostly under MEyM Res. No. 287/17, including the completion of Genelba Plus’ closing to CC project (199 MW).

 

The chart below shows the composition of installed capacity in Argentina (42.0 GW) as of December 31, 2020:

 

Argentina’s Installed Capacity

100%=42.0 GW

Regarding fuel supply for power generation, as from December 30, 2019 and pursuant to MDP Resolution No. 12/19, fuel commercial management and supply was again centralized in CAMMESA, except for generators with contracts under Energía Plus and SEE Resolution No. 287/17. Additionally, following the implementation of Plan Gas.Ar, on December 2, 2020 SE Resolution No. 354/20 was published, which, among other measures, established an optional scheme for the operating assignment of natural gas and its transportation to CAMMESA effective as from January 2021 for such exempted generators. Pampa acceded to this scheme. This new scheme set a new thermal dispatch order centralized in CAMMESA, which prioritizes units supplied with gas imported from Bolivia under a ToP condition, followed by those supplied under Plan Gas.Ar and, lastly, those with gas assigned to CAMMESA.

 

As regards fuel consumption, in 2020 the use of natural gas for power plants amounted to 16.3 million dam3, representing a 5% decrease compared to the previous year, mainly accounted for by the lower domestic supply, which experienced a 7% year-on-year decrease. Consequently, the shortage of fuel to meet electric power generation needs worsened and, therefore, the purchase of LNG and its re-gasification in Escobar continued, as well as natural gas imports from Bolivia, which experienced an 8% year-on-year increase. Moreover, alternative fuels (FO, GO and mineral coal) were used to meet the demand, in volumes significantly higher than in 2019. The use of FO tripled to 0.6 million ton, whereas the demand for GO and mineral coal doubled.

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The chart below shows the monthly average cost during 2020 (compared to 2019) that electricity consumers should pay so that the system does not become deficient. This cost includes, in addition to the price of energy, the capacity charge, the increased generation cost resulting from using fuel oil or diesel oil and other minor items.

Monthly Average Monomic Price (Ps. Per MWh)

Source: CAMMESA.

 

 

Seasonality

 

Seasonality also has a significant impact on the demand for electricity, with electricity consumption peaks in summer and winter. The impact of seasonal changes in demand is registered primarily among the residential and small commercial customers of Edenor. The seasonal changes in demand are attributable to the impact of various climatological factors, including weather and the amount of daylight time, on the usage of lights, heating systems and air conditioners.

The impact of seasonality on industrial demand for electricity is less pronounced than on the residential and commercial sectors for several reasons because (i) different types of industrial activity by their nature have different seasonal peaks, such that the effect on them of climate factors is more varied, and (ii) industrial activity levels tend to be more significantly affected by the economy, and with different intensity levels depending on the industrial sector.

Cost of sales

Our most significant costs of sales include purchases of inventory, energy and gas, personnel costs and property, plant and equipment depreciation.

Operating expenses

Our most significant operating expenses are administrative and selling expenses, which include related personnel costs, fees and compensations for services and taxes.

Reserves and Production of oil and gas

Natural gas and oil constitute the main energy sources in the national primary energy mix. The following chart illustrates their share as of December 31, 2019:

 

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2019 Argentine Energy Mix

100% = 77.2 million Ton of oil equivalent

Source: SGE. There is no available information for the year 2020.

The chart does not include other primary sources accounting for 6.3%

Natural Gas

 

In 2020, the total gross natural gas production amounted to 123 million m3 per day, which represents a 9% decrease compared to the volumes produced in 2019. This variation is due to the decline recorded in the country’s basins, mainly in the Neuquina Basin (-8 million m3 per day) and, to a lesser extent, in the Golfo de San Jorge and Austral Basins (-3 million m3 per day) as a result of the lower activity on account of the continuous fall in market prices and the demand contraction resulting from the impact of COVID-19.

 

Although domestic consumption experienced a 5% year-on-year decrease for the second consecutive year, domestic gas production was not able to meet the demand, a deficit evidenced since 2003, so the Federal Government resorted mainly to natural gas imports and the use of alternative fuels. In 2020, the supply from Bolivia averaged 15 million m3 per day (6% higher than in 2019) and seaborne LNG at the Escobar port recorded an average of 5 million m3 per day (5% higher than in 2019). Moreover, as in 2019, no imports of regasified LNG from Chile were recorded in 2020. On the other side, gas and LNG exports decreased by 29% compared to 2019, to a total of 4 million m3 per day, representing 3% of the total domestic production in 2020.

 

Based on the last annual information published by the SGE, as of December 31, 2019 total natural gas reserves and resources in the country reached 1,140,445 million m3, of which 35% were proven reserves. Furthermore, 57% of the total reserves and resources were unconventional. In a year-on-year comparison, total reserves and resources have experienced a slight 1% increase, especially resources, which have risen by 4%, totaling 415,020 million m3.

 

Evolution of Natural Gas Production and Reserves and Resources*

In billion m3, 2006-2020

Source: SEG. * There is no available information on reserves for the year 2020. Production is gross.

 

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Crude Oil

In 2020, total oil production amounted to 77 thousand m3 per day, 5% lower than the volumes produced in 2019 (81 thousand m3 per day), thus reversing the upward trend over the last two years, mainly on account of the demand contraction resulting from the impact of COVID-19, experiencing a 12% decline compared to 2019. In April and May, the months most impacted by the lockdown, the consumption of crude oil decreased by 35% compared to the same period of 2019, then gradually recovering although without reaching 2019 consumption levels, and finishing the month of December with a -7% year-on-year variation.

 

Based on the last annual information published by the SGE, as in 2019, in 2020 no oil imports were recorded. On the other hand, as a consequence of the sharp drop in domestic demand caused by the ASPO, in 2020 oil exports amounted to 12.3 thousand m3 per day, a volume 18% higher than in 2019. This volume represented 16% of the total domestic production during 2020.

 

As of December 31, 2019, total oil reserves and resources within the country totaled 832,098 thousand m3, of which 49% were proven reserves. In addition, 32% of the total reserves and resources were unconventional. In a year-on-year comparison, total reserves and resources have recorded a 4% increase. Furthermore, resources totaled 163,252 thousand m3, 4% lower than the levels recorded as of December 31, 2018.

 

Evolution of Oil Production and Reserves and Resources*

In million m3, 2006-2020

 

Source: SGE. * There is no available information on reserves for the year 2020.

 

For information about the regulatory framework of our Oil and Gas business, please see “Item 4. The Argentine Energy Sector— Oil & Gas Regulatory Framework”.

 

Results of Operations

The table below provides a summary of our results of operations for the years ended December 31, 2020, 2019 and 2018.

Results of operations related to (i) maintained as held for sale assets of distribution of energy segment and (ii) divested assets of refining and distribution and oil and gas segments, were disclosed within discontinued operations.

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  For the year ended December 31,
  2020   2019   2018
Revenue 1,071   1,338   1,436
Cost of sales (663)   (811)   (831)
Gross profit 408   527   605
Selling expenses (38)   (26)   (37)
Administrative expenses (93)   (105)   (130)
Exploration expenses -   (9)   (1)
Other operating income 56   79   223
Other operating expenses (36)   (43)   (156)
Impairment of property, plant and equipment, intangible assets and inventories (139)   (62)   (32)
Share of profit from associates and joint ventures 85   101   118
Income from the sale of associates -   -   28
Operating income 243   462   618
Gain on net monetary position, net -   -   403
Finance income 9   23   30
Finance costs (177)   (187)   (184)
Other financial results 84   175   (808)
Financial results, net (84)   11   (559)
Profit before income tax 159   473   59
Income tax (35)   130   32
Profit for the year from continuing operations 124   603   91
 (Loss) Profit for the year from discontinued operations (592)   197   196
 (Loss) Profit of the year (468)   800   287
           
Total (Loss) Profit of the year attributable to:          
Owners of the Company (367)   692   224
Non - controlling interest (101)   108   63
           
  For the year ended December 31,
  2020   2019   2018
Revenue          
Generation 559   819   606
Oil and gas 294   448   521
Petrochemical 265   321   338
Holding and others 20   20   36
Eliminations (67)   (270)   (65)
Total Revenue 1,071   1,338   1,436
           
Gross profit          
Generation 305   349   333
Oil and gas 51   135   234
Petrochemical 32   23   4
Holding and others 20   20   36
Eliminations -   -   (2)
Total Gross profit 408   527   605
           
           
Operating income          
Generation 241   322   324
Oil and gas (32)   72   250
Petrochemical 6   6   (61)
Holding and others 28   62   106
Eliminations -   -   (1)
Total operating income 243   462   618

 

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Total (loss) profit of the year          
Generation 139   248   106
Distribution of energy (592)   197   116
Oil and gas (58)   68   (113)
Petrochemical 6   11   (54)
           
Holding and others 37   276   231
Eliminations -   -   1
Total (loss) profit of the year (468)   800   287
           
Total (loss) profit attributable to owners of the company          
Generation 147   239   100
Distribution of energy (499)   98   61
Oil and gas (58)   68   (115)
Petrochemical 6   11   (54)
Holding and others 37   276   231
Eliminations -   -   1
Total (loss) profit attributable to owners of the company (367)   692   224
           
Total (loss) profit attributable to non - controlling interest          
Generation (8)   9   6
Distribution of energy (93)   99   55
Oil and gas -   -   2
Total (loss) profit attributable to non - controlling interest (101)   108   63

 

The Company is a fully integrated power company in Argentina that participates in the electricity, oil and gas value chains.

 

Through our own activities, subsidiaries and shareholdings in joint ventures and based on the business nature, customer portfolio and risks involved, we were able to identify the following reportable business segments:

 

·Generation, consisting of our direct and indirect interests in CPB, HINISA, HIDISA, Greenwind, Enecor, TMB, TJSM, CTB and through our own electricity generation activities through thermal plants Güemes, Piquirenda, Loma de la Lata, Genelba and Ecoenergía, Pilar, I. White, the Pichi Picun Leufu hydroelectric complex and Pampa Energía I and II wind farms;

 

·Oil and Gas, consisting of our own interests in oil and gas areas and through our direct interests in PACOSA and our indirect interest in OCP;

 

·Petrochemicals, comprised of our own styrene operations and the catalytic reformer plant operations conducted in Argentine plants;

 

·Holding and Other Business, consisting of financial investment transactions, holding activities, interests in joint businesses CITELEC and CIESA and their respective subsidiaries, which hold the concession over the high-voltage electricity transmission nationwide and over gas transportation in the south of the country, respectively; and

 

·Distribution of Energy, consisting of our direct interest in Edenor. As a result of the binding stock purchase agreement for the sale of our controlling interest in Edenor, related results of operations were classified within discontinued operations (see Item 4. “Relevant Events—Sale of Controlling Stake in Edenor”).

 

The Company manages its operating segments based on its individual net profit.

 

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Year ended December 31, 2020 compared to the fiscal year ended December 31, 2019

Generation Segment

    Fiscal Year Ended  
    December 31, 2020   December 31, 2019   Variation   %
Revenue   559 819   (260)   (32%)
                 
Cost of sales   (254)   (470)   216   (46%)
Gross profit   305   349   (44)   (13%)
                 
Selling expenses   (2)   (3)   1   (33%)
Administrative expenses   (30)   (32)   2   (6%)
Other operating income and expenses, net   29   47   (18)   (38%)
Share of profit from joint ventures   67   13   54   415%
Impairment of property, plant and equipment and intangible assets   (128)   (52)   (76)   146%
Operating income   241   322   (81)   (25%)
                 
Finance income   3   2   1   50%
Finance costs   (73)   (82)   9   (11%)
Other financial results   1   86   (85)   (99%)
Financial results, net   (69)   6   (75)   (1,250%)
Profit before income tax   172   328   (156)   (48%)
                 
Income tax   (33)   (80)   47   (59%)
Profit of the year   139   248   (109)   (44%)
                 
Owners of the company   147   239   (92)   (38%)
Non - controlling interest   (8)   9   (17)   (189%)

Revenues

Net revenues from our generation segment decreased 32%, to US$559 million in the fiscal year ended December 31, 2020, compared to US$819 million in the previous fiscal year. This variation is mainly explained by (i) a decrease in revenues caused by the discontinuation of fuel self-supply for electric power generation following the centralization of fuel purchases by CAMMESA beginning in December 2019, and (ii) a decrease in energy prices in the spot market following the effectiveness of SE Resolution N° 31/20, and the temporary suspension of the automatic inflation adjustment mechanism. These effects were partially offset by an increase in revenues upon the commercial commissioning of CTGEBA’s second combined cycle as from July 2, 2020, which enabled the entry into the wholesale power purchase agreement executed with CAMMESA for a maximum committed capacity of 377 MW.

 

The amount of electricity sold during the fiscal year ended December 31, 2020 increased slightly primarily due to the commissioning of new projects and acquisitions, which was partially offset by a decrease in generation from older and therefore less efficient thermal machines and lower hydro generation due to weather conditions.

 

The following table shows net electricity sales (in GWh) for our power generation plants:

  Fiscal year ended
  December 31, 2020 December 31, 2019
In GWh Net generation Total sales Net generation Total sales
Hydroelectric        
HINISA 481 482 499 500
HIDISA 323 323 334 334
HPPL 742 737 823 822
Wind        
PEMC 409 409 383 383
PEPE II 207 207 122 130
PEPE III 243 246 148 159
Thermal        
CTLL 4,406 4,399 5,096 5,307
CTG 368 418 755 893
CTP 55 55 53 53
CPB 576 575 1,106 1,107
CTPP 193 193 168 168
CTIW 229 229 312 312
CTGEBA 7,912 7,946 5,550 5,891
EcoEnergía 72 89 105 83
CTEB 255 255 128 125
Total 16,470 16,563 15,582 16,266

 

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Cost of Sales

Cost of sales decreased by 46%, to US$254 million for the fiscal year ended December 31, 2020, compared to US$470 million for the fiscal year ended December 31, 2019, primarily due to a decrease in gas purchases and transportation volumes (US$226 million) and a decrease in electricity purchase volumes (US$11 million), partially offset by higher depreciation in property, plant and equipment due to (i) the commercial commissioning of the PEPE II and III wind farms during the second quarter of 2019, and (ii) the expansion of the Genelba thermal plant in the third quarter of 2020 (collectively, US$26 million).

Gross Profit

Gross profit from our generation segment decreased by US$44 million (13%), recording a gain of US$305 million for the fiscal year ended December 31, 2020, compared to a gain of US$349 million for the fiscal year ended December 31, 2019. This variation is mainly explained by a decrease in the spot market energy price and higher depreciation of property, plant and equipment, partially offset by higher revenues from the commercial activation of the aforementioned projects.

In addition, in the fiscal year ended December 31, 2020, the gross margin in relation to sales increased to 55% compared to 43% for the fiscal year ended December 31, 2019.

Selling Expenses

Selling expenses from our generation segment did not vary significantly, amounting to US$2 million for the fiscal year ended December 31, 2020, compared to US$3 million for the fiscal year ended December 31, 2019.

Administrative Expenses

Administrative expenses in our generation segment decreased 6%, from US$32 million for the fiscal year ended December 31, 2019 to US$30 million for the fiscal year ended December 31, 2020. This variation is explained by lower charges related to salaries and social security.

Other Operating Income and Expenses Net

Other operating income and expenses, net decreased to a US$29 million gain for the fiscal year ended December 31, 2020, compared to a US$47 million gain for the fiscal year ended December 31, 2019. This variation corresponds to a US$26 million decrease in commercial interests gains, mainly as a result of the gain recorded in 2019 derived from the Agreement for the Regularization and Settlement of Receivables with WEM, minus higher interests gains from delayed monthly transaction payments from CAMMESA during 2020, all of which was offset by a contractual gain of US$7 million as compensation for damages suffered in certain wind power generation units.

Operating Income

Operating income decreased by US$81 million (25%), recording a gain of US$241 million for the fiscal year ended December 31, 2020, compared to a gain of US$322 million for the fiscal year ended December 31, 2019. This variation is mainly explained by: (i) higher impairment of property, plant and equipment and intangible assets that mainly supply the spot market (US$76 million); (ii) lower income due to a decrease in spot market prices (as a result of the conversion of foreign currency remuneration at the Spot market to Peso denominations) and (iii) a decrease in commercial interest gains as a result of the Agreement for the Regularization and Settlement of Receivables with WEM in 2019, partially offset by (i) an increase in generation capacity through the aforementioned expansion projects, and (ii) an increase in share of profit from associates and joint ventures due to the acquisition of CTB in June 2019.

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The operating margin in relation to sales for the fiscal year ended December 31, 2020, increased to 43% compared to a 39% margin for the fiscal year ended December 31, 2019.

Financial Results, Net

Financial results, net, from the generation segment represented a loss of US$69 million for the fiscal year ended December 31, 2020, compared to a gain of US$6 million for the fiscal year ended December 31, 2019. The variation is mainly due to: (i) lower present value measurement gains derived from the Agreement for the Regularization and Settlement of Receivables with WEM in 2019 (US$50 million); (ii) lower income from changes in the fair value of financial instruments (US$28 million), and (iii) higher net foreign exchange losses (US$16 million). These effects were partially offset by a decrease in interest losses (US$10 million), and higher profits derived from the repurchase of corporate bonds (US$10 million).

Income Tax

Generation activities recorded an income tax charge of US$33 million for the fiscal year ended December 31, 2020, compared to a charge of US$80 million for the fiscal year ended December 31, 2019, mainly due to a decrease in profits subject to income tax.

Profit

The generation segment recorded a US$139 million profit for the fiscal year ended December 31, 2020, of which US$147 million are attributable to the owners of the Company, compared to a US$248 million profit for the fiscal year ended December 31, 2019, of which US$239 million are attributable to the owners of the Company.

Oil and Gas Segment

 

    Fiscal year ended  
    December 31, 2020 December 31, 2019 Variation %
Revenue   294 448 (154) (34%)
Cost of sales   (243) (313) 70 (22%)
Gross profit   51 135 (84) (62%)
           
Selling expenses   (28) (12) (16) 133%
Administrative expenses   (42) (47) 5 (11%)
Exploration expenses   - (9) 9 (100%)
Other operating income and expenses, net   (8) (6) (2) 33%
Share of profit from associates   (5) 21 (26) (124%)
Impairment of property, plant and equipment   - (10) 10 (100%)
Operating income   (32) 72 (104) (144%)
           
Finance income   7 17 (10) (59%)
Finance costs   (100) (94) (6) 6%
Other financial results   44 89 (45) (51%)
Financial results, net   (49) 12 (61) (508%)
Loss before income tax   (81) 84 (165) (196%)
           
Income tax   23 (16) 39 (244%)
(Loss)/ Profit of the year   (58) 68 (126) (185%)

 

135 
 

 

 

Revenues

Net revenues in our oil and gas segment amounted to US$294 million for the fiscal year ended December 31, 2020, which was 34% lower than the US$448 million for the fiscal year ended December 31, 2019. This decrease is mainly due to a decrease in the prices tendered at CAMMESA’s monthly calls, a decrease in industrial activity, and the diluting effect of inflation on the price of gas sold to gas distributors, and a decrease in gas volumes sold to thermal power plants due to the discontinuation of the self-supply of fuel for electricity generation purposes. The oil sector was impacted by a decrease of domestic prices that use international prices as benchmarks, which experienced a strong decline due to the collapse in demand caused by COVID-19.

The following table shows our production for the oil and gas segment for the periods shown:

  For the fiscal year ended
  December 31, 2020 December 31, 2019
Production    
Oil (k bbl/day) 4,4 5.0
Gas (k m3/day) 6,902 7,344
Total (k boe/day) 45.0 48.2
     
Sales    
Oil (k bbl/day) 4.6 5.1
Gas (k m3/day) 7,190 8,367
Total (k boe/day) 46.9 54.3

Cost of Sales

The cost of sales from our oil and gas segment decreased by 22%, from US$313 million for the fiscal year ended December 31, 2019 to US$243 million for the fiscal year ended December 31, 2020. The variation is primarily due to: (i) decreases in gas purchases for resale (US$41 million); (ii) decreases in royalty charges as a result of the decrease in sales prices (US$17 million) and (iii) decrease in fees and compensation for services as a result of the decrease in the level of activity experienced during the period (US$6 million).

Gross Profit

Gross profit from our oil and gas segment decreased by 62%, from US$135 million in the fiscal year ended December 31, 2019, to US$51 million for the fiscal year ended December 31, 2020. This variation is primarily explained by a decline in sales prices, partially offset by lower purchases of gas for resale and lower royalty charges.

The gross margin in relation to sales for the fiscal year ended December 31, 2020 amounted to 17%, compared to 30% for the fiscal year ended December 31, 2019.

136 
 

Selling Expenses

The selling expenses of oil and gas increased to US$28 million for the fiscal year ended December 31, 2020, compared to US$12 million for the same period in 2019, mainly due to the impairment of US$13 million recognized in 2020 of receivables with gas distributors under Decree No. 1,053/2018 (subsequently abrogated in 2020), by virtue of which the differences in exchange rates between the gas price purchased by gas distributors and the gas tariffs charged to consumers for the period between April 2018 – March 2019 were borne by the Federal Government.

Administrative Expenses

Administrative expenses from our oil and gas segment decreased to US$42 million (11%) for the fiscal year ended December 31, 2020, compared to US$47 million for the fiscal year ended December 31, 2019. The variation is mainly due to decreases in salaries and social security charges (US$2 million), as well as fees and compensation for services (US$2 million).

Exploration Expenses

Exploration expenses from our oil and gas segment did not record any charge during the fiscal year ended December 31, 2020, compared to a loss of US$9 million during the fiscal year ended December 31, 2019. The 2019 charge corresponds to expenses associated with abandoned and unproductive wells (US$5 million) and a decrease in geological and geophysical expenses (US$4 million).

Other Operating Income and Expenses, net

Other operating incomes and expenses, net of our oil and gas segment recorded a higher net loss of US$8 million, for the fiscal year ended December 31, 2020, compared to a loss of US$6 million for the fiscal year ended December 31, 2019. The variation is mainly due to an increase in provisions allocated to contingencies (US$2 million).

Operating Income

The operating income from our oil and gas segment decreased to a loss of US$32 million for the fiscal year ended December 31, 2020, 144% lower than the gain of US$72 million for the fiscal year ended December 31, 2019. This variation is mainly explained by: (i) a lower gross profit (US$84 million) mainly due to a decline in sales prices and (ii) a decrease in profit from investment in associates (US$26 million) in relation to our participation in OCP. These effects were partially offset by the loss recorded in 2019 derived from impairment of property, plant and equipment (US$10 million).

Financial Results, Net

Financial results, net from the oil and gas segment represented a loss of US$49 million for the fiscal year ended December 31, 2020, compared to a profit of US$12 million for the fiscal year ended December 31, 2019, primarily due to: (i) lower income from changes in the fair value of financial instruments (US$34 million); (ii) higher net foreign exchange losses (US$17 million) and (iii) higher financial interest expense (US$13 million) due to debt issuance. These effects were partially offset by a gain on the repurchase of corporate bonds (US$5 million) and a higher present value measurement gains (US$5 million).

Income Tax

Our oil and gas segment recorded an income tax benefit of US$23 million for the fiscal year ended December 31, 2020, compared to an income tax charge of US$16 million for the same period in 2019. This variation relates mainly to a decrease in profits subject to income tax.

Total (Loss) Profit

Our oil and gas segment recorded a loss of US$58 million for the fiscal year ended December 31, 2020, compared to a profit of US$68 million for the prior fiscal year, both of which are entirely attributable to the owners of the Company.

137 
 

Petrochemicals Segment

  Fiscal year ended
  December 31, 2020 December 31, 2019 Variation %
Revenue 265 321 (56) (17%)
Cost of sales (233) (298) 65 (22%)
Gross profit 32 23 9 39%
         
Selling expenses (8) (9) 1 (11%)
Administrative expenses (3) (4) 1 (25%)
Other operating income and expenses, net (4) (4) - -
Impairment of inventories (11) - (11) -
Operating income 6 6 - -
         
Finance costs (3) (8) 5 (63%)
Other financial results 5 18 (13) (72%)
Financial results, net 2 10 (8) (80%)
Profit before income tax 8 16 (8) (50%)
         
Income tax (2) (5) 3 (60%)
Profit of the year 6 11 (5) (45%)

Revenues

Net revenues from our petrochemicals segment totaled US$265 million for the fiscal year ended December 31, 2020, 17% lower than the US$321 million reported for the fiscal year ended December 31, 2019. The variation is mainly due to lower sales prices resulting from the decrease in international reference prices.

The following table shows sales volumes in the petrochemicals segment during the specified periods:

Volume sold in k ton For the fiscal year ended
December 31, 2020 December 31, 2019
Styrene & polystyrene 94 99
SBR 37 27
Others 205 217
Total 337 343

Cost of Sales

The petrochemicals segment’s cost of sales decreased by 22%, to US$233 million for the fiscal year ended December 31, 2020, compared to US$298 million for the fiscal year ended December 31, 2019, mainly due to (i) decreases in prices of raw material resulting from the decrease in international reference prices (US$60 million), and (ii) decreases in salaries and social security charges (US$5 million).

Gross Profit

Gross profit from our petrochemicals segment increased by 39%, recording a profit of US$ 32 million for the fiscal year ended December 31, 2020, compared to a US$23 million profit for the same period in 2019.

 

The gross margin in relation to sales for the fiscal year ended December 31, 2020 amounted to 12%, compared to 7% for the fiscal year ended December 31, 2019.

138 
 

 

Selling Expenses

Selling expenses from the petrochemicals segment did not vary significantly, amounting to US$8 million for the fiscal year ended December 31, 2020 compared to US$9 million for the fiscal year ended December 31, 2019.

Administrative Expenses

Administrative expenses from the petrochemicals segment did not vary significantly, amounting to US$3 million for the fiscal year ended December 31, 2020, compared to US$4 million for the fiscal year ended December 31, 2019.

Other Operating Income and Expenses, Net

Other operating income and expenses, net remained unchanged, amounting US$4 million loss for both fiscal years ended December 31, 2019 and 2020.

Operating Income

The petrochemicals segment’s operating income did not vary, recording a US$6 million profit for both fiscal years ended December 31, 2019 and 2020. The increase in gross profit for the year ended December 31, 2020, was offset by an impairment in inventories of US$11 million recognized in 2020.

Financial Results, Net

Financial results, net from the petrochemicals segment, represented a gain of US$2 million for the fiscal year ended December 31, 2020, compared to a US$10 million profit for the fiscal year ended December 31, 2019. This variation is mainly due to a decrease in provisions allocated to contingencies (US$8 million).

Income Tax

Our petrochemicals segment recorded an income tax charge of US$2 million for the fiscal year ended December 31, 2020, compared to an income tax charge of US$5 million for the fiscal year ended December 31, 2019. This variation is mainly due to a decrease in profits before income tax.

Total profit

The petrochemicals segment recorded a net profit of US$6 million for the fiscal year ended December 31, 2020, compared to a net profit of US$11 million for the prior fiscal year, in both cases fully attributable to the company’s owners.

Holding and Others Segment 

  Fiscal year ended
  December 31, 2020 December 31, 2019 Variation %
Revenue 20 20 - -
Gross profit 20 20 - -
         
Selling expenses - (2) 2 (100%)
Administrative expenses (18) (22) 4 (18%)
Other operating income and expenses, net 3 (1) 4 (400%)
Share of profit from joint ventures 23 67 (44) (66%)
Operating income 28 62 (34) (55%)
Finance income 1 5 (4) (80%)
Finance costs (3) (4) 1 (25%)
Other financial results 34 (18) 52 (289%)
Financial results, net 32 (17) 49 (288%)
Loss before income tax 60 45 15 33%
         
Income tax (23) 231 (254) (110%)
Profit for the year 37 276 (239) (87%)

 

139 
 

 

Revenues

Net revenues from our holding and others segment remained unchanged, amounting to a US$20 million loss in both fiscal years ending 31 December 2019 and 2020.

Gross Profit

Gross profit from our holding and others segment net remained unchanged, amounting to a US$20 million loss for both fiscal years.

Selling Expenses

Selling expenses from our holding and others segment did not record charges for the fiscal year ended December 31, 2020 compared to US$2 million for the fiscal year ended December 31,2019.

Administrative Expenses

Administrative expenses decreased to US$18 million for the fiscal year ended December 31, 2020, 18% less than the US$22 million spent during the fiscal year ended December 31, 2019. This decrease was due to a decrease in fees (US$4 million).

Other Operating Income and Expenses Net

Other operating income and expenses, net, recorded a profit of US$3 million for the fiscal year ended December 31, 2020 compared to a loss of US$1 million for the fiscal year ended December 31, 2019. The variation is mainly due to a gain from the recovery of doubtful accounts (US$3 million).

Operating Income

Our holding and others segment’s operating income amounted to US$28 million for the fiscal year ended December 31, 2020, 55% lower than for the fiscal year ended December 31, 2019, which amounted to US$62 million. This variation is mainly explained by a decrease in profit from investment in associates and joint ventures (US$44 million), mainly in relation to our participation in CIESA.

Financial Results, Net

Financial results, net, from our holding and others segment represented a profit of US$32 million for the fiscal year ended December 31, 2020 compared to a loss of US$17 million for the fiscal year ended December 31, 2019, mainly due to a higher profit from net foreign exchange difference as a result of our shifting to a net passive position in Argentine Pesos (US$62 million). These effects were partially offset by a higher present value measurement loss of certain tax credits (US$8 million) and lower financial interests, net (US$6 million).

140 
 

Income Tax

Our holding and others segment recorded an income tax charge of US$23 million for the fiscal year ended December 31, 2020, compared to a gain of US$231 million for the fiscal year ended December 31, 2019.

Total Profit

Our holding and others segment registered a net profit of US$37 million for the fiscal year ended December 31, 2020 attributable to the owners of the company, compared to a net profit of US$276 million recorded in the fiscal year ended December 31, 2019, also attributable to the owners of the company. 

Distribution of Energy Segment

The results corresponding to the distribution of energy segment have been classified as discontinued operations as a result of the pending sale of our controlling stake in Edenor. See Item 4. “Relevant Events—Sale of Controlling Stake in Edenor” and note 5.3.3 to our Consolidated Financial Statements.

The distribution of energy segment recorded a total loss of US$592 million for discontinued operations during the fiscal year ended December 31, 2020, of which US$499 million are attributable to the owners of the Company, compared to a profit of US$197 million in 2019, of which US$98 million are attributable to the owners of the Company. This variation is mainly due to the divestment of our participation in Edenor.

 

Year ended December 31, 2019 compared to year ended December 31, 2018

Generation Segment

    Fiscal Year Ended
    December 31, 2019   December 31, 2018   Variation   %
Revenue   819   606   213   35%
Cost of sales   (470)   (273)   (197)   72%
Gross profit   349   333   16   5%
                 
Selling expenses   (3)   (1)   (2)   200%
Administrative expenses   (32)   (41)   9   (22%)
Other operating income and expenses, net   47   44   3   7%
Share of profit from joint ventures   13   (11)   24   (218%)
Impairment of property, plant and equipment   (52)   -   (52)   (100%)
Operating income   322   324   (2)   (1%)
                 
Gains on net monetary position   -   233   (233)   100%
Finance income   2   2   -   0%
Finance costs   (82)   (85)   3   (4%)
Other financial results   86   (365)   451   (124%)
Financial results, net   6   (215)   221   (103%)
Profit before income tax   328   109   219   201%
                 
Income tax   (80)   (3)   (77)   2,567%
Profit of the year   248   106   142   134%
Owners of the Company   239   100   139   139%
Non - controlling interest   9   6   3   50%

 

141 
 

 

Revenue

Revenue from our generation segment increased by 35%, to US$819 million, during the fiscal year ended December 31, 2019, compared to US$606 million for the same period in 2018. The segment’s US$213 million increase in electricity sales was mainly due to: (i) the recognition of higher sales during 2019 related to fuel self-supply as allowed pursuant to SGE Resolution No. 70/18 as from November 2018, and (ii) the commissioning of new wind farms (PEPE II and PEPE III), partially offset by (iii) lower spot market prices in accordance to SRRYME Resolution No. 1/19 effective as from March 2019.

The amount of electricity sold remained stable compared to 2018 (16,072 GWh for the fiscal year ended December 31, 2019, compared to 15,599 GWh for the fiscal year ended December 31, 2018).

The following table shows net electricity sales (in GWh) for power generation plants:

    Fiscal year ended
    December 31, 2019 December 31, 2018
In GWh Net generation Purchases Total sales Net generation Purchases Total sales
Hydroelectric          
HINISA 498                     -    498 577                     -    577
HIDISA 334                     -    334 393                     -    393
HPPL 823                     -    823 886                     -    886
Wind facilities:           
PEMC (1) 247 - 247 - - -
PEPEII 122 7 129 - - -
PEPEIII 148 5 154 - - -
Thermal facilities:           
CTG 755              137 891 1,674              553 2,227
CTLL 5,096                     -    5,096 4,748                     -    4,748
CTP 53                     -    53 134                     -    134
CPB 1,106                     -    1,106 753                     -    753
CTPP 168                     -    168 192                     -    192
CTIW 312                     -    312 274                     -    274
CTGEBA 5,550                337 5,887 4,859                598 5,457
EcoEnergía 105                     5 110 108                     2 110
CTEB (1) 128 - 128 - - -
Total 15,582 490 16,072 14,845 1,154 15,999

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

(1)          Non-consolidated plant

                 

Cost of Sales

Cost of sales increased by 72%, to US$470 million for the fiscal year ended December 31, 2019, compared to US$273 million for the fiscal year ended December 31, 2018, mainly due to: (i) US$176 million for higher gas purchases; (ii) US$6 million for higher depreciation of property, plant and equipment, and (iii) US$5 million for higher rental and insurance costs.

Gross Profit

Gross profit from our generation segment increased by US$16 million and recorded a US$349 million profit for the fiscal year ended December 31, 2019, compared to a US$333 million profit for the same period in 2018. On the other hand, gross margin on sales decreased to 43% for the year ended December 31, 2019 compared to 55% for the same period in 2018.

142 
 

Selling Expenses

Selling expenses from our generation segment increased to US$3 million, for the fiscal year ended December 31, 2019, compared to US$1 million for the fiscal year ended December 31, 2018, mainly due to US$1 million for higher charges for taxes, rates and contributions and US$1 million for higher net impairment losses on financial assets.

Administrative Expenses

Administrative expenses decreased by 22%, to US$32 million, for the fiscal year ended December 31, 2019, compared to US$41 million for the fiscal year ended December 31, 2018, mainly due to US$7 million for lower labor costs.

Other Operating Income and Expenses, Net

Other operating income and expenses, net increased by US$3 million, due to a US$47 million profit, for the fiscal year ended December 31, 2019, compared to a US$44 million profit for the fiscal year ended December 31, 2018, mainly attributable to: (i) the absence, during 2018 fiscal year, of the US$12 million loss registered on account of provision for contingencies, partially offset by (ii) US$4 million for higher tax on bank transactions; (iii) US$2 million for lower insurance recoveries and (iv) US$1 million for lower commercial interest gains.

Operating Income

Operating income of our generation segment amounted to US$322 million for the fiscal year ended December 31, 2019, compared to US$324 million for the same period in 2018, thus remaining stable. The operating margin on sales for 2019 fiscal year decreased to 39% compared to 53% in 2018 fiscal year.

Financial Results, Net

Net financial results from the generation segment accounted for a US$6 million gain for the fiscal year ended December 31, 2019, compared to a US$215 million loss for the fiscal year ended December 31, 2018, mainly due to: (i) US$340 million for lower losses generated by net foreign exchange difference mainly as a result of the change in Pampa’s functional currency as from January 1, 2019 (see Note 3 to our Consolidated Financial Statements); (ii) a US$49 million gain on discounted value measurement, during 2019, compared to a US$41 million loss during 2018; (iii) US$16 million for higher gains on changes in the fair value of financial instruments, and (iv) US$4 million for lower financial interest expenses net. These effects were partially offset by US$233 million from gains on net monetary position resulting from the application of IAS 29 during the 2018 fiscal year.

Income Tax

Generation segment recorded an income tax charge of US$80 million for the fiscal year ended December 31, 2019, compared to US$3 million charge for the fiscal year ended December 31, 2018, in line with the improvement in profits during the 2019 fiscal year.

Profit

Generation segment recorded a US$248 million profit for the fiscal year ended December 31, 2019, of which US$239 million are attributable to the owners of the Company, compared to US$100 million attributable to the owners of the Company for the fiscal year ended December 31, 2018.

143 
 

 

Oil and Gas Segment

    Fiscal year ended
    December 31, 2019 December 31, 2018 Variation   %
Revenue   448 521 (73)   (14%)
Cost of sales   (313) (287) (26)   9%
Gross profit   135 234 (99)   (42%)
             
Selling expenses   (12) (19) 7   (37%)
Administrative expenses   (47) (56) 9   (16%)
Exploration expenses   (9) (1) (8)   800%
Other operating income and expenses, net   (6) 27 (33)   (122%)
Share of profit from associates   21 37 (16)   (43%)
Income from the sale of companies   - 28 (28)   100%
Impairment of property, plant and equipment   (10) - (10)   (100%)
Operating income   72 250 (178)   (71%)
             
Gains on net monetary position   - 107 (107)   100%
Finance income   17 15 2   13%
Finance costs   (94) (79) (15)   19%
Other financial results   89 (512) 601   (117%)
Financial results, net   12 (469) 481   (103%)
Profit (Loss) before income tax   84 (219) 303   (138%)
             
Income tax   (16) 57 (73)   (128%)
Profit (Loss) from continuing operations   68 (162) 230   (142%)
             
Discontinued operations   - 49 (49)   (100%)
Profit (Loss) of the year   68 (113) 181   (160%)
             
Owners of the Company   68 (115) 183   (159%)
Non - controlling interest   - 2 (2)   100%

 

Revenues

Revenues from continuing operations in our oil and gas segment amounted to US$448 million for the fiscal year ended December 31, 2019, which was 14% lower than US$521 million for the fiscal year ended December 31, 2018. The US$73 million decrease was attributable to the decrease in oil and gas average prices for 2019 fiscal year, which was partially offset by the increase in gas sales volumes.

The following table shows our production for the oil and gas segment for the periods shown, including the production of discontinued operations:

  For the fiscal year ended
  December 31, 2019 December 31, 2018
Oil (thousand m3/d)    
Continuing operations 0.8 0.8
Discontinued operations - 2
Total 0.8 2.8
     
Gas (thousand m3/d)    
Continuing operations 7,344 6,753
Discontinued operations - 1,112
Total 7,344 7,865
GLP (thousand m3/d)    
Continuing operations - -
Discontinued operations - 0.1
Total - 0.1
Note: All figures have been subject to rounding, so figures shown as totals may not add up.
     

 

144 
 

 

Cost of Sales

The cost of sales from our oil and gas segment from continuing operations increased by 9%, to US$313 million for the fiscal year ended December 31, 2019, compared to US$287 million for the fiscal year ended December 31, 2018, mainly due to: (i) a US$20 million increase in property, plant and equipment depreciations, and (ii) a US$11 million increase in purchases of inventory and gas. These effects were partially offset by a US$15 million decrease in royalties.

Gross Profit

Gross profit from our oil and gas segment decreased by US$99 million and recorded a US$135 million profit for the fiscal year ended December 31, 2019, compared to a US$234 million profit for the same period in 2018. The gross margin of sales decreased to 30% for the fiscal year ended December 31, 2019, compared to 45% for the same period in 2018.

Selling Expenses

Selling expenses from our oil and gas segment from continuing operations decreased by 37% to US$12 million for the fiscal year ended December 31, 2019, compared to US$19 million for the same period in 2018, mainly due to: (i) a US$5 million decrease in taxes, fees and contributions, and (ii) a US$3 million decrease in compensation agreement charges.

Administrative Expenses

Administrative expenses from continuing operations decreased by 16% to US$47 million for the fiscal year ended December 31, 2019, compared to US$56 million for the fiscal year ended December 31, 2018, mainly due to: (i) a US$7 million decrease in labor costs; (ii) a US$3 million decrease in compensation agreements charges, and (iii) a US$1 million decrease in taxes, fees and contributions. These effects were partially offset by a US$2 million increase in fees and compensation for services.

Exploration Expenses

Exploration expenses from our oil and gas segment from continuing operations amounted to US$9 million, during the fiscal year ended December 31, 2019, compared to US$1 million in the fiscal year ended December 31, 2018, mainly due to higher well write-offs (US$4 million) and higher geological and geophysical expenses (US$4 million).

Other Operating Income and Expenses, net

Other operating income and expenses, net from continuing operations amounted to a loss of US$6 million, for the fiscal year ended December 31, 2019, compared to gain of US$27 million for the fiscal year ended December 31, 2018. This decrease was mainly a result of (i) the US$30 million income from the settlement agreement in Ecuador TLC recorded in 2018, and (ii) the absence of Gas Plan compensations due to the expiration of Gas Plan II from July 1, 2018. These effects were partially offset by (i) the US$9 million ship or pay contract loss recorded in 2018; (ii) the absence of the US$3 million charges resulting from agreements with provincial treasuries in relation with the Gas Plan compensations and (iii) US$2 million lower tax on bank transactions.

145 
 

Operating Income

The operating income from our oil and gas segment from continuing operations decreased by 71% and accounted for US$72 million for the fiscal year ended December 31, 2019, compared to the US$250 million for the fiscal year ended December 31, 2018. Consequently, gross margin on sales decreased to 16% for the year ended December 31, 2019 compared to 48% for the same period in 2018.

Financial Results, Net

The net financial results from the oil and gas segment from continuing operations amounted to a gain of US$12 million for the fiscal year ended December 31, 2019, compared to a loss of US$469 million for the fiscal year ended December 31, 2018, mainly due to: (i) US$567 million for lower losses generated by net foreign exchange difference mainly as a result of the change in Pampa’s functional currency as from January 1, 2019 (see Note 3 to our Consolidated Financial Statements); (ii) a US$1 million gain on discounted value measurement, during 2019, compared to a US$17 million loss during 2018; and (iii) US$17 million for higher gains from repurchase of financial debt. These effects were partially offset by (i) US$107 million from gains on net monetary position resulting from the application of IAS 29 during 2018 fiscal year, and (ii) US$2 million lower gains from changes in the fair value of financial instruments.

Income Tax

Our oil and gas segment’s continuing operations recorded an income tax charge of US$16 million for the fiscal year ended December 31, 2019, compared to an income tax benefit of US$57 million for the same period in 2018, in line with the improvement of profits during 2019 fiscal year.

Profit

Our oil and gas segment’s continuing operations recorded a profit of US$68 million for the fiscal year ended December 31, 2019, compared to a loss of US$162 million for the same period in 2018.

Our oil and gas segment recorded a total profit of US$49 million for discontinued operations in the fiscal year ended December 31, 2018, due to the sale in April 2018 of the direct 58.88% interest in Petrolera Entre Lomas S.A. (“PELSA”) and the direct interests in the Entre Lomas, Bajada del Palo, Agua Amarga and Medanito-Jagüel de los Machos blocks.

Finally, our oil and gas segment recorded a total profit for continuing and discontinued operations of US$68 million for the fiscal year ended December 31, 2019, all of which were attributable to the owners of the Company, compared to a total loss of US$113 million recorded for the fiscal year ended December 31, 2018, of which US$115 million were attributable to the owners of the Company.

Petrochemicals Segment

  Fiscal year ended
  December 31, 2019 December 31, 2018 Variation %
Revenue 321 338 (17) (5%)
Cost of sales (298) (334) 36 (11%)
Gross profit 23 4 19 475%
         
Selling expenses (9) (13) 4 (31%)
Administrative expenses (4) (6) 2 (33%)
Other operating income and expenses, net (4) (14) 10 (71%)
Impairment of property, plant and equipment - (32) 32 (100%)
Operating income 6 (61) 67 (110%)
         
Gains on net monetary position - 49 (49) (100%)
Finance costs (8) (15) 7 (47%)
Other financial results 18 (39) 57 (146%)
Financial results, net 10 (5) 15 (300%)
Profit (Loss) before income tax 16 (66) 82 (124%)
         
Income tax (5) 12 (17) (142%)
Profit (Loss) of the year 11 (54) 65 (120%)

 

146 
 

 

Revenues

Revenues from our petrochemicals segment amounted to US$321 million during the fiscal year ended December 31, 2019, 5% lower than US$338 million for the fiscal year ended December 31, 2018.

The following table shows sales volumes in the petrochemicals segment during the specified periods:

Volume sold in k ton For the fiscal year ended
December 31, 2019 December 31, 2018
Styrene & polystyrene 99 113
SBR 27 26
Others 217 215
Total 343 355

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

Cost of Sales

The petrochemicals segment’s cost of sales decreased by 11%, to US$298 million, for the fiscal year ended December 31, 2019, compared to US$334 million for the fiscal year ended December 31, 2018, mainly due to: (i) a US$22 million decrease in consumption of materials; (ii) a US$5 million decrease in labor costs; (iii) a US$5 million decrease in depreciation of property, plant and equipment, and (iv) US$2 million decrease in raw material purchases.

Gross Profit

Gross profit from our petrochemicals segment increased by US$19 million and recorded a US$23 million profit for the fiscal year ended December 31, 2019, compared to a US$4 million profit for the same period in 2018. Likewise, the gross margin on sales in 2019 increased to 7% from 1% in 2018.

Selling Expenses

Selling expenses from the petrochemicals segment amounted to US$9 million for the fiscal year ended December 31, 2019, 31% lower than the US$13 million recorded for the fiscal year ended December 31, 2018, mainly due to: (i) a US$2 million decrease in net impairment losses on financial assets, and (ii) a US$1 million decrease in taxes, fees and contributions.

Administrative Expenses

Administrative expenses decreased to US$4 million during fiscal year ended December 31, 2019, compared to US$6 million in the fiscal year ended December 31, 2018.

Other Operating Income and Expenses, Net

Other operating income and expenses, net recorded a loss of US$4 million for the fiscal year ended December 31, 2019, compared to a loss of US$14 million during the fiscal year ended December 31, 2018, mainly on account of US$12 million of lower idle capacity charges.

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Operating Income (Loss)

The petrochemicals segment’s operating income (loss) accounted for a profit of US$6 million for the fiscal year ended December 31, 2019, compared to a loss of US$61 million for the fiscal year ended December 31, 2018. The operating margin on sales for fiscal year 2019 was 2%, compared to the operating loss on sales of 18% in fiscal year 2018.

Financial Results, Net

The net financial results from the petrochemicals segment represented a gain of US$10 million during fiscal year ended December 31, 2019, compared to a loss of US$5 million for the fiscal year ended December 31, 2018, mainly due to: (i) US$46 million for higher gains from net foreign exchange difference mainly as a result of the change in Pampa’s functional currency as from January 1, 2019 (see Note 3 to our Consolidated Financial Statements) and (ii) US$7 million for lower financial expenses net. These effects were partially offset by US$49 million from gains on net monetary position resulting from the application of IAS 29 during the 2018 fiscal year.

Income Tax

Our petrochemicals segment recorded an income tax charge of US$5 million for the fiscal year ended December 31, 2019, compared to an income tax benefit of US$12 million for the fiscal year ended December 31, 2018.

Total Profit (Loss)

The petrochemicals segment disclosed a net profit of US$11 million for the fiscal year ended December 31, 2019, compared to a net loss of US$54 million all of which are attributable to the owners of the Company.

Holding and Others Segment

  Fiscal year ended
  December 31, 2019 December 31, 2018 Variation %
Revenue 20 36 (16) (44%)
Cost of sales - - - -
Gross profit 20 36 (16) (44%)
         
Selling expenses (2) (4) 2 (50%)
Administrative expenses (22) (27) 5 (19%)
Other operating income and expenses, net (1) 9 (10) (111%)
Share of profit from joint ventures 67 92 (25) (27%)
Operating income 62 106 (44) (42%)
         
Results on net monetary position - 12 (12) (100%)
Finance income 5 14 (9) (64%)
Finance costs (4) (6) 2 (33%)
Other financial results (18) 108 (126) (117%)
Financial results, net (17) 128 (145) (113%)
Profit before income tax 45 234 (189) (81%)
         
Income tax 231 (34) 265 (779%)
Profit from continuing operations 276 200 76 38%
         
Discontinued operations - 31 (31) (100%)
Profit of the year 276 231 45 19%
         
Owners of the Company 276 231 45 19%
Non - controlling interest - - - -

 

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Revenues

Revenues from our holding and others segment amounted to US$20 million for the fiscal year ended December 31, 2019, US$16 million lower than US$36 million for the fiscal year ended December 31, 2018.

Cost of Sales

Cost of sales of the holding and others segment was not material for fiscal years ended December 31, 2019 and 2018.

Gross Profit

Gross profit from our holding and others segment decreased by US$16 million and recorded a US$20 million profit for the fiscal year ended December 31, 2019, compared to a US$36 million profit for the same period in 2018.

Selling Expenses

Selling expenses from our holding and others segment amounted to US$2 million and US$4 million for the fiscal years ended December 31, 2019 and 2018, respectively. 

Administrative Expenses

Administrative expenses decreased by 19%, to US$22 million, during the fiscal year ended December 31, 2019, compared to US$27 million for the fiscal year ended December 31, 2018. This decrease was mainly due to US$8 million lower charges for fees and compensations for services, partially offset by US$3 million higher charges for directors and syndicates’ fees and US$3 million higher labor costs.

Other Operating Income and Expenses, Net

Other operating income and expenses, net recorded a loss of US$1 million for the fiscal year ended December 31, 2019 compared to a profit of US$9 million for the fiscal year ended December 31, 2018, due to: (i) US$6 million lower gains from services to third-parties and (ii) US$3 million for lower reversal of contingencies provision.

Operating Income

Our holding and others segment’s operating income amounted to US$62 million for the fiscal year ended December 31, 2019, 42% lower than the US$106 million recorded for the fiscal year ended December 31, 2018. This variation includes a decrease of US$25 million in share of profit from joint ventures to US$67 million gain for the year ended December 31, 2019 compared to US$92 million gain for the year ended December 31, 2018.

Financial Results, Net

Net financial results from our holding and other segment amounted to a loss of US$17 million for the fiscal year ended December 31, 2019 compared to a US$128 million gain for the fiscal year ended December 31, 2018, mainly due to: (i) a US$26 million loss from net foreign exchange difference, during 2019, compared to a US$156 million gain during 2018 mainly as a result of the change in Pampa’s functional currency as from January 1, 2019 (see Note 3 to our Consolidated Financial Statements); (ii) a US$12 million gains on net monetary position resulting from the application of IAS 29 during the 2018 fiscal year, and (iii) US$7 million for lower net financial gains. These effects were partially offset by: (i) a US$3 million gain from changes in the fair value of financial instruments, compared to a US$32 million loss in 2018 and (ii) a US$5 million gain from current valuation of asset, during 2019, compared to a US$17 million loss during 2018.

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Income Tax

Our holding and others segment recorded an income tax benefit of US$231 million for the fiscal year ended December 31, 2019, compared to a US$34 million charge for the fiscal year ended December 31, 2018.

Total Profit

Our holding and others segment registered a net profit from continuing operations of US$276 million for the fiscal year ended December 31, 2019 compared to a net profit of US$200 million recorded in the fiscal year ended December 31, 2018, all of which are attributable to the owners of the Company.

Our holding and others segment recorded a profit of US$31 million for discontinued operations in the fiscal year ended December 31, 2018, due to the sale in May 2018 of the main assets of the refining and distribution segment.

Our holding and others segment registered a net profit from continuing and discontinued operations of US$276 million for the fiscal year ended December 31, 2019 compared to a net profit of US$231 million recorded in the fiscal year ended December 31, 2018, all of which are attributable to the owners of the Company.

Distribution of energy segment

The results corresponding to the distribution of energy segment have been classified as discontinued operations as a result of the pending sale of our controlling stake in Edenor. See Item 4. “Relevant Events—Sale of Controlling Stake in Edenor” and note 5.3.3 to our Consolidated Financial Statements.

Distribution of energy segment recorded a total profit of US$197 million for discontinued operations in the fiscal year ended December 31, 2019, of which US$98 million are attributable to the owners of the Company, compared to a profit of US$116 million in 2018, of which US$61 million are attributable to the owners of the Company. This variation is mainly due to a gain of US$285 million recorded during 2020 as a result of the Agreement on the Regularization of Obligations entered into on May 10, 2019 by and between Edenor and the Argentine Federal Government, partially offset by: (i) lower gross profit (US$ 71 million); (ii) higher charges in income tax (US$ 129 million) and (iii) a lower gain on net monetary position (US$ 39 million).

Liquidity and Capital Resources

Analysis of our Financial Condition

Our ability to execute and carry out our strategic business plan depends upon our ability to obtain financing at a reasonable cost and on reasonable terms. Along these lines, and as a guiding principle, financial solvency is the foundation on which the sustainable development of our businesses is built. Pursuant to these strategic guidelines, we seek to: (a) Design a capital structure consistent with industry standards adaptable to the financial markets in which we operate; (b) Maintain a liquidity level—invested in financial assets with high credit quality—that allows us to meet our obligations; (c) Maintain a debt maturity profile consistent with projected cash generation; and (d) Efficiently manage borrowing costs.

Adhering to these guidelines enables us to treat financial management as a key element in the value creation process.

 

Our business activities are focused on the development and value-enhancement of our energy assets, while continuing to identify, evaluate and invest in other opportunities in the Argentine energy industry that offer significant growth potential and/or synergies.

 

Total consolidated borrowings as of December 31, 2020, 2019 and 2018 were US$1,614 million, US$1,947 million and US$2,177 million, respectively. As of December 31, 2020, 2019 and 2018, 88%, 92% and 93% of our borrowings were denominated in U.S. Dollars, respectively.

 

As of December 31, 2020, 2019 and 2018, cash and cash equivalents were US$141 million, US$225 million and US$241 million, respectively. We maintain our cash and cash equivalents in Pesos, and in U.S. Dollars depending on medium term requirements and availability, at all levels of operations. We and our subsidiaries conducted financings at both variable and fixed rates.

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The table below reflects our cash position at the dates indicated and the net cash provided by (used in) operating, investing and financing activities during the years indicated:

    As of December 31,
    2020   2019   2018(1)
Cash and cash equivalents at the beginning of the year   225   241   31
Net cash generated by operating activities   693   802   610
Net cash (used in) generated by investing activities   (255)   (369)   19
Net cash used in financing activities   (445)   (390)   (470)
Exchange difference generated by cash and cash equivalents   (25)   (59)   53
Loss on net monetary position generated by cash and cash equivalents   -   -   (8)
Cash and cash equivalents reclassified to assets classified as held for sale   (52)   -   6
Cash and cash equivalents at the end of the year   141   225   241

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

 

Net cash generated by operating activities

 

Net cash generated by operating activities amounted to US$693 million for the year ended December 31, 2020, attributable to cash flow generated by net income from continuing operations without considering (i) non-cash losses (mainly related to US$205 million for depreciation and amortization of assets, US$132 million for interest accrual, and US$139 million for property, plant and equipment, intangible assets and inventories’ impairment), and (ii) non-cash profits (mainly related to US$85 million for share of profit from joint ventures and associates), but considering (iii) changes in operating assets and liabilities (mainly related to US$20 million decrease in tax payables and US$6 million increase in inventories, partially offset by US$19 million decrease in trade and other receivables); (iv) US$211 million cash generated by discontinued operations; and (v) US$5 million in income tax payments.

Net cash generated by operating activities amounted to US$802 million for the year ended December 31, 2019, attributable to cash flow generated by net income from continuing operations without considering (i) non-cash losses (mainly related to US$186 million for depreciation and amortization of assets and US$110 million for interest accrual), and (ii) non-cash profits (mainly related to US$101 million for share of profit from joint ventures and associates, US$130 million for income tax accrual and US$88 million for financial instruments fair value’s changes), but considering (iii) changes in operating assets and liabilities (mainly related to US$65 million decrease in trade and other receivables, US$46 million increase in trade and other payables, partially offset by US$20 million increase in inventories); (iv) US$170 million cash generated by discontinued operations; and (v) US$42 million in income tax payments.

Net cash generated by operating activities amounted to US$610 million for the year ended December 31, 2018, attributable to cash flow generated by net income from continuing operations without considering (i) non-cash losses (mainly related to US$780 million for net foreign currency exchange difference, US$165 million for depreciation and amortization of assets, and US$105 million for interest accrual), and (ii) non-cash profits (mainly related to US$403 million for gains on net monetary position and US$118 million for share of profit from joint ventures and associates), but considering (iii) changes in operating assets and liabilities (mainly related to US$59 million increase in trade and other receivables, US$114 million decrease in trade and other payables and US$51 million decrease in provisions); (iv) US$224 million cash generated by discontinued operations; and (v) US$14 million in income tax payments.

Net cash used in or generated by investing activities

Net cash used in investing activities amounted to US$255 million for the year ended December 31, 2020, including payments of US$124 million for purchases of property, plant and equipment, US$151 million for public securities and shares acquisitions and US$86 million used in discontinued operations, partially offset by US$93 million proceeds from investment funds recoveries.

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Net cash used in investing activities amounted to US$369 million for the year ended December 31, 2019, including payments of US$426 million for purchases of property, plant and equipment, US$108 million for capital integration in associates and joint ventures, US$74 million for investment funds subscriptions and US$86 million used in discontinued operations, partially offset by US$190 million proceeds from the sale of public securities and shares and US$87 million proceeds from received dividends.

Net cash generated by investing activities amounted to US$19 million for the year ended December 31, 2018, including US$457 million in proceeds from sales of shares in companies and property, plant and equipment and US$189 million from the recovery of investment funds, partially offset by uses of cash including US$455 million in purchases of property, plant and equipment and US$221 million used in discontinued operations.

Net cash used in financing activities

Net cash used in our financing activities amounted to US$445 million for the year ended December 31, 2020, principally due to payments of US$481 million made in connection with bank and financial borrowings (including principal and interest), US$104 million related to acquisition of our own shares, US$110 million related to repurchase and redemption of corporate bonds and US$73 million used in discontinued operations, partially offset by US$353 million proceeds from borrowings.

Net cash used in our financing activities amounted to US$390 million for the year ended December 31, 2019, principally due to payments of US$652 million made in connection with bank and financial borrowings (including principal and interest), US$141 million related to acquisition of our own shares, US$66 million related to repurchase and redemption of corporate bonds and US$85 million used in discontinued operations, partially offset by US$556 million proceeds from borrowings.

Net cash used in our financing activities amounted to US$470 million for the year ended December 31, 2018, principally due to payments of US$356 million made in connection with bank and financial borrowings (including principal and interest), US$341 million related to acquisitions of our own shares and US$13 million used in discontinued operations, partially offset by US$245 million proceeds from borrowings.

Capital Expenditures

The following table sets forth our capital expenditures for the years ended December 31, 2020, 2019 and 2018:

  At December 31,
  2020   2019   2018(1)
Generation 61   240   235
Distribution of energy 135   173   227
Oil and gas 41   191   192
Petrochemical 3   4   4
Holding and others 2   3   7
  242   611   665

(1) Peso amounts as of December 31, 2018 have been translated into U.S. Dollars 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.

 

In 2020, our capital expenditures in our generation segment amounted to US$61 million mostly related to work in progress (US$54 million) in order to increase thermal generation capacity mainly through the completion of the closing of Genelba’s second combined cycle.

  

In our distribution of energy segment, we invested US$135 million in 2020, mainly related to work in progress (US$101 million) and substations, high, medium and low voltage lines, meters, transforming chamber and platforms (US$20 million). A substantial portion was dedicated to increasing the capacity of our grid in line with the growth of our customer base. In addition, we made investments in order to meet our quality standards levels.

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Our capital expenditures in our oil and gas segment amounted to US$41 million in 2020, mostly in order to develop gas reserves (US$18 million) and exploratory wells (US$23 million).

In 2019, our capital expenditures in our generation segment amounted to US$240 million mostly related to work in progress (US$217 million) in order to increase thermal generation capacity mainly through the closing of Genelba’s combined cycle project and the completion of wind farm projects.

  

In our distribution of energy segment, we invested US$173 million in 2019, mainly related to work in progress (US$139 million) and substations, high, medium and low voltage lines, meters, transforming chamber and platforms (US$9 million). A substantial portion was dedicated to increasing the capacity of our grid in line with the growth of our customer base. In addition, we made investments in order to meet our quality standards levels. Edenor complied with the investment plan for a five-year period agreed upon with the ENRE in the context of the RTI process.

Our capital expenditures in our oil and gas segment amounted to US$191 million in 2019, mostly related to work in progress (US$148 million) in order to develop gas reserves and exploratory wells (US$24 million).

In 2018, our capital expenditures in our generation segment amounted to US$235 million mostly related to work in progress (US$222 million) in order to increase thermal generation capacity mainly through the installation of a new turbine and the development of wind power projects.

 

In our distribution of energy segment, we invested US$227 million in 2018, mainly related to work in progress (US$195 million) and substations and high, medium and low voltage lines (US$13 million). A substantial portion was dedicated to increasing the capacity of our grid in line with the growth of our customer base. In addition, we made investments in order to meet our quality standards levels. Edenor complied with the investment plan for a five-year period agreed upon with the ENRE that had been submitted in the context of the RTI process.

Our capital expenditures in our oil and gas segment amounted to US$192 million in 2018, mostly related to work in progress (US$163 million), wells (US$1 million) and mining property (US$26 million) in order to develop gas reserves mainly through well drilling.

Future Capital Requirements

For the year of 2021, our Board of Directors has approved a capital expenditure program in an amount of US$ 204 million, which will be mainly focused in our gas segment. Because of that, we expect to improve our operating cash flow, driven by an increase in our natural gas production related to the commitments we made under the Plan Gas.Ar tenders.

We estimate that our capital expenditure requirements, debt payment obligations, dividend payments and working capital will be financed mainly from our cash from operations, new debt financings and possible divestments.

We prioritize financial discipline with an adequate liquidity position consistent with our cash flow generation and financial requirements. Our level of investments will depend on a variety of factors, many of which are beyond our control. These include the future evolution of the price of commodities we sell, the behavior of electricity demand in Argentina, the existence and competitive impact of alternative projects, the enforcement of regulations and changes in applicable regulations, taxes and royalties, and the political, economic and social situation prevailing in Argentina.

In our generation segment, future capital expenditures will mainly focus on the completion of expansion of thermal generation capacity projects through the execution of the closing to combined cycle at CTEB power plant.

 

Finally, in our oil and gas segment, the investment plan for 2021 has a strong focus on unconventional fields. Regarding the breakdown between oil and gas, the plan establishes significant investments in gas, in line with the commitments assumed in our participation in the Plan Gas.Ar tenders. For the period 2021-2024 we have committed to an investment plan which will exceed US$ 250 million. In order to achieve the incremental injection commitments for the next winter, a relevant portion of the US$ 250 million plan is expected to be deployed during 2021. Because of that, our capital expenditures will focus (i) on developing unconventional gas reserves (shale and tight gas) through well drilling, as well as, exploration studies aimed at making new discoveries at unconventional gas reservoirs; and (ii) on increasing our gas treatment facilities in order to be able to inject the new gas we develop. Because of that, our capital expenditures will focus (i) on developing unconventional gas reserves (shale and tight gas) through well drilling; and (ii) on increasing our gas treatment facilities in order to be able to inject the new gas we develop.

 

For further information on our investment commitments in oil and gas areas and our generation projects, please see Note 16 to our Consolidated Financial Statements.

 

Description of Indebtedness

Our total consolidated financial indebtedness as of December 31, 2020 was US$1,614 million, of which 85% was long-term debt, 88% of which was denominated in U.S. Dollars. The amount of our total consolidated financial debt does not include Edenor, Transener, TGS, Greenwind and CTB given that our stake in those companies constitutes an interest in a joint venture, and as such is not consolidated and is valued according to the equity method of accounting in the Consolidated Financial Statements.

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The below is a description of the main characteristics of the indebtedness of our group companies:

  2020 2019 2018
  (in millions of US$)
Short-Term Debt(1)      
Corporate Bonds 117 32 25
Financial borrowings 88 137 313
Bank overdrafts 37 - -
Related parties - 14 1
  242 183 339
Long-Term Debt(1)      
Corporate Bonds(2) 1,297 1,603 1,457
Financial borrowings 75 161 258
Total 1,372 1,764 1,715
Total Indebtedness 1,614 1,947 2,054

(1) 2018 figures exclude indebtedness with CAMMESA, settled in 2019.

(2) Net of repurchase of Corporate Bonds of Pampa for a principal amount of US$81 million and US$9 million, and the repurchase of Edenor’s Corporate Bonds for a principal amount of US$29 million and US$10 million, as of December 31, 2019 and 2018, respectively.

 

Financings

 

In 2020, we had short term debt maturities for approximately US$181 million. During 2020, particularly after the issuance of the Series IV, V and Class 6 notes, the Company cancelled at maturity and pre-cancelled short term financings with banks and additionally pre-cancelled and repurchased its own bonds in the market, improving its short term debt profile while keeping a solid cash position. As of December 31, 2020, our short-term maturities amounted to US$196 million.

Additionally, after the end of the 2020 fiscal year, we paid, at maturity, financings in a total amount of US$37 million.

The following table describes our debt maturity profile for the periods indicated, including principal amount plus the corresponding accrued interest as of December 31, 2020:

  < 1 year 1-5 years > 5 years Total
  (in millions of US$)
Total Indebtedness 242 463 910 1,614

 

Corporate Bonds

On April 30, 2020, Pampa issued (i) Series IV notes for a total amount of Ps.1,238 million and (ii) Series V notes for a total amount of Ps.565 million. Series IV notes accrue interest at a floating rate based on a Private Badlar plus an applicable margin of 3.00% and are due at a single installment upon its maturity on July 29, 2020. Series V notes accrue interest at a floating rate based on Private Badlar plus an applicable margin of 5.00% and are due at a single installment upon its maturity on October 27, 2020.

In July 2020, we issued the Class 6 notes for a total amount of Ps. 6,355 million. The Class 6 notes accrue interest at a floating rate based on a Private Badlar plus an applicable margin of 2,5% and are due at a single installment upon their maturity on August 21, 2021.

Additionally, on October 27, 2020 we cancelled at maturity the Series V notes for US$565 million.

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Credit Ratings

In April 2020, in line with the change in the sovereign’s credit risk outlook, Moody’s amended the rating of Pampa, Edenor and TGS corporate bonds on a global scale from “Caa1” to “Caa3” and the rating of Edenor’s corporate bonds on a national scale from “Baa3” to “Caa1”, in all cases with a negative outlook.

 

Likewise, in April 2020, S&P modified the rating of Transener’s corporate bonds, on a global scale from “B-“ to “CCC +” and on a national scale from “raBBB +” to “raBB”, both with a negative outlook. Subsequently, in May 2020, it also modified the ratings of Pampa and TGS corporate bonds on a global scale from “B-” to “CCC +” with a negative outlook.

 

In June 2020, for the same reasons as Moody’s and S&P, FitchRatings downgraded the global rating of Pampa's ONs from “CCC +” to “CCC”. Likewise, on a local scale, it maintained a rating of “AA-” for the long term and assigned a rating of “A1 +” for the short term.

 

Finally, in March 2021, S&P modified the global ratings assigned to the CB issued by Transener from “CCC+” to “CCC” and local ratings from “raBB” to “raCCC” due to the access restrictions to the MLC and regulatory uncertainty.

Company Agency Rating
    Global Local
Pampa S&P CCC+ -
Moody’s Caa3 -
FitchRatings CCC

AA- (long term)

A1+ (short term)

TGS S&P CCC- -
Moody’s Caa3 -
Transener S&P CCC- raCCC

 

 

Repurchase of debt securities

 

During 2020 we and our subsidiaries acquired a total of: (i) US$96,894,000 face value of our 2023 corporate bonds at an average clean price of US$75.5 per US$100 face value; (ii) US$50,985,000 face value of our own 2027 corporate bonds at an average clean price of US$66.8 per US$100 face value; and (iii) US$150,000 face value of our own 2029 corporate bonds at an average clean price of US$59.0 per US$100 face value. For more information, see Note 12 to our Consolidated Financial Statements.

In addition, during 2020, we acquired a total of 0.4 million of Edenor’s ADRs at an average cost of US$3.7 per ADR. As a result, our equity interest amounts to 55.1% of Edenor’s issued capital stock. On December 28, 2020, we entered into a binding stock purchase agreement for the sale of our controlling interest in Edenor. See “Item 4. “Relevant Events—Sale of Controlling Stake in Edenor”. As a result of the strategic divestment mentioned above, the distribution of energy segment was classified as discontinued operation as of December 31, 2020, and for the comparative period 2019.

Additionally, in 2020 Pampa acquired US$1.3 million face value of Transener’s 2021 corporate bonds at an average clean price of Ps.91.2 per US$1 face value.

Furthermore, in 2020 Pampa acquired, both directly and indirectly, 0.9 million TGS’s ADR at an average purchase cost of US$4.9/ADR. After the closing of the fiscal year, Pampa acquired, directly and indirectly, 0.9 million ADRs and 0.1 million shares of TGS at an average cost of US$5.2/ADR and Ps.160.0/share, respectively. As of the date of this annual report, the Company’s direct and indirect shareholdings amount to 28.9% of TGS’s issued capital stock. 

Covenants of our Indebtedness

 

Under the terms of the respective outstanding debt, we and certain of our subsidiaries are subject to a number of restrictive covenants, including limitations on incurrence of new indebtedness, capital expenditures and dividend payments, among others. As of December 31, 2020, we and our subsidiaries were in compliance with the covenants under our respective outstanding indebtedness.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements required to be disclosed under Item 5.E. of Form 20-F.

 

Item 6.Directors, Senior Management and Employees

 

General

 

We are managed by our board of directors, which is composed of ten directors and an equal or smaller number of alternate directors subject to the Annual Shareholders’ Meeting decision. Four of our ten directors are independent according to the criteria and requirements for independent directors under applicable Argentine law. One of our alternate directors is independent. The directors are elected on a staggered basis each year (three directors at a time in each of the first two years of a three-year cycle, and four in the third year). Our directors are elected for a three-fiscal-year term and can be reelected.

Pursuant to section 12 of our by-laws, any shareholder or group of shareholders who holds more than 3% of our capital stock (each, a “Proposing Shareholder”) may require our board of directors to give notice to our other shareholders of the candidate or candidates to be nominated by such shareholder or group of shareholders at our shareholders’ meeting for election of our board of directors. To such end, the relevant slate executed by the Proposing Shareholder or its representatives, as applicable, will be sent to the chairman of our board of directors, no less than five business days prior to the date of the relevant shareholders’ meeting, to be published in the Bulletin of the BASE at least two days prior to the date of our shareholders’ meeting. To facilitate the formation of the slates and the record of the candidates’ names, as of the date of the first notice calling for the relevant meeting, a special book will be made available to our shareholders at our registered office in which the names of the candidates proposed by any proposing shareholder shall be recorded. Similarly, our board of directors will propose to the shareholders’ meeting the candidates for election by slate or, if election by slate is objected to, individually. The names of the candidates proposed by the board will be made known to all our shareholders together with the slates proposed by the Proposing Shareholder. In addition, no proposal for the election of directors may be made, either before or during the shareholders’ meeting, unless written evidence of acceptance of office by the proposed candidates is submitted to us. Such slate or person, as the case may be, who obtains the vote of a majority of the shares present at the meeting will be declared elected. If no slate obtains such majority, a new vote will be taken in which the two slates or persons that obtained the largest number of votes will take part, and the slate or person who obtains the largest number of votes will be declared elected. The preceding rules will not prevent a shareholder who is present at the shareholders’ meeting from proposing candidates not included in the proposals from our board of directors.

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Duties and Liabilities of Directors

Pursuant to section 59 of the BCL, directors have the obligation to perform their duties with the loyalty and the diligence of a prudent business person. Directors are jointly and severally liable to the company, the shareholders and third parties for the improper performance of their duties, for violating the law, the company’s by-laws or regulations, if any, and for any damage caused by fraud, abuse of authority or negligence, as provided for in Section 274 of the BCL. The following are considered integral to a director’s duty of loyalty: (1) the prohibition on using corporate assets and confidential information for private purposes; (2) the prohibition on taking advantage, or to allow another to take advantage, by action or omission, of the business opportunities of the company; (3) the obligation to exercise board powers only for the purposes for which the law, the company’s by-laws or the shareholders’ or the board of directors’ resolution have intended; and (4) the obligation to take strict care so that acts of the board are not contrary, directly or indirectly, to the company’s interests. A director must inform the board of directors and the supervisory committee of any conflicting interest he or she may have in a proposed transaction and must abstain from voting thereon.

A director shall not be responsible for the decisions taken in a board of directors’ meeting as long as he or she states his or her opposition in writing and informs the supervisory committee before any claim arises. A director’s decision approved by the company’s shareholders releases that director of any responsibility for his decision, unless shareholders representing 5% or more of the company’s capital stock object to that approval, or the decision was taken in violation of applicable law or the company’s by-laws. The company is entitled to file judicial actions against a director if a majority of the company’s shareholders at a shareholders’ meeting request that action.

 

Under the BCL, the board of directors is in charge of the administration of the company and, therefore, makes any and all decisions in connection therewith, as well as those decisions expressly provided for in the BCL, the company’s by-laws and other applicable regulations. Furthermore, the board is generally responsible for the execution of the resolutions passed by shareholders’ meetings and for the performance of any particular task expressly delegated by the shareholders. In general, our board of directors may be more involved in operating decision-making than might be customary in other jurisdictions. Under the BCL, the duties and responsibilities of an alternate director, when acting in the place of a director on a temporary or permanent basis, are the same as those discussed above for directors. They have no other duties or responsibilities as alternate directors.

 

Board of Directors

 

The following table sets forth information about the members and alternate members of our board of directors, nine of whom have terms that will expire in December 2021, while five have terms that will expire in December 2022 and the remaining six have terms that will expire in December 2023. In accordance with Argentine law, each member maintains his or her position on the board until a new shareholders’ meeting elects new directors.

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Full Name

 

Age Position Appointment Date Termination Date
Marcos Marcelo Mindlin 57 Chairman 04/29/2021 12/31/2023
Gustavo Mariani 50 Vice Chairman 05/11/2020 12/31/2022
Ricardo Alejandro Torres 63 Director 05/11/2020 12/31/2022
Damián Miguel Mindlin 55 Director 04/29/2021 12/31/2023
Gabriel Cohen 56 Director 04/29/2019 12/31/2021
Carlos Correa Urquiza(1) (2) 51 Director 04/29/2019 12/31/2021
Juan Santiago Fraschina (1) (2) 44 Director 05/11/2020 12/31/2021
Dario Epstein(1) (2) 57 Director 04/29/2019 12/31/2021
María Carolina Sigwald 53 Director 04/29/2021 12/31/2023
Miguel Ricardo Bein(1) (2) 70 Director 05/11/2020 12/31/2022
Pablo Alejandro Diaz 63 Alternate Director 04/29/2019 12/31/2021
Nicolás Mindlin 31 Alternate Director 04/29/2019 12/31/2021
Gerardo Carlos Paz 52 Alternate Director 04/29/2021 12/31/2023
Silvana Wasersztrom(1) (2) 53 Alternate Director 04/29/2019 12/31/2021
Brian Robert Henderson 75 Alternate Director 04/29/2021 12/31/2023
Diego Martín Salaverri 56 Alternate Director 08/07/2020 12/31/2021
Victoria Hitce 44 Alternate Director 05/11/2020 12/31/2022
Mauricio Penta 44 Alternate Director 04/29/2021 12/31/2023
Horacio Jorge Tomás Turri 60 Alternate Director 05/11/2020 12/31/2022
Haroldo Adrián Montagu 41 Alternate Director 05/11/2020 12/31/2021

 

(1)Independent Directors under CML and CNV’s regulations.
(2)Independent Directors under Rule 10A-3 under the Securities Exchange Act of 1934, as amended.

 

Marcos Marcelo Mindlin and Damián Miguel Mindlin are brothers, Marcos Marcelo Mindlin and Nicolás Mindlin are father and son and, therefore, Damián Miguel Mindlin and Nicolás Mindlin are uncle and nephew. There are no other family relationships between the other members of our board of directors.

 

Nomination Policy and Nomination Committee

The Company’s board of directors approved a Nomination Policy in order to establish the principles governing the nomination and appointment of members of the Board of Directors.

Within the Nomination Policy framework, the Board of Directors created a Nomination Committee that provides assistance to the Board of Directors and the shareholders in the nomination and appointment of the members of the Board, according to the requirements and procedures set forth in the applicable rules and regulations in force in Argentina, Pampa’s bylaws and the rules of the committee.

 

The Nomination Committee reports to Pampa’s Board of Directors and consists of three regular members and an equal or lower number of alternate members.

 

The President of the committee must be independent, as determined by the guidelines set forth by the national securities commission. At present, Pampa’s Nomination Committee is composed as follows:

 

Name   Position
Miguel Bein   President
Gustavo Mariani   Regular Member
Ricardo Torres   Regular Member
Victoria Hitce   Alternate Member
Silvina Wasersztrom   Alternate Member
María Carolina Sigwald   Alternate Member

 

Senior Management

The table below sets forth certain information concerning our senior management:

 

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Name   Position   Age
Marcos Marcelo Mindlin   Chairman   57
Gustavo Mariani   Executive Vice president - Chief Executive Officer   50
Ricardo Alejandro Torres   Executive Vice president   63
Damián Miguel Mindlin   Executive Vice president   55
Horacio Jorge Tomás Turri   Executive Director of Oil & Gas   60
Gabriel Cohen   Chief Financial Officer   56
María Carolina Sigwald   Executive Director of Legal Affairs   53
Nicolás Mindlin   Executive Director of Planning, Strategy, Downstream and Affiliates   31
Mauricio Penta   Executive Director of Administration and Systems   44

 

The business address of each of our current directors and executive officers is Maipú 1, City of Buenos Aires, Argentina (C1084ABA).

 

Set forth below are brief biographical descriptions of the members of our board of directors and our senior management.

 

Marcos Marcelo Mindlin was born on January 19, 1964. He has been a member of our board of directors since 2006 and serves as Chairman. He is a member of the Council of the Americas. Mr. Mindlin received a Master of Science in Business Administration from the Universidad del CEMA (Center of Macroeconomic Studies). He also holds a degree in Economics from the Universidad de Buenos Aires. In 2008, Mr. Mindlin founded and since that time has directed the Foundation whose purpose is to improve childhood development and education. Mr. Mindlin is also a member and was Chairman of the Board of the Executive Committee of Tzedaká, a leading Jewish-Argentine foundation. From 1989 to 2004, Mr. Mindlin served as the founder, Senior Portfolio Manager and a shareholder of Grupo Dolphin. From 1991 to 2003, Mr. Mindlin was also a shareholder, Vice-Chairman and Chief Financial Officer of Inversiones y Representaciones S.A. (IRSA), a leading Argentine real estate company listed on the New York Stock Exchange. In November 2003, Mr. Mindlin resigned from IRSA to focus his work on Grupo Dolphin. Mr. Mindlin has extensive expertise in Latin America through his role as Chairman of the board of directors of Grupo Dolphin and several of its affiliates. From 1999 to 2004, Mr. Mindlin also served as Vice Chairman of Alto Palermo S.A. (a leading owner and operator of shopping centers in Buenos Aires), Vice Chairman at Cresud S.A.I.C. (one of the largest listed agricultural companies in Argentina) and ODS S.A. He also served as Director and member of the Executive Committee of Banco Hipotecario, the leading mortgage bank in Argentina. Mr. Mindlin is currently Chairman of the Foundation, Grupo Dolphin Holding S.A., Grupo Emes S.A. and Emes Inversora S.A. Mr. Mindlin also serves as director of Orígenes Seguros de Retiro S.A., Orígenes Seguros de Vida S.A., Consultores Fund Management and Mindlin Warrants S.A.

Gustavo Mariani was born on September 9, 1970. Mr. Mariani holds a degree in Economics from the Universidad de Belgrano and a Master’s degree in Finance from the Universidad del CEMA (Center of Macroeconomic Studies) and also is a Chartered Financial Analyst (CFA) since 1998. He has been a member of our board of directors since November 2005 and serves as Vice-Chairman and CEO. Mr. Mariani joined Grupo Dolphin in 1993 as an analyst and also served as an investment portfolio manager. Mr. Mariani is currently Chairman of HIDISA, HINISA, PACOSA, Generación Argentina SAU and Transelec. He is also Vice Chairman of SACDE. He also serves as Director of GMA Warrants S.A., ODS S.A., Dolphin Créditos Holding S.A., Emes Inversora S.A., Transba, Grupo Emes S.A., Emes Finance S.A, Grupo Dolphin Holding S.A., Orígenes Seguros de Vida S.A., Orígenes Seguros de Retiro S.A., PP, CPB, Sitios Argentinos S.A, TGS and Pampa Cogeneración. In addition, Mr. Mariani is a member of the management board of the Foundation.

Ricardo Alejandro Torres was born on March 26, 1958. Mr. Torres holds a degree in accounting from the Universidad de Buenos Aires and a Master’s degree in Business Administration from the Instituto de Altos Estudios Empresariales-Escuela de Negocios de la Universidad Austral and was a professor of Tax and Finance at the school of Economics of the Universidad de Buenos Aires. He has been a member of our board of directors since November 2005 and serves as Executive Vice president. He currently serves as Chairman of CPB, Pampa Cogeneración, PISA, RT Warrants S.A., Pop Argentina S.R.L. (Partner), Todos Capital S.R.L. (Partner). Also, Mr. Torres is Vice Chairman of the Foundation and Chairman of La Fundación Observatorio Argentinos por la Educación. He also serves as director of HIDISA, HINISA, PACOSA, PP, CITELEC and Transelec.

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Damián Miguel Mindlin was born on January 3, 1966. He has been a member of our board of directors since November 2005. Mr. Mindlin joined Grupo Dolphin in 1991 as a shareholder and a director. Since November 2003, Mr. Mindlin has served as Investment Portfolio Manager of Grupo Dolphin. Additionally, he is currently the Chairman of PP, Latina de Infraestructura Ferrocarriles e Inversiones S.L., ODS S.A., SACDE, Creaurban S.A., IECSA Chile S.A., Constructora Incolur IECSA S.A LTDA (Chile), Inversora Andina S.A. (Chile), Profingas S.A., Líneas del Norte S.A., Minera Geometales S.A., FIDUS S.G.R, Compañía Americana de Trasnmisión Eléctrica S.A. (CATESA), Corpus Energía S.A., Posadas Encarnación S.A., and ARPHC S.A. Also, Mr. Mindlin is the Vice Chairman of HIDISA, HINISA, PISA, Pampa Cogeneración, Sitios Argentinos S.A, Dolphin Créditos Holding S.A., Emes Inversora S.A., Grupo Emes S.A. and Grupo Dolphin Holding S.A. and he is member of the board of directors of Transelec, CPB, PACOSA, Pampa F&F, DMM Warrants S.A., Orígenes Seguros de Vida S.A., Orígenes Seguros de Retiro S.A., Consultores Fund Management Ltd and Emes Air S.A.; and alternate director of ByMA, Transba and CITELEC. Mr. Mindlin is currently the treasurer of the management board of the Foundation.

Gabriel Cohen was born on September 11, 1964. Mr. Cohen has been a director of Pampa since June 2006 and is currently the CFO of the Company. Mr. Cohen holds a degree in Business Administration from the Universidad de Buenos Aires. In addition, he worked for 15 years at Citibank, N.A., serving at the bank’s offices in Buenos Aires and Paris, holding different positions in financial control, treasury, investment banking, corporate banking and debt restructuring processes. Mr. Cohen currently serves as Chairman of Enecor and CITELEC, and Vice-Chairman of CPB. He is a member of the board of directors of Transener ; and alternate director of Transba, HIDISA, HINISA, CTB, PACOSA, PP and Transelec.

María Carolina Sigwald was born on November 15, 1967. She is the Executive Director of Legal Affairs of the Company since November 2017. Ms. Sigwald obtained her law degree from the Universidad de Buenos Aires, where she graduated with honors. She started her professional career as a lawyer in Central Puerto S.A. after its privatization and then joined Chadbourne & Parke in New York and later the IIC in Washington. Carolina returned to Argentina in 1998 as founding partner of Law Firm Díaz Bobillo, Sigwald & Vittone, where she performed as external advisor for energy companies, Pampa Energia among them. Likewise, she took office in Transportadora de Gas del Sur’s and Telefónica de Argentina’s board of directors. She is currently the Chairman of Greenwind and a member of the board of directors of Edenor, CTB, TGS, CIESA and PHA, and an alternate member of the board of directors of Pampa Cogeneración, Transba and CITELEC.

Carlos Correa Urquiza was born on September 17, 1969. On April 29, 2019, he joined the Company as a member of the board of directors. He currently serves as the Trading Desk in the Finance Area Management of Banco Hipotecario SA. Prior to joining BHSA (1999), he held the position of Head of the back office department of Consultores Asset Management (1994-1999). Carlos holds a Master’s degree in Banking Management from Universidad del Cema and a Bachelor’s Degree in Business Administration from Universidad de Belgrano.

Juan Santiago Fraschina was born on January 14, 1977. Mr. Fraschina has been a director of our company since May 2020. Mr. Fraschina holds a degree in Economics from the Universidad de Buenos Aires. He is a master in Economic Sociology (UNSAM). Mr. Fraschina was Vice Superintendent at Seguros de la Nación. He currently serves as General Secretary at the Administración Nacional de la Seguridad Social (ANSES). Previously, Mr. Fraschina was a professor at the Universidad de Buenos Aires, Universidad Nacional de Lomas de Zamora and Universidad de Morón. He currently serves as Teaching Head of Economic Social History I, and Director of the Economics career and the Diploma of Economic Structure Argentina at the Universidad Nacional de Avellaneda.

Miguel Ricardo Bein was born on October 28, 1950. Mr. Bein has been a director of our company since April 2017. He is currently an economic and financial consultant at Bein & Asociados, a consultant firm founded in 2001. Previously, he was Secretary of State at the Secretariat of Economic and Regional Programming of the Ministry of Economy, Works and Public Services during the period from 2000-2001. He was also Undersecretary of State in the Under Secretariat of Small and Medium Enterprise, Ministry of Industry and Foreign Trade. Mr. Bein holds a degree in Economics from the UBA. In 1993, he obtained a degree from the International Senior Management Program Harvard Business School in Boston, USA.

159 
 

Dario Epstein was born on July 19, 1963. On April 29, 2019, he joined the Company as a member of the board of directors. He currently is a director of Sur Investment, Research for Traders and FinGuru. He is a Public Accountant and has an MBA from the University of Michigan. He was also a director of CNV.

Pablo Díaz was born on June 26, 1957. Mr. Díaz has been an alternate director of our company since June 2006. Previously, he was an advisor to the federal Subsecretaría de Energía Eléctrica (the Sub-Secretariat for Electrical Energy). He currently serves as director of Citelec and Transba and as an alternate member of the board of directors of CPB, Transener, Edenor, HIDISA, HINISA, PACOSA, PP, Transelec and Transener. He is the Executive Secretary of the Foundation.

 

Nicolás Mindlin was born on November 11, 1989. Mr. Mindlin has been a member of the Board of directors of Pampa since April 2017. Mr. Mindlin holds an Industrial Engineer degree from the Technological Institute of Buenos Aires. Mr. Mindlin is also Chairman of PEB and PHA, Vicechairman of Trenerec Energía Bolivia S.A., member of the board of directors of Petrobras Energía Ecuador Ltd. and alternate member of Enecor. He is also the General Manager of EcuadorTLC S.A. and ENOPSA.

 

Gerardo Carlos Paz was born on October 24, 1968. Mr. Paz obtained a law degree from Universidad Nacional de Córdoba. He has worked at several places such as ENRE from 1994 to 2000, Camuzzi Gas Pampeana from 2001 to 2007 and Pampa Energía S.A. since 2007. Mr. Paz holds a Master’s degree in business law. Mr. Paz serves as Vice Chairman of PACOSA and Transelec. He is also director of HIDISA, HINISA, TJSM and TMB and alternate director of CPB, CIESA and Transba. Mr. Paz is also a member of the supervisory committee of CAMMESA.

Silvana Wasersztrom was born on March 18, 1968. Ms. Wasersztrom has served as an alternate member of our board since 2019. Ms. Wasersztrom is a lawyer, and completed postgraduate studies in Tax and Customs Law at the Universidad Austral y de Belgrano. Since 2012 she has practiced independently in her firm. Previously, from 1994 to 2002, she worked at Marval, O’Farrell & Mairal Abogados, and did an internship in Tampa, Florida, United States in the year 1992-1993.

Brian Henderson was born on September 23, 1945. Mr. Henderson is a Senior Advisor to the board of Pampa Energia S.A. Previously, Mr. Henderson served as director of the Latin America Region of National Grid, Silica Networks and Manquehue Net Telecomunicaciones (Chile) and vice-Chairman of commercial operations of Energy Charter Oak for America, Africa and Europe. Before Charter Oak Energy, Mr. Henderson served as vice-Chairman and CEO of Deutsche Babcock Riley, Canada Inc. Mr. Henderson is Chairman of Transba, and Vice-Chairman of Transener and Enecor. He is also director of Citelec and alternate director of HINISA, HIDISA and Transelec. He holds a degree in Industrial Engineering from the Hebum University.

 

Diego Martín Salaverri was born on August 7, 1964. He has been a member of our board of directors since June 2006. He is a founding partner of the Argentine law firm of Salaverri, Burgio & Wetzler Malbrán. He earned a degree in law in 1988 from the Universidad Católica Argentina, Buenos Aires. Currently, Mr. Salaverri serves as Chairman of Ecuador TLC SA, ENOPSA and Trenerec SA, Vice Chairman of Pampa Energía Bolivia SA, director of Edenor, Petrobras Energía Ecuador Ltd and alternate director of CIESA. He is also a regular member of the supervisory committee of Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Grupo Dolphin Holding S.A., Dolphin Finance S.A., Origen Seguros de Retiro S.A. and Origins Seguros de Vida S.A.; and alternate member of the supervisory committee of GSF S.A. and Partners I S.A. He is also an alternate member of the supervisory committee of Norpatagónica S.A.

Victoria Hitce was born on April 9, 1977. Ms. Hitce has been a member of the Board of Directors of Pampa since April 2017. Also, she was a founding partner of the Salaverri, Burgio & Wetzler Malbrán law firm. Currently, she is the Corporate and M&A Director of the Company. She is a lawyer graduated from the Universidad Católica Argentina. Ms. Hitce serves as director of Transba, CIESA, Edenor, HIDISA, HINISA, Pampa Energía Bolivia S.A. and Transporte de Servicios y Gas en Uruguay S.A. and CITELEC and as alternate director of PHA, Greenwind, TGS, Pampa Cogeneración, CTB, Generación Argentina SAU and Transener and alternate member of the supervisory committee of Refinor.

Horacio Turri was born on March 19, 1961. Mr. Turri is an industrial engineer and received his degree from the Instituto Tecnológico Buenos Aires. Mr. Turri served as Chief Executive Officer of Central Puerto S.A., Hidroeléctrica Piedra del Águila and Gener Argentina S.A. He worked as an analyst of investment projects in the oil, gas and electricity sectors at SACEIF Luis Dreyfus from 1990 to 1992. He also worked at Arthur Andersen & Co. and Schlumberger Wireline in 1987-1990 and 1985-1987, respectively. He also serves as a Vice-Chairman of TGS and CIESA.

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Mauricio Penta was born on July 23, 1976. He is the Director of Administration and Systems of the Company. Mr. Penta graduated in Public Accounting from the Universidad Argentina de la Empresa and he received an MBA from the Altos Estudios Empresariales. Previously, Mr. Penta worked for Deloitte and Grupo Cencosud as Tax Manager. Mr. Penta serves as director of CTB and as alternate director of PHA, Edenor and Generación Argentina SAU.

Haroldo Adrián Montagu was born on September 19, 1979. Mr. Montagu has been an alternate member of our board since 2020. Mr. Montagu holds a degree in Economics from the Universidad de Buenos Aires and a Master's degree in Development Studies from the Erasmus University. He held various positions in the national public sector for almost a decade. He is currently Secretary for Economic Policy of the Ministry of the Economy. In addition, he was a researcher for the Fénix Plan, a researcher for the Bariloche Foundation on issues related to economic and energy planning, and Head of Unit at the Economic Commission for Latin America (ECLAC) at its headquarters in Santiago, Chile. He also taught at the Universidad de Buenos Aires and at the Universidad Nacional de Moreno.

On April 16, 2018, the CNV issued Resolution No. 730, which modifies the criteria to determine if a director for the board of directors of companies under public regime shall not be considered independent. The Argentine independence standards under CNV rules differ in many ways from the NYSE, National Association of Securities Dealers Automated Quotation (“NASDAQ”) or the U.S. federal securities law standards. See “Item 16G. Corporate Governance.

The following directors, including alternate directors, do not qualify as independent members of our board of directors in accordance with the CNV criteria: Marcos Marcelo Mindlin, Ricardo Alejandro Torres, Damián Miguel Mindlin, Gustavo Mariani, Pablo Alejandro Diaz, Nicolás Mindlin, Gabriel Cohen, María Carolina Sigwald, Diego Martín Salaverri, Brian Robert Henderson, Mauricio Penta, Victoria Hitce, Horacio Jorge Tomás Turri and Gerardo Carlos Paz.

 

On the other hand, the following directors, including alternate directors, qualify as independent members of our board of directors according to the above mentioned criteria: Miguel Bein, Juan Santiago Fraschina, Haroldo Adrián Montagu, Carlos Correa Urquiza, Darío Epstein and Silvana Wasersztrom.

 

Audit Committee

 

According to the provisions of Section 109 of the CML, the Company established an audit committee. On February 18 and November 21, 2019, the audit committee approved an amendment of the audit charter, including the possibility of reelection of the members of the audit committee for successive terms.

 

Composition

 

Our audit committee is composed of three members of the board and of one alternate member. All the members of our audit committee must be independent according to the audit charter and must have professional experience in finance, accounting, law and/or management.

 

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The following table sets forth certain relevant information of the members of our audit committee:

Name

Position

Age

Miguel Bein

President

70

Carlos Correa Urquiza

Regular Member

51

Darío Epstein

Regular Member

57

Silvana Wasersztrom

Alternate Member

53

 

Each of the members of the Audit Committee satisfies the independence requirements of Rule 10A-3 of the Exchange Act. For biographical information on the member of the audit committee, see his biography under “Board of Directors”.

 

Budget

Our audit committee will have an annual budget approved by the ordinary annual shareholders’ meeting based on available funds from, without limitation, our revenues, investments and cost savings.

Duties and authority

Our audit committee is responsible for the performance of the duties that fall within its scope of authority pursuant to the provisions of the CML. These duties include, among others, the following:

·supervising the operation of the internal control systems and the administrative-accounting system of the Company as well as the reliability of the administrative-accounting system and of all the financial information for any other material facts submitted to the consideration of the authorities in compliance with the applicable reporting requirements in force;
·issuing an opinion on the external auditors nominated by the board of directors to be retained by the Company and verifying if they are independent pursuant to the CML;
·reviewing the plans submitted by the external auditors, supervising and assessing their performance and issuing an opinion thereon upon the presentation and publication of the Company’s annual financial statements and overseeing internal audit planning and performance;
·supervising compliance with the risk management information policies in place in the Company;
·issuing an opinion in relation to transactions with related parties in the events set forth in the applicable law and inform the provisions of the applicable law to the extent there is or may be an alleged conflict of interest in the Company;
·providing the market with complete information regarding transactions in connection of which there is a conflicts of interest with the members of our corporate bodies or controlling shareholders;
·verifying compliance with applicable standards of conduct;
·issuing an opinion with respect to the reasonableness of the fees of members of the Board of Directors and stock option plans proposed by the Board of Director;
·issuing an opinion with respect to the compliance with legal requirements and on the reasonableness of proposals to issue shares or securities convertible into shares, in the case of capital increases that exclude or limit preemptive rights;
·Providing any report, opinion or statement required by the current regulations in force, with the scope and frequency required by such regulations, as amended;

 

·Complying with all obligations provided for in our by-laws, as well as regulations binding for us; and
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·preparing an annual working plan to be reported to the Board of Directors and the Supervisory Committee within a term of 60 calendar days as from the beginning of the fiscal year.

Independence Criteria

Pursuant to the CML and CNV regulations, we are required to have an audit committee consisting of at least three members of our Board of Directors. Under CNV regulations, at least a majority of the members of the audit committee must be independent directors under CNV standards (see “Item 16G. Corporate Governance. Section 303A.02”).

 

Pursuant to NYSE Rule 303A.06, we are required to have an audit committee that complies with Rule 10-A3 of the Securities Exchange Act of 1934, as amended. Under rule 10-A3 of the Securities Exchange Act of 1934, as amended, we are required to comply with certain independence standards. Each member of the audit committee must be independent and a member of the board of directors. Pursuant to Rule 10-A3, in order to be considered “independent”, a member of an audit committee of a listed issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee:

 

·accept directly or indirectly any consulting, advisory, or other compensatory fee from the issuer or any subsidiary thereof. Compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the listed issuer (provided that such compensation is not contingent in any way on continued service); or

 

·be an affiliated person of the issuer or any subsidiary thereof.

 

Additionally, as of the date of this annual report, all members of our Audit Committee satisfy the independence requirements of Rule 10A-3 of the Securities Exchange Act of 1934, as amended, applicable NYSE standards to the audit committees of foreign private issuers and CNV requirements.

 

Supervisory Committee

Our current by-laws set forth a supervisory committee composed of three regular and three alternate members. The members of the supervisory committee shall hold office for a term of three fiscal years. Pursuant to the BCL, only lawyers and accountants admitted to practice in Argentina may serve as members of a supervisory committee of an Argentine sociedad anónima, or limited liability corporation.

The primary responsibilities of the supervisory committee are to monitor the management’s compliance with the BCL, the by-laws, its regulations, if any, and the shareholders’ resolutions, and to perform these duties include, inter alia, the following:

(1)attending meetings of the board of directors, audit committee and shareholders;
(2)calling extraordinary shareholders’ meetings when deemed necessary and ordinary and special shareholders’ meetings when not called by the board of directors; and
(3)investigating written complaints of shareholders.

In performing these functions, the supervisory committee does not control our operations or assess the merits of the decisions made by the directors. The duties and responsibilities of an alternate member, when acting in the place of a regular member on a temporary or permanent basis, are the same as those discussed above for the regular members. They have no other duties or responsibilities as alternate members.

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The following table sets forth certain relevant information of the members of our supervisory committee:

Name

Position

Age

Damián Burgio

Regular Member

57

José Daniel Abelovich

Regular Member

64

Martín Fernandez Dussaut

Regular Member

40

Marcelo Héctor Fuxman

Alternate Member

65

Tomás Arnaude

Alternate Member

39

 

Set forth below are brief biographical descriptions of the members of our supervisory committee:

 

José Daniel Abelovich was born on July 20, 1956. He has been a member of our supervisory committee since 2007. Mr. Abelovich holds a degree in Public Accounting from the Universidad de Buenos Aires. Mr. Abelovich is a partner of Abelovich, Polano & Asociados/NEXIA INTERNATIONAL, an auditing firm. Mr. Abelovich also serves as member of the following supervisory committees, among others: Arcos del Gourmet S.A., AdCap Securities Argentina S.A., Banco de Crédito y Securitización S.A., Banco Hipotecario S.A., BH Valores S.A. de Sociedad de Bolsa, BHN Seguros Generales S.A., BHN Sociedad de Inversión S.A., BHN Vida S.A., TGS, CIESA, Transener, Citelec, Convexity Sociedad Gerente de Fondos Comunes de Inversión S.A., Cresud SACIF, CT Mitre Office S.A, Cyrsa S.A., E-Commerce Latina S.A., Emprendimiento Recoleta S.A., HIDISA, Transba, Edenor, Hoteles Argentinos S.A., Inversora Bolívar S.A., IRSA Inversiones y Representaciones S.A., Palermo Invest S.A., PACOSA, Panamerican Mall S.A., Shopping Neuquén S.A., Llao – Llao Resorts S.A., Nuevas Fronteras S.A., Orígenes Seguros de Retiro S.A., Orígenes Seguros S.A., Solares de Santa María S.A., Tarshop S.A. y Unicity S.A.

Damián Burgio was born on December 13, 1963. He is a founding partner of the law firm Salaverri, Burgio & Wetzler Malbrán. Mr. Burgio is a lawyer graduated from the Universidad Católica Argentina. He currently serves as director of CT Mitre Office S.A., Creaurban S.A. and GG Negocios Fiduciarios S.A. as a member of the supervisory committee of Compañía Americana de Transmisión Eléctrica S.A., Fidus S.G.R, Grupo Dolphin Holding S.A., Envases Plásticos S.A., Enecor, SACDE, Inversora al Río, PEFM, Generación Argentina SAU, Salta Refrescos S.A, ODS S.A, CTB, PACOGEN, PACOSA, PP, PEFM, PHA, Delta Compresión and Transelec. 

Martín Fernandez Dussaut was born on January 29, 1981. Mr. Fernández Dussaut received his law degree from the Universidad Católica Argentina. He is a partner of the Argentine law firm Salaverri, Burgio & Wetzler Malbrán. He is a member of the board of directors of GG Negocios Fiduciarios S.A., AR Partners S.A., CT Mitre Office S.A. and Escrow Services S.A. Also, he is a member of the supervisory committee of ODS S.A., Greenwind, PP, CTB, SACDE, Creaurban S.A., Fidus S.G.R., Compañía Americana de Transmisión Eléctrica S.A. and PEFM. He is also alternate member of the supervisory committee of Grupo Dolphin Holding S.A., Pampa Cogeneración, Edenor, Inversora al Río, Generación Argentina SAU, PACOGEN, Transelec and Enecor.

Marcelo Héctor Fuxman was born on November 30, 1955. He has been a member of our supervisory committee since June 2006. Mr. Fuxman holds a degree in Accounting from the Universidad de Buenos Aires. Mr. Fuxman is a partner of Abelovich, Polano & Asociados/NEXIA INTERNATIONAL, an auditing firm, and managing partner of Real Estate Investments S.R.L. He currently serves as alternate director of Agra Argentina S.A. and member of the supervisory committee of Abus las Americas I S.A., Abus Securities S.A., Advanced Capital Securities S.A., Agro Managers S.A., Agro Investment S.A., Amauta Agro S.A., Arcos del Gourmet S.A., Austral Gold Argentina S.A., Baicom Networks S.A., Banco de Crédito y Securitización S.A., Banco Hipotecario S.A., BH Valores S.A. de Sociedad de Bolsa, BHN Seguros Generales S.A., BHN Sociedad de Inversión S.A., BHN Vida S.A., Bitania 26 S.A., Boulevard Norte S.A., Carnes Pampeanas S.A., Cincovial S.A., CATESA, TGS, Transener, Citelec, Convexity Sociedad Gerente de Fondos Comunes de Inversión S.A., Corpus Energía S.A., Creaurban S.A., Cresud SACIF, Cyrsa S.A., CT Mitre Office S.A., E-Commerce Latina S.A., Emprendimiento Recoleta S.A., Emprendimientos del Puerto S.A., Transba, Edenor, Fibesa S.A., Fidus S.G.R., Focolare S.A., Futuros y Opciones.com S.A., Granos Olavarría S.A., HIDISA, Hoteles Argentinos S.A., SACDE, Inversora Bolívar S.A., IRSA Inversiones y Representaciones S.A., IRSA Propiedades Comerciales S.A., La Clara de Banderaló S.A., La Pionera de Anta S.A., Líneas del Norte S.A., Líneas del Comahue de Cuyo S.A., Líneas Mesopotámicas S.A., Llao – Llao Resorts S.A., Minera Geometales S.A., Nabsa Corporation S.A., Nuevas Fronteras S.A., Oberli S.A., ODS S.A., Palermo Invest S.A., Panamerican Mall S.A., Posadas Encarnación S.A., Profingas S.A., Préstamos y Servicios S.A., Proyectos Edilicios S.A., Puerto Retiro S.A., Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Dolphin Finance S.A., Grupo Dolphin Holding S.A., Palermo Invest S.A., Quality Invest S.A., Shopping Neuquén S.A., S.R.K. Italia Hotel S.A., Tarshop S.A., Torres del Puerto S.A., Torres de Puerto Madero S.A. and Sociedad de Inversiones Dique 4 S.A.

Tomás Arnaude was born on December 17, 1981. He has been an alternate member of our supervisory committee since November 2016. Mr. Arnaude received his law degree from the Universidad Católica Argentina. He is a partner of the Argentine law firm Salaverri, Burgio & Wetzler Malbrán and was a foreign associate of Shearman & Sterling LLP in 2010. He currently serves as member of the Supervisory Committee of PEFM, Pampa Cogeneración, SACDE, PHA, Transelec, PACOSA, PP and Generación Argentina SAU and as alternate statutory auditor of GG Negocios Fiduciarios S.A., Creaurban S.A, CTB, ENECOR, Transba and Veinticuatro de Enero S.A.

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Corporate Governance

The Company enacted several policies and practices, including a comprehensive business code of conduct:

·

Business Code of Conduct. This Code states the ethical principles that constitute the foundation of the relationship between the Company, its employees and suppliers, and offers the means and instruments that guarantee the transparency of issues and problems affecting the management of the Company.

·Ethics Hotline. The Company has implemented the Ethics Hotline as an exclusive channel to report, under strict confidentiality, any suspected misconduct or breach of the Code.
·

Insider Trading Policy. This Policy has been implemented to avoid “insider trading” practices by the Company’s employees (i.e., to prevent the use of non-public material information to gain an advantage for oneself or others, either directly or indirectly). The Policy applies to the Company’s staff and its subsidiaries, including directors, supervisory committee members, and senior management lines, and it extends to their families or persons who live with them, as well as to certain suppliers.

·Self-Assessment Questionnaire for the Board of Directors. The Company’s Board of Directors passed the implementation of a self-assessment questionnaire to annually examine and assess its own performance and management. The Company’s Corporate Law Department along with the Nomination Committee is in charge of examining and filing each questionnaire with the individual answers given by the Board members and, based on the results, it shall submit to the Company’s board of directors all the proposed measures deemed useful to improve the performance of the board of directors’ duties.
·Internal Policy on Transactions with Related Parties. According to the provisions of the CML, the Company approved the Internal Policy of Transactions with Related Parties. Pursuant to such policy and as stated in the applicable regulations, all high-value transactions (i.e. all exceeding 1% of the equity of the Company) made by the Company with individuals and/or legal entities which are considered as “related parties” pursuant to the provisions set forth in applicable regulations, must be subject to a specific prior authorization and control procedure that is carried out under the coordination of the Company’s Corporate Law Division and which involves both the Company’s’ board of directors and its Audit Committee, as the case may be.
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·Nomination Policy. The Nomination Policy establishes the principles governing the nomination and appointment of members of the Board of Directors of Pampa and is designed pursuant to the rules and regulations in force in Argentina, the bylaws of the Company and the rules of the Nomination Committee that are applicable to the matter.
·Compensation Policy. The Compensation Policy is designed in accordance with the laws and regulations in force in Argentina, the bylaws of the Company and the rules of the Compensation Committee, and provides guidance on the principles pursuant to which compensation is payable to the members of the Board of Directors of Pampa. It will be used by the shareholders, the Board of Directors and the Compensation Committee to guide their practice.
·Pre-approval of Principal Accountant Services. This Policy standardizes an internal process that allows the Audit Committee to comply with its obligation to grant prior approval for hiring an external auditor for the provision of any kind of authorized service to the Company or any of its subsidiaries.
·Policy against Fraud, Corruption and Other Irregularities. In 2020, our Board of Directors approved an update to this Policy, reaffirming transparency and ethics as necessary behaviors to lead the Company’s business and achieve its sustainable growth. In this sense, this Policy prohibits fraud, corruption in any form, or acts of misconduct within Pampa. Moreover, it sets Pampa’s stance on preventing corruption and other acts of misconduct, complementing the principles and values defined in our Business Code of Conduct; therefore, both documents should be read in conjunction. Finally, this Policy also establishes the obligation to report any actual or suspected violation of laws and/or regulations, as well as the prohibition of retaliation against any employee or third party for filing a report legitimately and in good faith or for refusing to participate in acts of corruption.
·Policy on Material Information’s Disclosure. This policy was approved with the aim of standardizing the basic principles concerning the way in which Company’s material information disclosure processes operate, in accordance with the regulatory requirements of the securities markets on which the Company’s securities are listed or those in which it is registered to such end. To ensure the duly execution and compliance with the internal dispositions and applicable regulations with respect to this matter, the Company established an Information Disclosure Committee.
·Dividend Policy. The board approved this policy following laws and regulations in force in Argentina and the Company’s bylaws. It establishes a set of guidelines to be observed to keep an adequate balance between distributed amounts and Pampa’s investment plans; aiming at establishing a clear, transparent and consistent practice that enables shareholders to make informed decisions. According to this policy, the decision to distribute a dividend is at the sole discretion of the Shareholders’ Meeting, based upon the board of directors’ recommendation. It expressly sets forth that the Company is under no obligation to distribute profits, and the Shareholders’ Meeting will have sole discretion regarding the determination and timing of a dividend distribution.
·Policy on Quality, Safety, Environment and Labor Health. Our board of directors approved the QHSE Policy to continue meeting the standards for operating oil and gas, generation, distribution of energy, refining and distribution and petrochemical segments with the highest safety possible within the ordinary course of each activity.
·Swap Transactions Policy. Our board of directors approved the “Swap Transactions Policy”, which sets forth the framework under which the Company shall manage risks related to any Swap it executes under International Swaps and Derivatives Associations (‘ISDA’) agreements. This policy applies only to activities governed by the Commodity Exchange Act, as amended (the “CEA”), and only with respect to the election of the “End-User Exception” as provided in Section 2(h)(7) of the CEA.
·Anti-Money Laundering and Terrorist Financing Prevention Policy. This Policy was approved in accordance with the provisions set forth in Law No. 25,246, its regulations and related provisions, and UIF. Its main purpose is to establish the procedures aimed at preventing money laundering and financing of terrorism.
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Compensation of Directors and Officers

The BCL provides that the compensation payable to all directors (including those directors who are also members of senior management) in a fiscal year may not exceed 5% of net income for such fiscal year, if the company is not paying dividends in respect of such net income. The BCL increases the annual limitation on director compensation to up to 25% of net income if all the net income for such year is distributed as dividend. The percentage decreases proportionally based on the relation between the net income and the dividends distributed. The BCL also provides that the shareholders’ meeting may approve the remuneration of the directors in excess of the limits set by the BCL in case the company has no net income or the net income is low, if the relevant directors performed during such fiscal year special commitments or technical-administrative functions. The audit committee issues an opinion with respect to the reasonableness of the fees of members of the Board of Directors. Also, the aggregate amount payable to the Board of Directors’ members will be previously submitted to the Compensation Committee (as defined below) for its opinion as to whether the compensation proposed is consistent with compensation received by directors at other comparable local companies. The compensation of all directors and members of the supervisory committee requires shareholders’ approval at an ordinary shareholders’ meeting.

At the ordinary shareholders’ meeting held on April 29, 2021, the compensation for Pampa’s directors was set for a total amount of Ps.436,400,019.33 for the year ended December 31, 2020. This amount includes fees, remunerations, gratifications and benefits of compensation agreements.

Compensation Plans

 

Stock-based Compensation Plan

 

With the aim of aligning personnel performance with Pampa’s strategic plan and creating a transparent and direct link between value creation for the shareholders and personnel remuneration, on February 8, 2017, Pampa’s board of directors approved the creation of stock-based compensation plan (the “Plan”). In order to implement the Plan, the Company can create Individual Plans.

In addition, Pampa’s board of directors on February 8, 2017, approved the repurchase of Pampa Shares in accordance with Article 64 of the CML and CNV regulations as a means to implement the Individual Plans 2017-2019 and 2018-2020. Later, on March 8, 2018, the Board of Directors approved a second repurchase of Pampa shares in accordance with Section 64 of the CML and CNV rules that will be destined to cover the Individual Plan 2019-2021.

During fiscal year ended December 31, 2020, the Company delivered 0.7 million of its own shares as payments under the stock compensation plan for officers and other key staff. As of December 31, 2020, the Company acquired 6 million of its own shares, out of which 2 million were allocated to the compensation of senior managers and, as of the closing of the fiscal year, 4 million remained in treasury to be delivered to employees under such plan.

Since March 2021, the Company has delivered an amount equivalent to 451,525 shares to employees under such plan. As of the date of this annual report, we held in treasury 3,878,939 common shares to be delivered to employees under such plan, which represented 0.3% of our issued capital.

Compensation Agreements – Senior Management

On June 2, 2017, the Board of Directors approved the execution of compensation agreements with the Company’s main executives. These agreements mainly provide for an annual, variable and contingent compensation equivalent to, in the aggregate, to 3% of the Company’s annual market value appreciation. For the fiscal year ended December 31, 2017, the calculation period started on June 1. Furthermore, an annual cap of 50% of the accrued amount and 1.5% of the Company’s operating income before interest, taxes and other non-cash items (adjusted EBITDA provision) for the period to be compensated, was established.

 

Accrued amounts which have not been paid by the Company may only be collected by their beneficiaries to the extent Pampa’s share market capitalization at the time of realization is higher than the recorded maximum (high water mark provision). Additionally, the annual total amount payable should not exceed 1.5% of the adjusted EBITDA of the year subject to compensation. The payment of the annual compensation will be subject to the prior approval of the Shareholders’ Meeting to be held in each fiscal year. Furthermore, Pampa will deduct from the variable compensation, if applicable, remunerations that beneficiaries may have collected on account of bonds and/or other similar items from subsidiaries of Pampa, proportionally to the Company’s interests in such companies.

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The objective of this variable compensation is to align the executives’ interests with the shareholders of the Company, creating value for the executives only if there is also value created for the shareholders. The compensation agreements were subject to the prior consideration of our Audit Committee, which concluded favorably regarding their reasonability.

Annual Variable Compensation

 

Petrolera Pampa (currently, Pampa as the surviving company) granted to certain officers an annual variable compensation for the performance of technical and administrative duties amounting to 7% and 4% of the EBDA accrued until November 2020 and from December 2020, respectively (EBITDA less paid income tax, less total net financial costs, less interest on its own capital, considering an annual 10% dollar-denominated rate) of the oil and gas business from Petrolera Pampa (currently, Pampa as the surviving company). The Company recognizes a provision (liability) and an expense for this EBDA Compensation based on the previously mentioned formula (see Note 4.7 to the Consolidated Financial Statements).

 

Compensation Policy and Compensation Committee

The Company’s Board of Directors approved a Compensation Policy to provide guidance on the principles pursuant to which compensation is payable to the members of the Board of Directors of Pampa.

Within the Compensation Policy framework, the Board of Directors created a Compensation Committee that will assist them and the shareholders in matters related to the compensation of the members of Pampa’s Board of Directors, in compliance with the requirements and procedures set forth in the applicable rules and regulations in force in Argentina, Pampa’s bylaws and the rules of the committee. The Compensation Committee reports to the Board of Directors and will consist of three regular members and equal or lower number of alternate members, who shall not serve in executive offices at Pampa.

As of the date of this annual report, Pampa’s Compensation Committee is composed as follows:

Name

 

Position

 

Miguel Bein

President

Dario Epstein

Regular Member

Carlos Correa Urquiza

Regular Member

Silvana Wasersztrom

Alternate Member

 

 

Share Ownership

As of March 31, 2021, the following members of our board of directors and our senior management had an ownership interest in our capital stock of: Marcos Marcelo Mindlin (18.03%), Gustavo Mariani (3.00%), Damian Miguel Mindlin (3.20%), Ricardo Alejandro Torres (1.99%), Horacio Turri (0.65%), Gabriel Cohen (0.24%), Nicolás Mindlin (0.01%), Mauricio Penta (0.01%), Victoria Hitce (0.01%), Gerardo Paz (0.003%), Carlos Correa Urquiza (0.003%), María Carolina Sigwald (0.002%) and Diego Salaverri (0.001%). No other member of our board of directors or our senior management beneficially owns any shares of our capital stock. See “Item 7. Major Shareholders and Related Party Transactions.

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Employees

Excluding those employed by us on a temporary basis and including controlled-subsidiaries, as of December 31, 2020, we had 1,937 full time employees. Additionally, we operate CTEB, which is jointly owned with YPF and has 95 full-time employees.

Approximately 46.01% of our workforce is affiliated with a union and/or is a party to a collective bargaining agreement. We have completed salary negotiations for 2020. We maintain a positive relationship with each of the employee unions at the Company and our subsidiaries’ levels.

We offer a variety of benefits beyond those required by the Argentine Labor Contract Law, but make no payments to retirees or terminated employees. In accordance with the agreements we have entered with the unions at some of our subsidiaries, we are required to pay certain seniority premiums to retiring employees as a one-time payment upon retirement.

 

Item 7.Major Shareholders and Related Party Transactions

 

Major Shareholders

 

On May 2, 2018, the merger of Pampa, Petrobras Argentina, Albares and Petrobras Energia Internacional S.A. (“PEISA”) was registered with the IGJ. As a result, Pampa issued 101,873,741 common shares and, consequently, our capital stock increased to 1,938,368,431 common shares.

 

Furthermore, on August 2, 2018, the merger of Pampa, Petrolera Pampa, CTG, CTLL, EG3 Red S.A., BLL, Inversora Diamante S.A. , Inversora Nihuiles S.A., Inversora Piedra Buena S.A. and PP II S.A. was registered with the IGJ. As a result, Pampa issued 144,322,083 common shares and, consequently, our capital stock increased to 2,082,690,514 common shares.

 

On October 2, 2018, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 182,820,250 common treasury shares of Pampa, which represented 8.8% of the then-issued capital. The withdrawal of the repurchased shares from the capital stock provides the Company with the ability to repurchase shares in the market. Consequently, the IGJ registered the capital reduction and 182,820,250 shares were cancelled, decreasing Pampa’s capital stock to 1,899,870,264 shares (1,874,434,580 of which are outstanding shares and 25,435,684 treasury shares).

 

On October 1, 2019, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 151,997,025 common treasury shares of Pampa, which represented 8% of the then-issued capital. The withdrawal of the repurchased shares from the capital stock allows the Company to repurchase shares in the market. Consequently, the IGJ registered the capital reduction, decreasing Pampa’s capital stock to 1,747,873,239 shares. As of the date of this annual report, 151,997,025 shares are still pending cancellation by the CNV.

 

As of December 31, 2019, our share capital authorized for public trading was Ps. 1,747,873,239 represented by 1,747,873,239 common shares of par value Ps.1 and with right to one vote per share, of which 70,761,196 are treasury shares under share repurchase programs. Therefore, as of December 31, 2019, excluding treasury shares, the total outstanding common shares amount to 1,677,112,043.

On April 7, 2020, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 151,585,025 common treasury shares of Pampa. The withdrawal of the repurchased shares from the capital stock allows the Company to repurchase shares in the market. Consequently, our capital stock decreased to 1,596,288,214 shares. As of the date of this annual report, the registration with IGJ is still pending.

On December 10, 2020, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 140,786,959 common treasury shares of Pampa. Consequently, our capital stock decreased to 1,455,501,255 shares. As of the date of this annual report, the registration of this capital stock reduction remains pending.

On April 29, 2021, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 56,581,600 common treasury shares of Pampa. Consequently, our capital stock decreased to 1,398,919,655 shares. As of the date of this annual report, the registration of this capital stock reduction remains pending.

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J.P. Morgan informed us that, as of March 31, 2021, there were 31,323,208 outstanding ADSs.

As of such date, there was one registered holder of our ADSs in the United States. Since certain of our ADSs are held by brokers or other nominees, the number of direct record holders in the United States may not be fully indicative of the number of direct beneficial owners in the United States of our ADSs, or of where the direct beneficial owners of such ADSs are resident. We have no information concerning holders with registered addresses in the United States that hold our shares, which are not represented by ADSs.

The table below sets forth information concerning the beneficial ownership of our common shares as of March 31, 2021:

Name of Shareholder   Number of Shares   Percentage of our Capital Stock   Percentage of voting power
ANSES (¹)   306,958,364   21.09%   21.09%
             
Management            
Marcos Marcelo Mindlin   262,366,623   18.03%   18.03%
Gustavo Mariani   43,674,659   3.00%   3.00%
Damián Miguel Mindlin   46,532,923   3.20%   3.20%
Ricardo Alejandro Torres   28,952,864   1.99%   1.99%

Note: Our major shareholders do not have different voting rights.

(1)       On November 20, 2008, the Argentine Congress passed a law unifying the Argentine pension and retirement system into a system publicly administered by the ANSES and eliminating the retirement savings system previously administered by private pension funds under the supervision of a governmental agency. In accordance with the new law, private pension funds transferred all of the assets administered by them under the retirement savings system to the ANSES. These transferred assets included 295,765,953 common shares of the Company, representing 20.50% of our capital stock at that date. The ANSES is subject to the same investment rules, prohibitions and restrictions that were applicable to the Argentine private pension funds under the retirement savings system, except as described in the following sentence. On April 12, 2011, the Executive Power issued Emergency Decree No. 441, which annulled the restrictions under Section 76(f) of Law No. 24,241on the exercise of more than 5% of the voting power in any local or foreign company, such as the Company, in any meeting of shareholders, irrespective of the actual interest held in the relevant company's capital stock. The annulment of the restrictions under Section 76(f) of Law No. 24,241 came into effect on April 14, 2011. As of such date, ANSES may exercise its voting power in any local or foreign company, such as the Company, based on the actual interest held in the relevant company’s capital stock.

We are aware through public filings with the SEC, that Hidden Lake S.A. owns shares representing 4.8% of our capital stock as of March 31, 2021.

Related Party Transactions

The BCL permits directors of a corporation to enter into transactions with that corporation provided that any such transactions are consistent with prevailing market practice. The CML provides that corporations whose shares are subject to public offerings must submit to their respective audit committees the issuance of a prior opinion of all transactions with a related party involving an amount that exceeds 1% of the corporation’s net worth.

Compensation Plans

See “Item 6. Directors, Senior Management and Employees– Compensation Plans”.

For further information on our related parties’ transactions and our outstanding balances from our transactions with related companies (including companies under joint control), please see Note 17 to our Audited Consolidated Financial Statements.

Except as set forth above and as otherwise permitted under applicable law, we are currently not party to any transactions with, and have not made any significant loans to, any of our directors, key management personnel or other related persons, and have not provided any guarantees for the benefit of such persons, nor are there any such transactions contemplated with any such persons.

Interests of experts and counsel

During the year ended December 31, 2018, 2019 and 2020, we engaged the services of the Argentine law firm Salaverri, Burgio & Wetzler Malbrán. One alternate director, Mr. Diego Martín Salaverri, two members of our Supervisory Committee, Martín Fernandez Dussaut and Damián Burgio, and one of the alternate members of our Supervisory Committee, Tomás Arnaude, are partners of Salaverri, Burgio & Wetzler Malbrán.

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Item 8.Financial Information

CONSOLIDATED FINANCIAL STATEMENTS

See “Item 18. Financial Statements” beginning on page F-1.

LEGAL PROCEEDINGS

In the normal course of business, we are a party to lawsuits of various types. Our management evaluates the merit of each claim and assesses the likely outcome, recording an accrual in our financial statements for the related contingent liability when an unfavorable decision is probable and the amount may be reasonably estimated. At December 31, 2020, we had established accruals in the aggregate amount of US$103 million to cover potential losses from such claims and legal proceedings. The above-mentioned amount does not include Transener and TGS given they are not consolidated and are valued according to the equity method of accounting in the Consolidated Financial Statements. Except as disclosed below, we are not a party to any legal proceedings or claims that may have a material adverse effect on our financial position or operational results.

Set forth below is a brief description of significant proceedings for which provisions have been recorded as of December 31, 2020:

 

-Relevant Customs Summary Proceedings - Gasoline Exports: there are an important number of customs summary proceedings and proceedings in process before the National Tax Court in which the tax authority challenges the tariff heading used by Petrobras during 2008-2014. The fiscal authority takes a position of a higher export duty rate. As of December 31, 2020, the associated provision amounts to US$ 86 million.

 

Set forth below are brief descriptions of the nature of the significant legal proceedings or claims in which the Company is a party. As of December 31, 2020, the Company, in accordance with the analysis of our internal and external legal advisors, considers that such legal proceedings are not viable.

 

Labor Claims - Compensatory Plan

 

We face several legal proceedings associated with one of our defined benefit plans, the “Compensatory Plan” (see “Item 18. Financial Statements—Note 11.8”). We hereinafter describe the nature of currently-pending labor claims:

·Claims by former employees, not covered by the plan, seeking to be included in the plan. One of the claims has resulted in a favorable ruling for the Company, which has been appealed by the plaintiff.
·Claims by former employees who were dismissed as part of scheduled layoffs due to Company’s change of control.
·Claims alleging that the index (IPC) used to update the plan benefits is ineffective to keep the benefits’ “constant value”. In one of the cases, the Company obtained a favorable judgment, which has been appealed by the plaintiff.
·Claims on an alleged underfunding of the plan upon the elimination of the Company’s contributions based on earnings.

 

Tax Claims

 

Tax on Liquid Fuels and Natural Gas

 

AFIP claims the payment of Ps. 54 million due to an alleged omission in the payment of the tax on liquid fuels and natural gas for the fiscal periods from January 2006 to August 2011, plus compensatory interest and a fine of Ps. 38 million as a result of alleged tax avoidance. AFIP’s claim is based on the existence of misappropriation of a tax benefit that was meant for sales in regions that are considered by tax law as tax relieved. The proceeding is currently being heard before the Federal Tax Court, and the evidentiary period has been completed.

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Environmental Claims

-The Association of Land Owners of Patagonia (ASSUPA) has brought a complaint for an indefinite amount against the Company and other companies seeking the restoration of the environment to the state prior to the exploration, exploitation, production, storage and transportation of hydrocarbon works conducted by the defendants and the prevention of alleged future environmental impacts on certain areas in the Austral Basin. The National Government and the Provinces of Santa Cruz and Tierra del Fuego have been summoned as third parties. The proceeding is at the complaint answer stage.
-ASSUPA has instituted a complaint before the CSJN against 10 companies, including the Company. The National Government and the Provinces of Buenos Aires, La Pampa, Mendoza, Neuquén and Río Negro have been summoned as third parties. The main claim seeks that the defendants should be ordered to redress the alleged environmental damage caused by the hydrocarbon activity developed in the Neuquina Basin and to set up the environmental restoration fund provided for by section 22 of the General Environmental Law. Subsidiarily, and in case restoration is not possible, it seeks the redress of the allegedly sustained collective damages for an amount estimated at US$ 547 million based on a United Nations Development Program report. The proceeding is in the complaint answer stage.
-Beatriz Mendoza and other 16 plaintiffs brought a complaint before the CSJN against the National Government, the Province of Buenos Aires, the Government of the Autonomous City of Buenos Aires and 44 companies, including the Company, conducting industrial activities along the Matanza-Riachuelo River Basin. The plaintiffs seek compensation for alleged damages sustained as a result of an alleged environmental impact, its cessation, the environmental recomposition and redress, for an estimated amount of US$ 500 million for the financing of the Matanza-Riachuelo River Basin Environmental Management Plan aiming at the restoration of the basin. The proceeding is in the third-party summoning stage.
-Inertis S.A. Has filed a complaint against the Company for alleged damage to the environment in a lot owned by this company as a result of the activities conducted by the Dock Sud Plant seeking the redress of alleged damages for a nominal amount estimated at Ps. 1 million and US$ 1 million, or the difference between the value of the allegedly affected lot and its valuation. The proceeding is in the evidentiary stage.
-Fundación SurfRider Argentina has requested the performance of preliminary proceedings on account of alleged indications of environmental damage in the City of Mar del Plata. The plaintiff seeks the recomposition of the alleged environmental damage having collective impact, or the compensation for the alleged damages caused by all companies owning gas stations in the coastal area of the City of Mar del Plata for an alleged fuel leakage from gas stations’ underground storage tanks into the water, soil and marine system. The Foundation estimates damages in the amount of US$ 200 million. The proceeding is pending the resolution of the admissibility of CSJN’s jurisdiction.
-Some neighbors of the Dock Sud area brought a complaint against 14 oil companies, including the Company, petrochemical companies and waste incineration plants located in the Dock Sud Petrochemical Complex for an alleged damage to the environment and alleged individual damage to their goods, health and morale. The CSJN determined it had jurisdiction over the environmental issue, and maintained the civil and commercial jurisdiction regarding the compensation for the alleged damages.
-A neighbor of the Province of Salta owning a lot where a joint venture made up of the defendants (the Company and other companies) conducted hydrocarbon activities seeks environmental protection and restoration for alleged damage caused by hydrocarbon prospecting, exploration and/or exploitation activities or, alternatively, a compensation in case such environmental restoration is not possible. The Province of Salta has been summoned as a third party. The proceeding is in the complaint answer stage and with a negative conflict of jurisdiction.
-Owners of a lot in the town of Garín, Province of Buenos Aires, seek the performance of preliminary proceedings for alleged indications of damage to the environment in their place of residence which would result from an alleged leakage from the adjacent gas station under the Company’s branding. Preliminary measures are being conducted in this proceeding.
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-Neighbors of the Province of Neuquén brought a proceeding against the Company for alleged environmental damage resulting from the hydrocarbon exploration, exploitation, transportation and well abandonment activities in which that plaintiff has been taking part. Should this not be feasible, they claim a compensation for alleged damages to support the Environmental Restoration Fund. Additionally, they request the redress of alleged moral damages to be allocated to the Environmental Restoration Fund. The presence of all involved parties has been properly verified, and the lawsuit has been referred to the administrative litigation jurisdiction.
-The Company initiated a legal claim against the Province of La Pampa requesting the annulment and revocation of administrative acts through which such Province, through its Undersecretary of Hydrocarbons and Mining and its Undersecretariat of Environment, claims that the Company has definitively abandoned 13 hydrocarbon wells located within the Jagüel de los Machos Area that were inactive by the time the concession belonged to the Company - September 2015 -, as well as the presentation of a plan for the remediation of certain environmental liabilities. It is worth clarifying that an environmental audit was carried out at the time of the reversal of the hydrocarbon area, and the deviations observed therein are currently corrected. The presence of all involved parties under the lawsuit is currently being verified.
-Plaintiff Martinez Lidia and other three plaintiffs claim financial compensation for alleged damage to their health and property caused by the alleged environmental affectation sustained as a result of living next to Puerto General San Martin petrochemical plant (Rosario-Santa Fe). The proceeding is currently pending judgment and pending setting of the hearing date for the drawing of the Public Defender for the heirs of the deceased plaintiff.
-A neighbor of the Province of Buenos Aires brought a complaint against the Company seeking the removal of three fuel storage tanks and pumps and the remediation and restoration of the soils where such tanks are located on account of an alleged environmental affectation. The proceeding is in the evidentiary stage.
-Neighbors of the Province of Santa Fe have brought a complaint against the Company for alleged environmental damage. The Company obtained a favorable judgment, which has been appealed by the plaintiff.

Civil and Commercial Claims

 

-The consumers’ association named “Consumidores Financieros Asociación Civil Para Su Defensa” claim the nominal amount of US$ 3,650 million as compensation for damages against Pampa, Petrolera Pampa S.A. and certain Pampa directors in office during 2016 which are co-plaintiffs together with Petroleo Brasileiro S.A. A complaint has been brought against Petrobras Brasil for the depreciation of the share quotation value as a result of the “lava jato operation” and the so-called “Petrolao”, and the plaintiffs claim Pampa’s, Petrolera Pampa S.A.’s and the directors’ joint and several liability alleging the acquisition of indirect control in Petrobras Argentina S.A. may have thwarted the enforcement of a possible judgment favorable to the plaintiff (for up to the amount of the price paid by Pampa for the acquisition of control over Petrobras Argentina S.A.). The plaintiff appealed the Arbitration Court’s decision declaring the dismissal of the main claim upon the failure to pay the arbitration fee. The Chamber of Appeals in Commercial Matters upheld the filed extraordinary appeal. On its part, Petróleo Brasileiro S.A. filed an appearance, requested that the lack of substance of the filed appeal should be declared, and, in the alternative, answer such appeal. The Company has still not been served notice of the appeal.
-The Company was notified of the initiation of a collective action in the City of Rio de Janeiro, Brazil, by a Brazilian lawyer, Felipe Machado Caldeira, alleging that Petróleo Brasileiro S.A. has not conducted Petrobras Argentina’s sales process pursuant to a competitive bidding process in accordance with Brazilian laws applicable to mixed public-private firms in Brazil, for a nominal amount of R$ 1,000 million. In this proceeding, no specific accusation against Pampa has been filed. The proceeding is currently suspended in the integration and complaint answer stage. Upon the death of the plaintiff and the Public Prosecution Service’s statement that it is not interested in pursuing the complaint, a legal notice was published so that any citizen may express its interest in pursuing it and judgment was rendered, thus terminating the proceeding, which judgment is final and conclusive and deemed res judicata.
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-Messrs. Candoni, Giannasi, Pinasco and Torriani brought arbitration complaints against the Company before the Buenos Aires Stock Exchange’s Arbitration Court seeking to challenge the price and tender offer for the merger through absorption of Petrobras Argentina S.A. into Pampa Energía S.A. for a nominal amount of Ps. 148 million. The complaints have been joined. The Court issued a partial award upholding the challenge under the capital markets law used by the plaintiff to dispute the exchange ratio used in the merger and dismissed the Company’s position, which stated that the proper course of action would be to challenge the shareholders’ meeting pursuant to the Business Organizations Law. The Company filed an appeal against this partial award and filed a motion for appeal and nullity which was resolved by the Chamber of Appeals in Commercial Matters. This Chamber upheld the motion for appeal and nullity filed by the Company, revoking the partial award and sustaining that the proper proceeding for raising objections is to contest the shareholders’ meetings under the Business Organizations Law, and not to challenge the fair price established in the capital markets law for mandatory tender offers. This judgment is deemed final and conclusive as the plaintiffs have not filed an extraordinary appeal before the CSJN.
-Petrobras Operaciones S.A. (“POSA”) has filed an international arbitration claim against the Company before the International Chamber of Commerce (“ICC”) on account of alleged breaches to the Assignment Agreement entered into between Petrobras Argentina S.A. (currently Pampa) and POSA in 2016 for the transfer of a 33.6% interest in the “Río Neuquén” Concession. The breaches alleged by POSA in its arbitration claim consist of the failure to transfer certain assets associated with the assigned interest, and differences in the calculation of adjustments in the assignment price. The arbitration will be conducted according to the ICC Rules of Arbitration, the applicable law will be that of the Republic of Argentina, and the seat of arbitration will be Buenos Aires, Argentina. The Company timely answered the arbitration claim, and also filed a counterclaim for differences in the calculation of adjustments in the assignment price which were not paid by POSA. The Arbitration Court that will hear the arbitration proceeding has been set up, and the Mission Statement and Procedural Order No. 1 have been executed.

Set forth below are brief descriptions of the nature of the significant legal proceedings or claims brought by the Company. As of December 31, 2020, we consider that such legal proceedings are probable and economic benefits are expected to the Company.

 

 

Administrative claims

 

-CTLL (currently Pampa) filed an administrative litigation complaint against the Federal Government for contractual breach during the January 2016-July 2016 period. CTLL claims that CAMMESA’s decision regarding the renewal and recognition of costs associated with natural gas supply agreements should be reversed and that, subsidiarily, sustained damages should be redressed. The rendering of judgment was requested. Subsequently, CTLL filed a new administrative litigation complaint against the Federal Government for contractual breach during the April 2016-October 2018 period. The Federal Government has answered the complaint.
-Upon the determination of the expiration of the Veta Escondida block concession granted by the Province of Neuquén, the Company filed a declaratory judgment action to achieve certainty under the original jurisdiction of the CSJN pursuant to section 322 of the Federal Code of Civil and Commercial Procedure. Both parties agreed to suspend the proceeding to pursue a private settlement and, therefore, the closing of the evidentiary stage will be requested.
-The Company brought an administrative litigation action against the Road Authority (DNV) of the Province of Buenos Aires seeking the nullity of DNV Resolution No. 1715/19 dated December 10, 2019, which modified the regulatory framework applicable to aerial and underground power lines in Urban and Rural Road Areas of the Province of Buenos Aires, compliance with which may generate economic losses to the Company. Based on the analysis of this Resolution, the Company withdrew the filed complaint, and keeps the right to individually challenge the administrative actions ordered pursuant to DNV Resolution No. 1715/2019.

 

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Civil and Commercial claims

 

-The Company has filed an international arbitration claim against Petrobras International Braspetro B.V. on account of fraudulent representations and omissions associated with certain export transactions under the share purchase agreement executed on May 13, 2016, whereby the Company acquired 67.2% of Petrobras Argentina S.A.’s capital stock. The arbitration will be held pursuant to the ICC’s Arbitration Rules, the applicable law will be that of the State of New York and the seat of arbitration will be New York. Petrobras International Braspetro B.V. timely answered the request for arbitration and also filed a counterclaim seeking the payment of a percentage over the difference between the amount estimated for certain contingencies detected in the purchase process and the amount actually paid for them. The Arbitration Court that will hear the arbitration proceeding has been set up, and the Mission Statement and Procedural Order No. 1 have been executed.
-Our subsidiary EcuadorTLC, in its capacity as assignee of the Ecuadorian company Petromanabí S.A., has filed an international arbitration proceeding against the Republic of Ecuador seeking the payment of 12% of the Settlement Value, the latter pursuant to the terms of the Hydrocarbon Exploration and Crude Oil Exploitation Participation Agreement in Block 18 entered into on December 19, 1995 and/or the Hollín Common Field Unified Exploitation Operating Agreement executed on August 7, 2002 —in both cases, as amended. The arbitration will be conducted according to the Arbitration Rules of the United Nations Commission on International Trade Law, the applicable law will be the Ecuadorian law, and the seat of arbitration will be the City of Santiago de Chile. The procedure for the appointment of the arbitrators who will make up the arbitration court is currently underway.
-Our subsidiary EcuadorTLC is currently making claims to Petroecuador as a result of certain breaches to the transportation agreement entered into on December 31, 2008 whereby the Ecuadorian Government undertook the crude oil transportation commitment through the OCP, to be charged to the oil transportation capacity hired by EcuadorTLC. To such effect, a mediation proceeding was brought before the Center for Mediation of the Attorney General’s Office of the Government of Ecuador sitting in the City of Quito, which ended without agreement. EcuadorTLC retains its claim rights for the aforementioned breaches.
-The Company reached a settlement agreement with Petrominera Chubut Sociedad del Estado on account of the latter’s breach of Inversora Ingentis S.A.’s share purchase agreement and the decision issued by the BCBA’s Arbitration Court in this respect. In accordance with the agreement, as of December 31, 2020 the Company received a payment of US$ 3.5 million and has recognized a US$ 2.8 million profit under “Other operating income” in the Statement of Comprehensive Income.
-After the commissioning of PEPE II and PEPE III wind farms, certain defects were evidenced in the blades of some wind turbines, which resulted in their withdrawal from service for their subsequent repair and/or replacement. As a result of the failure, the generation capacity of the wind farms has been partially reduced. The Company submitted the corresponding claims to the supplier and the insurance company in order to move forward with the repair of the wind turbines and cover the incurred damages. In this sense, the Company, together with the wind turbines supplier, performed the tasks for the progressive repair of the wind turbines in 2020, with the exception of a wind turbine in PEPE II wind farm, which remains unavailable, and has disclosed a receivable with an offsetting entry in the item “Other operating income” of the Statement of Comprehensive Income in the amount of US$ 6.6 million regarding the claims made to the supplier and the insurance company. As of December 31, 2020, the Company has received payments for US$ 3.2 million on account of compensation for the claimed damages, and as of the issuance hereof, US$ 1.2 million are pending collection.

DIVIDENDS

In accordance with the provisions of the Argentine Personal Asset Tax Law, we are required to pay the personal asset tax, payable by all of our shareholders who are subject to the tax to the AFIP as of December 31 of each year. Although the law permits companies to recover the amounts paid, recovery can be burdensome. In practice, companies usually bear the cost of this tax, which adversely affects their results and does not generate any income tax deduction.

Notwithstanding, the Company and subsidiaries have applied for an exemption to pay the personal asset tax for the periods 2016 to 2018, in accordance with the benefits of Law 27,260.

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We did not declare any dividends for the fiscal years ended on either December 31, 2016, December 31, 2017, December 31, 2018, December 31, 2019 or December 31, 2020.

We have a formal dividend policy, for more information see “Item 6. Directors, Senior Management and Employees—Corporate Governance—Dividend Policy” andItem 10. Additional Information—Dividends and Paying Agents.

SIGNIFICANT CHANGES

There are no significant changes to the financial information included in the most recent audited consolidated financial statements contained in this annual report, other than as otherwise described in this annual report.

Item 9.The Offer and Listing

TRADING HISTORY

Our capital stock consists of common shares, with a par value of Ps.1.00 each. Each share entitles the holder thereof to one vote at shareholders’ meetings. All outstanding shares are fully paid in and our common shares have been listed on the BASE since 1947. Since October 9, 2009, our ADSs have been listed on the NYSE. The ADSs have been issued by the Bank of New York as depositary. Each ADS represents 25 common shares.

Shares

Our common shares are currently traded on the BASE under the symbol “PAMP”, and our ADSs are traded on the NYSE under the symbol “PAM”.

The following table sets forth, for the years indicated, the reported high and low sales prices as well as the average daily trading volume of our shares traded on the BASE, and of our ADSs traded on the NYSE:

  Buenos Aires Stock Exchange   New York Stock Exchange
        Average Daily         Average Daily
Pesos per Share   Trading Volume   U.S. Dollars per ADS   Trading Volume
  High Low   Pesos   High Low   U.S. Dollars
                   
2016(1) 23.20 9.65   21,213,181   37.11 17.52   7,832,862
2017(1) 51.25 22.15   39,518,145   71.39 35.52   16,535,669
2018(1) 57.60 35.05   50,765,767   72.98 24.93   18,015,650
2019(1) 64.50 29.15   50,179,161   39.89 12.01   16,258,128
2020(1) 86.25 32.00   56,576,326   16.69 8.72   4,380,259

The following table sets forth, for the periods indicated, the reported high and low sales prices as well as the average daily trading volume of our shares traded on the BASE, and of our ADSs traded on the NYSE:

  Buenos Aires Stock Exchange   New York Stock Exchange
        Average Daily         Average Daily
  Pesos per Share   Trading Volume   U.S. Dollars per ADS   Trading Volume
High Low   Pesos   High Low   U.S. Dollars
2019(1)                  
First Quarter 60.40 44.75   49,262,881   39.89 25.47   12,232,829
Second Quarter 60.30 35.05   51,107,586   35.56 19.50   25,126,398
Third Quarter 64.50 29.15   51,510,391   36.41 12.01   16,498,487
Fourth Quarter 54.40 37.30   48,822,580   19.10 12.43   11,124,680
2020(1)                  
First Quarter 50.20 32.00   37,002,047   16.69 8.72   6,832,201
Second Quarter 58.00 35.85   65,090,205   12.27 9.14   5,016,437
Third Quarter 64.00 42.80   62,865,320   13.50 9.33   3,808,367
Fourth Quarter 86.25 59.50   60,777,057   14.78 10.23   1,950,594
2021(1)                  
First Quarter 90.00 73.20   36,796,031   15.25 12.17   1,606,836
Second Quarter 91.35 82.30   33,112,697   15.23 13.18   2,422,235

 

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The following table sets forth, for the months indicated, the reported high and low sales prices as well as the average daily trading volume of our shares traded on the BASE, and of our ADSs traded on the NYSE:

  Buenos Aires Stock Exchange   New York Stock Exchange
        Average Daily         Average Daily
Pesos per Share   Trading Volume   U.S. Dollars per ADS(2)   Trading Volume
  High Low   Pesos   High Low   U.S. Dollars
2020(1)                  
November 85.00 72.40   38,756,747   14.33 11.84   1,965,091
December 85.65 73.60   75,337,699   14.78 12.90   1,809,640
2021(1)                  
January 83.50 73.20   35,065,779   13.75 12.17   1,636,971
February  90.00  73.90    37,813,323    15.12  12.61    1,749,804
March  89.45  77.00    38,631,208    14.92  12.89    1,498,608
April(3) 91.35 82.30   33,112,697   15.23 13.18   2,422,235

 

(1)       Values provided by Bloomberg.

(2)       Values available for our ADSs from October 9, 2010, the first trading date on the NYSE.

(3)       Represents the average of the lowest and highest daily rates from April 1 through April 29, 2021.

 

Purchases of Pampa’s Shares

On April 27, 2018, the Board of Directors approved the repurchase of Pampa shares plan in accordance with Section 64 of the CML and the CNV rules. To arrive at this decision, the Board of Directors took into consideration the difference between the value of our assets and the quoted price of Pampa in the stock exchanges. The Board of Directors determined that the latter does not reflect the value or the economic reality of Pampa, nor Pampa’s potential, resulting in a detriment to Pampa’s shareholders’ interest. In its determination, the Board of Directors considered our strong cash position and funds availability.

On June 27, 2018, the Repurchase Program I was completed for a total number of 4,119,451 ADRs, which equal 103.0 million common shares, at an average price of US$48.52/ADR. Furthermore, Pampa’s Board of Directors approved on June 22, 2018 a second share repurchase plan for up to US$200 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock, which was completed on October 23, 2018, for a total number of 3,997,742 ADRs, which equal 99.9 million common shares, at an average price of US$32.14/ADR.

In addition, on March 27, 2019, the Board of Directors approved a third share repurchase plan for up to US$100 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. On June 12, 2019, the Board of Directors suspended the Repurchase Program III as the price of our shares and ADRs reached values exceeding the repurchase cap.

On August 12, 2019, the Board of Directors approved a fourth share repurchase plan. On August 30, 2019, an extension of the maximum amount to be disbursed under this program was approved by the Board of Directors, from US$50 million to US$65 million. Moreover, on November 8, 2019 the Board of Directors approved the fifth share repurchase plan for US$50 million or the lower amount resulting from the acquisition until reaching 10% of repurchased treasury shares over the capital stock.

During fiscal year 2020, the Board of Directors approved Programs VI and VII for US$ 27 million and $ 3,600 million, with a maximum price of US$ 13 per ADR, which have been completed and for which all repurchased shares have been canceled.

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The Repurchase Program VIII was approved on October 30, 2020 for a maximum amount of US$ 30 million and an initial term of 120 calendar days, with a maximum price of US$ 15 per ADR and Ps. 85.20 per common share, was in effect as of December 31, 2020, and has terminated as of the issuance of this annual report.

As of December 31, 2020, there are no own shares held in treasury under the buyback programs.

Finally, the Repurchase Program IX was approved by the Company’s Board of Directors on March 1, 2021 for a maximum amount of US$ 30 million and an initial term of 120 calendar days, under which shares may be acquired up to a maximum price of US$ 16 per ADR and Ps. 92.16 per common share, is in effect as of the date of this annual report. As of the date of this annual report the Company has not made repurchases of its shares under the Repurchase Program IX.

On the other hand, after December 31, 2020, the Company, directly and indirectly, acquired 57.6 million own shares for a value of US$ 31.7 million.

For more information, please see “Item 16.E—Purchases of Equity Securities by the Issuer and Affiliated Purchasers” and “Item 7. Major Shareholders and Related Party Transactions”.

American Depositary Shares

Since October 9, 2009, our ADSs have been listed on the NYSE and trade under the ticker PAM. Each ADS represents 25 common shares (or a right to receive 25 common shares). Pursuant to the provisions of the Deposit Agreement, on January 23, 2017, Pampa sent a notice to BONY stating that Pampa (i) removed BONY as depositary and (ii) appointed J.P. Morgan as successor Depositary thereunder, effective on the later to occur of the close of business New York City time on (a) February 21, 2017 and (b) the date of effectiveness of the Form F-6 filed with respect to the appointment of J.P. Morgan as successor Depositary under the Deposit Agreement. On February 22, 2017, Pampa filed the F-6 and the appointment of J.P. Morgan became effective as of such date.

Furthermore, the Company made certain amendments to the Deposit Agreement by Form of Amendment No. 1 to the Second Amended and Restated Deposit Agreement (previously filed as Exhibit 99.A2 to our Registration Statement on Form F-6 POS (File No. 333-216157) on November 18, 2020).

Each ADS will also represent any other securities, cash or other property, which may be held by the ADS Depositary, J.P. Morgan.

The ADS Depositary’s office at which the ADRs are administered is located at 4 New York Plaza, Floor 12, New York, New York 10004. See “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares.” The Designated Market Maker on the trading floor of the NYSE for our ADSs is Barclays Capital.

The ADS Depositary has informed us that, as of December 31, 2020, there were 30,737,372 outstanding ADSs.

THE ARGENTINE SECURITIES MARKET

Trading in the Argentine securities market

Pursuant to the provisions of the CML, the securities market in Argentina is comprised of several Authorized Markets, including the BYMA, the Mercado Abierto Electrónico S.A., the Mercado de Valores de Córdoba S.A., the Mercado a Término de Rosario S.A., among others. The CML allows the Authorized Markets to delegate certain of its duties and rights as a market to other qualified entities, as previously authorized by the CNV. Securities listed on these exchanges include corporate equity, bonds and government securities.

On December 29, 2016, the CNV authorized BYMA and on January 2, 2017, IGJ and CNV authorized the creation and operation of BYMA. Seventy percent of its capital stock is held by free float and the other 30 percent is owned by BASE.

 

BYMA is the largest authorized market in Argentina. Pursuant to Resolution No. 18,629, the CNV authorized BYMA to operate as an Authorized Market, and allowed BYMA to delegate certain of its rights and duties as a market in the BASE, including without limitation, the right to authorize the listing of issuers and securities in the BYMA, and the right to publish the daily market gazette.

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In Argentina, debt and equity securities traded on an exchange or the over-the-counter market must, unless otherwise instructed by their shareholders, be deposited with Caja de Valores. Caja de Valores is the central securities depositary of Argentina and provides central depositary facilities, as well as acting as a clearing house for securities trading and as a transfer and paying agent for securities transactions. Additionally, Caja de Valores handles the settlement of securities transactions carried out by the BASE and operates the computerized exchange information system mentioned above.

BYMA incorporated 99.96% of Caja de Valores’ equity, and as a result, the operating cycle of the capital market industry is vertically integrated. At the technological level, BYMA acquired the Millennium Stock Exchange platform belonging to the London Stock Exchange group as a sign of its innovative vocation and with the aim of providing the best attention to its participants and investors. Millennium, a leading global technology provider in trading and post-trading software, currently serves the London, Milan, Oslo and Johannesburg Stock Exchanges, among others.

Although companies may list all of their capital on BYMA or any other Authorized Market, controlling shareholders in Argentina typically retain the majority of a company’s capital stock, resulting in a relatively small percentage of active trading of the companies’ stock by the public on any such Authorized Market.

Securities may also be listed and traded through over-the-counter market brokers who are linked to an electronic reporting system. The activities of such brokers are controlled and regulated by MAE, an electronic over-the-counter market reporting system that functions independently from BYMA. Under an agreement between the BASE and MAE, trading in equity and equity-related securities is conducted exclusively on the BASE (now BYMA) and trading in corporate debt securities is conducted on both the S&P MERVAL/BASE (now BYMA) and the MAE. Trading in Argentine Government securities, which are not covered by the agreement, may be conducted on either or both of the BYMA and the MAE. The agreement does not extend to other Argentine exchanges.

Regulation of the Argentine securities market

The Argentine securities market is regulated and overseen by the CNV, pursuant to the CML, as well as stockbroker transactions, market operations, the public offering of securities, corporate governance matters relating to public companies and the trading of futures and options. Argentine insurance companies are regulated by a government agency, the Superintendencia de Seguros de la Nación, whereas financial institutions are regulated primarily by the Central Bank.

On June 1, 2001, the Argentine Government issued Decree No. 677/2001, which provided certain guidelines and provisions relating to capital markets transparency and best practices. Further improvements to Argentine securities market regulations were introduced in December 2011 when the Argentine Criminal Code was amended to include insider trading as a criminal offense. In addition, on November 29, 2012, the Argentine Government enacted the CML, which revoked law No. 17,811, and Decree No. 677/2001. However, CML incorporated most of the provisions established in those regulations. These provisions were regulated by the CNV through Resolution No. 622/2013 and further modifications.

On May 9, 2018, the Argentine Congress approved the Law No. 27,440, called Ley de Financiamiento Productivo, which introduced significant reforms to the CML, the Mutual Funds Law No. 24,083 and the Argentine Negotiable Obligations Law No. 23,576, among others.

 

Prior to offering securities to the public in Argentina, an issuer must meet certain requirements established by the CNV (for example, regarding the issuer’s assets, operating history and management, among others), and only securities authorized for public offering by the CNV may be listed on a stock exchange. Although issuers of listed securities are required to file with the CNV and the stock exchange on which their securities are listed several financial documents (such as, unaudited quarterly financial statements, audited annual financial statements, various other periodic reports), as well as to report any event related to the issuer and its shareholders that may materially affect the value or trading volume of the traded securities,- the CNV approval does not imply any kind of certification as to the quality of the securities or the solvency of the issuer.

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Money Laundering

The concept of money laundering is commonly used to refer to operations that aim to enter funds from criminal activities into the institutional system and thus convert profits from illegal activities into assets of apparently lawful origin.

On April 13, 2000, the Argentine Congress passed the Anti-Money Laundering Law which classifies money laundering as a crime. Additionally, such law, which amended several sections of the Argentine Criminal Code, has established sanctions for those incurring in such illicit activity and has created the UIF, a unit of the Ministry of Economy created to prevent money laundering and financing of terrorist activities.

The Argentine Criminal Code defines money laundering as the exchange, transfer, management, sale or any other use of money or other assets obtained through a crime, by a person who did not take part in such original crime, with the potential result that such original assets (or new assets resulting from such original assets) appear as if obtained through legitimate means, provided that the aggregate value of the assets involved exceed in the aggregate (through one or more related transactions) Ps.300,000. As previously mentioned, the Anti-Money Laundering Law created the UIF, which is in charge of the analysis, supervision and conveyance of information in order to prevent (A) the laundering of assets obtained from: (i) Crimes related to illegal traffic and commercialization of narcotics (Law No. 23,737); (ii) Crimes related to arms trafficking (Law No. 22,415); (iii) Crimes related to the activities of an illegal association as defined in Article 210 bis of the Argentine Criminal Code; (iv) Illegal acts committed by illegal associations (Article 210 of the Argentine Criminal Code) organized to commit crimes with political or racial motivation; (v) Crimes of fraud against the Public Administration (Article 174, Section 5 of the Argentine Criminal Code); (vi) Crime against the Public Administration under Chapters VI, VII, IX and IX bis of Title XI of Book Two of the Argentine Criminal Code; (vii) Crimes of underage prostitution and child pornography under Articles 125, 125 bis, 127 bis and 128 of the Argentine Criminal Code; (viii) Crimes related to financing terrorism (Articles 41quinquies and 306 of the Argentine Criminal Code); (ix) Crimes of extortion (Article 168 of the Argentine Criminal Code); (x) Tax crimes, related to social security and fiscal resources (pursuant to law 24,769) and (xi) Crimes related to human trafficking; and (B) Crimes related to financing terrorism.

The Anti-Money Laundering Law assigns information and control duties to certain private sector entities, such as banks, agents, stock exchanges and insurance companies, according to the regulations of the UIF, and for financial entities, the Central Bank.

Financial entities must inform the UIF about any suspicious or unusual transaction, or transactions lacking economic or legal justification, or that are unnecessarily complex. In addition, guidelines and internal procedures were created to detect unusual or suspicious transactions, which must be implemented by financial institutions and other entities.

Pursuant to the same criteria that underlies the aforementioned law, in 2012, the office of the Attorney General issued Resolution No. 914/12, which created the PROCELAC. As PROCELAC has no competence to apply sanctions, its main role is to collaborate with the Federal Prosecutors in the investigation of crimes and in receiving complaints in order to initiate preliminary investigations.

The UIF issued Resolution No. 229/2011, which was replaced by Resolution UIF No. 21/2018 and, subsequently amended by Resolutions No. 156/2018, No. 18/2019 and No. 117/2019 (“AML in the Capital Market Sector”). The AML in the Capital Market Sector establishes certain procedures that must be followed by the authorized agents of the CNV involved in the placement, intermediation and public offering of securities (the “Obliged Subjects in the Capital Market Sector”) in order to prevent, detect and report (within the deadlines established) the acts, transactions or omissions that may arise from committing money laundering and terrorist financing crimes in the capital market sector. Additionally, the AML in the Capital Market Sector introduced general guidelines to identify different types of customers (including a distinction between frequent, casual and inactive customers), the requested information, the documentation to be kept and the procedure to detect and report all suspicious transactions within the established deadlines.

The main obligations pursuant to the AML in the Capital Market Sector are the following: (i) to prepare manuals providing the mechanisms and procedures for the prevention of money laundering and financing of terrorism; (ii) to appoint a compliance officer; (iii) to audit regularly; (iv) to provide training programs to the employees; (v) to enforce measures that would allow the Obliged Subjects in the Capital Market Sector to compile the transactions performed by the customers using a computerized method, as well as technological tools which would enable the analysis and supervision of different transactions to identify behaviors and detect potential suspicious operations; (vi) the implementation of technological tools that would result in effective control and prevention procedures against money laundering and financing of terrorism; and (vii) to record the analysis and risk management of the suspicious transactions that were detected and those that, for having been considered suspicious, have been reported.

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The Central Bank and the CNV should also comply with provisions of the Anti-Money Laundering Law. In this respect, the CNV regulations provide that entities involved in the public offering of securities (other than issuers), including, among others, underwriters of any primary issuance of securities, must comply with the standards set forth by the UIF. In particular, they must comply with the obligation regarding customer identification and required information, record-keeping, precautions to be taken to report suspicious transactions, policies and procedures to prevent money laundering and terrorist financing. Whilst, the acquirers of notes will provide the information and documentation required regarding the origin and legality of the funds used for the subscription.

 

On the other hand, pursuant to Resolution No. 21/2018, as amended subsequently, the Obliged Subjects in the Capital Market Sector shall identify and evaluate the risks that they are exposed to and, as a result, to adopt administrative measures for mitigating them, in order to more effectively prevent money laundering. In accordance with this standard, the Obliged Subjects in the Capital Market Sector must have policies and procedures to know their client (“KYC”), which must be applied according to the risk rating resulting from the implemented risk model. Within this framework, individuals are enabled to implement reputable technological platforms, which allow long-distance procedures without the need to present documentation in person, without prejudice to the fulfillment of due diligence duties.

 

In accordance with Annex I of the UIF Resolution No. 154/2018 (which established the supervision and inspection mechanism of the UIF), both the Central Bank and the CNV are considered “Specific Controllers”. Therefore, they must collaborate with the UIF in complying with the procedures for the prevention of money laundering and finance of terrorism implemented by the obligated subjects subject to its control. For these purposes, they are empowered to supervise, monitor and inspect such entities. The refusal to cooperate or obstruction of inspections by the obliged subjects may result in penalties by the UIF, CNV or the Central Bank. Both UIF Resolution No. 30/2017, as amended, as well as the Central Bank regulations require banks to take certain minimum precautions to prevent money laundering.

 

With respect to issuers (such as the company), CNV regulations provide that any person (either individuals or legal entities) performing significant capital contributions or loans must be identified, whether a shareholder or not at the time of the contributions, and must meet the requirements for general participants in the public offering of securities, set forth in the CNV regulations and the UIF regulations, especially with respect to the identification of such persons and to the origin and legality of the funds and loans provided.

On October 14, 2016, the UIF issued Resolution No. 135/2016, which strengthened the regulations regarding the international exchange of information between similar authorities which may enter into agreements or memoranda of understanding as well as to the foreign public bodies that are members of the Egmont Group of Financial Information Unit or the Asset Recovery Network of the Financial Action Task Force of Latin American (GAFILAT).

On January 11, 2017, the UIF published Resolution No. 4/2017, which established that special due diligence measures must be applied for identifying foreign and domestic investors (who shall comply with the requirements therein set forth to qualify as such) in the Republic of Argentina upon requesting the opening of special investment accounts.

In addition, the Argentine tax amnesty law (Law 27,260 and its regulatory decree No. 895/16, as amended) (the “Tax Amnesty Law”) provided that the information that has been voluntarily disclosed may be used for investigating and sanctioning crimes of money laundering and finance of terrorism. To this end, the UIF is authorized to inform other public intelligence agencies about investigations, based on a previous resolution of the president of the UIF and provide those agencies with information that evidences crimes of money laundering and/or financing of terrorism. In the same way, the AFIP is obliged to report to the UIF any suspicious transactions detected in the context of the Tax Amnesty Law and to provide all the information that the UIF requires, not being able to invoke fiscal confidentiality.

 

In November 2018, the UIF passed Resolution No. 134/2018, which updates the list of persons considered to be “politically exposed persons” (“PEP”) in Argentina, taking into account any positions occupied by them in the present or in the past, and their relationship by closeness or affinity with third parties who occupy or have occupied such positions. Also, during 2019, the UIF issued Resolution No. 15/2019, which modified the PEP list and Resolution 128/19 established that foreign PEPs will be considered high risk and therefore subject to reinforced due diligence measures, with some exceptions.

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On December 26, 2018, the UIF published UIF Resolution No. 154/2018, which amended the supervision procedures then in effect providing for new procedures consistent with and conforming to the international standards promoted by the Financial Action Task Force (“FATF”), which shall be applied in accordance with a risk-based approach.

 

For more information, you should seek advice from your legal counsel and read the applicable rules mentioned herein, including their amendments, which can be found at the following websites: www.infoleg.gov.ar, the UIF’s website: www.uif.gov.ar and the Central Bank’s website: www.bcra.gov.ar. The information contained on these websites is not part and shall not be deemed incorporated into, this annual report.

 

Corporate Criminal Liability Law

 

On March 1, 2018, the Corporate Criminal Liability Law came into effect, after having been enacted by the Argentine Congress on November 8, 2017, providing for the criminal liability of corporate entities for offenses against the public administration and cross-border bribery committed by, among others, of their shareholders, attorneys-in-fact, directors, managers, employees, or representatives. A company found liable under this law may be subject to various sanctions, including, among others, fines from two to five times the undue benefit obtained or that could have been obtained and the partial or total suspension of their activities for up to ten years. In addition, this law extended the criminal liability under the Argentine Criminal Code to actions committed outside Argentina by Argentine citizens or companies domiciled in Argentina.

On April 6, 2018, the executive branch of the Argentine Government issued Decree No. 277/18, which regulates the Corporate Criminal Liability Law, providing that the Anticorruption Office of the Ministry of Justice and Human Rights will establish the guidelines to comply with the Corporate Criminal Liability Law’s provisions related to the Integrity Program. On October 4, 2018, the Anticorruption Office issued Resolution No. 27/2018, which approved the “Integrity’s Guidelines for the best compliance of sections 22 and 23 of the Corporate Criminal Liability Law”.

Upon the enactment and entry into force of the Corporate Criminal Liability Law, our Board of Directors assessed the level of compliance with the Integrity Program set forth in sections 22 and 23 of such law, which seeks to implement a set of internal procedures, mechanisms and actions for integrity, supervision and control, geared at preventing, detecting and correcting the irregularities and acts covered by such law.

The Integrity Program set forth by law has mandatory and optional requirements, and we have defined the need to comply with all of them.

Furthermore, the Integrity Program is periodically monitored by our Board of Directors to identify the existence of improvement opportunities or necessary updates. Our Board of Directors has defined that our internal audit department will be responsible for the implementation of the Integrity Program.

 

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Item 10.Additional Information

MEMORANDUM AND ARTICLES OF ASSOCIATION

Corporate Purpose

Pursuant to Article 4 of our by-laws, our corporate purpose is to carry out the following activities: (a) Industrial: 1) Operations for the generation, transformation, transmission and distribution of electric power; 2) To explore, exploit, prospect, detect, probe and drill hydrocarbon and any other fields, areas and/or wells, and to develop mining activities generally; 3) to purchase, sell, lease and exploit drilling equipment, any spare parts and accessories thereof, and enter into any contracts and perform any acts and transactions related to mining extraction; 4) to manufacture, process, industrialize, purchase, sell, import, export and transport hydrocarbons and any byproducts thereof belonging to the Company or to third parties, either liquid, solid or gaseous; 5) to enter into any kind of contracts for the performance of works and/or services related to the foregoing activities; 6) Exploitation in any manner of agriculture, livestock-farming, fruit-growing, winemaking, olive grove, forestry growth and/or farming establishments; and 7) Production through any form of industrial process of agricultural or winemaking products or by-products. (b) Commercial: Commercial transactions by importing, exporting, selling and purchasing, transporting, storing and distributing products, subproducts and goods related to electric power, mining production, including the exercise or performance of activities as representative or commission, consignment and other agents. (c) Financial: Financial transactions generally; to extend loans and/or make capital contributions to individuals and companies in connection with business operations performed or to be performed; to provide guarantees, collateral and surety in favor of third parties; to sell, purchase and manage shares, governmental securities, debentures and other securities on any of the systems and in any form created or to be created, other than transactions falling within the scope of the Financial Entities Law. (d) Investment: Investing activities in undertakings and companies of any nature, in accordance with and subject to the limitations established by applicable laws and regulations; the Company may organize or take part in the organization of companies or purchase and hold equity interests in companies now existing or to be created in the future in Argentina or abroad, be a party to temporary business associations, cooperative associations, joint ventures and business associations. The Company may also, for investment purposes, purchase, develop and dispose of real and personal property of any kind, encumber and convey and receive such property under a lease, a concession or a financial lease. (e) Services: To provide services or act as an agent in its own name or for the benefit of third parties. To such end, we have full legal capacity to acquire rights and incur obligations and to carry out any such acts as are not prohibited by the laws or our bylaws, including, without limitation, guaranteeing any obligations of our company or any third party.

Year-End Date

Our fiscal year-end date is December 31 each year.

Redemption and Withdrawal Rights

Our shares are subject to a proportional redemption in connection with a capital reduction by the vote of a majority of shareholders at an extraordinary shareholders’ meeting based on a favorable report of a statutory auditor. Any shares so redeemed must be cancelled by us.

If such were the case, we would be required to reimburse the value of the shares to the shareholders exercising such right in the cases described below.

Whenever our shareholders approve a spin-off or merger in which we are not the surviving corporation and the shares our shareholders receive as a result of such spin-off or merger are not publicly traded, the change of our corporate legal status, a fundamental change in our corporate purpose, change of our domicile outside of Argentina, voluntary withdrawal from public offering or delisting, our continuation in the case of mandatory delisting or cancellation of the public offering authorization, or a total or partial recapitalization following a mandatory reduction of our capital or liquidation, any shareholder that voted against such action or did not attend the meeting at which the decision was taken, may withdraw and receive the book value of its shares, determined on the basis of our latest balance sheet prepared or that should have been prepared in accordance with Argentine laws and regulations, provided that such shareholder exercises its appraisal rights within a determined period. However, because of the absence of legal precedent directly on point, there is doubt as to whether holders of ADSs will be able to exercise their appraisal rights either directly or through the depositary with respect to the shares represented by the ADSs. The appraisal rights must be exercised within the five days following the adjournment of the meeting at which the resolution was adopted, in the event that the dissenting shareholder voted against such resolution, or within 15 days following such adjournment if the dissenting shareholder did not attend such meeting and can prove that it was a shareholder on the date of such meeting. In the case of merger or spin-off, appraisal rights may not be exercised if the shares to be received as a result of such transaction are authorized for public offering or listed. Appraisal rights are extinguished if the resolution giving rise to such rights is revoked at another shareholders’ meeting held within 60 days of the meeting at which the resolution was adopted.

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Payment on the appraisal rights must be made within one year of the date of the shareholders’ meeting at which the resolution was adopted, except when the resolution was to delist our shares or to continue following a mandatory delisting, in which case the payment period is reduced to 60 days from the resolution date.

Preemptive and Accretion Rights

Pursuant to section 194 of the BCL, holders of common shares have preemptive rights proportionate to the number of shares held by each holder, to subscribe for shares of capital of the same class owned by the shareholder, and accretion rights to subscribe additional common shares not subscribed by other shareholders on a pro rata basis. Preemptive rights and accretion rights may be waived only by each shareholder on a case-by-case basis. In accordance with section 194 of the BCL, our by-laws provide that the holders of common shares have preemptive rights to subscribe additional common shares in any amount sufficient to maintain their pro rata share of capital.

In this way, pursuant to the BCL, in exceptional cases and on a case by case basis when required for the best interest of the company, the shareholders at an extraordinary meeting with a special majority may decide to limit or suspend shareholders’ preemptive rights, provided that the resolution is included in the agenda of the meeting and the shares to be issued are paid in kind or are issued to cancel preexisting obligations.

Pursuant to Section 6 of our by-laws, Shareholders shall be entitled to first-refusal and accretion rights for the subscription of any newly issued shares, pro rata to their respective shareholding, and the relevant notices shall be published to this effect as legally required. First-refusal and accretion rights may be exercised within the legally established periods and shall be solely limited or suspended by resolution of an Extraordinary Meeting of Shareholders in compliance with the conditions established by section 197 of the BCL.

According to our by-laws, (a) first-refusal and accretion rights shall be solely limited or suspended (i) in accordance with the Section 6 of the Bylaws or (ii) when an Extraordinary Meeting of Shareholders approving an issuance of shares and convertible notes has resolved that first-refusal rights shall not be applicable both under section 194 of BCL and under the CML, and in such an event any shareholders wishing to take part in the capital increase shall not be entitled to first-refusal rights and compliance with the conditions for first-refusal rights to be suspended under section 197 of BCL shall not be required; (b) in case of a capital increase through the issuance of shares or convertible notes offered by means of a public offering under the CML and subject to the approval of the meeting of shareholders approving the respective issuance of shares and convertible notes, the first-refusal right contemplated in section 194 of BCL and section 11 of Law No. 23,576 and any other statutory rules that may replace them in the future shall be exercised by means of the placement procedure determined in the respective public offering prospectus; and the holders of shares and convertible notes, as the beneficiaries of such preemptive right, shall be acknowledged priority in the awarding of shares up to the amount they may be entitled to, based on their respective shareholding percentage. This shall be so provided that any purchase orders submitted by the shareholders or holders of convertible notes, as the beneficiaries of such first-refusal right, are placed at the price resulting from the placement procedure or at an established price either equal to or higher than the subscription price determined in the public offering, and accretion rights shall not be applicable. Until the new applicable law permits the foregoing provisions, section 6 of these Bylaws shall be applied.

Pursuant to Argentine Law, if authorized by an extraordinary shareholders’ meeting, companies authorized to make public offerings of their shares may shorten the period during which preemptive rights may be exercised from 30 to up to ten days following the publication of the offering to the shareholders to exercise preemptive rights in the official gazette and a newspaper of wide circulation in Argentina. Preemptive rights are exercisable following the described publication (which has to be made for three days) for a period of 30 days, provided such period is not reduced as described above.

Shareholders who have exercised their preemptive rights have the right to exercise accretion rights at the same time, on a pro rata basis, with respect to any unsubscribed common shares. Shares not subscribed by shareholders by virtue of preemptive or accretion rights may be offered to third parties.

Holders of ADSs may be restricted in their ability to exercise preemptive rights if a prospectus under the Securities Act relating thereto has not been filed or is not effective or an exemption from registration is not available.

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Voting Rights

Under our by-laws, our common shares entitle the holder thereof to one vote per share at any meeting of our shareholders.

Dividends

In accordance with section 36 of our by-laws, our yearly net income (as adjusted to reflect changes in prior results) is allocated in the following order:

(1) to comply with our legal reserve policy requirement of 5% of our realized and liquid earnings until such reserve equals up to 20% of the capital (pursuant to section 70 of the BCL);

(2) to pay the accrued fees of the members of the Board of Directors and the Supervisory Committee;

(3) for voluntary or contingent reserves, as may be resolved from time to time by our shareholders at the annual ordinary shareholders’ meeting; and

(4) the remainder of the net income for the year may be distributed as dividends on common shares or as otherwise decided by our shareholders at the annual ordinary shareholders’ meeting.

Registration Requirements of Foreign Companies

Under the BCL, foreign companies that hold shares in an Argentine company must register with the public registry of commerce to exercise certain shareholder rights, including voting rights. The registration with the public registry of commerce in certain jurisdictions, such as in the City of Buenos Aires, requires the filing of corporate and accounting documents in order to demonstrate that the foreign shareholder: (1) is not a special purpose vehicle created solely to conduct business in Argentina, (2) owns non-current assets outside of Argentina that are significant compared to its assets owned or to be owned in Argentina and (3) is entitled to conduct business in its place of organization.

Under the CNV provisions, foreign companies could attend a Shareholders meeting only with a dully authorized official, with no additional formal registration needed. Is considered to be duly authorized: (i) the legal representative of the company in Argentina, (ii) an attorney with enough power to represent the company in Argentina. The power could be granted in Argentina or abroad, complying with all legal and formal requirements (duly legalized and apostilled).

Liquidation Rights

Pursuant to section 109 of the BCL, in the case of our liquidation or dissolution, our assets will be applied to satisfy our outstanding liabilities and then proportionally distributed among holders of our shares.

Ordinary and Extraordinary Shareholders’ Meetings

Shareholders’ meetings may be ordinary meetings or extraordinary meetings. We are required to convene and hold an ordinary meeting of shareholders within four months of the close of each fiscal year to consider the matters specified in the first two paragraphs of Section 234 of the BCL, such as the approval of our financial statements, allocation of net income for such fiscal year, approval of the reports of the board of directors and the audit committee and election, performance and remuneration of directors and members of the supervisory committee. In addition, pursuant to the CML, at an ordinary shareholders’ meetings, our shareholders must consider (1) the disposition of, or creation of any lien over, our assets as long as such decision has not been performed under the ordinary course of business and (2) the execution of administration or management agreements and whether to approve any agreement by virtue of which the assets or services provided to us are paid partial or totally with a percentage of our income, results or earnings, if the payment is material when measured against the volume of the ordinary course of business and our shareholders’ equity. Other matters that may be considered at an ordinary shareholders’ meeting convened and held at any time include the responsibility of directors and members of the supervisory committee, capital increases and the issuance of certain notes. Extraordinary shareholders’ meetings may be called at any time to consider matters beyond the authority of an ordinary meeting including, without limitations, the amendment of our by-laws, issuance of debentures, early dissolution, merger, spin off, reduction of capital stock and redemption of shares, transformation from one type of entity to another, appointment, removal and retribution of the liquidators and limitation or suspension of shareholders’ preemptive rights.

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In accordance with Article 21 g) of our by-laws, our board of directors has broad borrowing powers, and may incur any indebtedness without the approval of the shareholders, unless the indebtedness consists of the issuance of notes (pursuant to Law No. 23,576) or debentures (pursuant to the BCL), in which cases, the decision must be approved by our shareholders as described above, except for such bonds that are not convertible into stocks.

On February 17, 2021, the Company’s General Ordinary and Extraordinary Shareholders’ Meeting approved the amendment of Section 30 of the Company’s by-laws in order to allow to virtually hold Shareholder’s meetings in the following way: Article 30: To be validly assembled, an Ordinary Meeting of Shareholders held on first call shall require the presence of shareholders representing a majority of voting shares, and on second call a Meeting shall be validly assembled with any number of such shares present. Extraordinary Meetings of Shareholders shall be validly held on first call with the presence of shareholders representing not less than 60% of voting shares, and on second call the presence of not less than 30% of such shares shall be required. The Shareholder’s Meetings may be held with its members present or communicated between them by other means allowing for the simultaneous transmission of sound, images and words, and Shareholders both physically present and attending remotely shall be computed for purposes of quorum and majority requirements. The minutes of these meetings shall be prepared and signed within five (5) days after the relevant meeting has been held by the President and the appointed Shareholders. If a Shareholders’ Meeting cannot be validly held due to the absence of the required number of attendants, and if an Ordinary Shareholders’ Meeting has not been convened on first and second call at the same time, the Meeting must be convened again within the following 30 days.

Notices of Meetings

Notices of shareholders’ meetings are governed by the provisions of the BCL. Furthermore, notice of shareholders’ meetings must be published for five days in the Official Gazette, in an Argentine newspaper of wide circulation and at the markets’ means of publications, at least 20 but not more than 45 days prior to the date on which the meeting is to be held. Such notice must include information regarding the type of meeting to be held, the date, time and place of such meeting and the agenda. If a quorum is not available at such meeting, a notice for a meeting on second call, which must be held within 30 days of the date on which the first meeting was called, must be published for three days at least eight days before the date of the meeting on second call. The above described notices of shareholders’ meetings may be effected simultaneously for the meeting on second call to be held on the same day as the first meeting, only in the case of ordinary meetings and special shareholders’ meetings of a relevant class of shares. Shareholders’ meetings may be validly held without notice if all the shares of our outstanding share capital are present and resolutions are adopted by unanimous vote of shares entitled to vote.

Quorum and Voting Requirements

The quorum for ordinary meetings of shareholders on first call is a majority of the shares entitled to vote, and action may be taken by the affirmative vote of an absolute majority of the shares present that are entitled to vote on such action. If a quorum is not available at the first meeting a meeting on second call may be held at which action may be taken by the holders of an absolute majority of the shares present, regardless of the number of such shares. The quorum for an extraordinary shareholders’ meeting on first call is 60% of the shares entitled to vote, and if such quorum is not available, a meeting on second call may be held, for which the quorum is 30% of the shares entitled to vote.

Action may be taken at extraordinary shareholders’ meetings by the affirmative vote of an absolute majority of shares present that are entitled to vote on such action, except that: the approval of a majority of shares with voting rights (for these purposes, non-voting preferred shares shall have voting rights and multiple votes shares shall have one vote per share), is required at both the meetings on first and second call for: (1) the transfer of our domicile outside Argentina, (2) a fundamental change of the corporate purpose set forth in our by-laws, (3) total or partial recapitalization, (4) limitation or suspension of the shareholders’ preemptive and accretion rights, (5) the creation of voluntary reserves with the company’s net profits, if such funds together with the existing voluntary reserves exceeds the amount of capital stock and legal reserves, (6) continuation of the company upon delisting or cancellation of our public offering authorization or (7) merger or spin-off (except if we are the absorbing company), and (8) our anticipated dissolution.

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Pursuant to Article 33 of our by-laws: (1) any amendment to the regime of Mandatory Public Tender Offer upon acquisition of a controlling interest in our capital stock, as described below under “—Mandatory Public Tender Offer Upon Acquisition of 50% of our Voting Shares,” requires for approval the favorable vote of shares representing at least 66.6% of the capital stock issued and outstanding, (2) any amendment to the rules of the Audit Committee as well as any amendment to the regime of Mandatory Public Tender Offer upon acquisition of a significant interest in our capital stock as described below under “—Mandatory Public Tender Offer upon Acquisition of 35% of our Voting Shares,” shall require for approval the favorable vote of at least 66.6% of the shareholders in attendance at the meeting to the extent that they represent at least 35% of the capital stock issued and (3) any amendment to the special majority regime as established above which shall require for approval the same special majority intended to be amended.

Shareholders’ meetings may be called by the board of directors or the members of the supervisory committee whenever required by law or whenever they deem it necessary. Also, the board or the members of the supervisory committee are required to call shareholders’ meetings upon the request of shareholders representing an aggregate of at least five percent of our outstanding share capital in which case the meeting must take place within 40 days of such shareholders’ request. If the board of directors or the supervisory committee fails to call a meeting following such a request, a meeting may be ordered by the CNV or by the courts. In order to attend a meeting, a shareholder must also deposit with us a certificate of book entry shares registered in its name and issued by Caja de Valores at least three business days prior to the date on which the meeting is to be held. If so entitled to attend a meeting, a shareholder may be represented by proxy. Proxies may not be granted to our board, members of the supervisory committee, officers or employees.

Election of Directors

In accordance with Article 12 of our by-laws, our Board of Directors is composed of nine regular members appointed by the Ordinary Meeting of Shareholders. Our directors will be elected for a three-year term, which terms shall be in force until a replacement director is appointed. The election of our directors will be on a staggered basis, so that one third of the board membership is renewed each year. The directors will be elected by slate, always provided that no shareholder or group of shareholders holding more than 3% of our capital stock objects to such election method. In the event of such an objection, their election will be made individually. Any shareholder or group of shareholders who holds more than 3% of our capital stock (each, a Proposer) may require our Board to give notice to the other shareholders of the candidate slate or individual candidates to be proposed by such shareholder or group of shareholders to the shareholders’ meeting for election. In the case of depositary banks that are holders of shares of our common stock registered in their name, this rule will be applicable to the beneficiaries. To such end, the relevant slate executed by the Proposer or its representatives, as applicable, will be sent to the chairman of our board or whoever replaces him, no less than five business days prior to the date of the relevant shareholders’ meeting, so as to be officially notified by publication in the Bulletin of the BASE at least two days prior to the meeting’s date. In order to facilitate the formation of the slates and the record of the candidates’ names, as from the date of the first notice calling for the relevant meeting, a special book will be made available to the shareholders at the registered office in which the names of the slates or candidates proposed by any shareholders shall be recorded. Similarly, our Board of Directors will propose to the shareholders’ meeting a slate of candidates for election by slate or individually, if the former election method were objected to, whose names will be made known to all the shareholders together with the slates proposed by the Proposer. In addition, no proposal for the election of directors may be made, either before or during the shareholders’ meeting, unless written evidence of acceptance of office by the proposed candidates is submitted to us. Such slate or person, as the case may be, who obtains the vote of a majority of the shares present at the meeting will be declared elected. If no slate obtains such majority, a new voting will be taken in which the two slates or persons that obtained the largest number of votes will take part, and the slate or person who obtains the largest number of votes will be declared elected. The preceding rules will not prevent a shareholder who is present at the shareholders’ meeting from proposing candidates not included in the proposals from our Board of Directors. All proposed directors must comply with our Nomination Policy rules prior to their designation.

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There are no provisions under Argentine law or in our by-laws providing for the retirement of directors under an age limit requirement.

Directors’ compensation

In accordance with Article 31 of our by-laws, our director’s compensation is considered and approved by our shareholders in an ordinary meeting held in compliance with such law. Additionally, pursuant to our audit committee charter, our audit committee is responsible for approving, by a vote of only its independent members, any proposal related to the remuneration and compensation of our directors and executive officers, before any proposal, which is always non-binding, is submitted by our Board of Directors to the shareholders for their consideration. Any proposal for remuneration or compensation that is not approved by our audit committee cannot be submitted by the Board of Directors to our shareholders. Annual compensations must comply with our Compensation Policy prior to its approval by the board.

Mandatory Public Tender Offer Upon Acquisition of 35% of Our Voting Shares

Our by-laws provide in Article 38 that in the event that any person, directly or indirectly, individually or in agreement with other persons, by any means or title (pursuant to a sale, an assignment, pursuant to foreclosure proceedings either at court or out of court, or pursuant to any other means of disposal or transfer), acquires or becomes the beneficial owner of shares of our common stock, options, warrants or securities of the company convertible into shares, convertible notes, GDRs or ADRs and options to acquire shares (together, our Securities) representing, or entitling in the event of conversion, when added to such person’s prior holding, if any, to 35% or more of our voting stock, even though such interest does not confer control over us, such person or group of persons shall be required to publicly tender for 100% of our outstanding capital stock and Securities at a price no less than the highest of: (1) the share price of the company in U.S. Dollars determined based on a valuation of our net worth prepared by an independent, internationally-recognized investment bank, the valuation must take into account an increase in the company’s capital stock as a result of the exercise of conversion rights as contained in the Securities and must be performed on the basis of the most recent balance sheet approved by the company; (2) 135% of the subscription price (denominated in U.S. Dollars, as of the date of subscription of any shares issued as a result of a capital increase during the 24-month period immediately preceding the date of the notice of such person or group of persons announcing the commencement of the mandatory tender offer for the acquisition of a significant interest herein established, adjusted to reflect any stock split, stock dividends, par value variation, capital reduction, earning capitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby bonus shares of our common stock and/or Securities are delivered; and (3) 135% of the weighted average listing price in U.S. Dollars (at closing of trading) of our shares of common stock and/or GDRs during the 120-day period immediately preceding the notice announcing the commencement of the mandatory tender offer due to acquisition of a significant interest, in the BASE and in New York and at any other exchange or market in which our shares and Securities are listed, adjusted to reflect any stock split, stock dividend, par value variation, capital reduction, earning capitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby bonus shares of our common stock and/or Securities are delivered.

Mandatory Public Tender Offer Upon Acquisition of 50% of Our Voting Shares

Our by-laws provide in Article 38 that in the event that any person, directly or indirectly, individually or in agreement with other persons, by any means or title (pursuant to a sale, an assignment, foreclosure proceedings either at court or out of court, or to any other means of disposal or transfer), acquires or becomes the beneficial owner of shares of our common stock and/or Securities, representing or entitling in the event of conversion, when added to such person’s prior holding, if any, more than 50% of our voting stock or in any other way entitling the purchaser to exercise the power to remove a majority of our directors (each, a Controlling Interest), prior to acquiring such Controlling Interest, such person or group of persons shall make a public tender offer to purchase shares of our common stock and Securities held by all other shareholders at a price no less than the highest of: (1) the share price of the company in U.S. Dollars, determined based on a valuation of our net worth prepared by an independent, internationally-recognized investment bank, the valuation must take into account an increase in the company’s capital stock as a result of the exercise of conversion rights as contained in the Securities of the company and must be performed on the basis of the most recent balance sheet approved by the company; (2) 135% of the subscription price denominated in U.S. Dollars, as of the date of subscription of any shares issued as a result of a capital increase during the 24-month period immediately preceding the date of the notice announcing the commencement of the mandatory tender offer for the acquisition of a significant interest herein established, adjusted to reflect any stock split, stock dividends, par value variation, capital reduction, earning capitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby bonus shares of our common stock and/or Securities are delivered; (3) 135% of the weighted average listing price in U.S. Dollars (at closing of trading) of our shares of common stock and/or GDRs or ADRs during the 120-day period immediately preceding the notice announcing the commencement of the mandatory tender offer due to acquisition of a significant interest, in the BASE and in New York and at any other exchange or market in which our shares and Securities are listed adjusted to reflect any stock split, stock dividends, par value variation, capital reduction, earning capitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby bonus shares of our common stock and/or Securities are delivered; and (4) the highest price per share or Securities paid by such person or on behalf of such person, in relation to any acquisition of shares and/or Securities within a period of two years immediately prior to the announcement of Acquisition of a Controlling Interest, adjusted to reflect any stock split, stock dividend, par value variation, capital reduction, earning recapitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby shares of our common stock or other securities are delivered.

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Duty to Inform

Our by-laws provide in Article 38 that any person, whether acting directly or indirectly through other persons or legal entities, as well as any group of people acting in agreement with other persons, who (1) acquires or sells our shares of common stock or Securities by any means or title, (2) alters the configuration or composition of its direct or indirect interest in our capital stock, (3) converts notes into shares of common stock, (4) exercises options to purchase any convertible securities mentioned or (5) changes its intention with respect to its interest in our capital stock, in existence at the time any of the assumptions provided for in preceding (1) to (4), as long as, in each case, the purchase made in each of such assumptions grants control over 5% or more of our capital stock or voting rights, shall, immediately upon consummation of the transaction or change in intentions, inform us of such circumstances, irrespective of compliance with any additional duty that applicable securities rules and regulations may require if such were the case. Future transactions for an amount equivalent to a multiple of 5% of our capital stock or voting rights must also be communicated to us.

Form and Transfer

Our current share capital is represented by book-entry shares. Our shareholders are required to hold their shares through book-entries directly made by Caja de Valores in the shares registry of the company carried by Caja de Valores or through book-entries with brokers, banks and other entities approved by the CNV that have accounts with Caja de Valores, or with the participants of Caja de Valores. Caja de Valores is in charge of maintaining a shares registry on our behalf based on information received from shareholders that choose to hold their shares directly by registration on the shares registry of the company and from participants of Caja de Valores, and in accordance with Argentine Law only those holders listed in the shares registry either directly or through participants of Caja de Valores will be recognized as shareholders. Shares held by participants of the Caja de Valores have the same rights as shares recorded in our shareholders’ register.

MATERIAL CONTRACTS

Not Applicable.

 

EXCHANGE CONTROLS

The following is a summary of the main measures taken by the BCRA with the purpose of regulating inflows and outflows in the MLC to maintain the exchange rate stability and protect international reserves in view of the high degree of uncertainty and volatility in the exchange rate by tightening exchange controls and restrictions on the inflow and outflow of foreign exchange. In this regard, the BCRA issued a series of communications (including, but not limited to, Communications “A” 7001, 7030, 7042, 7052, 7068, 7106, 7142 and 7152), which introduced restrictions associated, among other factors, with transactions with stock market assets by companies and the disposal of liquid foreign assets, thus imposing further restrictions on access to the MLC.

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In sum, it provided for the obligation to file an affidavit to access the MLC without BCRA’s prior authorization, certifying that all foreign-currency holdings in the country are deposited in accounts with local financial institutions and that it does not have liquid foreign assets available for an amount equivalent to or higher than US$ 100,000. In case such liquid foreign assets exceed the amount of US$ 100,000, but include reserve or guarantee funds created under debt contracts or transactions with derivatives entered into abroad and that may not be used, an additional affidavit should be submitted.

To such effects, the term “liquid foreign assets” will comprise, among others: holdings of foreign currency notes and coins, availability of gold in the form of good delivery bars or coins, sight deposits in foreign financial entities and other investments allowing for the immediate availability of foreign currency (for example, investments in foreign public securities, funds in investment accounts deposited with investment managers located abroad, crypto assets, funds deposited in payment service providers’ accounts, etc.). On the other hand, the following will not be considered available liquid foreign assets: funds deposited abroad which may not be used by the customer as they are reserve or guarantee funds created under foreign debt contracts, or funds kept as collateral for foreign transactions with derivatives entered into abroad.

Furthermore, it established the obligation to enter and settle in the MLC, in case access has been requested and within a term of five business days after they become available, foreign funds originating from the collection of loans granted to third parties, the collection of time deposits or the sale of any kind of asset, in case the asset has been acquired, the deposit has been made or the loan has been granted after May 28, 2020.

As regards transactions with stock market assets, it established: (i) the restriction, as from the moment access to the MLC is requested, to perform security sales transactions to be settled in foreign currency or their transfer to depository institutions abroad for a term of 90 days before and after the request, and the filing of an affidavit in this respect; and (ii) that transactions with securities concerted abroad and securities acquired abroad may not be settled in Pesos in the country.

Regarding imports, BCRA’s prior authorization to access the MLC is required to make payments for the import of certain goods abroad or to cancel the principal of debts originating from the import of goods by companies. Additionally, and before executing payments for the import of goods, entities should verify that the affidavit requested to the customer is compatible with BCRA’s existing data. Moreover, the need for BCRA’s prior authorization to access the MLC for the cancellation of principal of foreign financial debts with foreign affiliates remains in effect until June 30, 2021 inclusive.

Furthermore, the BCRA established the obligation to submit a refinancing plan for certain debts and principal maturities scheduled until December 31, 2021, based on the following criteria: (i) access to the MLC for up to 40% of the principal amount, within the original term; and (ii) the refinancing of the principal balance, through new foreign indebtedness with an average life of 2 years. Within the framework of this refinancing process, access to the MLC is allowed for the early cancellation of principal, interest or debt swaps up to 45 calendar days before the maturity date, provided all requirements set forth by the regulation have been verified. The cancellation of the capital of such debts for amounts of US$ 2,000,000 are excluded from the obligation to present the aforementioned plan and will have access to the MLC.

Regarding transactions that have been entered and settled through the MLC as from November 16, 2020 and are destined to the financing of projects under the Gas.Ar Plan, the BCRA issued Communication “A” 7168 providing for access to the MLC: (i) to transfer foreign currency abroad as earnings and dividends to non-resident shareholders, as from the second anniversary of the investment; (ii) for the repayment of principal and interest of foreign debts with an average life of no less than two years; (iii) for the repatriation of direct investments by non-residents as from the second year and up to the amount of the direct-investment contributions settled in the MLC in the case of a share capital reduction and/or a reimbursement of irrevocable capital contributions by the domestic company, among other requirements provided in the regulation.

In January 2021, the BCRA issued Communication “A” 7196, which provided, among other modifications, for a series of measures aiming to make regulations more flexible so as to facilitate the exchange or financing of foreign private-sector liabilities that have been entered and settled through the MLC and concerted as from January 7, 2021, such as: (i) the extension of the term before the maturity date to access the MLC for the cancellation of principal and interest of foreign financial debts or debt securities publicly registered in the country and denominated in foreign currency; and (ii) the possibility to accumulate funds originating from the collection of goods and services exports in foreign and/or domestic accounts destined to guarantee the payment of maturities of debts concerted as from January 2021, among others.

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Later, on April 8, 2021, the Registry Listing Foreign Exchange Data on Exporters and Importers was created by the BCRA as a requirement to access the MLC as of May 1, 2021 for transactions involving outflows of funds, including swaps and arbitrages. This requirement will not apply to access to the MLC for the repayment of of foreign currency financings granted by local financial entities. Obliged subjects shall have to (i) re-register before March 31 of each year; and (ii) report any changes in their registered information within 15 business days of the change. The Company was deemed by the BCRA as an obligated subject and as of the date of this annual report the Company has already completed its registration in such registry. In addition, the BCRA regulated the Investment Promotion Regime for Exports created by the Decree No.234/21, establishing, among others, the possibility to apply the foreign currency proceeds obtained from the exports related to the project under such regime for certain operations, to the extent that the requirements set forth in the applicables rules are met.

For more information regarding Argentina’s foreign exchange policies, you should seek advice from your legal counsel and read the applicable rules mentioned herein, including their amendments, which can be found at the following websites: www.infoleg.gov.ar and the Central Bank’s website: www.bcra.gov.ar. The information contained on these websites is not part and shall not be deemed incorporated into, this annual report.

 

TAXATION

The following summary contains a description of the principal Argentine and U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase common shares or ADSs. The summary is based upon the tax laws of Argentina and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect on the date hereof, which are subject to change. Investors should consult their own tax advisors as to the tax consequences of the Acquisition, ownership and disposition of common shares or ADSs.

Although there is at present no income tax treaty between Argentina and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of common shares or ADSs.

Argentine Tax Considerations Capital gains tax

Resident individuals

The Law No. 27,430 provides for the taxation of Argentine resident individuals’ income from the sale, exchange or other disposition of shares will be subject to income tax rate of 15%.

The Tax Reform establishes an exemption for individuals tax residents on the sale of shares that are publicly traded in stock exchanges under the supervision of the Argentine Securities and Exchange Commission (CNV).

 

Foreign beneficiaries

Pursuant to the Law No. 27,430, all income resulting from the purchase and sale, exchange or other disposition of shares and other securities earned by foreign beneficiaries will be exempt of the Income Tax, if they are (i) listed on stock exchanges or securities markets and/or have an authorization for public offering under the supervision of the CNV and (ii) the foreign beneficiaries do not reside in or the funds do not arise from “non-cooperating jurisdictions” (the “publicly traded exemption”). In case the disposition does not meet such requirements, the income obtained by foreign individual and legal entities will be taxable at a 13,5% rate on the gross price or 15% rate on the net capital gain (with the possibility of adjusting the value of acquisitions from January 1, 2018 and onwards for the purpose of determining the net capital gain, taking into account the variation of the Internal Wholesale Price Index).

 

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The non-cooperating jurisdictions list is prepared and published by the executive branch. The U.S. is currently not a non-cooperating jurisdiction.

 

The Tax Reform, effective as of January 1, 2018, specifies that in case of share certificates issued abroad that represent shares issued by Argentine companies (i.e., ADSs), the “source” is defined by the location of the original issuer of the shares. However, the tax will not be due if the publicly traded exemption, described above, applies in respect of the underlying shares.

 

Local entities

Capital gains obtained by Argentine entities in general, entities organized or incorporated under Argentine law, certain traders and intermediaries, local branches of non-Argentine entities, sole proprietorships and individuals carrying on certain commercial activities in Argentina derived from the sale, exchange or other disposition of our common shares or ADSs are subject to income tax at the rate of 30% for fiscal periods starting on January 1, 2018 until January 1, 2021, and 25% for the fiscal periods starting thereafter. Losses arising from the sale of our common shares or ADSs can be applied to offset such income.

Additionally, a withholding of 7% or 13% is established for the periods mentioned above, on the dividends distributed by the capital companies in favor of their shareholders, when they are legal persons or undivided successions resident in the country, or are foreign beneficiaries.

 

On April 6, 2021, the PEN submitted a new bill to the Argentine Congress, establishing a tiered marginal tax rate structure with three segments depending on the level of accumulated taxable net income: (i) a first tier with a 25% rate for accumulated net income up to $5 million; (ii) the second tier of 30% for accumulated net income over $5,000,000 and up to $20,000,000; and (iii) a third tier of 35% for accumulated net income over $20,000,000. Dividends distributed will pay in all cases the 7% rate, in line with the current schedular tax. If the bill passes through both chambers and is subsequently enacted by the PEN, the new tax rate structure will be aplicable for the fiscal year starting on January 1, 2021.

 

Dividends tax

Pursuant to Law No. 26,893, dividends and other profits paid in cash or in kind —except for stock dividends—by companies and other entities incorporated in Argentina referred to in the Argentine Income Tax Law (the “Income Tax Law”), Sections 73 (a)(1), (2), (3), (6) and (7), and Section 69(b), were subject to income tax at a 10% rate except for those beneficiaries that were domestic corporate taxpayers. Law No. 27,260 repealed this withholding tax as of July 23, 2016. Consequently, no withholding tax is to levied on dividends distributed to either Argentine or non-Argentine resident shareholders since then. This treatment applies only to dividends to be distributed at any time out of retained earnings accumulated until the end of the last fiscal year starting before January 1, 2018.

 

Likewise, the portion of those dividends exceeding the company’s accumulated net taxable income (as determined by application of the Argentine Income Tax Law), if any, is subject to a 35% withholding tax on such excess (the “Equalization Tax”). For purpose of the Equalization Tax, the amount of accumulated net taxable income to be considered shall be determined by (1) deducting the income tax paid by the company, and (2) adding the dividends and profits not subject to tax received as distributions from other corporations. If the distribution is in-kind, then the corporation must pay the tax to the Argentine tax authorities and will be entitled to seek reimbursement from the shareholders.

 

Dividends to be distributed out of earnings accrued in fiscal years starting on or after January 1, 2018, are to be subject to a tax treatment different from the one previously described, based on the recent enactment of a comprehensive tax reform -Law No. 27,430-, published in the Official Gazette on December 29, 2017, and generally effective since January 1, 2018.

 

Pursuant to Law No. 27,430, dividends and other profits paid in cash or in kind —except for stock dividends—by companies and other entities incorporated in Argentina referred to in the Argentine Income Tax Law, Sections 73 (a)(1), (2), (3), (6), (7) and (8), and Section 73(b) out of retained earnings accumulated in fiscal years starting on or after January 1, 2018, will be subject to withholding tax at a 7% rate (on profits accrued during fiscal years starting January 1, 2018 until January 1, 2021), and at a 13% rate (on profits accrued for the fiscal years starting thereafter), provided that they are distributed to Argentine resident individuals and foreign shareholders (including holders of common shares or ADSs).

 

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With respect to dividends paid to shareholders residing abroad, such withholding may be reduced by a tax treaty between Argentina and their country of residence. See “Tax Treaties” below.

Capital reductions and other distributions

Capital reductions and redemptions of our common shares and ADSs are not subject to income tax up to an amount equivalent to the contributed capital corresponding to the common shares and ADSs to be redeemed. Any distribution exceeding this amount, however, will be considered as a dividend for tax purposes and subject to withholding tax as described above.

 

Other Income Tax provisions

Transfer pricing

 

The Transfer Pricing regime includes import and export controls of any product with the intervention of an international intermediary, that is not the importer at destination or exporter at origin, respectively.

 

In addition, for exports of goods with known prices and with the intervention of an intermediary (either related, or located in “non-cooperating” or low or no tax jurisdictions), the Law requires the Argentine exporter to file with AFIP the agreements supporting the transactions.

 

Equalization income tax

 

Equalization income tax -established by Income Law, art. 74- will not be applicable on profits generated on or after January 1, 2018.

 

Upgrade

 

The Tax Reform re-establishes the adjustment for inflation procedures in the Income Tax Law with the following rules: (i) inflation adjustment of new acquisitions and investments carried out from January 1, 2018 and onwards, considering the variation of the Internal Wholesale Price Index (in Spanish, Indice de Precios Internos al Consumidor Nivel General or IPC) supplied by the INDEC; and (ii) the application of an integral inflation adjustment mechanism when, the variation of the IPC is higher than 100% for the 36-month period before the end of the fiscal period or else, with respect to the first, second and third fiscal year of effectiveness, this procedure will be applicable in case the accumulated variation of the IPC, calculated from the beginning of the first of them and until the end of each year, exceeds fifty-five percent (55%), thirty percent (30%) and fifteen percent (15%) for the first, second and third year of application, respectively. The inflation adjustment that must be calculated in the first three fiscal years beginning on January 1, 2018 must be charged in equal quotas (1/3 in fiscal period 2018 and the remaining 2/3 in equal parts in the remaining fiscal periods, and 1/6 in fiscal periods 2019 and 2020, and the remaining 2/6 in equal parts in the remaining fiscal periods)

 

 

Tax and accounting revaluation

 

Tax Reform established the possibility of upgrading certain assets that are part of the assets of taxpayers, in order to update their value, since the period of acquisition until December 31, 2017.

 

This revaluation was optional, and the amount of revaluation was taxable at special rate 8% to 15%, depending on the type of property to be revalued. We paid an special revaluation tax of Ps. 1.495 million and have updated the value of certain assets for an amount of Ps.15,311 million.

 

Personal assets tax

 

Argentine entities, such as us, are required to pay the personal assets tax corresponding to Argentine and foreign individuals and foreign entities for the holding of our shares at December 31 of each year. The applicable tax rate is 0.5% and is levied on the equity value, or the book value, of the shares arising from the last balance sheet. Pursuant to the Personal Assets Tax Law, the Argentine company is entitled to seek reimbursement of such paid tax from the applicable Argentine individuals and/or foreign shareholders or by withholding dividend payments.

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Gross Income Tax

The gross income tax is a local tax; therefore, the rules of the relevant provincial jurisdiction should be considered, which may levy this tax on the customary purchase and sale, exchange or other disposition of common shares and ADSs, and/or the collection of dividends at an average rate between 6% and 10%, unless an exemption is applicable. In the particular case of the City of Buenos Aires, any transaction involving common shares and/or the collection of dividends and revaluations is exempt from this tax. To date, there is no withholding regime provided for foreign holders of common shares and ADSs.

Value added tax

 

The sale, exchange or other disposition of our common shares or ADSs and the distribution of dividends are exempted from the value added tax.

 

Transfer taxes

 

The sale, exchange or other disposition of our common shares or ADSs is not subject to transfer taxes.

Stamp taxes

Stamp taxes may apply in the City of Buenos Aires and in certain Argentine provinces in case transfer of our common shares or ADSs is performed or executed in such jurisdictions by means of written agreements.

 

Other taxes

Commissions paid on brokerage transactions for the sale of our common shares on the BCBA are subject to VAT at a rate of 21%.

There is no inheritance, gift, succession or VAT applicable to the ownership, transfer, exchange or disposition of our common shares or ADSs, except for the inheritance tax applicable only to corporations or individuals with tax domicile in the Province of Buenos Aires with a fixed amount tax plus a tax rate between 1% and 9% depending on the relationship and the amount of inheritance).

 

Tax for an inclusive and caring Argentina (Impuesto Para una Argentina Inclusiva y Solidaria “PAIS”)

 

Law No. 27,541 of Social Solidarity and Productive Reactivation (the “Solidarity Law”), established on an emergency basis and for the term of five fiscal periods as of the entry into force, a 30% tax on the purchase of foreign currency and other foreign exchange operations carried out by individuals and legal entities resident in Argentina.

The potential investors of the ADs should consult their own tax advisers about the effects of the aforementioned tax according to their particular circumstances.

Solidarity and Extraordinary Contribution to help mitigate the effects of the pandemic

 

On an emergency basis and for only one time, the Argentine Government imposed an extraordinary, obligatory contribution which falls on the assets of certain individuals and undivided estates in existence at the date of entry into force of Law No. 27,605 (i.e. December 18, 2020) (the “Extraordinary Contribution”).

The aforementioned Extraordinary Contribution applies to:

a) Argentine resident individuals and undivided estates, for the totality of their assets located in the country and abroad. Also included are those individuals of Argentine nationality whose domicile or residence is in “non-cooperative jurisdictions” or “no tax-or-low-tax jurisdictions” according to the terms of the ITL (Income Tax Law)

b) Individuals and undivided estates residing abroad (except those mentioned in the previous point) for the totality of their assets located in the country.

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For the purposes of this Extraordinary Contribution, the applicable residence is the subject’s residence as of December 31, 2019 according to the provisions of the ITL.

In both cases, these subjects will be exempted from this Extraordinary Contribution when the total value of their assets, included and valued according to the Personal Assets Tax Law terms, regardless of the treatment they have against such tax and without any non-taxable minimum threshold deduction, does not exceed Ps. 200,000,000, inclusive.

For those mentioned in point a), the taxable base of this Extraordinary Contribution will be determined considering the total value of their assets in the country and abroad, including contributions to trusts or foundations of private interest and other similar structures, participations in companies or other entities of any type without fiscal personality and direct or indirect participations in companies or other entities of any type, existing at the date of entry into force of this law.

The Extraordinary Contribution to be paid will be determined on the basis of a scale and rates varying from 2 to 5.25%, depending on (i) the total value of the assets and (ii) their location. The differential rate between assets located abroad and those located in the country shall be eliminated if part of these assets are repatriated within a certain period of time and to the extent those funds remain until December 31st, 2021 deposited in a bank account under the name of the holder or are affected, once this deposit is made, to one of the destinations established by the National Executive Branch.

Individuals, sole proprietorships or estates established in the country that possess, use, dispose, own, custody or keep assets subject to the Extraordinary Contribution pertaining to individuals and undivided states that reside abroad, must act as surrogate taxpayers for purposes of such contribution.

Holders of ADSs should consult with their own tax advisers on the Extraordinary Contribution considering their particular circumstances.

 

 

Tax treaties

 

Argentina has signed tax treaties for the avoidance of double taxation with Australia, Belgium, Bolivia, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Italy, Mexico, Norway, Qatar, Russia, Spain, Sweden, Switzerland, The Netherlands, United Arab Emirates, United Kingdom, and Uruguay (through an information exchange treaty that contains clauses for avoidance of double taxation). In addition, Argentina has signed tax treaties with Turkey, Luxembourg, Japan, Austria and China, but they are still pending approval by the Argentine Congress. In turn, tax treaties are being negotiated with Colombia and Israel, and amendments to the current tax treaty with Germany. There is currently an agreement between Argentina and the United States on the exchange of Country-by-Country Reports, but there is no tax treaty or convention in effect between both countries. It is not clear when, if ever, a treaty will be ratified or entered into effect. As a result, the Argentine tax consequences described in this section will apply, without modification, to a holder of our common shares or ADSs that is a U.S. resident. Foreign shareholders located in certain jurisdictions with a tax treaty in force with Argentina may be exempted from the payment of the personal asset tax.

Value Added Tax (VAT)

Investments Tax Returns

 

The return of tax credits originated in investments in fixed assets will be given, in cases that, six months after their payment, have not been absorbed by fiscal debits generated by the activity.

 

Tax on Fuels

The Fuel tax scheme is modified, incorporating a tax on carbon dioxide emissions. The same tax pressure existing before the reform will be maintained.

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United States Federal Income Tax Considerations

 

This summary describes certain U.S. federal income tax consequences for a U.S. holder (as defined below) of acquiring, owning, and disposing of ADSs. This summary applies to a holder only if such holder holds the ADSs as capital assets for tax purposes. This summary does not address the Medicare tax on net investment income or the alternative minimum tax and does not apply to investors that are members of a class of holders subject to special rules, such as:

·a dealer in securities or currencies;
·a trader in securities that elects to use a mark-to-market method of accounting for securities holdings;
·a bank;
·a life insurance company;
·a tax-exempt organization;
·an entity treated as a partnership for U.S. federal income tax purposes, or a partner therein;
·a person that holds ADSs that are a hedge or that are hedged against interest rate or currency risks;
·a person that holds ADSs as part of a straddle or conversion transaction for tax purposes;
·a person whose functional currency for U.S. tax purposes is not the U.S. Dollar; or
·a person that owns or is deemed to own 10% or more of any class of our stock.

This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. Investors should consult their own tax advisors concerning the consequences of purchasing, owning, and disposing of ADSs in their particular circumstances, including the possible application of state, local, non-U.S. or other tax laws. For purposes of this summary, an investor is a “U.S. holder” if such investor is a beneficial owner of an ADS and is:

·a citizen or resident of the United States;
·a U.S. domestic corporation; or
·otherwise subject to U.S. federal income tax on a net income basis with respect to income from the ADS.

In general, if a U.S. holder is the beneficial owner of ADSs, such U.S. holder will be treated as the beneficial owner of the common shares represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if such U.S. holder exchanges an ADS for the common shares represented by that ADS.

Passive Foreign Investment Company Rules

Special U.S. federal income tax rules apply to companies that are passive foreign investment companies (“PFICs”). We will be classified as a PFIC in a particular taxable year if either

75% or more of our gross income for the taxable year is passive income; or
50% or more of the quarterly average value of our assets is attributable to assets that produce or are held for the production of passive income.
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For this purpose, passive income generally includes dividends, interest, gains from certain commodities transactions, rents, royalties and the excess of gains over losses from the disposition of assets that produce passive income.

Based on our financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2020 taxable year. In addition, based on our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not expect to become a PFIC for our 2021 taxable year. However, the determination of whether we are a PFIC must be made annually based on the facts and circumstances at that time, some of which may be beyond our control, including the valuation of our assets as implied by the market price for our common shares or ADSs. Accordingly, it is possible that we could become a PFIC in the current or a future year.

If we are classified as a PFIC in any taxable year during which a U.S. holder holds our ADSs, such U.S. holder could be subject to a special tax at ordinary income rates on “excess distributions,” including certain distributions by us and gain recognized on the sale of the ADSs. The amount of income tax on any excess distributions will be increased by an interest charge to compensate for tax deferral, calculated as if the excess distributions were earned ratably over the period the U.S. holder held the ADSs. Classification as a PFIC may also have other adverse consequences, including, in the case of individuals, the denial of a step-up in the basis of the ADSs at death. In addition, if we are a PFIC for any year during which a U.S. Holder holds our common shares or ADSs, we will generally continue to be treated as a PFIC for all subsequent years during which such U.S. Holder holds our common shares or ADSs, unless we cease to be a PFIC and the U.S. Holder makes a special “purging” election.

Except where otherwise noted, the remainder of this summary assumes that we were not a PFIC for our 2020 taxable year and that we will not become a PFIC in the current or any future year. U.S. holders should consult their own tax advisers as to our status as a PFIC and the potential tax consequences to them of such status.

Dividends

The gross amount of distributions that U.S. holders receive (prior to deduction of Argentine taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income, to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. We do not expect to maintain calculations of our earnings and profits in accordance with U.S. federal income tax principles. U.S. Holders therefore should expect that distributions generally will be treated as dividends for U.S. federal income tax purposes. Dividends paid in Argentine Pesos will be included in a U.S. holder’s income in a U.S. Dollars amount calculated by reference to the exchange rate in effect on the date of the depositary’s receipt of the dividend, regardless of whether the payment is in fact converted into U.S. Dollars. A U.S. holder will have a tax basis in such Pesos for U.S. federal income tax purposes equal to the U.S. Dollars value on the date of such receipt. Any subsequent gain or loss in respect of such Pesos arising from exchange rate fluctuations will be ordinary income or loss and will be treated as income from U.S. sources for foreign tax credit purposes. If such a dividend is converted into U.S. Dollars on the date of receipt, investors generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. Subject to certain exceptions for short-term (60 days or less) positions, the U.S. Dollars amount of dividends received by an individual U.S. holder in respect of ADSs generally will be subject to taxation at a maximum rate of 20% if the dividends are “qualified dividends.” Dividends paid on the ADSs will be treated as qualified dividends if (1) the ADSs are readily tradable on an established securities market in the United States and (2) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (a “PFIC”). The ADSs are listed on the New York Stock Exchange and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our Consolidated Financial Statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2019 and 2020 taxable years. In addition, based on our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2021 taxable year. See “—Passive Foreign Investment Company Rules,” above.

Because the common shares are not themselves listed on a U.S. exchange, dividends received with respect to the common shares may not be treated as qualified dividends. U.S. holders of should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances.

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Distributions of additional shares in respect of ADSs that are made as part of a pro-rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax, unless a U.S. Holder that receives the distribution has the right to receive cash or property, in which case the U.S. Holder will be treated as if it received cash equal to the fair market value of the distribution.

Sale or other disposition

Upon a sale or other disposition of ADSs, a U.S. holder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. Dollars value of the amount realized and such U.S. holder’s tax basis, determined in U.S. Dollars, in the ADSs. Generally, such gain or loss realized on the sale or other disposition of ADSs will be treated as U.S. source capital gain or loss, and will be long-term capital gain or loss if the ADSs were held for more than one year. The ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder, generally is subject to taxation at a reduced rate.

Foreign tax credit considerations

Investors should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits. If no such rules apply, a U.S. holder may be able to claim a credit against its U.S. federal income tax liability for Argentine income taxes withheld at the appropriate rate applicable to the U.S. holder from cash dividends on the ADSs, if the tax is treated for U.S. federal income tax purposes as imposed on the U.S. holder, so long as the U.S. holders has owned the ADSs (and not entered into specified kind of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Dividend distributions with respect to the ADSs generally will be treated as “passive category” income from sources outside the United States for purposes of determining a U.S. Holder’s U.S. foreign tax credit limitation. If a gain realized on the sale or other disposition of ADSs is subject to withholding tax, a U.S. holder may not be able to credit the tax against its U.S. federal income tax liability unless such credit can be applied (subject to applicable conditions and limitations) against tax due on other income treated as derived from foreign sources. It is unclear whether the Argentine personal assets tax (as described in “—Argentine Tax Considerations”) is treated as an income tax for U.S. federal income tax purposes. If the Argentine personal assets tax is not treated as an income tax for U.S. federal income tax purposes, a U.S. holder would be unable to claim a foreign tax credit for any Argentine personal assets tax withheld. A U.S. holder may be able to deduct such tax in computing its U.S. federal income tax liability, subject to applicable limitations. The calculation of foreign tax credits and, in the case of a U.S. holder that elects to deduct foreign taxes, the availability of deductions, involve the application of complex rules that depend on a U.S. holder’s particular circumstances. Investors should consult their own tax advisors regarding the creditability or deductibility of such taxes.

U.S. information reporting and backup withholding rules

Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting unless the holder is an exempt recipient and may also be subject to backup withholding unless the holder (1) provides its taxpayer identification number and certifies that it is not subject to backup withholding or (2) otherwise establishes an exemption from backup withholding. Investors may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim or refund with the Internal Revenue Service and filing any required information.

 

A holder that is a foreign corporation or a non-resident alien individual may be required to comply with certification and identification procedures in order to establish its exemption from information reporting and backup withholding.

 

198 
 

Specified Foreign Financial Assets

Certain U.S. holders that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 on the last day of the taxable year or US$75,000 at any time during the taxable year are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. U.S. holders who fail to report the required information could be subject to substantial penalties. In addition, the statute of limitations for assessment of tax would be suspended, in whole or part. Investors should consult their own tax advisors concerning the application of these rules to their particular circumstances.

 

DOCUMENTS ON DISPLAY

The materials included in this annual report on Form F-20, and exhibits therein, may be inspected and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Any SEC filings we make are also available to the public over the Internet at the SEC’s website: www.sec.gov.

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Item 11.Quantitative and Qualitative Disclosures about Market Risk

 

Our activities are exposed to market risk, including the exchange rate risk, the interest rate risk and the price risk. Financial risks are those derived from financial instruments we are exposed to during or at the closing of each fiscal year. Risk management systems and policies are reviewed on a regular basis to reflect changes in market conditions and our activities, with a focus not placed on the individual risks of the business units’ operations, but with a wider perspective focused on monitoring risks affecting the whole portfolio. Financial risk management is controlled by the Financial Department, which identifies, evaluates and covers financial risks. Our risk management strategy seeks to achieve a balance between profitability targets and risk exposure levels.

For further information on our market risks, please see Note 6.2 to our Consolidated Financial Statements.

 

Item 12.Description of Securities Other than Equity Securities

 

DESCRIPTION OF AMERICAN DEPOSITARY SHARES

Payment of Taxes

The holders of ADSs will be responsible for any taxes or other governmental charges payable on their ADSs or on the deposited securities represented by any of their ADSs. The depositary may refuse to register any transfer of the ADSs or allow the holders to withdraw the deposited securities represented by their ADSs until such taxes or other charges are paid. The depositary may apply payments owed to the holders or sell deposited securities represented by their American Depositary Shares to pay any taxes owed and the holder will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.

 

Fees and Expenses for Holders of ADRs

Persons depositing or withdrawing shares
or ADS holders must pay:

For:

  • US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
  • Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property; and
     
  • Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates
     
  • US$0.02 (or less) per ADS 
     
  • Any cash distribution to ADS holders
     
  • A fee equivalent to the fee that would be payable by the holder if the Company distributes shares and the holder deposits the shares with the depositary for issuance of ADSs
     
  • Distribution of securities to holders of deposited securities which are distributed by the depositary to ADS holders
     
  • US$0.02 (or less) per ADS per calendar year 
     
  • Depositary services
     
  • Registration or transfer fees
     
  • Transfer and registration of shares on our share register to or from the name of the depositary or its agent when the holder deposits or withdraws shares 
     
200 
 

 

  • Expenses of the depositary
  • Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); and
     
  • Converting foreign currency to U.S. Dollars
     
  • Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes
     
  • As necessary

 

  • Any charges incurred by the depositary or its agents for servicing the deposited securities
     
  • As necessary

Depositary Payments to the Company

J.P. Morgan, as depositary, has agreed to reimburse us for expenses they incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse us for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the depositary collects from investors.

The depositary collects fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees related to making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.

201 
 

 

Item 13.Defaults, Dividend Arrearages and Delinquencies

Not applicable.

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

Not applicable.

Item 15.Controls and Procedures

(a) Disclosure Controls and Procedures

 

We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of December 31, 2020.

 

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, we, with the participation of our chief executive officer and chief financial officer, concluded that as of December 31, 2020, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. The company’s internal control over financial reporting was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company’s internal control over financial reporting includes those policies and procedures that:

(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and

(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the company’s internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (2013). Based on our assessment and those criteria, management believes that the company maintained effective internal control over financial reporting as of December 31, 2020.

 

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by Price Waterhouse & Co. S.R.L., an independent registered public accounting firm, as stated in their report, which appears herein.

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(c) Attestation Report of the Registered Public Accounting Firm

Reference is made to the report of the Price Waterhouse & Co. S.R.L. on page F-3 of this annual report.

(d) Changes in Internal Control over Financial Reporting

There have been no changes in internal control over financial reporting that occurred during the period covered by this annual report, that have materially affected, or are reasonably likely to materially affect, Pampa’s internal control over financial reporting.

Item 16A.Audit Committee Financial Expert

Miguel Bein, an independent member of our Board of Directors, under Argentine law and Rule 10A-3, is our “audit committee financial expert” as defined in Item 16A of Form 20-F under the Securities and Exchange Act of 1934 and pursuant to section 407 of Sarbanes Oxley Act.

Item 16B.Code of Ethics

The Business Code of Conduct was approved by our Board of Directors on March 9, 2017, which applies to all of our employees, including our principal executive, financial and accounting officers, as well as other corporate governance policies (see “Item 6. Directors, Senior Management and Employees—Corporate Governance”). Our Business Code of Conduct is posted, in both English and Spanish, on our website at https://ri.pampaenergia.com/en/corporate-governance/code-of-business-conduct/.

Item 16C.Principal Accountant Fees and Services

 

Principal Accountant’s fees

 

Price Waterhouse & Co. S.R.L. acted as our independent registered public accounting for the fiscal years ended December 31, 2020, 2019 and 2018. The following table discloses the services rendered to Pampa and its consolidated companies by Price Waterhouse & Co. S.R.L and the fees for those services:

 

  Year ended December 31,
  2020 2019 2018
  (in million US$)
       
Audit Fees (1) 1.9 1.8 1.4
Audit-related Fees (2) - - -
Tax Fees (3) - - -
Other non-audit Fees (4) - - 0.2
Total 1.9 1.8 1.6

  

(1) Audit Fees comprised of audit of our financial statements and our subsidiaries, the review of the interim financial statements, review of the Company’s annual report on Form 20-F, work to comply with the requirements of the Sarbanes Oxley – Section 404 and other services rendered by the external auditor in connection with statutory or regulatory filings or engagements.

(2) Audit-related Fees comprised of those outside the normal scope of the services included in an audit but are nevertheless reasonably related to the performance of the audit or review of our financial statements or our subsidiaries and may be effectively and efficiently rendered by the external auditor because of his knowledge of our financial information.

(3) Tax Fees comprised of services rendered by the external auditor for tax compliance.

(4) Services included under this heading include regulatory attestation reports presented to the IGJ for 2018.

 

For a description of the permissible services included under these headings, please see the description of the categories of services of the “Audit Committee’s Pre-approval Policy” described below.

All of our audit fees contained in the above table were billed by Price Waterhouse & Co. S.R.L.

 

203 
 

Audit Committee’s Pre-approval Policy

 

The Audit Committee has developed a Pre-approval Policy regarding the engagement of services by the external auditor, establishing the obligation to obtain prior approval from the audit committee for any service to be rendered by the external auditor to the Company or any of its subsidiaries. The policy ensures that the external auditor preserves its independence and is applicable to the Company and its subsidiaries. Services pre-approved by the audit committee of Edenor do not require pre-approval by the Audit Committee of Pampa, but are reported to the latter.

The Audit Committee has delegated to one of its members the authority to grant pre-approvals to auditors. The decision of that member to pre-approve a service is presented to the full audit committee at each of its scheduled meetings.

Pre-approval is required for all services rendered by the external auditor.

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

Not applicable.

204 
 

Item 16E.Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Period   (a) Total Number of Shares(or Units) Purchased   (b) Average Price Paid per Share (or Units)   (c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs   (d) Maximum Number (or Approximate Dollar Value) of Shares ( or Units) that May Yet Be Purchased Under the Plans or Programs
       
2020   ADS   Common Shares   ADS   Common Shares   Common Shares (*)    
Pampa Energía S.A.                      
January   437,302   -   13.80   -   10,932,550   for up to US$50 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. (i)
February   1,300,979   -   13.01   -   32,524,475   for up to US$50 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. (i)
March (until 3-12)   629,371   -   12.05   -   15,734,275   for up to US$50 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. (i)
March   1,066,731   -   10.01   -   26,668,275    for up to US$27,02 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. (ii)
April   577,699   -   9.73   -   14,442,475   for up to US$27,02 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. (ii)
May   349,862   -   9.82   -   8,746,550   for up to US$27,02 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. (ii)
June     493,928   -   10.10   -   12,348,200   for up to US$27,02 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. (ii)
July  (until 7-3)   213,438   -   10.58   -   5,335,950   for up to US$27,02 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. (ii)
July (from 7-3 to 7-8)   239,555   309,534   10.86   46.95   6,298,409   for up to Ps. 3,600 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. (iii)
Pampa Energía Bolivia S.A.                      
July (from 7-13 to 7-22)   212,178   -   11.00   -   5,304,450   Rule 10b-18 safe harbor protection.  
August   1,308,886   -   11.08   -   32,722,150   Rule 10b-18 safe harbor protection.  
September   1,179,032   -   11.26   -   29,475,800   Rule 10b-18 safe harbor protection.  
October   998,519   -   11.12   -   24,962,975   Rule 10b-18 safe harbor protection.  

(*) Each ADS represents 25 common shares.

(i) Our Board of Directors approved on November 8, 2018, the Repurchase Program V with the purpose of contributing to the reduction of the gap between the Company's fair value based on its assets value and the price of the shares in the stock exchange, seeking to contribute to the market’s strengthening by efficiently applying the Company’s strong cash position. According to the following terms and conditions: (a) Maximum Amount to Invest: Up to US$50,000,000; (b) Maximum amount of Pampa shares or maximum percentage of Pampa capital stock subject to the acquisition: an amount that will never surpass the 10% of our capital stock limit at the time of the acquisition of the Pampa shares, as per the applicable law; (c) Price Per Share: Up to the equivalent of US$0.58 in Argentine Pesos per share in BYMA and up to US$14.50 per ADR in the NYSE; and (d) Period in which the acquisitions will be performed: a 120 day period, counted as from the business day following the one when the repurchase is published in the communications media to the market and subject to any renewal or extension of the term that will be duly informed. As of the date of this annual report, this program has expired.

(ii) On March, 9, 2020, our Board of Directors approved the Repurchase Program VI in accordance with Section 64 of the CML and the CNV rules with the purpose of contributing to the reduction of the gap between the Company's fair value based on its assets value and the quoted price from the stock exchange, seeking to contribute to the market’s strengthening by efficiently applying the Company’s strong cash position. According to the following terms and conditions: (a) Maximum Amount to Invest: Up to US$27,020,000; (b) Maximum amount of Pampa shares or maximum percentage of Pampa capital stock subject to the acquisition: an amount that will never surpass the 10% of our capital stock limit at the time of the acquisition of the Pampa shares, as per the applicable law; (c) Price Per Share: Up to the equivalent of US$.0.52 in Argentine Pesos per share in ByMA and up to US$.13 per ADR in the NYSE; and (d) Period in which the acquisitions will be performed: a 120 day period, counted as from the business day following the one when the repurchase is published in the communications media to the market and subject to any renewal or extension of the term that will be duly informed. As of the date of this annual report, this program has expired.

(iii) On April 13, 2020, our Board of Directors approved the Repurchase Program VII in accordance with Section 64 of the CML and CNV rules that will be destined to cover our Stock-based Compensation Plan, according to the following terms and conditions: (a) Maximum Amount to Invest: Up to Ps. 3,600,000,000; (b) Maximum amount of Pampa shares or maximum percentage of Pampa capital stock subject to the acquisition: an amount that will never surpass the 10% of our capital stock limit at the time of the acquisition of the Pampa shares, as per the applicable law; (c) Price Per Share: Ps.67.34 per share in ByMA and up to US$13 per ADR in the NYSE; and (d) Period in which the acquisitions will be performed: a 120 day period, counted as from the business day following the one when the repurchase is published in the communications media to the market and subject to any renewal or extension of the term that will be duly informed. As of the date of this annual report, this program has expired. For more information, please see “Item 6. Directors, Senior Management and Employees—Stock-based Compensation Plan” and “Item 9. The Offer and Listing—Purchases of Pampa’s Shares”.

205 
 

Item 16F.Change in Registrant’s Certifying Accountant

Not applicable.

Item 16G.Corporate Governance

 Among the corporate governance principles that are applicable at the Company are several provisions of Argentine law, including, but without limitation: (i) the BCL; (ii) the CML; and (iii) the regulations of the CNV approved on September 5, 2013 (the “Regulations”).

In addition, we follow certain corporate governance guidelines and practices that prevail in the international markets and in international regulations applicable to us (sometimes mandatory), including United States law. On August 27, 2009, we registered with the SEC as a “foreign private issuer” and began to trade American Depositary Shares on the NYSE.

Thus, we are subject to the provisions of Section 303A.11 of the NYSE’s Listed Company Manual (“LCM”) and Item 16.G of Form 20-F of the SEC, which require foreign issuers to disclose the differences existing between their corporate governance practices and the corporate governance requirements for U.S. domestic companies under their applicable listing standards. The following table provides the comparison required under the Section 303A.11 of the NYSE LCM and Item 16.G of the SEC’s Form 20-F mentioned above:

 

 

CORPORATE GOVERNANCE PRACTICES COMPARATIVE TABLE

 

NYSE REQUIREMENTS for DOMESTIC COMPANIES REQUIREMENTS AND OUR PRACTICES
NYSE LCM DESCRIPTION DESCRIPTION

 

Section 303A.01

 

 

 

Independent directors must constitute the majority of a listed company’s board of directors.

 

Under Argentine law, the board of directors of a listed company need not be composed of a majority of independent directors. Nonetheless, the CML and the CNV’s Regulations require listed companies to have a sufficient number of independent directors to form the audit committee, which must be composed of a majority of independent members.

 

Although not required by Argentine law, and in accordance with our audit committee’s regulations, all the members of our audit committee must qualify as independent.

 

206 
 

 

 

 

Section 303A.02

 

This rule establishes the standards that determine whether a director qualifies as independent.

 

It provides that directors cannot qualify as independent unless the board of directors finds them to have no material relationship with the listed company. A number of per se exclusions from independence apply, generally triggered by having a connection, individually or through an immediate family member, to the listed company or to a company that has a material relationship with the listed company as a shareholder, employee, officer, or director of the listed company.

 

 

The CNV’s Regulations, specifically Article 11 of Section III, Chapter III, Title II I, indicate the criteria for establishing independence of a director. They provide that any director is not independent when:

 

(i)            has been a member of the management body for the controlling entity or another company belonging to the same economic group of the issuer by a preexistent relationship to the moment of his/her election, or if said relationship had ceased to exist during the previous three years;

(ii)           is associated to the issuer or any of its shareholders that have significant participation, directly or indirectly, with the issuer; or with companies with which they have significant participation, directly or indirectly; or if he/she was associated to them by an employment relationship for the past three years;

(iii)         has professional relationships or is affiliated to a professional organization or entity that maintains a frequent professional relationship of such nature and of relevant volume with, or that entitles him or she to a remuneration or fees (different from those corresponding to the functions that he/she fulfills in the management body), from the issuer, the issuer’s shareholders that have directly or indirectly “significant participations” or with companies in which these too have, directly or indirectly, “significant participations. This prohibition comprises the professional relationships and affiliation during the last three years prior to the appointment as director;

(iv)         holds 5% or more, directly or indirectly, of shares attached with voting rights and/or capital stock of the issuer or any company with a “significant participation” in it;

(v)           directly or indirectly, sells and/or provides goods and/or services – different from those accounted for in subsection c) – frequently and in such nature and volume relevant to the issuer or its shareholders that have a “significant participation” with it, directly or indirectly, for which he or she has perceived amounts substantially superior to those perceived for his or her functions as a member of the management body. This prohibition comprises the commercial relationships that took place during the last three years prior to his/her appointment as director;

(vi)         has been director, manager, administrator or principal executive of nonprofit organizations that have been benefited from funds proceeding from the company, its controlling company and any other company belonging to the same organization, by an amount superior to those described in article 12 subsection I) of the Resolution UIF Nº 30/2011 and its amendments thereto;

(vii)        receives any payment, including the participation in plans or stock option schemes, from the company or from another company belonging to the same economic group, other than the compensation paid as a member of the board of directors, except dividends paid as a shareholder of the company in the terms of paragraph d) and the corresponding to the consideration described in paragraph e);

(viii)      has been a director for the issuer, the controlling entity or another company belonging to the same economic group of the issuer for more than ten years. If said relationship had ceased to exist during the previous three years, the independent condition will be recovered;

(ix)         is spouse or a legally recognized partner, up to the third grade of consanguinity or second grade of affinity, of the members of the management body of the company that do not comply with the conditions described in the previous points;

(x)           is a member of the board of directors or supervisory committee in one or more companies registered as Agente de Negociación, Agente de Liquidación y Compensación y/o Agente de Corretaje de Valores Negociables, which are members of the respective stock exchange market or depend on members of such stock exchange market; and

(xi)         directly or indirectly, maintains a significant participation in one or more companies registered as Agente de Negociación, Agente de Liquidación y Compensación y/o Agente de Corretaje de Valores Negociables, which are members of the stock exchange market.

 

In addition, Article 4 of Section III, Chapter I, Title XII of the CNV’s Regulations provides that at each election of directors, the non-independence or independence of any candidates proposed at the shareholders’ meeting must be disclosed. Moreover, after the shareholders’ meeting in which directors are appointed, the personal data of the appointed directors and their qualification as independent or non-independent (in the latter case in the form of an affidavit executed by each director) must be disclosed to the CNV and the exchanges where the company has its securities listed.

 

 

Section 303A.03

 

This rule requires regularly scheduled meetings of non-management directors to increase the involvement and efficiency of such directors.

 

 

Argentine law does not require that non-executive directors hold separate meetings. Non-executive directors attend the general board meetings, which must be held at least every three months pursuant to Section 267 of the BCL.

207 
 

 

 

Section 303A.04

 

 

Listed companies must organize a Nominating and Corporate Governance Committee composed entirely of independent directors.

 

 

 

The organization of an Appointment and Corporate Governance Committee is not mandatory. In most cases, the functions of such committee are functions that the Audit Committee is already required to perform. Nonetheless, the CNV’s Regulations suggest (among its non-binding recommendations) that an Appointment and Corporate Governance Committee be organized.

 

We have a Nomination Committee, whose president must be an independent member of the Board of Directors. Additionally, and with respect to corporate governance matters, the Legal Corporate Department of Pampa oversees this area.

 

 

 

Section 303A.05

 

Listed companies must organize a Compensation Committee composed entirely of independent directors, which satisfy additional independence requirements specific to Compensation Committee membership.

 

 

The organization of a Compensation Committee is not mandatory under Argentine law. In most cases, some of the functions of such a committee are included in the functions that the audit committee is required to perform. However, the CNV’s Regulations suggest (among its non-binding recommendations) that a Compensation Committee be organized.

 

Pampa has a Compensation Committee that is currently composed entirely of independent directors.

 

 

Section 303A.06

 

 

 

Listed companies must organize an Audit Committee that meets the requirements set forth in the Securities Exchange Act of 1934.

 

 

 

Pursuant to Section 303A.00, Pampa, as a foreign private issuer, is subject to Rule 303A.06, and we are in full compliance.

 

208 
 

 

 

Section 303A.07

 

 

The audit committee must have at least three members, all of whom must qualify as independent.

 

 

 

 

 

 

 

In addition, the audit committee must have written regulations establishing: (i) the purpose of the committee; (ii) the annual assessment of the committee’s performance; and (iii) the committee’s duties and responsibilities.

 

 

 

 

 

 

Finally, the rule establishes that listed companies must have internal audit functions within their organization in order to assist both the audit committee and the company’s management in matters related to risk and internal control processes.

 

 

Article 109 of the CML and Article 16, Section 5, Chapter III, Title II of the CNV Regulations provide that the audit committee must have at least three board members, the majority of whom must qualify as independent. All the members of our audit committee qualify as independent.

 

Argentine law requires the audit committee to issue its own regulations. The scope of the committee’s powers and obligations is detailed in Article 110 of the CML and Article 17 and following sections of Section 5, Chapter III, Title II, of the CNV’s Regulations. Such obligations and responsibilities are similar to those attributed to this body under the U.S. law.

 

Our audit committee has approved its own written regulations.

 

Argentine law does not require the audit committee to conduct an annual self-assessment. However, the CNV’s Regulations recommend that all directors (i.e., not only the independent directors who are members of the audit committee) complete a self-assessment.

 

We have adopted this recommendation and have developed a self-assessment form to be completed by all our directors at the close of each fiscal year.

 

Argentine laws contain no rules regarding internal audit functions. However, Pampa has an internal audit department that is supervised by, and reports to, Pampa’s Audit Committee. Additionally, Pampa’s audit committee regularly reviews, during its meetings, the internal audit reports submitted to it.

 

 

Section 303A.08

 

 

The shareholders must be given the opportunity to vote on equity-compensation plans and their material revisions, although there are exceptions to this requirement, such as when these compensation plans serve as labor incentive tools.

 

 

Directors’ compensation is fixed at the ordinary shareholders’ meeting (Section 234, Subsection 2, of the BCL). That compensation is for national currency cash.

 

With the aim of aligning the personnel performance, on February 8, 2017, our Board of Directors approved the creation of the stock-based compensation plan in accordance with Section 64 of CML and CNV’s regulations. See “Item 6 Directors, Senior Management and Employees—Stock-based Compensation Plan”.

209 
 

 

 

Section 303A.09

 

 

Listed companies must adopt and disclose their corporate governance guidelines.

 

 

 

 

Listed companies must meet the annual disclosure requirements of the CNV’s Regulations. Listed companies must issue a report stating whether and how they followed the recommendations provided by the CNV’s Regulations or explaining the reasons for their failure to adopt such recommendations, and/or whether they plan to adopt them in the future. This information must appear in their annual report, attached to the financial statements for the relevant fiscal year as a separate exhibit. Once filed with the CNV and the exchanges where the company is listed, the CNV’s Regulations report qualifies as public information.

 

We comply with the CNV’s Regulations annual disclosure requirements and disclose our corporate governance policies and practices. This information may be viewed on the Company’s website, www.pampaenergia.com.

 

 

Section 303A.10

 

 

Listed companies must adopt and disclose to the market a Code of Ethics and Business Conduct which is applicable to their directors, officers and employees. In addition, any waiver of the provisions contained in this Code in favor of any of the parties that are subject to it must be immediately disclosed.

 

 

 

Under Argentine law there is no requirement that listed companies adopt a Code of Ethics and Business Conduct.

 

Nonetheless, in 2008, our Board of Directors approved a Code of Business Conduct applicable to all the employees, interns and trainees of Pampa and of its controlled and related companies and subsidiaries. This Code is applicable to all directors and statutory auditors of Pampa and its controlled and related companies and subsidiaries, as well as to their suppliers and consultants. Additionally, in 2010, Pampa approved the implementation of the Ethics Hotline as a channel to be solely used for reporting, in the strictest confidentiality, any presumed irregularity concerning the Business Conduct Code and/or violations thereof.

 

 

Section 303A.12

 

The Chief Executive Officer (CEO) of a listed company must certify on a yearly basis that he or she has no knowledge of any violation or default of the corporate governance listing standards.

 

Additionally, the CEO must promptly notify the NYSE in writing after any executive officer

of the listed company becomes aware of any non-compliance with any provision of the

governance listing standards.

 

Finally, listed companies must file an annual statement and updated reports with the NYSE disclosing any changes in the composition of their board of directors or any of the committees described in Section 302A of the NYSE LCM.

 

 

Pursuant to Section 303A.00, Pampa, as a foreign private issuer, is subject to Section 303A.12, with the exception of the annual CEO certification. Pampa is in full compliance with the applicable provisions.

 

Item 16H.Mine Safety Disclosure

 

Not applicable.

 

210 
 

 

Item 17.Financial Statements

Not applicable.

Item 18.Financial Statements

Our Consolidated Financial Statements are included in this annual report beginning on page F-1.

Item 19.Exhibits

Documents filed as exhibits to this annual report:

 

1.1 Amended and Restated By-laws (estatutos sociales) of the Registrant (English translation) (previously filed as 6-K (File No. 001-34429) – (Film No.18995818) on August 7, 2018 and incorporated by reference herein.)
   
2.1 Form of Second Amended and Restated Deposit Agreement among the Registrant, J.P. Morgan as successor Depositary thereunder (previously filed as Exhibit 99.A to our Registration Statement on Form F-6 (File No. 333-216157) on February 22, 2017 and incorporated by reference herein, as amended by Form of Amendment No. 1 to the Second Amended and Restated Deposit Agreement (previously filed as Exhibit 99.A2 to our Registration Statement on Form F-6 POS (File No. 333-216157) on November 18, 2020 and incorporated by reference herein.)
   
2(d) Description of Securities
   
8.1 List of significant subsidiaries of Pampa
   
12.1 Certification of Gabriel Cohen, Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
12.2 Certification of Gustavo Mariani, Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
13.1 Officer Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
13.2 Reserves Reports of Gaffney, Cline & Associates Inc., dated February, 2 2021.
   
13.3 Consent of Gaffney, Cline & Associates.
   
101.INS XBRL Instance Document
   
101.SCH XBRL Taxonomy Extension Schema Linkbase Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

 

 

211 
 

SIGNATURE

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

  Pampa Energía S.A.
  By: /s/ Gustavo Mariani
  Name: Gustavo Mariani
Title: Chief Executive Officer

 

  By: /s/ Gabriel Cohen
  Name: Gabriel Cohen
Title: Chief Financial Officer

 

 

Date: April 30, 2021

 

 

 

212 
 

 

 

 

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

AS OF DECEMBER 31, 2020 AND 2019

FOR THE YEARS ENDED DECEMBER 31, 2020, 2019 AND 2018

 

(In millions of U.S. dollar (“US$”))

F-1 
 

INDEX TO FINANCIAL STATEMENTS

Pampa Energía S.A.

Consolidated Financial Statements as of December 31, 2020 and 2019, and for the Years Ended December 31, 2020, 2019 and 2018  
Report of Independent Registered Public Accounting Firm  F-3
Consolidated Statement of Comprehensive Income F-11
Consolidated Statement of Financial Position F-13
Consolidated Statement of Changes in Equity   F-15
Consolidated Statement of Cash Flows   F-17
Notes to the Consolidated Financial Statements F-18

 

 

 

F-2 
 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Shareholders of

 

Pampa Energía Sociedad Anónima (Pampa Energía S.A.)

 

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated statement of financial position of Pampa Energía Sociedad Anónima (Pampa Energía S.A.) and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of comprehensive income, of changes in equity and of cash flows for each of the three years in the period ended December 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

 

Basis for Opinions

 

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test

 

 

Price Waterhouse & Co. S.R.L., Bouchard 557, piso 8°, C1106ABG - Ciudad de Buenos Aires

T: +(54.11) 4850.0000, F: +(54.11) 4850.1800, www.pwc.com/ar

 

Price Waterhouse & Co. S.R.L. es una firma miembro de la red global de PricewaterhouseCoopers International Limited (PwCIL). Cada una de las firmas es una entidad legal separada que no actúa como mandataria de PwCIL ni de cualquier otra firma miembro de la red.

 

 

F-3 
 

 

 

basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

The Impact of Estimates of Oil and Gas Reserves on Proved Oil and Gas Property, Plant and Equipment and Allocated Goodwill.

 

As described in Notes 7 and 11.2 to the consolidated financial statements, as of December 31, 2020, the Company's consolidated net book value of property, plant and equipment balance of the oil and gas segment was US$543 million, the goodwill balance allocated to the oil and gas segment was US$35 million, and depreciation expense for the year ended December 31, 2020 was US$108 million. As described in Note 6.1.7 to the consolidated financial statements, the Company's management estimates oil and gas reserves which are used in the determination of depreciation of property, plant and equipment used in the areas of oil and gas, as well as assessing the recoverability of these assets and goodwill allocated to the oil and gas segment. There are numerous uncertainties in estimating proved reserves and future production profiles, development costs and prices, including several factors beyond the producer's control. Reserve engineering is a subjective process of estimating underground accumulations involving a certain degree of


F-4 
 

 

 

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. Periodic revisions to the estimated oil and gas reserves and related future net cash flows may be necessary as a result of changes in a number of factors, including reservoir performance, new drilling, oil and gas prices, cost, technological advances, new geological or geophysical data, and other economic factors. The Company’s estimates of oil and gas reserves have been developed by employed specialists, specifically petroleum engineers, and audited by independent specialists engaged by the Company.

 

The principal considerations for our determination that performing procedures relating to the impact of estimates of proved oil and gas reserves on proved oil and gas property, plant and equipment and allocated goodwill are a critical audit matter are that there was significant judgment by management, including the use of specialists, when developing the estimates of oil and gas reserves, which in turn led to a high degree of auditor judgment and effort in performing procedures to evaluate the significant assumptions used in developing those estimates, including future production profiles, development costs and prices. 

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s estimates of oil and gas reserves. These procedures also included, among others, evaluating the methods and significant assumptions used by management in developing these estimates, including future production profiles, development costs and prices. The work of management’s engaged specialist was used in performing the procedures to evaluate the reasonableness of these estimates of proved oil and gas reserves. As a basis for using this work, the specialists’ competence, capability and objectivity were understood, as well as their methods and assumptions. The procedures performed also included tests of the data used by the Company’s engaged specialists and an evaluation of their findings. Evaluating the significant assumptions relating to the estimates of proved oil and gas reserves also involved obtaining evidence to support the reasonableness of the assumptions, including whether the assumptions used were reasonable considering the past performance of the Company, and whether they were consistent with evidence obtained in other areas of the audit. The procedures performed also included testing that the estimates of oil and gas reserves were appropriately included in the Company’s determination of depreciation expense, as well as in the impairment of non-financial assets assessment of oil and natural gas.

Impairment of Non-Financial Long-Lived Assets 

 

As described in Notes 11.1 and 11.2 to the consolidated financial statements, as of December 31, 2020, the Company’s consolidated property, plant and equipment balance was US$1,610 million and the intangible assets balance (including goodwill) was US$41 million. According to Note 11.1.1, as of December 31, 2020 there were internal and external impairment indicators and certain negative changes to the Company’s segments. Management analyzes the recoverability of its non-financial long-lived assets on a periodical basis or when events or changes in circumstances indicate their recoverable amount may be below its carrying amount. In order to evaluate if there is evidence that a cash generating unit (CGU) could be affected, both external and internal sources of information are analyzed. The recoverable amount is the higher of value in use and fair value less costs of disposal. Management used value in use to determine the recoverable amount. The value in use is determined based on projected and discounted cash flows, using discount rates that reflect the time value of money and the specific risks of the assets considered. Management’s assessment of the existence of impairment indicators and cash flow projections included significant judgments and assumptions relating to reference prices for products, future demand per type of product, costs evolution, macroeconomic variables such as inflation and exchange rates, the discount rate, among others.

 

F-5 
 

 

 

The principal considerations for our determination that performing procedures relating to the impairment of non-financial long-lived assets is a critical audit matter are that there was significant judgment by management when evaluating the existence of impairment indicators and when developing the recoverable value measurement of the non-financial long-lived assets. This in turn led to a high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s assessment of impairment indicators and cash flow projections and significant assumptions, including, among others, reference prices for products, future demand per type of product, costs evolution, macroeconomic variables such as inflation and exchange rates and the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge to assist us in performing these procedures and evaluating the audit evidence obtained.

 

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s impairment assessment, including controls over the valuation of the Company’s non-financial long-lived assets. These procedures also included, among others, evaluating the determination of the Company’s CGUs, as well as the allocation of the assets and liabilities thereto; evaluating the reasonableness of management’s assessment over the existence of impairment indicators; testing management’s process for developing the value in use estimate; evaluating the appropriateness of the discounted cash flow model, as well as the mathematical precision of the calculations; testing the completeness, accuracy, and relevance of underlying data used in the model; and evaluating the significant assumptions used by management. Evaluating management’s assumptions involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the segments, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist us in the evaluation of the Company’s discounted cash flow model and certain significant assumptions, including the discount rate. The procedures performed also included evaluating the sufficiency of the information disclosed in the consolidated financial statements regarding the evaluation of the recoverable value of long-lived non-financial assets.

 

 

/s/ PRICE WATERHOUSE & CO. S.R.L.

 

/s/ Reinaldo Sergio Cravero (Partner)
 

 

Autonomous City of Buenos Aires, Argentina, March 10, 2021.

 

We have served as the Company’s auditor since 2006.

F-6 
 

 

 

 

 

GLOSSARY OF TERMS

The following are not technical definitions, but they are helpful for the reader’s understanding of some terms used in the notes to the Consolidated Financial Statements of the Company.

Terms   Definitions
ADR   American Depositary Receipt
AFIP   Federal Administration of Public Revenue 
BCBA   Buenos Aires Stock Exchange
BNA   Banco de la Nación Argentina
BO   Official Gazette
ByMA   Argentine stock exchange and markets
CABA   Ciudad Autónoma de Buenos Aires 
CAMMESA Compañía Administradora del Mercado Eléctrico Mayorista S.A.
CAU   Charge of Access and Use
CC   Combined Cycle 
CGU   Cash-Generating Unit
CIESA   Compañía de Inversiones de Energía S.A.
Citelec   Compañía Inversora en Transmisión Eléctrica Citelec S.A.
 CNV   Comisión Nacional de Valores
Corod   Corod Producción S.A.
CPB   Central Térmica Piedra Buena S.A.
CSJN   Corte Suprema de Justicia de la Nación
CTB   CT Barragán S.A
CTEB    Central Térmica Ensenada Barragán
CTG   Central Térmica Güemes S.A.
CTGEBA   Central Térmica Genelba
CTLL   Central Térmica Loma La Lata S.A.
CTP   Central Térmica Piquirenda
EBISA   Emprendimientos Energéticos Binacionales S.A.
EcuadorTLC EcuadorTLC S.A

 

F-7 
 

 

GLOSSARY OF TERMS: (Continuation)

Terms   Definitions
Edenor   Empresa Distribuidora y Comercializadora Norte S.A.
EGSSA   EMDERSA Generación Salta S.A.
ENARGAS   National Regulator of Gas
ENARSA / IEASA Integración Energética Argentina S.A. (ex Energía Argentina S.A.)
ENRE    National Regulatory Authority of Electricity 
FACPCE   Federación Argentina de Consejos Profesionales de Ciencias Económicas
Greenwind    Greenwind S.A.
GUMA, GUME, GUDI   Gran Usuario Mayor, Gran Usuario Menor, Gran Usuario del Distribuidor
GyP   Gas y Petróleo del Neuquén S.A.P.E.M.
HI   Hydroelectric
HIDISA   Hidroeléctrica Diamante S.A.
HINISA   Hidroeléctrica Los Nihuiles S.A.
IAS   International Accounting Standards 
IASB   International Accounting Standards Board
IFRIC   International Financial Reporting Interpretations Committee
IFRS   International Financial Reporting Standards
IGJ   Inspección General de Justicia - General Inspection of Justice
INDEC   Instituto Nacional de Estadística y Censos
IPIM   Índice de Precios Internos al por Mayor
LGS   Commercial Companies General
LNG   Liquefied Natural Gas 
MAT    WEM’s Forward Market 
MATER   Mercado a Término de Energía Renovable
MEyM   Ministry of Energy and Mining 
MINEM   Ministerio de Energía y Minas
MLC    Foreign Exchange Market
NYSE   New York Stock Exchange

 

F-8 
 

GLOSSARY OF TERMS: (Continuation)

 

Terms   Definitions
OCP   Oleoducto de Crudos Pesados
Oldelval   Oleoductos del Valle S.A.
PACOSA   Pampa Comercializadora S.A.
Pampa FPK   Pampa FPK S.A.U.
Pampa Holding   Pampa Holding MMM S.A.U.
Pampa QRP   Pampa QRP S.A.U.
Pampa Ventures   Pampa DM Ventures S.A.U.
PBA   Buenos Aires province
PEB   Pampa Energía Bolivia S.A. (formerly “PBI” - Petrobras Bolivia Internacional S.A.)
PELSA   Petrolera Entre Lomas S.A.
PEN   Federal Executive Power
PEPASA   Petrolera Pampa S.A.
PEPE II   Parque Eólico Pampa Energía II
PEPE III   Parque Eólico Pampa Energía III
Petrobras   Petrobras Argentina S.A.
PHA   Petrobras Hispano Argentina S.A.
PISA   Pampa Inversiones S.A.
PIST   Transportation System Entry Point
PP   Pampa Participaciones S.A.U.
Refinor   Refinería del Norte S.A.
RT   Technical Resolution
RTI   Tariff Structure Review 
SACDE    Sociedad Argentina de Construcción y Desarrollo Estratégico S.A.
SADI    Sistema Argentino de Interconexión
SE   Secretary of Energy 
SEC   Security and Exchange Commission

 

F-9 
 

 

GLOSSARY OF TERMS: (Continuation)

 

Terms   Definitions
SEE   Secretary of Electrical Energy
SGE   Secretary of Government of Energy
SRRyME   Secretary of Renewable Resources and Electricity Market
SSERYEE   Undersecretary of Renewable Energy and Energy Efficiency
SSHC   Undersecretary of Hydrocarbons and Fuels
TG   Gas Turbine
TGS   Transportadora de Gas del Sur S.A.
The Company / Pampa   Pampa Energía S.A.
The Group   Pampa Energía S.A. and its subsidiaries
TJSM   Termoeléctrica José de San Martín S.A.
TMB   Termoeléctrica Manuel Belgrano S.A.
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.
TV   Vapor Turbine
US$   U.S. dollar
UTE Senillosa   Petrolera Pampa S.A. – Rovella Carranza – Gas y Petróleo del Neuquén, Unión Transitoria de Empresas Senillosa
VAT   Value Added tax
WACC   Weighted Average Cost of Capital
WEM   Wholesale Electricity Market 
YPF   YPF S.A.

 

F-10 
 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

For the years ended December 31, 2020, 2019 and 2018 (See Note 5.3)

(In millions of US$ – unless otherwise stated)

 

 

  Note   12.31.2020   12.31.2019   12.31.2018
               
Revenue 8   1,071   1,338   1,436
Cost of sales 9   (663)   (811)   (831)
Gross profit     408   527   605
               
Selling expenses 10.1   (38)   (26)   (37)
Administrative expenses 10.2   (93)   (105)   (130)
Exploration expenses 10.3   -   (9)   (1)
Other operating income 10.4   56   79   223
Other operating expenses 10.4   (36)   (43)   (156)
Impairment of property, plant and equipment, intangible assets and inventories 1.2 and 11.1   (139)   (62)   (32)
Share of profit from associates and joint ventures 5.4.2   85   101   118
Income from the sale of associates 5.2.1   -   -   28
Operating income     243   462   618
               
Gain on monetary position, net 10.5   -   -   403
Finance income 10.5   9   23   30
Finance costs 10.5   (177)   (187)   (184)
Other financial results 10.5   84   175   (808)
Financial results, net     (84)   11   (559)
Profit before income tax     159   473   59
Income tax 10.6   (35)   130   32
Profit of the year from continuing operations     124   603   91
(Loss) Profit of the year from discontinued operations 5.3   (592)   197   196
(Loss) Profit of the year     (468)   800   287
               
               
Other comprehensive income (loss)              
Items that will not be reclassified to profit or loss              
Results related to defined benefit plans     1   2   (4)
Income tax     -   -   1
Share of loss from joint ventures     -   -   (1)
Items that may be reclassified to profit or loss              
Exchange differences on translation     (8)   (9)   1
Other comprehensive loss of the year from continuing operations     (7)   (7)   (3)
Other comprehensive (loss) income of the year from discontinued operations 5.3   (33)   (28)   8
Other comprehensive (loss) income of the year     (40)   (35)   5
Total comprehensive (loss) income of the year     (508)   765   292

 

F-11 
 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (Continuation)

For the years ended December 31, 2020, 2019 and 2018 (See Note 5.3)

(In millions of US$ – unless otherwise stated)

 

 

 

  Note   12.31.2020   12.31.2019   12.31.2018
Total (loss) income of the year attributable to:              
Owners of the Company     (367)   692   224
Non - controlling interest     (101)   108   63
      (468)   800   287
               
Total (loss) income of the year attributable to owners of the Company:              
Continuing operations     132   594   85
Discontinued operations     (499)   98   139
      (367)   692   224
               
Total comprehensive income of the year attributable to:              
Owners of the Company     (393)   672   225
Non - controlling interest     (115)   93   67
      (508)   765   292
               
Total comprehensive  income (loss) of the year attributable to owners of the Company:              
Continuing operations     124   588   80
Discontinued operations     (517)   84   145
      (393)   672   225
               
(Loss) Earnings per share attributable to the equity holders of the Company during the year              
Basic and diluted earnings per share from continuing operations 13.2   3.30   12.38   1.63
Basic and diluted (loss) earnings per share from discontinued operations 13.2   (12.48)   2.04   2.68
Total basic and diluted (loss) earnings per share 13.2   (9.18)   14.42   4.31

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-12 
 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As of December 31, 2020 and 2019 (See Note 5.3)

(In millions of US$ – unless otherwise stated)

 

  Note   12.31.2020   12.31.2019
ASSETS          
NON-CURRENT ASSETS          
Property, plant and equipment 11.1   1,610   3,507
Intangible assets 11.2   41   151
Right-of-use assets 18.1.1   10   16
Deferred tax assets 11.3   108   28
Investments in joint ventures and associates 5.3.2   549   511
Financial assets at amortized cost 12.1   100   18
Financial assets at fair value through profit and loss 12.2   11   11
Other assets     1   1
Trade and other receivables 12.3   43   79
Total non-current assets     2,473   4,322
           
CURRENT ASSETS          
Inventories 11.4   116   153
Financial assets at amortized cost 12.1   25   54
Financial assets at fair value through profit and loss 12.2   325   365
Derivative financial instruments     -   4
Trade and other receivables 12.3   341   561
Cash and cash equivalents 12.4   141   225
Total current assets     948   1,362
Assets classified as held for sale 5.3   1,469   -
Total assets     4,890   5,684

 

 

F-13 
 


CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Continuation)

As of December 31, 2020 and 2019 (See Note 5.3)

(In millions of US$ – unless otherwise stated)

 

 

  Note   12.31.2020   12.31.2019
SHAREHOLDERS´ EQUITY          
Share capital 13   38   46
Share capital adjustment     201   260
Share premium     516   510
Treasury shares     -   1
Treasury shares adjustment     1   1
Treasury shares cost     (6)   (44)
Legal reserve     61   42
Voluntary reserve     1,057   422
Other reserves     (18)   (18)
Retained earnings     (372)   726
Other comprehensive income     (50)   (29)
Equity attributable to owners of the company     1,428   1,917
Non-controlling interest     341   492
Total equity     1,769   2,409
           
LIABILITIES          
NON-CURRENT LIABILITIES          
Investments in joint ventures  and associates 5.3.2   2   4
Provisions 11.5   111   145
Income tax and minimum notional income tax provision 11.6   131   10
Deferred revenue     -   5
Taxes payables 11.7   2   4
Deferred tax liabilities 11.3   1   368
Defined benefit plans 11.8   17   27
Salaries and social security payable 11.9   -   4
Borrowings 12.5   1,372   1,764
Trade and other payables 12.6   16   90
Total non-current liabilities     1,652   2,421
           
CURRENT LIABILITIES          
Provisions 11.5   16   20
Income tax and minimum notional income tax provision 11.6   11   53
Taxes payables 11.7   36   72
Defined benefit plans 11.8   4   4
Salaries and social security payable 11.9   23   65
Derivative financial instruments     -   3
Borrowings 12.5   242   183
Trade and other payables 12.6   116   454
Total current liabilities     448   854
Liabilities associated to assets classified as held for sale 5.3   1,021   -
Total liabilities     3,121   3,275
Total liabilities and equity     4,890   5,684

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

F-14 
 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

For the years ended December 31, 2020, 2019 and 2018 (See Note 5.3)

(In millions of US$ – unless otherwise stated)

 

  Attributable to owners        
  Equity holders of the company   Retained earnings            
  Share capital   Share capital adjustment   Share premium   Treasury shares   Treasury shares adjustment   Treasury shares cost   Legal reserve   Voluntary reserve   Other reserves   Other comprehensive income / (loss)   Retained earnings (Accumulated losses)   Subtotal   Non-controlling interest   Total equity
Balance as of December 31, 2017 55   289   491   -   -   (3)   19   333   10   (10)   313   1,497   472   1,969
Change in accounting policies  (1) -   -   -   -   -   -   -   -   -   -   (1)   (1)   (1)   (2)
Balance as of Juanary 1, 2018 55   289   491   -   -   (3)   19   333   10   (10)   312   1,496   471   1,967
Constitution of legal and voluntary reserve -   -   -   -   -   -   5   128   -   -   (133)   -   -   -
Capital reduction -   -   -   (5)   (25)   296   -   (266)   -   -   -   -   -   -
Stock compensation plans -   -   -   -   -   -   -   -   -   -   -   -   -   -
Acquisition of own shares (5)   (29)   -   5   29   (332)   -   -   (23)   -   -   (355)   (14)   (369)
Dividends provided for pay -   -   -   -   -   -   -   -   -   -   -   -   (2)   (2)
Sale of interest in subsidiaries -   -   -   -   -   -   -   -   -   -   -   -   (93)   (93)
Profit for the year -   -   -   -   -   -   -   -   -   -   224   224   63   287
Other comprehensive income for the year -   -   -   -   -   -   -   -   -   1   -   1   4   5
Balance as of December 31, 2018 50   260   491   -   4   (39)   24   195   (13)   (9)   403   1,366   429   1,795
                                                       
Constitution of legal and voluntary reserve -   -   -   -   -   -   18   351   -   -   (369)   -   -   -
Capital reduction -   -   -   (3)   (3)   130   -   (124)   -   -   -   -   -   -
Stock compensation plans -   -   -   -   -   -   -   -   1   -   -   1   -   1
Acquisition of own shares (4)   -   19   4   -   (135)   -   -   (6)   -   -   (122)   (29)   (151)
Dividends provided for pay -   -   -   -   -   -   -   -   -   -   -       (1)   (1)
Profit for the year -   -   -   -   -   -   -   -   -   -   692   692   108   800
Other comprehensive income for the year -   -   -   -   -   -   -   -   -   (20)   -   (20)   (15)   (35)
Balance as of December 31, 2019 46   260   510   1   1   (44)   42   422   (18)   (29)   726   1,917   492   2,409

 

 

(1)Adjustment to the opening balance in equity as a result of the application of IFRS 9, as amended, as of January 1, 2018. See Note 6.2.1.2

 

 

 

 

F-15 
 

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continuation)

For the years ended December 31, 2020, 2019 and 2018 (See Note 5.3)

(In millions of US$ – unless otherwise stated)

 

  Attributable to owners        
  Equity holders of the company   Retained earnings            
  Share capital   Share capital adjustment   Share premium   Treasury shares   Treasury shares adjustment   Treasury shares cost   Legal reserve   Voluntary reserve   Other reserves (1)   Other comprehensive income / (loss)   Retained earnings (Accumulated losses)   Subtotal   Non-controlling interest   Total equity
Balance as of December 31, 2019 46   260   510   1   1   (44)   42   422   (18)   (29)   726   1,917   492   2,409
Constitution of legal and voluntary reserve -   -   -   -   -   -   19   707   -   -   (726)   -   -   -
Capital reduction -   -   -   (9)   (59)   140   -   (72)   -   -   -   -   (19)   (19)
Stock compensation plans -   -   -   -   -   -   -   -   -   -   -   -   -   -
Acquisition of own shares (8)   (59)   6   8   59   (102)   -   -   -   -   -   (96)   (8)   (104)
Dividends provided for pay -   -   -   -   -   -   -   -   -   -   -   -   (9)   (9)
Loss for the year -   -   -   -   -   -   -   -   -   -   (367)   (367)   (101)   (468)
Other comprehensive income for the year -   -   -   -   -   -   -   -   -   (21)   (5)   (26)   (14)   (40)
Balance as of December 31, 2020 38   201   516   -   1   (6)   61   1,057   (18)   (50)   (372)   1,428   341   1,769

 

 

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

 

 

 

 

F-16 
 

CONSOLIDATED STATEMENT OF CASH FLOWS

For the years ended December 31, 2020, 2019 and 2018 (See Note 5.3)

(In millions of US$ – unless otherwise stated)

 

  Note   12.31.2020   12.31.2019   12.31.2018
Cash flows from operating activities:              
Profit of the year from continuing operations     124   603   91
Adjustments to reconcile net profit to cash flows generated by operating activities: 14.1   380   (23)   521
Changes in operating assets and liabilities 14.2   (22)   52   (226)
Net cash generated by operating activities from discontinued operations 5.3   211   170   224
Net cash generated by operating activities     693   802   610
Cash flows from investing activities:              
Payment for property, plant and equipment     (124)   (426)   (455)
Payment for acquisitions of intangible assets         -   2
(Payment) collection for public securities and shares, net     (151)   190   31
Payments for capital integration in associates     (3)   (108)   -
Proceeds from sale of intangible assets              
Collections for sales of shares in companies and property, plant and equipment     1   42   457
Dividends received     3   87   19
Colletion (pay) from loans, net     7   6   (3)
Early collection for sale of subsidiary     5   -   -
Recovery (suscription) of investment funds, net     93   (74)   189
Net cash used in investing activities from discontinued operations     (86)   (86)   (221)
 Net cash (used in) generated by investing activities     (255)   (369)   19
               
Cash flows from financing activities:              
Proceeds from borrowings     353   556   245
Payment of  borrowings     (291)   (523)   (240)
Payment of  borrowings interests     (190)   (129)   (116)
Payment for acquisition of own shares     (104)   (141)   (341)
Payments of dividends from subsidiaries to third parties     (9)   (1)   (2)
Repurchase and redemption of corporate bonds     (110)   (66)   (3)
Payments of leases     (2)   (1)   -
Payments for capital reduction     (19)   -   -
Net cash used in financing activities from discontinued operations 5.3   (73)   (85)   (13)
Net cash used in financing activities     (445)   (390)   (470)
               
(Decrease) Increase in cash and cash equivalents     (7)   43   159
               
Cash and cash equivalents at the begining of the year 12.4   225   241   31
Cash and cash equivalents at the begining of the year reclasified to assets classified as held for sale     -   -   6
Exchange difference generated by cash and cash equivalents     (25)   (59)   53
Loss on net monetary position generated by cash and cash equivalents     -   -   (8)
Cash and cash equivalents at the end of the year reclasified to assets classified as held for sale     (52)   -   -
(Decrease) Increase in cash and cash equivalents     (7)   43   159
Cash and cash equivalents at the end of the year 12.4   141   225   241

 

The accompanying notes are an integral part of these Consolidated Financial Statements.

F-17 
 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018

(In millions of US$ – unless otherwise stated)

 

NOTE 1: GENERAL INFORMATION AND GROUP STRUCTURE

1.1 General information of the Company

The Company is a fully integrated power company in Argentina, which directly and through its subsidiaries, participates in the electric energy and gas value chains.

In the generation segment, the Company, directly and through its subsidiaries and joint ventures, has a 4,955 MW installed capacity, which represents approximately 12% of Argentina’s installed capacity, and is the second largest independent generator in the country. Additionally, the Company is currently undergoing a process to expand its capacity by 295 MW.

In the distribution segment, the Company has a controlling interest in Edenor, the largest electricity distributor in Argentina, which has more than 3.2 million customers and a concession area covering the Northern part of the City of Buenos Aires and Northwestern Greater Buenos Aires. On account of the execution of the contract for the sale of the 51% interest in Edenor (see detail in Note 5.3.1), all Edenor’s assets and liabilities have been classified as held for sale as of December 31, 2020, and the associated results and cash flows, for each of the years ended December 31, 2020, 2019 and 2018, are disclosed under discontinued operations.

In the oil and gas segment, the Company develops an important activity in gas and oil exploration and production, with operations in 13 production areas and 5 exploratory areas reaching a production level of 6.9 million m3/day of natural gas and 4,400 barrels/day of oil equivalent for oil in Argentina, as of December 31, 2020. Its main natural gas production blocks are located in the Provinces of Neuquén and Río Negro. The results and cash flows for 2018 associated with the divestment mentioned in Note 5.3.2 are disclosed under discontinued operations.

In the petrochemicals segment, operations are located in the Republic of Argentina, where the Company operates three high-complexity plants producing styrene, synthetic rubber and polystyrene, with a domestic market share ranging between 85% and 98%.

Finally, through the holding and others segment, the Company participates in the transmission and gas transportation businesses. In the transmission business, the Company jointly controls Citelec, which has a controlling interest in Transener, a company engaged in the operation and maintenance of a 21,090 km high-voltage electricity transmission network in Argentina with an 85% share in the Argentine electricity transmission market. In the gas transportation business, the Company jointly controls CIESA, which has a controlling interest in TGS, a company holding a concession for the transportation of natural gas with 9,231 km of gas pipelines in the center, west and south of Argentina, and which is also engaged in the processing and sale of natural gas liquids through the Cerri Complex, located in Bahía Blanca, in the Province of Buenos Aires. Besides, the Company owns a 28.5% direct interest in Refinor, which has a refinery with an installed capacity of 25.8 kb of oil per day and 91 gas stations. Additionally, the segment includes advisory services provided to related companies.

The results and cash flows for 2018 associated with the divestment of the main assets of the refining and distribution segment mentioned in Note 5.3.3 are disclosed under discontinued operations in the Holding and others segment.

 

F-18

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 1: (Continuation)

1.2Economic context in which the Company operates

The Company operates in a complex economic context which main variables have recently suffered significant volatility both in the domestic and international spheres.

The outbreak of the COVID-19 pandemic in March 2020 caused by the Coronavirus has brought about several consequences globally.

Most governments around the world, including the Argentine Government, implemented drastic measures to contain the spread of the virus, including, but not limited to, the closure of borders and the mandatory lockdown of the population, halting non-essential economic activities and generating a pronounced decrease in the economic activity and production levels. As a result, most governments implemented a series of tax aid measures to sustain the income of part of the affected population, mitigate the risk of disruptions in payment chains and avoid financial crises.

Globally, as from the month of May, a gradual lockdown easing process started; however, some countries experienced a new increase in infection levels, which led to the temporary reimplementation of some measures.

In Argentina, the social, preventive and mandatory lockdown measures decreed by the Federal Government as from March 20, 2020 have affected the power industry, mainly in the second and third quarters of 2020, as detailed below:

-As regards the electric power generation market, in the second and third quarters of 2020 the SADI’s net demand for electricity decreased by 5.7% and 2.0% compared to the same periods of 2019, mainly due to the lower industrial and commercial activity resulting from the social lockdown. Furthermore, the tariff freeze and the social lockdown have generated delays in the electricity distribution company’s payment chain, added to deferrals in the National Treasury contributions, as a result of which CAMMESA has recorded a growing delay in payment terms to generation and hydrocarbon producers, reaching a maximum of 45 days in July 2020. Additionally, the SE instructed CAMMESA to suspend the automatic adjustment mechanism for the spot remuneration set by SE Resolution No. 31/20.
-As regards the gas sector, in the second and third quarters of 2020 gas production recorded a 9.0% and 10.2% year-on-year decrease, respectively, due to the restraining effects of the social, preventive and mandatory lockdown, combined with a higher efficiency of power generation facilities as a result of the renewable and thermal energy installed over the last three years. The average price of gas at wellhead in the second and third quarters of 2020 amounted to US$2.2 and US$2.4 per MMBTU, respectively, experiencing an approximate 35% decrease compared with the same periods of 2019. This decrease is mainly due to the lower prices tendered at CAMMESA’s monthly calls, the lower industrial activity and the diluting effect of inflation on the price of gas sold to distributors.
-The economic recession caused by the spread of COVID-19, the significant decline in the demand for fuels and the disagreement between producers that are members of the Organization of Oil Exporting Countries (“OPEC”) and non-OPEC (“OPEC+”) producers resulted in a supply and storage crisis of such magnitude that the oil market was greatly impacted. The WTI showed a record drop, reaching -37.63 US$/bbl, whereas the Brent price fell below 20 US$/bbl. After the cutbacks on supply implemented by the OPEC and the OPEC+ and the gradual easing of lockdown measures attempted by several countries, a recovery trend was evidenced in the listings of crude oil and its derivatives, with the Brent crude oil showing a sustained quotation above 40 US$/bbl as from mid-June. Even though domestic oil prices use international values as benchmarks, they have experienced a strong decline as a result of the collapse in demand. In this sense, on May 18, 2020, the Federal Government set a support price of 45 US$/barrel for the domestic production. However, this support price was suspended as a result of the increase in the Brent reference price. (see Note 2.3.2).
F-19

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 1: (Continuation)

 

-As regards the petrochemicals segment, during the second quarter of 2020 there was a significant decrease in the demand for certain products sold by the Company, such as styrene and octane bases and, to a lesser extent, polystyrene. As a result of these declines, the styrene and reforming plants halted production for 40 and 60 days, respectively, between May and June, whereas the polystyrene plant stopped production for 30 days in June. Furthermore, the production of rubber had to be suspended in the months of April and May as it was not considered an essential activity and in line with the shutdown of its main domestic customers, which impacted on the recoverability of inventories of several raw materials and products for sale, generating the posting of an allowance for impairment of inventory for US$ 11 million.. Sold volumes experienced a substantial improvement as from the third quarter of 2020 as a result of the recovery of the industrial activity and the international context.

The Argentine economy was undergoing a recession process, which was deepened by the described COVID-19 pandemic, with an accumulated 11.8% year-on-year fall in the GDP as of the third quarter of 2020, a 36.1% cumulative inflation (CPI) for 2020 and a 40.5% depreciation of the peso against the U.S. dollar according to the BNA’s exchange rate. Furthermore, stricter exchange restrictions were imposed (see Note 2.7), which affect the value of the foreign currency in existing alternative markets for certain exchange transactions that are restricted in the official market.

The context of volatility and uncertainty continues as of the date of issuance of these Consolidated Financial Statements.

The Company’s Management permanently monitors the evolution of the variables affecting its business to define its course of action and identify potential impacts on its assets and financial position. The Company’s Consolidated Financial Statements should be read in the light of these circumstances.

 

 

NOTE 2: REGULATORY FRAMEWORK

 

2.1 Generation

 

2.1.1 Generation units

 

The Company’s revenues from the electric power generation activity come from: i) sales contracts with large users within the MAT (Resolutions No. 1,281/06 and No. 281/17); ii) supply agreements with CAMMESA (Resolutions No. 220/07, No. 21/16, No. 287/17 and Renovar Programs) and iii) sales to the Spot market pursuant to the provisions applicable within the WEM administered by CAMMESA (SEE Resolution No. 19/17, from February 2017, SRRYME Resolution No. 1/19 as from March 2019 and SE Resolution No. 31/20 from February 2020). Furthermore, energy not committed under sales contracts with large users within the MAT and with CAMMESA are remunerated at the Spot market.

 

F-20

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)


NOTE 2: (Continuation)

 

The Company’s generating units are detailed below, directly and through its subsidiaries and joint businesses:

 

In operation:        
         
Generator Generating unit Tecnology Power Applicable regime (1)
 
CTG GUEMTG01 TG  100 MW Energy Plus Res. No. 1,281/06
CTG GUEMTV11 TV ≤100 MW SE Resolutions No. 31/20
CTG GUEMTV12 TV ≤100 MW SE Resolutions No. 31/20
CTG GUEMTV13 TV >100 MW  SE Resolutions No. 31/20
Piquirenda PIQIDI 01-10 MG  30 MW SE Resolution No. 220/07
CPB BBLATV29 TV >100 MW SE Resolutions No. 31/20
CPB BBLATV30 TV >100 MW SE Resolutions No. 31/20
CT Ing. White BBLMD01-06 MG 100 MW SEE Resolution No. 21/16
CTLL LDLATG01 TG >50 MW SE Resolutions No. 31/20
CTLL LDLATG02 TG >50 MW SE Resolutions No. 31/20
CTLL LDLATG03 TG >50 MW SE Resolutions No. 31/20
CTLL LDLATV01 TV 180 MW SE Resolution No. 220/07 (1)
CTLL LDLATG04 TG  105 MW SEE Res. 220/07 (75%)
CTLL LDLATG05 TG  105 MW SEE Resolution No. 21/16
CTGEBA GEBATG01/TG02/TV01 CC >150 MW SE Resolutions No. 31/20
CTGEBA GEBATG03 TG 169 MW Energy Plus Res. No. 1,281/06
CTGEBA GEBATG03/TG04/TV02 CC 400 MW SE Resolutions No. 287/17
Ecoenergía CERITV01 TV Renewable  ≤ 50 Energy Plus Res. N° 1,281/06 (1)
CT Parque Pilar PILBD01-06 MG 100 MW SEE Resolution No. 21/16 (1)
CTB EBARTG01 - TG02 TG HI – Small  50<P≤120 SE Resolution No. 220/07 (1)
HIDISA AGUA DEL TORO HI HI – Small  50<P≤120 SE Resolutions No. 31/20
HIDISA EL TIGRE HI HI – Small  50<P≤120 SE Resolutions No. 31/20
HIDISA LOS REYUNOS HB HB – Media  120<P≤300 SE Resolutions No. 31/20
HINISA NIHUIL I - II - III HI HI – Chica  50<P≤120 SE Resolutions No. 31/20
HPPL PPLEHI HI HI – Media  120<P≤300 SE Resolutions No. 31/20
P.E. M. Cebreiro CORTEO Eólica 100 MW Renovar
PEPE II PAMEEO Eólica 53 MW SEE Resolution No. 281/17
PEPE III BAHIEO Eólica 53 MW SEE Resolution No. 281/17
         
(1) Uncommitted power and energy under the sales contracts are remunerated according to Resolution No. 31/20.

 

In construction:      
       
Generator Tecnology Capacity Applicable regime
 
CTLL MG 15 MW SE Resolutions No. 31/20
CTB CC 280 MW SE Resolution No. 220/07

 

F-21

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

2.1.2 Remuneration at the Spot market

 

Resolutions SEE No. 19/17 and SRRYME No. 1/19, applicable as from February 2017 and March 2019, respectively, established remunerative items based on technology and scale with US$-denominated prices payable in AR$ by applying BCRA’s exchange rate.

 

On February 27, 2020, SE Resolution No. 31/20 was published in the BO, which superseded the remuneration scheme established by SRRYME Resolution No. 1/19, and provided as follows: i) a reduction in U.S.-denominated values for power capacity availability, maintaining the values of the remuneration for generated and operated energy; ii) converted remuneration values to Argentine pesos at a 60 $/US$ exchange rate; and iii) an additional remuneration, in pesos, for the power capacity generated during the hours of maximum thermal demand of the month, taking into consideration the average power capacity generated by thermal generators and the average power capacity operated by hydroelectric generators.

 

Finally, it established that the new values set would be updated monthly from the second month of implementation, through a factor that envisages a 60% adjustment by IPC and a 40% adjustment by IPIM. However, on 8 April 2020, through Note No. 2020-24910606-APN-SE-MDP of 8 April 2020, the SE instructed CAMMESA to postpone until a new decision the implementation of the above-mentioned automatic adjustment mechanism, which has not been restored to the date of issuance of these Consolidated Financial Statements.

 

2.1.2.1 Remuneration for Available Power Capacity

 

2.1.2.1.1 Thermal Power Generators

Resolution SEE No. 19/17 set a minimum remuneration for power capacity based on technology and scale, and allowed generating, co-generating and self-generating agents owning conventional thermal power plants to offer guaranteed availability commitments for the energy and power capacity generated by their units and not committed under sales contracts with large users within the MAT and supply agreements with CAMMESA. This scheme remains in force until the current resolution.

In Resolution SEE No. 19/17, the availability commitments for each unit were declared for a term of three years, together with information for the summer seasonal programming, with the possibility to offer different availability values for the summer and winter six-month periods. The thermal generators’ remuneration for committed power capacity was proportional to their compliance. In SRRYME Resolution No. 1/19 and SE Resolution No. 31/20, an offer scheme for quarterly periods was established: a) summer (December through February); b) winter (June through August), and c) ‘Other’, which comprises two quarters (March through May, and September through November).

The power remuneration for thermal generators with commitments is proportional to their compliance.

F-22

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

The minimum remuneration for generators with no availability commitments includes the following scales and prices:

 

Technology / Scale

SEE No. 19/17

(US$ / MW-month)

SRRYME No. 1/19

(US$ / MW-month)

SE No. 31/20

(AR$ / MW-month)

Large CC Capacity > 150 MW 3,050 3,050 100,650
Large ST Capacity > 100 MW 4,350 4,350 143,550
Small ST Capacity > 100 MW 5,700 5,200 171,600
Large GT Capacity > 50 MW 3,550 3,550 117,150

The remuneration for guaranteed power capacity to generators with availability commitments is:

 

Period

SEE No. 19/17

(US$ / MW-month)

SRRYME No. 1/19

(US$ / MW-month)

SE No. 31/20

(AR$ / MW-month)

Summer – Winter 7,000 7,000 360,000
Fall - Spring 7,000 5,500 270,000

 

Under SRRYME Resolution No. 1/19 provided for the application on the power capacity remuneration of a coefficient derived from the average utilization factor over the unit’s last twelve months: with a minimum 70% of the utilization factor, 100% of the power capacity payment was collected; if the utilization was between 30% and 70%, the power capacity payment ranged from 70% to 100%; and if the utilization factor was lower than 30%, 70% of the power capacity payment was collected. SE Resolution No. 31/20 maintained the same formula than the previous regime, but in case the utilization factor is lower than 30%, 60% of the power capacity payment is collected.

 

Finally, SEE Resolution No. 19/17 established an additional remuneration of 2,000 US$/MW-month aiming to encourage availability commitments in the grid’s higher demand periods, that was abolished by SRRYME Resolution No. 1/19. However, the SE Resolution No. 31/20 established an additional remuneration for the hours of maximum thermal requirement of the month (hmrt), which corresponds to the 50 hours with the largest dispatch of thermal generation of each month divided into two blocks of 25 hours each, applying the following prices to the average generated power:

 

Period

First 25 hours

($ / MW-hmrt)

Second 25 hours

($ / MW-hmrt)

Summer – Winter 45,000 22,500
Fall - Spring 7,500 -

 

F-23

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

2.1.2.1.2 Hydroelectric Generators

 

Resolutions SEE No. 19/17 and SRRYME No. 1/19 set a base remuneration and an additional remuneration for power capacity.

 

Power capacity availability was determined independently of the reservoir level, the contributions made, or the expenses incurred. Furthermore, in the case of pumping hydroelectric power plants, the operation as turbine and pump at all hours within the period was considered to calculate availability.

 

The base and the additional remunerations included the following scales and prices:

 

Technology / Scale

Base

(US$ / MW-month)

Additional

(US$ / MW-month)

Medium HI Capacity > 120 ≤ 300 MW 3,000 1,000
Small HI Capacity > 50 ≤ 120 MW 4,500 1,000
Medium Pumped HI Capacity > 120 ≤ 300 MW 2,000 500
Renewable HI Capacity ≤ 50 MW 8,000 1,000

 

Under SEE Res. No. 19/17, the payment for power capacity was determined by the actual power capacity plus that under programmed and/or agreed maintenance, whereas under SRRYME Res, No. 1/19, hours of unavailability due to programmed and/or agreed maintenance were not computed for the calculation of the power capacity remuneration. However, in order to contemplate the incidence of programmed maintenance works in power plants, from May 2019, pursuant to SME Note No. 46631495/19, the application of a 1.05 factor over the power capacity payment was established.

 

In case of hydroelectric power plants that were responsible for control structures on river courses and did not have an associated power plant, a 1.20 factor was applied to the plant at the headwaters.

The allocation and collection of 50% of the additional remuneration was conditional upon the generator taking out insurance, to CAMMESA’s satisfaction, to cover for major incidents on critical equipment, as well as upon the progressive updating of the plant’s control systems pursuant to an investment plan to be submitted in accordance with criteria defined by the SEE.

F-24

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

The following are the power by technology and scale values set under SE Resolution No. 31/20:

 

Technology / Scale

SE No. 31/20

(AR$ / MW-month)

Medium HI Capacity > 120 ≤ 300 MW 132,000
Small HI Capacity > 50 ≤ 120 MW 181,500
Medium Pumped HI Capacity > 120 ≤ 300 MW 132,000
Renewable HI Capacity ≤ 50 MW 297,000

 

Period

First 25 hours

($ / MW-hmrt)

Second 25 hours

($ / MW-hmrt)

Summer – Winter 39,000 19,500
Fall - Spring 6,500 -

Furthermore, SE Resolution 31/20 maintains the application of a 1.05 factor over the power capacity to compensate the incidence of programmed maintenance works and the 1.20 factor for units maintaining control structures on river courses and not having an associated power plant is maintained.

 

2.1.2.1.3 Wind generators

 

SEE Resolution No. 19/17 established a remuneration associated with the availability of the installed equipment at a base price of 7.5 US$/MW and an additional price of 17.5 US$/MW, which was abrogated by SRRYME Resolution No. 1/19.

 

2.1.2.2 Remuneration for Generated and Operated Energy

 

Resolutions SEE No. 19/17 and SRRYME No. 1/19 set a remuneration for generated energy with prices ranging from 5 to 10 US$/MWh and from 4 US$/MWh to 7 US$/MWh, respectively, depending on the technology and type of fuel used.

The remuneration for operated energy applicable to the integration of hourly power capacities for the period was valued at 2.0 US$/MWh and 1.4 US$/MWh for any type of fuel under Resolutions SEE No. 19/17 and SRRYME Resolution No. 1/19, respectively.

SE Resolution No. 31/20 establishes a remuneration for Generated Energy with prices ranging between 240 and 420 $/MWh, depending on the type of fuel and a remuneration for Operated Energy, with an 84 $/MWh price for any type of fuel.

 

 

F-25

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

It should be noted that, in the event that the generation unit is dispatched outside the optimal dispatch, remuneration for generated energy will be set at 60% of the net installed power capacity, regardless of the energy delivered by the generation unit.

 

In the case of hydroelectric power plants, prices for generated and operated energy under Resolutions SEE No. 19/17 and SRRYME No. 1/19 were 3.5 and 1.4 US$/MWh, respectively, regardless of the scale. Under SE Resolution No. 31/20, they are remunerated at 210 $/MWh and 84 $/MWh, respectively. The remuneration for operated energy must correspond to the optimal dispatch of the system, however, the resolution does not indicate what the consequence would be otherwise.

 

In the case of hydroelectric pumping plants, both the energy generated and the one consumed for pumping are considered. In addition, if it functions as a synchronous compensator, 60 $/MVAr will be recognized for the megavolt exchanged with the network when required and 84 $/MWh for the energy operated.

 

As regards energy generated from unconventional sources, SRRYME Resolution No. 1/19 established a single remuneration value of US$ 28/MWh, irrespective of the source used. SE Resolution No. 31/20 sets a value of 1,680 $/MWh. Energy generated prior to the commissioning by the Organismo Encargado del Despacho will be remunerated at 50% of the above-mentioned remuneration.

 

2.1.2.3 Additional Remuneration for Efficiency and for Low-Use Thermal Generators

 

SEE Resolution No. 19/17 provided for an efficiency incentive that consisted of the recognition of an additional remuneration equivalent to the remuneration for the generated energy by the percentage difference between the actual consumption and the reference consumption determined for each unit and fuel type, as well as an additional remuneration for low-use thermal generators and having frequent startups based on the monthly generated energy for a price of 2.6 US$/MWh multiplied by the usage/startup factor, which were abrogated under the scheme set under SRRYME Resolution No. 1/19.

2.1.2.4 Suspension of contracts within the MAT

 

The suspension of contracts within the MAT (excluding those derived from a differential remuneration scheme) provided for by SE Resolution No. 95/13 remains in effect.

 

2.1.3 Sales contracts with large users within the MAT

 

2.1.3.1 Energy Plus

With the purpose of encouraging new generation works, in 2006 the SE approved Resolution No. 1,281/06 established a specific regime which would remunerate newly installed generation sold to a certain category of Large Users at higher prices.

F-26

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

The Energy Plus service consists of the offer of additional generation availability by generators, co-generators and self-generators which, as of the date of publication of SE Resolution No. 1,281/06, were not WEM agents or did not have facilities or an interconnection with the WEM; Considering that:

 

-These plants should have fuel supply and transportation facilities;
-The energy used by GU300 in excess of the Base Demand (energy consumption for 2005 year) qualifies for Energy Plus agreements within the MAT at a price negotiated between the parties; and
-For new GU300 entering the system, their Base Demand will equal zero.

If a generator cannot meet the power demand by an Energy Plus customer, it should purchase that power in the market at the operated marginal cost, or, alternatively, support the committed demand in case of unavailability through agreements with other Energía Plus generators.

Currently, the Company has Power Availability agreements in force with other generators whereby, in case of unavailability, it may purchase or sell power to support the contracts mutually.

Furthermore, the SE, through Note No. 567/07, as amended, established that GU300 not purchasing their surplus demand in the MAT should pay the Average Incremental Charge of Surplus Demand. As from the month of June 2018, pursuant to SE Note No. 28663845/18, the CMIDE became the greater of $1,200/MWh or the temporary dispatch surcharge.

 

Due to the drop in surplus demand as a consequence of the decrease in the economic activity, some GU300 decide not to enter into Energy Plus contracts (with higher prices), and generators have to sell their energy at the spot market with lower profitability margins.

 

Additionally, the Energy Plus contracts market continues being affected by the migration of demand towards renewable energy contracts in the MAT ER.

 

Under this regime, the Company —through its power plants Güemes, EcoEnergía and Genelba— sells its energy and power capacity for a maximum amount of 283 MW. The values of Energy Plus contracts are mostly denominated in U.S. dollars.

 

2.1.3.2 Renewable Energy Term Market (“MAT ER” Regime)

Pursuant to Resolution No. 281/17, the MEyM regulated the MAT ER Regime with the purpose of setting the conditions for large users within the WEM and WEM distributing agents’ large users covered by Section 9 of Law No. 27,191 to meet their demand supply obligation from renewable sources through the individual purchase within the MAT ER from renewable sources or self-generation from renewable sources.

Furthermore, it regulates the conditions applicable to projects for the generation, self-generation and co-generation of electric power from renewable sources, and creates the el Registro Nacional de Proyectos de Generación de Energía Eléctrica de Fuente Renovable for the registration of these projects.

 

 

 

 

F-27

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

Projects destined to the supply of electric power from renewable sources under the MAT ER Regime may not be covered by other remuneration mechanisms, such as the agreements under the Renovar rounds. Surplus energy will be sold in the spot market.

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

Within the framework of this provision, the Company, through its PEPE II and III wind farms, sells energy for a maximum amount of 106 MW and, additionally, has started selling third-party generators’ renewable energy for an approximate volume of 2 MW.

 

2.1.4 Supply Agreements with CAMMESA

 

2.1.4.1 SE Resolution No. 220/07 (“Agreement Res.220”)

 

Aiming to encourage new investments to increase the generation offer, the SE passed Resolution No. 220/07, which empowers CAMMESA to enter into Agreement with WEM Generating Agents for the energy produced with new equipment. These will be long-term agreements and the price payable by CAMMESA should compensate the investments made by the agent at a rate of return to be accepted by the SE.

 

Under this regulation, the Company, through its power plants Piquirenda, Loma de La Lata and Barragán, has executed Agreement Res.220 to sell energy and power capacity for a total amount of 856 MW.

It is worth mentioning that the 10-year term for Piquirenda and Loma de la Lata contracts (210 MW) expires in July and November 2021, respectively. Besides, Barragán has an expansion project underway to add 280 MW under this scheme, which commissioning is estimated for the first quarter of 2022.

 

For further information on the project to the CC at CTB, see Note 16.1.3.

 

2.1.4.2 SEE Resolution No. 21/16

 

As a result of the state of emergency in the national electricity sector, the SEE issued Resolution No. 21/16 calling for parties interested in offering new thermal power generation capacity with the commitment to making it available through the WEM for the 2016/2017 summer; 2017 winter, and 2017/2018 summer periods.

 

For the awarded projects, wholesale power purchase agreements were entered into with CAMMESA for a term of 10 years, with a remuneration made up of the available power capacity price plus the variable non-fuel cost for the delivered energy and the fuel cost (if offered), less penalties and fuel surpluses. Surplus power capacity is sold in the spot market.

 

Pursuant to this resolution, the Company, through its Loma de la Lata, Ingeniero White and Pilar thermal power plants, has effective agreements with CAMMESA for the sale of energy and power capacity for a total 305 MW.

F-28

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

2.1.4.3 SEE Resolution No. 287/17

On May 10, 2017 the SEE issued Resolution No. 287/17 launching a call for tenders for co-generation projects and the closing to CC over existing equipment. The projects should have low specific consumption (lower than 1,680 kcal/kWh with natural gas and 1,820 kcal/kWh with alternative liquid fuels), and the new capacity should not exceed the existing electric power transmission capacity; otherwise, the cost of the necessary extensions will be borne by the bidder.

For the awarded projects, wholesale power purchase agreements were entered into for a term of 15 years, with a remuneration made up of the available power capacity price plus the variable non-fuel cost for the delivered energy and the fuel cost (if offered), less penalties and fuel surpluses. Surplus power capacity is sold in the spot market.

Pursuant to this regulation, the Company, through its Genelba thermal power plant, has entered into an agreement with CAMMESA for the sale of energy and power capacity for a total 400 MW (see Note 16.1.2).

 

2.1.4.4 Renovar Programs

 

In order to meet the objectives, set by Law No. 26,190 and Law No. 27,191 promoting the use of renewable sources of energy, the MEyM called for open rounds for the hiring of electric power from renewable sources (RenovAr Programs, Rounds 1, 1.5 and 2) within the WEM. These calls aimed to assign power capacity contracts from different technologies (wind energy, solar energy, biomass, biogas and small hydraulic developments with a power capacity of up to 50 MW).

For the awarded projects, renewable electric power supply agreements were executed for the sale of an annual committed electric power block for a term of 20 years.

 

Additionally, several measures have been established to promote the construction of projects for the generation of energy from renewable sources, including tax benefits (advance VAT reimbursement, accelerated depreciation of the income tax, import duty exemptions, etc.) and the creation of a fund for the development of renewable energies destined, among other objectives, to the granting of loans and capital contributions for the financing of such projects.

Under this regulation, the Company, through Greenwind, has a supply agreement in place with CAMMESA for a total 100 MW.

 

2.1.5 Fuel supply for thermal power plants

On November 6, 2018, SGE Resolution No. 70/18 was published in the BO, which empowered generating, co-generating and self-generating agents within the WEM to acquire the fuels required for own generation; this resolution superseded SE Resolution No. 95/13, which provided that fuel supply for electric power generation would be centralized in CAMMESA (with the exception of generation under the Energy Plus regime). Under the scheme set forth by SGE Resolution No. 70/18, the cost of generation with own fuels was valued according to the mechanism for the recognition of the Variable Production Costs recognized by CAMMESA. During its term of validity, CAMMESA remained in charge of the commercial management and the dispatch of fuels for generators that do not or cannot make use of this option.

F-29

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

In the seasonal programming conducted on November 12, 2018, the Company opted to make use of the self-supply option, and allocated a significant part of its natural gas production as an input for the dispatch of its thermal units.

 

On December 27, 2019, the Ministry of Productive Development passed Resolution No. 12/19, abrogating, effective as from December 30, 2019, SGE Resolution No. 70/18, and re-establishing the validity of section 8 and section 4 of SE Resolutions No. 95/13 and 529/14, respectively, thus restoring the centralized scheme in CAMMESA for the supply of fuels for generation purposes (except for generators under the Energy Plus scheme and with Wholesale Power Purchase Agreements under Resolution No. 287/17).

 

In December 2020, on account of the implementation of the GasAr Plan (see Note 2.3.2.1.2), SE Resolution No. 354/20 was passed, which established a new dispatch order for generation units based on the fuel supplied for their operation under a centralized dispatch scheme.

 

SE Resolution No. 354/20 established the gas volumes CAMMESA should prioritize in the electricity dispatch. In this sense, firm volumes to be used by CAMMESA were defined, including: i) volumes corresponding to contracts entered into by CAMMESA with producers acceding to the GasAr Plan; ii) volumes corresponding to contracts executed by adherent producers with generators acceding to the centralized dispatch (these volumes will be discounted by the adherent producers from the applicable quota for which they should enter into contracts with CAMMESA under the GasAr Plan) and; iii) volumes to meet the Take or Pay (“TOP”) obligations under the supply agreement entered into between IEASA and Yacimientos Petrolíferos Fiscales Bolivianos (“YPFB”).

 

Besides, an electricity dispatch priority scheme was set based on the allocation of the natural gas quota taking into consideration the take or pay obligations. To this effect, the following priorities were set (within each priority level, the order of agents is set based on the generator’s production cost):

 

(i)Dispatch Priority 1: Generators, Self-generators and/or Co-generators supplied with a natural gas quota under a TOP Bolivia condition assigned by IEASA. If a generator with a fuel stocking obligation optionally acquires from IEASA natural gas from Bolivia, this volume will be included in this quota.
(ii)Dispatch Priority 2: Generators, Self-generators and/or Co-generators supplied by CAMMESA with a natural gas quota from the centralized list of volumes up to the TOP of each contract.
(iii)Dispatch Priority 3: Generators, Self-generators and/or Co-generators supplied by CAMMESA with a natural gas quota from the centralized list of volumes for the Daily Maximum Amount (DMA) less those corresponding to the TOP of each contract.
(iv)Dispatch Priority 4: Generators, Self-generators and/or Co-generators supplied by CAMMESA with natural gas or LNG coming from other firm commitments undertaken by CAMMESA.
(v)Dispatch Priority 5: Generators, Self-generators and/or Co-generators supplied with a gas quota from the unassigned, spot natural gas contracts from any source, acquired by CAMMESA and/or the Generator, according to the supply source. In the case of a generator with own fuel, the maximum amount to be acknowledged will be the corresponding reference prices.

 

As regards the costs associated with the supply of these fuels, it was established that the electricity demand will bear, among others, the regulated transportation costs, the cost of natural gas and the applicable take or pay obligations.

F-30

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

Generating agents that kept the possibility to purchase their fuel supply (agents under the Energy Plus Program or with Wholesale Purchase Agreements under Resolution No. 287/17) could opt in or out of CAMMESA’s unified dispatch. Acceding to the unified dispatch involves the operating assignment of the contracted firm gas and transportation volumes. Based on their option, the priority order was modified as described above.

 

In the specific case of generators with wholesale power purchase agreements under SEE Resolution No. 287/17, it was provided that they would have the option of canceling the self-supply obligation and the resulting recognition of its associated costs, having to maintain the respective transportation capacity for its management in the centralized dispatch.

 

The Company assigned the firm gas and transportation volumes committed to the supply of Genelba Plus’ CC and Energy Plus contracts. In the case of the supply to Genelba Plus’ CC, the assignment will remain effective during the life of the GasAr Plan, and it may be revoked by the generator with a minimum advance notice of 30 business days. Within this framework, the parties agreed to enter into an addendum to the Wholesale Power Purchase Agreement to establish the modifications regarding this new supply scheme, which execution is pending as of the issuance of these Consolidated Financial Statements.

 

2.1.6 Agreement for the Regularization and Settlement of Receivables with the WEM

 

On August 5, 2019 and under the call to Generators, the Company and certain subsidiaries executed with CAMMESA an Agreement for the Regularization and Settlement of Receivables with the WEM (the “Agreement”), as instructed through SGE Note NO-2019-66843995-APN-SGE#MHA.

 

Pursuant to the Agreement, CAMMESA undertook to pay the outstanding Sales Liquidations with Maturity Date to be Defined (“LVFVD”) after discounting the debts taken on with the WEM under the Financing Agreements, Loan Agreements and Receivables Assignment Agreements executed by generators, and applying a 18% write-off on the balance. In this sense, the parties have agreed a total net settlement amount for the outstanding LVFVDs taking into consideration the interest update as of July 31, 2019 and the effects of the mentioned write-off, which amounts to $ 2,122.7 million, before tax withholdings for a total amount of $ 392.9 million. Finally, on August 7, 2019, the total agreed amount was collected.

 

In furtherance of the undertaken commitments, the Company and certain subsidiaries have waived all submitted claims and have irrevocably dismissed their rights to file any kind of claim (whether administrative and/or judicial) against the Federal Government, the SGE and/or CAMMESA regarding the outstanding LVFVDs.

 

As a result of the Agreement, the Company has recognized revenues in the amount of US$ 5.9 million and net financial profits for US$ 71.1 million in the year ended December 31, 2019.

F-31

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

2.1.7        Loosening up of charges and interests in late payment of the economic transaction

 

Resolutions SRRYME No. 29/2019 and SE No. 148/20 provided for a relaxation in the application of penalty interest and charges in case of delays in the payment of economic transactions within the WEM.

 

(i)Reduction of surcharges: the 50% reduction in surcharges for agents with overdue and unpaid debts is postponed until December 31, 2020. This measure in no way affects the Extraordinary Payment Mechanism for Large Users detailed in the next note.

 

(ii)Compensatory and penalty interest: only compensatory interest will apply, with a rate equivalent to the rate fixed by the BNA for its 30-day discount transactions, for agents registering a delay in payment but having promptly paid the last three immediately preceding debt maturities, provided the payment is made within 15 days after the invoice maturity date; additionally, penalty interest of 1% will apply for each day of delay, with a cap equivalent to the surcharges provided for in the CAMMESA procedures when the payment is made after such term. It is worth highlighting that the previous scheme provided for increasing penalty interest based on the time elapsed.

 

(iii)Compensations: in the case of delays not exceeding 5 days in a certain month, compensations without the application of compensatory interest are allowed by advancing the payment of the following invoice by 2 days per each day of delay.

2.1.8 Generation projects

As a result of the COVID-19 pandemic (see Note 1.2), through Note NO-2020-37458730-APN-SE#MDP the SE instructed the temporary suspension of terms for the execution of the contracts under the RenovAr Programs (Rounds 1, 1.5, 2 and 3), former SE Resolution No. 712/09, former MEyM Resolution No. 202/16 and former SEE Resolution No. 287/17, as well as for projects within the framework of former MEyM Resolution No. 281/17. The instruction applies to projects which had not been previously commissioned as from March 12, 2020 and until September 12, 2020, both dates inclusive. Consequently, the temporary suspension of notices of non-compliance with the scheduled work progress dates was instructed, both regarding the increase in the contract performance bond and the imposition of the stipulated penalties, as applicable, under all agreements entered into pursuant to such resolutions.

Furthermore, it ordered the temporary suspension of notices of breach upon failure to comply with the date scheduled for the commercial commissioning of projects with a dispatch priority under the terms of former MEyM Resolution No. 281/17, and of the collection of the amounts stipulated in the event of breach, in all cases keeping the timely granted dispatch priorities.

 

2.2 Transmission

 

2.2.1 Tariff situation

The Solidarity 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.

In 2020, the ENRE did not apply Transener’s semi-annual tariff update mechanism established in the RTI, the tariff scheme in force being that resulting from the August 2019 update.

 

F-32

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

In this sense, on December 16, 2020, pursuant to Executive Order No. 1020/20, the Federal Government established the beginning of the renegotiation of the current RTI for the electricity and natural gas transportation and distribution utility services, which proceeding may not exceed a term of 2 years. Until the conclusion of each renegotiation, all Agreements corresponding to the respective RTIs in effect will be suspended within the scopes determined in each case by the Regulatory Entities for reasons of public interest. The transitory and final agreements will be entered into with the ENRE or ENARGAS, and the Ministry of Economy ad referendum to the PEN. Furthermore, the electricity tariffs maintenance term established in section 5 of Act No. 27,541 on Social Solidarity and Productive Reactivation within the Public Emergency Framework was extended for 90 calendar days, or until the entry into effect of the new transitory tariff schemes resulting from the Transition Tariff Regime.

On January 19, 2021, through Resolution No. 17/21, the ENRE launched the proceeding for the transitory adjustment of tariffs of the transmission public utility aiming to establish a Transitional Tariff Regime until reaching a Final Renegotiation Agreement, and summoning Transportation Companies. In this sense, a request for information to begin this process was received.

 

As of the issuance of these Consolidated Financial Statements, Transener has complied with this requirement, prioritizing the operating costs and capital investments required to maintain service quality.

 

On March 3, 2021, pursuant to Resolutions No. 54/21 and 55/21, the ENRE called for a Public Hearing for March 29, 2021 to provide information and gather feedback on the Transitory Tariff Regime for Transener and Transba, respectively, within the RTI Process and prior to the definition of tariffs.

Besides, on July 3, 2018 the ENRE informed of the launching of the proceeding for the determination of the remuneration of Independent Transmission Companies in the exploitation stage: TIBA (Transba), the Fourth Line (Transener), YACYLEC and LITSA. In this respect, on October 8, 2018, information on costs, investments and tariff claims corresponding to the Fourth Line and TIBA were submitted to the ENRE. As of issuance of these Consolidated Financial Statements, the ENRE has not issued a resolution with the results of the analysis of the requested information.

 

2.2.2SADI’s power service outage

 

On June 16, 2019 at 7:07 a.m., the SADI experienced a total outage.

The outage was a result of the concurrence of multiple shortcomings within the SADI, some of them unrelated to the Transmission System operated and maintained by Transener.

As regards the Transmission System under the responsibility of Transener, the fault was due to a specific technical issue, and not to the lack of investment and maintenance. As a result of the change in the Littoral Corridor configuration due to the bypass between the 500 kV Colonia Elía – Campana and Colonia Elía –Manuel Belgrano lines, the Auto-Disconnect Generation (“DAG”) mechanism was not properly adapted and did not recognize signals sent out by the protection system. This bypass was made on account of the relocation of Tower 412 to support the highest possible power transmission capacity in the Litoral corridor.

 

 

F-33

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

Due to the great volume of electricity dispatched from this corridor and the DAG failure, there was an imbalance between supply and demand which could not be redressed by the system’s other restraint barriers external to the electric power transmission service, resulting in a total outage.

The 500 kV Transmission System was available immediately after the disruption, and 100% of the transmission lines were available to come into operation and allow for the restoration of the system. Service restoration was overall fast (within just 8.5 hours, 75% of the country’s demand had been restored).  

Transener estimates that the above mentioned event will give rise to a penalty of approximately $ 6.6 million plus interest, for which a provision is held as of December 31, 2020. This estimate is based on the application of the High-Voltage Transmission System’s Service Quality and Penalties Regime attached to Transener’s Concession Agreement as Sub-annex IV. 

As of the issuance of these Consolidated Financial Statements, the ENRE has not applied the penalty to Transener, which may differ from the company's estimates.

The occurrence of this event had an impact in 2020 on the amount of both penalties, which were increased, and awards, which were reduced, on account of the Additional Service Quality and Penalties Regime established by Resolutions No. 552/16 and No. 580/16.

 

2.3.Oil and gas

 

2.3.1 Argentine Hydrocarbons Law

On October 29, 2014, the National Congress enacted Law No. 27,007 amending Hydrocarbons Law No. 17,319 (enacted in 1967), which empowers the Government to grant exploration permits and concessions to the private sector. Additionally:

(i)Sets the terms for exploration permits:
-Conventional exploration: the basic term is divided into two periods of up to three years each, plus an optional extension of up to five years;
-Unconventional exploration: the basic term is divided into two periods of four years each, plus an optional extension of up to five years; and
-Exploration in the continental shelf and the territorial sea: the basic term is divided into two periods of three years each, plus an optional extension of one year each.
(ii)Sets the terms for exploitation concessions, extensible for 10-year terms:
-Conventional exploitation concession: 25 years;
-Unconventional exploitation concession: 35 years; and
-Continental shelf and off-shore exploitation concession: 30 years.
(iii)Sets transportation concessions will be granted for the same term than that granted for the originating exploitation concession.
(iv)Sets prices for payments of exploration and exploitation levy and empowers the enforcement authority to establish the payment of extension and exploitation bonds.

 

F-34

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 2: (Continuation)

(v)Establishes a 12% royalty payable by the exploitation concessionaire to the grantor on the proceeds derived from liquid hydrocarbons extracted at wellhead and the production of natural gas. In the case of extension, additional royalties for up to 3% over the applicable royalties at the time of the first extension, up to a total of 18%, will be paid for the following extensions.
(vi)Provides for two types of non-binding commitments between the National Government and the Provinces aiming to establish a uniform environmental legislation and to adopt a uniform tax treatment to encourage hydrocarbon activities.
(vii)Restricts the National Government and the Provinces from reserving new areas in the future in favor of public or mixed companies or entities, irrespective of their legal form.

 

2.3.2 Gas Market

 

2.3.2.1 Natural Gas Production Promotion Programs

 

2.3.2.1.1 Gas Plan II

In November 2013, pursuant to Resolution No. 60/13, the Committee created the Gas Plan II covering companies with no previous production or with a 3.5 MMm3/day production cap, establishing price incentives for production increases and penalties for the importation of LNG in case of breach of the committed volumes. Resolution No. 60/13, as amended (Resolutions No. 22/14 and No. 139/14), established a price ranging from US$4/MBTU to US$7.5/MBTU, based on the highest production curve attained.

On March 6, 2014 and January 30, 2015, former subsidiaries PELSA and Petrobras were registered with this program pursuant to esolutions No. 20/14 and No. 13/15, respectively, of the Secretariat of Economic Policies and Development Planning of the Ministry of Economy and Public Finances.

However, the receivables recorded by the Company in 2017 under the above-mentioned plan were not timely collected.

To this effect, on April 3, 2018, MINEM Resolution No. 97/18 established a procedure for the cancellation of compensations pending settlement and/or the payment of year 2017, payable in thirty monthly consecutive installments as from January 1, 2019. Beneficiary companies opting for the application of the procedure should state their decision to accede, waiving all present or future administrative and/or judicial actions, remedies, rights or claims regarding the payment of such obligations.

On May 2, 2018, the Group filed with the Ministry of Energy the application form to join the payment procedure set forth by MINEM Resolution No. 97/18, expressing its consent to and acceptance of its terms and scope, the amount of the compensation to the Group established by this resolution being estimated at US$ 148 million.

On February 21, 2019, SGE Resolution No. 54/19 was published, which modifies the described cancellation mechanism and provided for cancellations to be instrumented through the delivery of public debt bonds.

 

On April 17, 2019 and July 16, 2019, bonds were credited in favor of the Company for a face value of US$ 89 million and US$ 54 million, respectively. These bonds do not accrue interest and are repayable in 29 monthly and consecutive installments, the first one for 6.66%, the following eighteen installments for 3.33%, and the remaining ten installments for 3.34% of the original face value.

F-35

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

As of December 31, 2020, the Company collected US$ 71 million and US$ 43 million, respectively, as repayments, 6 installments still pending collection, which are disclosed in “Public debt securities” under “Investments at amortized cost”.

 

2.3.2.1.2 Argentine Natural Gas Production Promotion Plan (“GasAr Plan”)

 

On November 16, 2020, Executive Order No. 892/20 was published in the BO, which approved the GasAr Plan to foster the development of the Argentine gas industry based on a bidding mechanism, and instructed the SE to instrument such plan and to set the applicable complementary and clarifying rules. The most relevant aspects of this executive order include as follows:

 

(i)The call for tenders for 70 million m3/d of gas in the 4-year base block, which may not represent more than 70% of the companies’ production.
(ii)During its term of validity, as from May 2021, each signatory producer commits to supply an injection equal to or higher than the average injection for the May-July 2020 quarter per basin.
(iii)For off shore production, an additional term of 4 years is established (8 years in total), and the differential between the base production and the actual production will be offset with imported gas or injections exceeding those committed during the months of June, July and August of the first 4 years of the GasAr Plan.
(iv)Beneficiaries of other plans wishing to take part in the bid should file the waiver provided for in the regulation to be timely approved by the enforcement authority.
(v)A maximum award price of 3.21 US$/MMBTU (price at current value) is established.
(vi)The SE will determine, with the assistance of ENARGAS and through a process including actual civic participation, the price for which the natural gas service providers may request the implementation of a tariff update on account of variations in the price of the natural gas purchased, which may be equal to or lower than the market price. The differential between the price determined by the enforcement authority and that offered will be borne by the Federal Government in the form of a compensation.
(vii)The Federal Government undertakes to create a guarantee fund.
(viii)The recognition of tax credits subject to regulation.
(ix)The BCRA will establish appropriate mechanisms to facilitate access to the MLC, provided: funds have been entered through the MLC; and they are “genuine transactions” conducted after the entry into effect of the executive order and destined to the financing of projects under the GasAr Plan.

 

On November 23, 2020, the SE, through Resolution No. 317/20, launched the “National Public Call for Tenders for the Argentine Natural Gas Production Promotion Plan – 2020-2024 supply and demand scheme” for the award of a volume of 70 million m3 of natural gas per calendar year (CAMMESA plus distributors), which may be modified by the SE to guarantee an optimal domestic supply.

 

F-36

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

The bidding terms and conditions included samples of the contracts the producers should enter into with CAMMESA and gas distributors. These sample contracts stipulated a Deliver or Pay (“DOP”) obligation for 100% per day and a TOP obligation of 75% per month for CAMMESA and per quarter for distributors.

 

As regards the payment of contracts with distributors, the Federal Government will bear the monthly payment of the difference between the price offered and that resulting from the tariff schemes through a subsidy payable directly to producers. Pursuant to Act No. 27,591, the payment of this subsidy will be guaranteed by a procedure, pending regulation by the AFIP and the SE.

 

Additionally, to access the GasAr Plan producers submitted a plan of investments necessary to maintain the committed production and a national added-value commitment providing for the development of direct local, regional and national suppliers.

 

On December 15, 2020, Resolution No. 391/20 was published in the BO, whereby the natural gas volumes offered under the GasAr Plan were awarded.

 

In this sense, out of a total base volume of 67.42 million m3/day of natural gas to be purchased, in terms of the offered volume, the Company was ranked third in the Neuquina Basin, with a base volume awarded of 4.9 million m3/day at an annual average price of US$ 3.60 per million BTU for a term of four years effective as from January 1, 2021.

 

Additionally, the Company has been one of the three producers that offered an additional volume during the winter period, with the award of 1 million m3/day at a price of US$ 4.68 per million BTU. This volume is indispensable to accompany the high seasonality of the Argentine demand, reducing gas imports, the consumption of alternative fuels, and the use of foreign-currency reserves.

 

Besides, the Company was the firm with the highest increase in offered production (20% between base injection and the winter period) under the call for tenders.

 

The award granted to the Company represents a 7 million m3/day commitment and, based on the gas curve projected by the SE, the Company has entered into contracts with CAMMESA, IEASA and the other distributors that operating as from January 2021.

 

It is worth highlighting that this positioning minimizes contractual demand risks and makes it feasible for the Company to make a strong investment commitment, which will amount to approximately US$ 250 million during the four years of validity of the GasAr Plan.

 

2.3.2.2 Natural Gas for the Residential segment and CNG

Natural Gas Price within the PIST

On account of the significant devaluation of the Argentine peso and the impossibility to transfer this impact to final users’ tariff schemes, in early October, 2018 prices began to be agreed with distributors in the spot market on a daily basis.

F-37

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

On November 15, 2018 PEN Executive Order No. 1,053/18 was issued, which established, on an exceptional basis, that the Federal Government would bear the exchange difference between the price of gas purchased by gas distributors and that recognized in the gas distributors’ final tariffs for the April 2018 – March 2019 period. ENARGAS will determine the net amount to be transferred to each distributor in 30 monthly and consecutive installments as from October 1, 2019, updated with BNA’s 30-day interest rate; upon the collection of each installment, distributors will immediately make the corresponding payments to the involved natural gas suppliers, and will have to inform and provide proof of such payments before the ENARGAS on a monthly basis.

ENARGAS Resolution No. 466/19 and its amending provisions (Resolutions No. 554/19, No. 624/19 and No. 636/19), established the methodology to determine the amount payable by the Federal Government pursuant to the provisions of PEN Executive Order No. 1,053/18.

 

On October 25, 2019, the Company acceded to the collection procedure established by PEN Executive Order No. 1,053/18 and regulated by ENARGAS Resolution No. 466/19, the net amount of the receivable pending collection by the Company ascertained pursuant to ENARGAS Resolution No. 735/19 dated November 14, 2019 reaching $ 1,219 million. In December 2019, the Company collected the first installment of $ 41 million, but none of the overdue additional installments have been collected during 2020.

 

On December 14, 2020, National Budget Act No. 27,591 abrogated PEN Executive Order No. 1,053/18 without affecting rights acquired by the Company to collect the owed amount undertaken by the Federal Government during its term of validity. However, as of the date hereof no transfers corresponding to the overdue installments have been made, significantly affecting the recoverability of this receivable; consequently, in fiscal year 2020, the Company has recorded impairment losses in the amount of $ 888 million (US$ 13 million).

 

As of the issuance of these Consolidated Financial Statements, the Company is evaluating the possibility to initiate the pertinent proceedings for the collection of the overdue installments.

2.3.2.3 Acquisition of Natural Gas for Generation

 

Since November 2018, the Company has opted to make use of its self-supply capacity, during the term of SGE Resolution No. 70/18, and has destined a significant part of its natural gas production to its thermal units’ dispatch (see Note 2.1.5).

 

On the other hand, on December 27, 2018, under a CAMMESA auction conducted for the year 2019, offers for a total 222 million m3 interruptible gas-day were received, at seasonal PIST prices with a maximum price of US$5.2/MBTU and a minimum price of US$3.2/MBTU for the June-August 2019 period, and with a maximum price of US$3.7/MBTU and a minimum price of US$2.2/MBTU for the rest of the year. For implementation of this auction, reference PIST maximum seasonal prices, based on the source basin, were considered according to SGE Note No. 66680075/18, effective as of January 2019. Pampa took part in this auction.

 

Following the abrogation of SGE Resolution No. 70/18, which restored CAMMESA’s centralization scheme for the supply of fuels for generation purposes, as from December 2019 several successive calls for tenders without a purchase commitment were made (the purchased volume depends on the dispatch by thermal units on a daily basis).

 

F-38

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

On January 29, 2020, CAMMESA launched a tender for the purchase of the gas volumes required to meet the generation demand for the month of February 2020, with a 30% delivery commitment over the daily order, at an average price of US$ 2.67 for the Neuquina Basin. Since then, CAMMESA has replicated this methodology in all 2020 tenders, of which Pampa took part. Prices obtained in the tenders launched by CAMMESA have shown a sustained downward trend compared to year 2019 prices.

 

As a result of the implementation of the GasAr Plan, and taking into consideration that the awarded volume has not met the total demand, in the last days of the month of December 2020, a new tender was launched for January 2021, with a price of US$ 2.30 that, for awardees of the GasAr Plan that —as is the case of the Company— does not have either conditions or DOP.

 

2.3.2.4 Natural Gas Exports

 

Through resolutions MEyM No. 104/18 and SGE No. 9/18, subsequently replaced in July 2019 by the SGE Resolution No. 417/19, a Procedure for the Authorization of Natural Gas Exports was established. Authorizations, considering in all cases the security of supply to the Argentine domestic market, may consist of short-term (up to 1 year) or long-term (1 to 10 years) exports, whether on an interruptible basis or on a firm basis for summer periods (October - April for a term of up to 5 years), or operational exchanges in emergency situations. Likewise, in August 2019, through the SHC Provision No. 168/19, the terms and conditions for firm gas exports to Chile until May 15, 2020, were approved.

 

In December 2018 and January 2019, the Company was authorized pursuant to resolution SGE No. 252/18 and No. 12/19 to export natural gas to Chile and Uruguay, on an interruptible basis, respectively. Furthermore, in September 2019, Pampa obtained permission to export natural gas, on a firm basis, to ENAP Refineries in Chile.

On October 31, 2019, SSHC Resolution No. 284/19 was published in the BO, which approves the operating procedure for natural gas exports effective until September 30, 2021 seeking to:

-ensure the security of the supply to the domestic market;
-ascertain the scope of any need to restrict gas exports which are operationally useful in case of lack of supply to the domestic market (the “Useful Interruption”);
-organize, document, and provide predictability to natural gas restriction or interruption procedures; and
-coordinate the actions to be implemented to ensure supply to the domestic market.

 

Under this proceeding, the SSHC, ENARGAS, Transport Licensees and Exporters should hold weekly/bi-weekly meetings to analyze the supply domestic status and its implications in gas exports, taking into consideration the projection of the operational status of the gas transportation system and subsystems, the domestic demand, and any event involving potential drawbacks.

 

The procedure establishes that should the security of the supply to the domestic market be at stake, producers should adjust their exports pursuant to what is resolved under such procedure, and the mere notice of Useful Interruption served by a reliable means will entail the abide by producers.

 

F-39

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

In case of incurring higher costs for the use of alternative fuels to generate electricity by the WEM (imported LNG, coal, FO or GO), whose cost was borne by the National Government, exporters must pay compensation to CAMMESA. Through SGE Resolution No. 506/19 issued on August 29, 2019, a minimum of US$ 0.1/MBTU and a maximum of US$ 0.2/MBTU for the exported volume were set, that could be offset with receivables for gas sale in in the domestic market with CAMMESA. Such compensation would be included in WEM’s cost of energy.

 

It should be pointed out that from September 4, 2018 to December 31, 2020, Executive Order No. 793/18 regulated the application of a 12% export tax rate with a cap of $ 4 over each exported US$ for natural gas exports. On December 14, 2019, Executive Order No. 37/19 voided the ceiling of $ 4 for each US$ exported, established in Article 2 of Decree No. 793/18 as amended.

 

Law No. 27,541 authorized the PEN to modify the Export Duties corresponding to hydrocarbons sold in the external market and ratified the validity of Executive Order No. 793/18 and No. 37/19.

 

As from the entry into effect of the GasAr Plan, awardees will have preferential firm export conditions for a total volume of up to 11 million m3 per day, exclusively during the non-winter period, which may be used both for exporting natural gas through pipelines and for its domestic liquefaction for its later export as LNG. Firm permits may be obtained for 4 million m3/d in the Neuquina Basin and 2 million m3/d in the Austral Basin (with priority being determined by the price-competition positioning under the GasAr Plan).

 

2.4 Oil market

On May 18, 2020 Executive Order No. 488/20 was issued, which provides for a series of measures aiming to preserve crude oil’ exploration and production activities; its main provisions are outlined below:

-It sets a billing price of 45 US$/bbl for the commercialization of Medanito-type crude oil in the domestic market, adjusted by quality for other types of crude oil and loading ports, effective from the executive order’s publication date to December 31, 2020.
-It sets a price for the so-called “Criollo Barrel”, which will be quarterly reviewed and rendered ineffective if the Brent oil price exceeds 45 US$/bbl for 10 calendar days.
-It forces producing and refining companies to keep activity levels similar to those recorded in 2019, although taking into consideration the current contraction in demand resulting from the COVID-19 pandemic, and also requires refining companies to acquire their whole crude oil demand from domestic producers.
-It limits, while the support price remains in effect, access to the foreign exchange market by producing companies to purchase foreign assets and/or securities denominated in pesos for their further sale in foreign currency or custody transfer abroad.
-It sets a 0% rate for crude oil export duties considering a base value lower than 45 US$/bbl. The rate will increase gradually as the international price increases until reaching 8%, the cap to be recognized when this price equals or exceeds 60 US$/bbl.

 

 

F-40

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

As regards the oil market, after the cutbacks on supply implemented by the OPEC and OPEC+ and the gradual easing of lockdown measures attempted by several countries, a recovery trend was evidenced in the listings of crude oil and its derivatives, with the Brent crude oil showing a sustained price above 40 US$/bbl as from mid-June, after reaching a minimum value below 20 US$/bbl in the month of April 2020.

The validity of the support price for the sale of crude oil in the domestic market, established by Executive Order No. 488/20, terminated on August 31, 2020 as the international Brent crude oil price exceeded US$45/bbl for 10 consecutive days.

2.4.1 Hydrocarbon exploration and exploitation levy

On September 26, 2019, the Province of Neuquén published Executive Order No. 2.032/19, which established values for the exploration and exploitation levy effective as from 2020. An exploration levy of $ 1,245, $ 4,980, $ 7,470 and $ 87,150 per km2 or fraction is set for the first, second, third period and extension, respectively, as well as an exploitation levy of $ 22,410 per km2 or fraction.

 

 

Likewise, at the national level the Executive Order No. 771/20 updates the value of the hydrocarbon exploration and exploitation levy payable on a yearly basis to the Federal Government or the Provincial Jurisdiction, as applicable, effective as from fiscal year 2021. It establishes an exploration levy for an amount in pesos equivalent to 0.46, 1.84 and 32.22 oil barrels per square kilometer for the first period, the second period and the term extension, respectively, as well as an exploitation levy for a maximum amount in pesos equivalent to 8.28 oil barrels per square kilometer or fraction.

 

2.5 Gas Transportation

 

2.5.1. General aspect

 

TGS’ license has been granted for an original term of 35 years starting December 28, 1992. However, upon termination TGS may request to the ENARGAS a License extension for an additional ten-year period. Upon termination of the License’s life, whether it be 35 or 45 years, the Natural Gas Law and Executive Order No. 2,458/92 require the call for a new bid for the granting of a new license, where TGS —provided it has substantially met its obligations resulting from the License— will have the option to match the best offer received by the National Government during the bidding process.

 

2.5.2. TGS’s Tariff situation

 

2.5.2.1.Integral Agreement

 

On March 30, 2017, within the framework of the tariff renegotiation process, TGS executed the 2017 Integral Agreement which, after being approved by the different intervening government agencies and the National Congress, was ratified on March 27, 2018, through PEN Decree No. 250/18. This decree represents the conclusion of the RTI process and terminates all transitional agreements celebrated by TGS, and thus, the final renegotiation of the license after seventeen years of negotiations.

 

F-41

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

The 2017 Integral Agreement sets the guidelines for the provision of the natural gas transportation service until the end of the License. Among these guidelines:

 

-The RTI Process, which will culminate in the signing of the integral agreement, was approved. As a result of this RTI, a new tariff schedule was also approved. This new tariff schedule applicable to the Company determined a total tariff increase of 214.2% and 37%, in the event that it had been granted in a single installment as of April 1, 2017, on the tariff of the natural gas transportation service and the CAU, respectively.
-A Five-Year Investment Plan to be executed by TGS is approved, the plan requires a high level of essential investments for the operation and maintenance of the pipeline system, to provide quality, safe and reliable service. The Five-Year Plan was for the period from April 1, 2017 to March 31, 2022 and amount to $ 6,786 million (valued at December 31, 2016).
-A non-automatic six-month adjustment mechanism for the natural gas transportation tariff and the investment commitments were approved. This adjustment must be approved by ENARGAS and for its calculation, the evolution of the WPI published by INDEC will be considered.
-TGS and its shareholders must withdraw any claim against the Government related to the natural gas transportation business, including the arbitration proceedings before the ICSID. The Company desisted from it on June 26, 2018.

 

As it is mentioned above the tariff increase was granted in 3 installments according to the following resolutions:

 

-Effective as of April 1, 2017, 64.2% of the tariff for the natural gas transport service, the CAU not being adjusted, in accordance with the provisions of Resolution No. 4,362/17.
-Effective as of December 1, 2017, after the issuance of Resolution No. 120/17, 81.1% on the tariff for the natural gas transport service and 29.7% on the CAU, which includes the first adjustment by WPI.
-Effective as of April 1, 2018, an increase of 50% over the tariff for the natural gas transport service and the CAU within the framework of the provisions of Resolution No. 310/18 issued by the ENARGAS.

 

2.5.2.2 Semi-annual tariff increase

 

This increase is granted within the framework of the semi-annual tariff adjustment of the natural gas transportation service in accordance with the provisions of the RTI process.

 

In the public hearing held on September 4, 2018, in which the Company requested, based on the variation of the WPI recorded for the period February - August 2018, a tariff increase of approximately 30%. Considering the hearing, on September 27, 2018, ENARGAS issued Resolution No. 265/18 which determined a 19.7% tariff increase effective as of October 1, 2018.

 

This increase was determined by ENARGAS based on the simple average of the WPI, the Construction Cost Index for the period February and August 2018 and the Salary Variation Index between December 2017 and June 2018.

F-42

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

It is noteworthy that ENARGAS supported the determination of the aforementioned tariff increase in the provisions of Resolution No. 4,362/17, which, among other issues, provided that under certain circumstances and macroeconomic conditions, such as the significant devaluation occurred after April 2018, ENARGAS may use other indexes than the WPI to determine the tariff increase. TGS notified ENARGAS its disagreement with respect to the methodology for calculating the semi-annual adjustment.

 

On March 29, 2019, ENARGAS issued Resolution No. 192/19 approved, effective as from April 1, 2019, a 26% increase in tariff schemes applicable to the natural gas transportation utility by TGS current as of March 31, 2019.

 

In accordance with current regulations, ENARGAS has considered the evolution of the IPIM update index between the months of August 2018 and February 2019 to define six-monthly adjustments to TGS’ tariffs.

 

As regards the semi-annual tariff update which should have become effective as from October 1, 2019, on September 3, 2019, the ex SGE issued Resolution No. 521/19, later amended by Resolution No. 751/19, postponed its application until February 1, 2020. This deferral will result in TGS having to review and adjust, in the same proportion as the foregone income, the execution of the Five-Year Investment Plan.

 

However, the Solidarity Law provided that natural gas transportation and distribution tariffs would remain unchanged for a term of 180 days as from December 23, 2019. In this sense, the PEN is vested with the power to renegotiate them, whether under the current RTI or through an extraordinary review pursuant to the provisions of the Natural Gas Law.

 

On June 9, 2020, pursuant to Resolution No. 80/2020, the ENARGAS created the Coordination and Centralization Committee —Act No. 27,541 and Executive Order No. 278/20— with the mission of coordinating the Integral Tariff Structure Review provided for in section 5 of the Solidarity Law.

 

On June 19, 2020, the PEN issued Executive Order No. 543/2020 extended the life of that natural gas transport and distribution tariffs would remain undestop for an additional term of 180 calendar days, that is, until December 16, 2020.

 

Pursuant to Emergency Executive Order No. 1,020/2020, the PEN launched the renegotiation of the RTI finished in 2018, which may not exceed a term of 2 years. Until then, renegotiation agreements in force are suspended. The renegotiation will be conducted by ENARGAS ad referendum to the PEN.

 

Furthermore, Executive Order No. 1,020/2020 extends the tariff freeze for an additional term of 90 calendar days or until the approval of the transitory tariffs. It is worth highlighting that all the agreements, whether transitory or general, entered into with the Federal Government will have to contemplate the public hearing proceedings established by the current regulations and be authorized by the different governmental bodies.

 

Additionally, the Solidarity Law provides for the administrative intervention of the ENARGAS, recently extended through Decree No. 1,020.

 

On February 22, 2021, ENARGAS issued Resolution No. 47/21 convening a public hearing by 16 March 2021 to consider the transitional tariff increase in accordance with Decree No. 1,020.

 

F-43

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

2.5.2.3 Collection deferrals

 

On June 21, 2019, the SGE issued Resolution No. 336/19 establishing a 22% payment deferral on bills issued to natural gas distributors from July 1, 2019 to October 31, 2019 for the utility services provided to natural gas residential users.

 

The described deferrals will be recoverable in bills issued as from December 1, 2019 in five monthly, equal and consecutive installments.

 

As of December 31, 2019, TGS’s sales receivables from natural gas distributors amount to $ 1,206 million under these items.

 

2.5.2.4 Non-regulated segments

 

2.5.2.4.1 Domestic market

 

The Production and Commercialization of Liquids segment is not subject to regulation by ENARGAS. However, over recent years, the Argentine Government enacted regulations which significantly impacted it.

 

GLP domestic sales prices are impacted by the provisions of Law No. 26,020 "Regime of the industry and commercialization of liquefied petroleum gas" and the SRH (former Secretary of Hydrocarbon Resources), that sets forth LPG minimum volumes to be sold in the local market in order to guarantee domestic supply.

 

In this context, TGS sells the production of propane and butane to fractionators at prices determined semiannually by the SRH. On March 30, 2015, the PEN issued Decree No. 470/15, regulated by SE Resolution No. 49/15, which created the “Household Plan” and sets a maximum reference price for the members of the marketing chain in order to guarantee the supply to low-income residential user, by committing the GLP producers to supply at a fixed price with a quota assigned to each producer. Additionally, payment of compensation to the Household Plan participating producers was established.

 

In 2020, pursuant to Executive Order No. 311, maximum reference prices for the sale of LPG, which TGS sells in the domestic market, remained unchanged for a term of 180 calendar days as from its issuance date. On October 19, 2020, the SE passed Resolution No. 30/2020 increasing the price of these products to $ 10,885.

 

In this context, TGS has filed various administrative and judicial claims challenging the general regulations of the program, as well as the administrative acts that determine the volumes of butane that must be sold in the domestic market, in order to safeguard its economic-financial situation and thus, preventing that this situation does not extend over time.

 

In addition, TGS is a party of the Propane Gas Supply Agreement for Induced Propane Gas Distribution Networks ("Propane for Networks Agreement") entered into with the Argentine Government by which it undertakes to supply propane to the domestic market at a price lower than the market price. In compensation, TGS receives an economic compensation calculated as the difference between the sale price and the export parity determined by the SE.

 

F-44

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

Within the gradual subsidies reduction path granted by MINEM, on March 31, 2017, the MINEM issued Resolutions No. 74 and No. 474/17 that stipulate increases in the price of undiluted propane gas destined to the Propane for Networks Agreement as of April 1 and December 1, 2017, respectively. From those dates onwards, the price of undiluted propane gas had been set at $ 1,267/tn and $ 2,832/tn and $ 1,941.20/tn and $ 3,964/tn, respectively, depending on the client to whom the undiluted propane gas is delivered.

 

Finally, in May 2018, TGS initiated the sixteenth extension by which the methodology for determining the price and volumes for the period April 1, 2018 - December 31, 2019 is established. Additionally, this last extension established the propane sale price to customers under this program. Notwithstanding the foregoing, on January 14, 2020 TGS received an instruction issued by the SE to proceed with propane deliveries in accordance with set conditions by the sixteenth extension. Later, TGS executed the seventeenth extension to the Propane for Grids Agreement, effective until December 31, 2020. As of the date of issue of these Consolidated Financial Statements, this agreement has not been extended.

 

During 2020 and 2019, TGS received the amount of $ 150 million and $ 638 million, for subsidies for the programs mentioned above, respectively.

As it has been previously mentioned, participation in the Household Plan results in economic and financial damage to TGS, since under certain circumstances products would be sold at prices below their production costs.

As of December 31, 2020, the Argentine Government owes TGS $ 303 million under these items.

 

2.5.2.4.2 Foreign market

 

On September 3, 2018, the Executive Branch issued Decree No. 793/18, which, between September 4, 2018 and December 31, 2020, sets an export duty of 12% on the exported amount of propane, butane and natural gasoline. This withholding is capped at $4 for each dollar of the tax base or the official FOB price.

Later, as a result of the enactment Law No. 27,541, an 8% cap was set for the rate applicable to hydrocarbons effective as from December 23, 2019.

Executive Order No. 488/2020 regulated the rate applicable to the export duties for certain gas and oil derivatives, including the products produced and exported by TGS, which will range between 0% and 8% depending on the price of the “ICE Brent first line” barrel. If this price is below US$ 45, the rate will be 0%. Instead, if the price equals or exceeds US$ 60, an 8% rate will be paid, and the rate will be variable if the price is between US$ 45 and US$ 60.

 

2.6Tax regulations - Main tax reforms

 

Pursuant to Act No. 27,430 and Act No. 27,541, several modifications were introduced in the tax treatment, the key components of which are described below:

 

2.6.1 Income tax

 

2.6.1.1 Income tax rate

 

According to Law No. 27,430, the income tax rate for Argentine companies will be gradually reduced from 35% to 30% for fiscal years beginning as from January 1, 2018 until December 31, 2019, and to 25% for fiscal years beginning as from January 1, 2020.

F-45

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

However, Law No. 27,541 suspended the reduction in the rate projected for fiscal years beginning on or after January 1, 2021, providing that during the suspension period the tax rate will remain at 30%.

 

The effect of the application of the income tax rate changes on deferred tax assets and liabilities pursuant to the above-mentioned tax reform was recognized, based on their expected realization year, in “Effect of tax rate change in the deferred tax” under Income tax of the Consolidated Statement of Comprehensive Income (Note 10.6).

 

2.6.1.2 Tax on dividends

 

According to Law No. 27,430, the tax on dividends or earnings distributed by, among others, Argentine companies or permanent establishments to individuals, undivided estates or beneficiaries residing abroad is introduced based on the following considerations: (i) dividends resulting from earnings accrued during fiscal years beginning as from January 1, 2018 until December 31, 2019, will be subject to a 7% withholding; and (ii) dividends resulting from earnings accrued during fiscal years beginning as from January 1, 2020 will be subject to a 13% withholding.

 

Pursuant to the suspension of the Income Tax rate provided for by Law No. 27,541, the 7% withholding will remain in effect for fiscal years beginning on or before January 1, 2021.

 

Dividends resulting from benefits gained until the fiscal year prior to that beginning on January 1, 2018 will remain subject to the 35% withholding on the amount exceeding the untaxed distributable retained earnings (equalization tax’ transition period) for all beneficiaries.

 

2.6.1.3 Optional Tax revaluation

 

Law No. 27,430 provides that Companies may opt to make a tax revaluation of assets located in the country and subject to the generation of taxable earnings existing as of December 31, 2017. The special tax on the revaluation amount depends on the asset, and will amount to 8% for real estate not accounted for as inventories, 15% for real estate accounted for as inventories, and 10 % for personal property and the remaining assets. Once the option is exercised for a certain asset, all assets within the same category should be revalued.

 

The tax result from the revaluation will not be subject to income tax, and the special tax on the amount of the revaluation will not be deductible from such tax.

 

Several regulations (Decrees No. 353/18, No. 613/18 and No. 143/19 and AFIP General Resolution No. 4,287), have repeatedly postponed the date for exercising this option based on the international context and the greater volatility in financial variables affecting decision-making regarding the exercise of the option.

 

On March 27, 2019, Pampa and CPB, based on their evaluation of the domestic context and the evolution of financial variables (including the inflation rate), exercised their option to adhere to the tax revaluation regime on their property, plant and equipment existing as of December 31, 2017 pursuant to Title X of Law No. 27,430, the tax cost of such property thus increasing to $ 15,311 million.

 

On exercising this option, Pampa and CPB have paid the special tax for a principal amount of US$ 34.5 million plus interest for US$ 1 million.

 

F-46

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

Additionally, Pampa and CPB had to waive all lawsuits and rights invoked in any previously brought judicial or administrative proceedings seeking the application of updating mechanisms on the income tax (see Notes 11.6.1 and 15.2). Furthermore, Pampa and CPB had to waive their rights to initiate any judicial or administrative proceeding seeking the application of such updating mechanisms regarding fiscal years ended before December 31, 2017.

 

2.6.1.4 Tax inflation adjustment

 

Law No. 27,430 sets out the following rules for the application of the income tax inflation adjustment mechanism:

(i)a cost adjustment for goods acquired or investments made during fiscal years beginning after January 1, 2018 taking into consideration the percentage variations in the IPC published by the INDEC; and
(ii)the application of the adjustment provided for by Title VI of the Income Tax Law when variations in the above-mentioned index exceed one hundred percent (100%) over the thirty-six (36) months preceding the closing of the fiscal period to be settled; alternatively, for the first, second and third fiscal year as from its effective date, this proceeding will apply in case the accumulated variation in such price index, calculated from the beginning of the first fiscal year to the closing of each fiscal year, are higher than fifty-five percent (55%), thirty percent (30%) and fifteen percent (15%) for the years 2018, 2019 and 2020, respectively.

 

Law No. 27,541 provides that, as regards the positive or negative fiscal inflation adjustment determined as a result of the application of the adjustment provided for by Title VI of the Income Tax Law corresponding to the first and second fiscal year starting as from January 1, 2019, one-sixth (1/6) should be charged in that fiscal period and the remaining five sixths (5/6), in equal parts, in the five immediately following fiscal periods.

As of the end of fiscal year 2018, an accumulated variation in the price index exceeding the foreseen 55% condition for the application of the comprehensive adjustment in such first fiscal year was not evidenced. However, the costs of goods acquired during fiscal year 2018 have been adjusted in accordance with the procedure stated in subsection (i).

As of December 31, 2019 and 2020, the cumulative variation in the IPC had exceeded the 15% and 30% condition set for the third and second transition years, , pursuant to Law No. 27,430, and, therefore, the effect of the tax inflation adjustment has been accrued in the calculation of the current and deferred income tax provision, except in cases where, as irregular fiscal years, the legal parameter mentioned for each of the annual financial years has not been exceeded.

The Company and its subsidiaries determine and disclose the impact of the tax inflation adjustment for each of the fiscal periods in which it is applicable taking into consideration the annual guideline established by Act No. 27,430.

 

2.6.2 Value-added tax

 

A procedure is established for the reimbursement of tax credits originated in investments in property, plant and equipment which, after 6 months as from their assessment, have not been absorbed by tax debits generated by the activity.

F-47

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

2.7Regulations on access to the exchange free market (“MLC”)

 

The following is a summary of the main measures taken by the BCRA with the purpose of regulating inflows and outflows in the MLC to maintain the exchange rate stability and protect international reserves in view of the high degree of uncertainty and volatility in the exchange rate by tightening exchange controls and restrictions on the inflow and outflow of foreign exchange. In this regard, in 2020, the BCRA issued a series of communications (including, but not limited to, Communications “A” 7001, 7030, 7042, 7052, 7068, 7106, 7142 and 7152), which introduced restrictions associated, among other factors, with transactions with stock market assets by companies and the disposal of liquid foreign assets, thus imposing further restrictions on access to the MLC.

In main, it provided for the obligation to file an affidavit to access the MLC without BCRA’s prior authorization, certifying that all foreign-currency holdings in the country are deposited in accounts with local financial institutions and that it have liquid foreign assets available was requested for an amount equivalent to or higher than US$ 100,000. In case such liquid foreign assets exceed the amount of US$ 100,000, but include reserve or guarantee funds created under debt contracts or transactions with derivatives entered into abroad and that may not be used, an additional affidavit should be submitted.

 

To such effects, the term “liquid foreign assets” will comprise, among others: holdings of foreign currency notes and coins, availability of gold in the form of good delivery bars or coins, sight deposits in foreign financial entities and other investments allowing for the immediate availability of foreign currency (for example, investments in foreign public securities, funds in investment accounts deposited with investment managers located abroad, crypto assets, funds deposited in payment service providers’ accounts, etc.). On the other hand, the following will not be considered available liquid foreign assets: funds deposited abroad which may not be used by the customer as they are reserve or guarantee funds created under foreign debt contracts, or funds kept as collateral for foreign transactions with derivatives entered into abroad.

 

Furthermore, it established the obligation to enter and settle in the MLC, in case access has been requested and within a term of five business days after they become available, foreign funds originating from the collection of loans granted to third parties, the collection of time deposits or the sale of any kind of asset, in case the asset has been acquired, the deposit has been made or the loan has been granted after May 28, 2020;

 

As regards transactions with stock market assets, it established: (i) the restriction, as from the moment access to the MLC is requested, to perform security sales transactions to be settled in foreign currency or their transfer to depository institutions abroad for a term of 90 days before and after the request, and the filing of an affidavit in this respect; and (ii) that transactions with securities concerted abroad and securities acquired abroad may not be settled in pesos in the country.

 

Regarding imports, BCRA’s prior authorization to access the MLC is required to make payments for the import of certain goods abroad or to cancel the principal of debts originating from the import of goods by companies. Additionally, and before executing payments for the import of goods, entities should verify that the affidavit requested to the customer is compatible with BCRA’s existing data. Moreover, the need for BCRA’s prior authorization to access the MLC for the cancellation of principal of foreign financial debts with foreign affiliates remains in effect until March 31, 2021 inclusive.

 

 

F-48

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 2: (Continuation)

 

Furthermore, the BCRA established the obligation to submit a refinancing plan for certain debts and principal maturities scheduled between October 15, 2020 and March 31, 2021, based on the following criteria: (i) access to the MLC for up to 40% of the principal amount, within the original term; and (ii) the refinancing of the principal balance, through new foreign indebtedness with an average life of 2 years. Within the framework of this refinancing process, access to the MLC is allowed for the early cancellation of principal, interest or debt swaps up to 45 calendar days before the maturity date, provided all requirements set forth by the regulation have been verified.

 

Regarding transactions that have been entered and settled through the MLC as from November 16, 2020 and are destined to the financing of projects under the Gas.Ar Plan (see Note 2.2.2.1.2), the BCRA issued Communication “A” 7168 providing for access to the MLC: (i) to transfer foreign currency abroad as earnings and dividends to non-resident shareholders, as from the second anniversary of the investment; (ii) for the repayment of principal and interest of foreign debts with an average life of no less than two years; (iii) for the repatriation of direct investments by non-residents as from the second year and up to the amount of the direct-investment contributions settled in the MLC in the case of a share capital reduction and/or a reimbursement of irrevocable capital contributions by the domestic company, among other requirements provided in the regulation.

 

After December 31, 2020, BCRA Communication “A” 7196 provided, among other modifications, for a series of measures aiming to make regulations more flexible so as to facilitate the exchange or financing of foreign private-sector liabilities that have been entered and settled through the MLC and concerted as from January 7, 2021, such as: (i) the extension of the term before the maturity date to access the MLC for the cancellation of principal and interest of foreign financial debts or debt securities publicly registered in the country and denominated in foreign currency; and (ii) the possibility to accumulate funds originating from the collection of goods and services exports in foreign and/or domestic accounts destined to guarantee the payment of maturities of debts concerted as from January 2021, among others.

 

More information on Argentina’s foreign exchange regulations can be found at the Central Bank’s website: www.bcra.gov.ar.

 

NOTE 3: BASIS OF PREPARATION

These Consolidated Financial Statements have been prepared in accordance with IFRS issued by IASB and have been approved for issue by the Board of Directors dated March 10, 2021. Significant accounting policies adopted in the preparation of these Consolidated Financial Statements are described in Note 4, which have been consistently applied.

These accounting policies have been applied consistently by all Group companies.

On account of the execution of the contract for the sale of the 51% interest in Edenor (see detail in Note 5.3.1), comparative results corresponding to the electricity distribution segment have been disclosed under “Discontinued operations” in the statement of comprehensive income.

Figures corresponding to commercial interest presented in comparative form have been reclassified from Financial income to Other operating income to maintain consistency with this period’s figures in accordance with the change of policy detailed in Note 4.

The Company adopted the U.S. dollar as its functional currency commencing on January 1, 2019; therefore, previous comparative figures have been restated 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.

Additionally, other not significant reclassifications have been made to those financial statements to keep the consistency in the presentation with the amounts of the current year.

F-49

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 4: ACCOUNTING POLICIES

 

The main accounting policies used in the preparation of these consolidated Consolidated Financial Statements are explained below.

 

The Company has modified its policy for the classification of commercial interest in the statement of comprehensive income as it understands that the items corresponding to late payment surcharges in the cancellation of sales receivables provide relevant information on the business operations and operating flows rather than represent the Company’s financial performance and, therefore, as from this fiscal year, they are disclosed under Other operating income. Management considers that this presentation better reflects the impacts of the operating cycle, allowing for a unified presentation together with other expenses already disclosed under operating expenses (including the impairment of receivables), mainly considering the context detailed in Note 1.2, which furthered the delay in payment terms to generators and hydrocarbon producers.

4.1New accounting standards, amendments and interpretations issued by the IASB effective as of December 31, 2020 and adopted by the Company

 

The Company has applied the following standards and / or amendments for the first time as of January 1, 2020:

-Conceptual Framework (issued in March 2018).
-IFRS 3 “Business Combinations” (amended in October 2018).
-IAS 1 “Presentation of Financial Statements” and NIC 8 “Accounting Policies, Changes in Accounting Estimates and errors” (amended in October 2018).
-IFRS 9 “Financial Instruments”, NIC 39 “Financial Instruments: Presentation” and IFRS 7 “Financial Instruments: Disclosures” (amended in September 2019).
-IFRS 16 “Leases” (amended in May 2020)

 

The application of the detailed standards and amendments did not have any impact on the results of the operations or the financial position of the Company.

4.2New standards, amendments and interpretations issued by the IASB not yet effective and which have not been early adopted by the Company
-IFRS 17 -“Insurance Contracts”: issued in May 2017 and modified in June 2020. It supersedes IFRS 4, introduced in 2004 as an interim standard, which gave companies dispensation to carry on accounting for insurance contracts using national accounting standards, thus resulting in several application approaches. IFRS 17 sets the principles for the recognition, measurement, presentation and disclosure of information associated with insurance contracts and is applicable as from January 1, 2023, allowing for its early adoption for entities already applying IFRS 9 and IFRS 15. The Company estimates that its application will not have a significant impact on the Company’s operating results or financial position.

 

F-50

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

 

-IAS 1 - “Presentation of financial statements”: amended in January and July 2020. It incorporates amendments to the classification of liabilities as current or non-current. Amendments are applicable to fiscal years starting on or after January 1, 2023, allowing for early adoption. Its application will not have a significant impact on the Company’s operating results or financial position.

 

-IFRS 3 – “Business Combinations”: amended in October 2020. It incorporates references to the definitions of assets and liabilities of the new Conceptual Framework and clarifications associated with contingent assets and liabilities incurred separately from those taken on in a business combination. It applies to business combinations as from January 1, 2022, and allows for its early adoption.

 

-Annual Improvements to IFRS Standards – 2018-2020 Cycle: amendments were issued in May 2020 and are applicable to annual periods starting as from January 1, 2022. The Company estimates that their application will not have a significant impact on the Company’s operating results or financial position.

 

-IAS 16 – “Property, Plant and Equipment”: amended in May 2020. It incorporates modifications on the recognition of inventories, sales and costs of items produced while bringing an item of property, plant and equipment to the location and the conditions necessary for it to be capable of operating in the manner intended. Amendments are applicable to fiscal years starting on or after January 1, 2022, allowing for early adoption. The Company is currently analyzing the impact of the application of these modifications in its operating results or financial position.

 

-IAS 37 – “Provisions, Contingent Liabilities and Contingent Assets”: amended in May 2020. It clarifies the scope of the concept of fulfillment cost of an onerous contract. Amendments are applicable to fiscal years starting on or after January 1, 2022, allowing for early adoption. The Company estimates that its application will not have a significant impact on the Company’s operating results or financial position.

 

-Amendments to IFRS 9 – “Financial Instruments”, IAS 39 – “Financial instruments: Presentation” and IFRS 7 – “Financial Instruments: Disclosures”, IFRS 4 – “Insurance Contracts” and IFRS 16 – “Leases”: amended in August 2020. It incorporates guidelines for the measurement of financial assets and liabilities at amortized cost affected by the reform in the reference interest rate. Amendments are applicable to fiscal years starting on or after January 1, 2021. The Company is currently analyzing the impact of the application of these modifications in its operating results or financial position.
4.3Effects of changes in foreign exchange rates

4.3.1 Functional and presentation currency

The information included in these Consolidated Financial Statements is recorded in U.S. Dollars, which is the Company’s functional currency, that is, the currency of the primary economic environment where the entity operates.

F-51

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

4.3.2 Foreign-currency transactions and balances

Foreign currency transactions are translated into the functional currency at the exchange rates prevailing on each transaction date or valuation date, when items are remeasured. Foreign exchange gains and losses arising on the settlement of monetary items and on translating monetary items at the closing of the fiscal year using year-end exchange rate are recognized within the financial results in the statement of comprehensive income, with the exception of capitalized amounts.

4.3.3 Group companies’ translation into functional currency

The results and financial position of subsidiaries, joint ventures and associates whose functional currency is the Argentine Peso, a currency of a hyperinflationary economy, are translated into the Company’s functional currency using the year-end exchange rate. The results generated by the application of IAS 29 adjustment mechanism for hyperinflationary economies, on the opening equity measured in functional currency are recognized under “Other comprehensive income”.

4.3.4 Classification of Other comprehensive income within the Company’s equity

The Company classifies and directly accumulates within equity, in the retained earnings line, the results generated by the application of the IAS 29 adjustment mechanism on the opening retained earnings, while the remaining results are presented in a separate component of equity and accumulated until the disposal of the foreign operation in “Other comprehensive income”, in accordance with IAS 21.

4.4Principles of consolidation and equity accounting

4.4.1 Subsidiaries

Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power to direct the activities of the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. The Group cease consolidation of entities from the date that control ceases.

The acquisition method of accounting is used to account for business combinations by the Group (see Note 4.4.5 below).

Intercompany transactions, balances and unrealized gains on transactions between Group companies are eliminated. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the transferred asset. Accounting policies of subsidiaries have been changed when necessary to ensure consistency with the policies adopted by the Group.

Non-controlling interests in the results and equity of subsidiaries are shown separately in the Consolidated Statement of Comprehensive Income, Consolidated Statement of Changes in Equity and Consolidated Statement of Financial Position respectively.

F-52

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

4.4.2 Associates

Associates are all entities over which the group has significant influence but not control or joint control. This is generally the case where the Group holds between 20% and 50% of the voting rights. Investments in associates are accounted for using the equity method of accounting (see Note 4.4.4 below), after initially being recognized at cost.

4.4.3 Joint arrangements

Investments in joint arrangements are classified as either joint operations or joint ventures, according IFRS 11 “Joint Arrangements”. The classification depends on the contractual rights and obligations of each investor, rather than the legal structure of the joint arrangement. The Company has both joint operations and joint ventures.

4.4.3.1 Joint operations

The Company recognizes its direct right to the assets, liabilities, incomes and expenses of joint operations and its share of any jointly held or incurred assets, liabilities, incomes and expenses. These have been incorporated in the Consolidated Financial Statements under the appropriate headings.

4.4.3.2 Joint ventures

Interests in joint ventures are accounted for using the equity method (see Note 4.4.4 below), after initially being recognized at cost.

4.4.4 Equity Method

Under the equity method of accounting, the investments are initially recognized at cost and adjusted thereafter to recognize the Group’s share of the post-acquisition profits or losses of the investee in profit or loss, and the Group’s share of movements in other comprehensive income of the investee in other comprehensive income. Dividends received or receivable from associates and joint ventures are recognized as a reduction in the carrying amount of the investment.

When the Group’s share of losses in an equity-accounted investment equals or exceeds its interest in the entity, together with any long-term interests that, in substance, form part of the net investment, the Group does not recognize further losses, unless it has incurred obligations or made payments on behalf of the other entity.

Unrealized gains on transactions between the Group and its associates and joint ventures are eliminated to the extent of the group’s interest in these entities. Unrealized losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Accounting policies of equity accounted investees have been changed where necessary to ensure consistency with the policies adopted by the Group.

The carrying amount of equity accounted investments is tested for impairment in accordance with the policy described below in Note 4.9.

F-53

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

4.4.5 Business combinations

The acquisition method of accounting is used to account for all business combinations, regardless of whether equity instruments or other assets are acquired. The consideration transferred for the acquisitions comprises:

(i)the fair value of the transferred assets,
(ii)the liabilities incurred to the former owners of the acquired business,
(iii)the equity interests issued by the group,
(iv)the fair value of any asset or liability resulting from a contingent consideration arrangement, and
(v)the fair value of any pre-existing equity interest in the subsidiary.

Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date. The group recognises any non-controlling interest in the acquired entity on an acquisition-by-acquisition basis at the non-controlling interest’s proportionate share of the acquired entity’s net identifiable assets.

 

Acquisition-related costs are expensed as incurred. The value of the goodwill represents the excess of: i) the consideration transferred, ii) the amount of any non-controlling interest in the acquired entity, and iii) the acquisition-date fair value of any previous equity interest in the acquired entity, over the fair value of the net identifiable assets acquired is recorded as goodwill. If the fair value of the net identifiable assets of the business acquired exceeds those amounts, the gain on bargain purchase is recognised directly in profit or loss.

Where settlement of any part of cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of exchange. The discount rate used is the entity’s incremental borrowing rate, being the rate at which a similar borrowing could be obtained from an independent financier under comparable terms and conditions.

Contingent consideration is classified either as equity or a financial liability. Amounts classified as a financial liability are subsequently remeasured to fair value with changes in fair value recognised in profit or loss.

If the business combination is achieved in stages, the acquisition date carrying value of the acquirer’s previously held equity interest in the acquiree is remeasured to fair value at the acquisition date. Any gains or losses arising from such remeasurement are recognised in profit or loss.

The Group has up to 12 months to finalize the accounting for a business combination. Where the accounting for a business combination is not complete by the end of the year in which the business combination occurred, the Group reports provisional amounts.

4.4.6 Changes in ownership interests

The Group treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the group. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in “Other reserves” within equity attributable to owners of the Company.

 

F-54

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

When the Group ceases to consolidate or equity account for an investment because of a loss of control, joint control or significant influence, any retained interest in the entity is remeasured to its fair value with the change in carrying amount recognized in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting for the retained interest as an associate, joint venture or financial asset. In addition, any amounts previously recognized in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of the related assets or liabilities. This may mean that amounts previously recognised in other comprehensive income are reclassified to profit or loss.

If the ownership interest in a joint venture or an associate is reduced but joint control or significant influence is retained, only a proportionate share of the amounts previously recognized in other comprehensive income are reclassified to profit or loss where appropriate.

 

4.5Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the Executive committee.

The Executive Committee, is the highest decision-making authority, is the person responsible for allocating resources and setting the performance of the entity’s operating segments, and has been identified as the person/ body executing the Company’s strategic decisions.

In segmentation the Company considers transactions with third parties and intercompany operations, which are done on internal transfer pricing based on market prices for each product.

4.6Property, plant and equipment

Property, Plant and Equipment is measured following the cost model. It is recognized at acquisition cost less depreciation a less any accumulated impairment.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. The carrying amount of any component accounted for as a separate asset is derecognised when replaced. All other repairs and maintenance are charged to profit or loss during the reporting period in which they are incurred.

The cost of work in progress whose construction will extend over time includes, if applicable, the computation of financial costs accrued on loans granted by third parties and other pre-production costs, net of any income obtained from the sale of commercially valuable production during the launching period.

Works in progress are valued according to their degree of progress. Works in progress are recorded at cost less any loss due to impairment, if applicable.

Assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each year. An asset’s carrying amount is written down immediately to its recoverable amount if the asset´s carrying amount is greater than its estimated recoverable amount.

 

F-55

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

 

Gains and losses on disposals are determined by comparing the sale price with the carrying amount, stated in terms of the measuring unit current at the disposal date.

4.6.1Depreciation methods and useful lives

The group depreciates productive wells, machinery and camps in the oil and gas production areas according to the units of production method, by applying the ratio of oil and gas produced to estimated proved developed oil and gas reserves. The acquisition cost of property with proved reserves is depreciated by applying the ratio of oil and gas produced to estimated proved oil and gas reserves. Acquisition costs related to properties with unproved reserves is valued at cost with recoverability periodically assessed on the basis of geological and engineering estimates of possible and probable reserves that are expected to be proved over the life of each concession.

Machinery and generation equipment (including any significant identifiable component) are depreciated under the unit of production method.

The group´s remaining items of property, plant and equipment (including any significant identifiable component) are depreciated by the straight-line method based on estimated useful lives, as detailed below:

Buildings: 50 years

Vehicles: 5 years

Furniture, fittings and communication equipment: 5- 20 years

Computer equipment and software: 3 years

Tools: 10 years

Gas Plant and Pipeline: 20 years

If appropriate, the depreciation method is reviewed and adjusted at the end of each year.

4.6.2 Asset retirement obligations

Estimated future costs of asset retirement obligations on well abandonment in oil and gas areas and wind turbines decommissioning in wind farms, discounted at a risk adjusted rate, are capitalized in the cost of the assets and depreciated using the units of production method. Additionally, a liability at the estimated value of the discounted amounts payable is recognized. Changes in the measurement of asset retirement obligations that result from changes in the estimated timing, amount of the outflow of resources required to settle the obligation, or the discount rate, are added to, or deducted from, the cost of the related asset. If a decrease in the liability exceeds the carrying amount of the asset, the excess is recognized immediately in profit or loss.

4.7Intangible assets
4.7.1Goodwill

Goodwill is the result of the acquisition of subsidiaries. Goodwill represents the excess of the acquisition cost over the fair value of the equity interest in the acquired entity held by the company on the net identifiable assets acquired at the date of acquisition.

F-56

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

For impairment testing, goodwill acquired in a business combination is allocated from the acquisition date to each of the acquirer’s CGU or group of CGUs that are expected to benefit from the synergies of the combination. Each unit or group of units that goodwill is allocated represents the lowest level within the entity at which the goodwill is monitored for internal management purposes.

4.7.2Concession arrangements

Concession arrangements corresponding to Edenor and hydroelectric generation plants Diamante and Nihuiles are not under the scope of the guidelines of IFRIC 12 “Service Concession Arrangements”.

 

These concession agreements meet the criteria set forth by the IFRSs for capitalization less depreciation a less any accumulated impairment. They are amortized following the straight-line method based on each asset’s useful life, which corresponds to the life of each concession agreement.

4.7.3Identified intangible assets in acquired investments

Corresponds to intangible assets identified at the moment of the acquisition of companies. Identified assets meet the criteria established in IFRS for capitalization less depreciation a less any accumulated impairment. They are amortized by the straight-line method according to the useful life of each asset, considering the estimated way in which the benefits produced by the asset will be consumed.

4.8Assets for oil and gas exploration

The Company uses the successful efforts method of accounting for its oil and gas exploration and production activities. This method involves the capitalization of: (i) the cost of acquiring properties in oil and gas exploration and production areas; (ii) the cost of drilling and equipping exploratory wells that result in the discovery of commercially recoverable reserves; (iii) the cost of drilling and equipping development wells, and (iv) the estimated asset retirement obligations (see Note 4.6.2).

According to the successful efforts method of accounting, exploration costs (including geological and geophysical costs), excluding exploratory well costs, are expensed during the period in which they are incurred. Drilling costs of exploratory wells are capitalized until it is determined that proved reserves exists and they justify the commercial development. If reserves are not found, such drilling costs are expensed. Occasionally, an exploratory well may determine the existence of oil and gas reserves but they cannot be classified as proved when drilling is complete. In those cases, such costs continue to be capitalized insofar as the well has allowed determining the existence of sufficient reserves to warrant its completion as a production well and the Company is making sufficient progress in evaluating the economic and operating feasibility of the project.

F-57

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

4.9Impairment of non-financial long-lived assets

Intangible assets that have an indefinite useful life and goodwill are not subject to amortization and are tested annually for impairment, or more frequently if events or changes in circumstances indicate that they might be impaired.

The remaining non-financial long-lived assets are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs of disposal and value in use. For the purpose of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows which are largely independent of the cash inflows from other assets or groups of assets (CGU).

Non-financial long-lived assets, other than goodwill, that have been impaired are reviewed for possible reversal of the impairment at the end of each reporting period.

 

4.10Financial assets

 

4.10.1Classification

The Group classifies its financial assets in the following categories:

(i)those that are subsequently measured at fair value (either through other comprehensive income or through profit or loss), and
(ii)those that are subsequently measured at amortised cost.

The classification depends on the entity’s business model for managing the financial assets and the contractual cash flow characteristics.

Gains and losses from financial assets measured at fair value, will be recorded in the Statement of Comprehensive Income or in Statement of Other Comprehensive Income.

Investments in equity instruments are measured at fair value. For those investments that are not held for trading, the Company may make an irrevocable election at initial recognition to present subsequent changes in other comprehensive income. The Company's election was to recognize changes in fair value through profit and loss.

The company reclassifies financial assets when and only when it changes its business model for managing those financial assets.

 

4.10.2Recognition

The conventional purchases and sales of financial assets are accounted for at trade date, that is, the date on which the Company undertakes to purchase or sell the asset, or at settlement date. Financial assets are derecognized when contractual rights to the cash flows from the financial assets have expired or been transferred, and the Company has substantially transferred all risks and rewards of ownership of the asset.

 

F-58

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

 

4.10.3Measurement

At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition of the financial asset.

 

A gain or loss on a debt investment that is subsequently measured at fair value and is not part of a hedging relationship is recognised in profit or loss and disclosed in “Changes in the fair value of financial instruments” within “Other financial Results. A gain or loss on a debt investment that is subsequently measured at amortised cost and is not part of a hedging relationship is recognized in profit or loss when the financial asset is derecognised or impaired and through the amortization process using the effective interest rate method.

The Group subsequently measures equity investments at fair value. Dividends from such investments continue to be recognized in profit or loss as long as they represent a return on investment.

 

4.10.4Impairment of financial assets

The Company assesses the expected credit losses related to its financial instruments at amortized cost and financial instruments at fair value through other comprehensive income, if applicable.

The Company applies the simplified approach allowed by IFRS 9 to measure expected credit losses for trade receivables and other receivables with similar risk characteristics. For this purpose, receivables are grouped by business segment and based on shared credit risk characteristics and expected credit losses are determined based on rates calculated for different ranges of default days from the due date.

The expected loss rates are based on the sales collection profiles over a period of 24 months before the end of each year, considering historical credit losses experienced within this period that are adjusted, if applicable, to reflect forward-looking information that could affect the ability of customers to settle the receivables.

 

4.10.5Offsetting of financial instruments

Financial assets and liabilities are offset, and the net amount reported in the consolidated statements of financial position, when there is a legally enforceable right to offset the recognized amounts, and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously.

4.11Trade and other receivables

Trade receivables and other receivables are recognized at fair value and subsequently measured at amortized cost, using the effective interest method, less provision for impairment, if applicable.

The Company recognises provisions for impairment on trade and other receivables based on expected credit loss model described in Note 4.10.4. Trade receivables are written off when there is no reasonable expectation of recovery. The Company considers the following default indicators: i) voluntary reorganization proceedings, bankruptcy or initiation of judicial demands; ii) insolvency implying a high impossibility of collection and iii) past due balances greater than 90 days.

Where applicable, allowances for doubtful tax credits have been recognized based on estimates on their uncollectibility within their statutory limitation period, taking into consideration the Company’s current business plans.

F-59

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

4.12Derivative financial instruments and hedging account

Derivative financial instruments are measured at fair value, determined as the amount of cash to be collected or paid to settle the instrument as of the measurement date, net of any prepayment collected or paid. Fair value of derivative financial instruments traded in active markets is disclosed based on their quoted market prices and fair value of instruments that are not traded in active markets is determined using different valuation techniques. Subsequent accounting of changes in fair value depends on whether the derivative is designated as a hedging instrument and, if so, the nature of the item being hedged. The Company may designate derivative financial instruments in the following categories:

(i)fair value hedge of recognized assets or liabilities or over firm commitment (fair value hedge);
(ii)cash flow hedges of a particular risk associated with recognized assets and liabilities and highly probable future transactions (cash flow hedges), or
(iii)net investment hedge in foreign operation (net investment hedges).

At the beginning of the hedge relationship, the Group documents the economic relationship between the hedging instruments and the hedged items, even if it is expected that changes in the cash flows of the hedging instruments offset changes in the cash flows of the hedged items. The Group documents its objective and risk management strategy to carry out its hedging operations.

Changes in the measurement of derivative financial instruments designated as cash flow hedge, which have been determined as effective, are recognized in equity. The gain or loss related to the ineffective portion is recognized immediately in profit or loss. Changes in the measurement of derivative instruments that do not qualify for hedge accounting are recognized in profit or loss.

The Company has not formally designated financial instruments as hedging instruments.

4.13Inventories

This line item includes crude oil stock, raw materials, work in progress and finished products relating to Petrochemicals and Oil and Gas business segments as well as materials and spare parts relating to the Generation business segment.

Inventories are stated at the lower of cost or net realizable value. Cost is determined using the weighted average price method. The cost of inventories includes expenditure incurred in purchases and production and other necessary costs to bring them to their existing location and condition. In case of manufactured products and production in process, the cost includes a portion of indirect production costs, excluding any idle capacity (slack).

The net realizable value is the estimated selling price in the ordinary course of business less the estimated cost of completion and the estimated costs to make the sale.

The assessment of the recoverable value of these assets is made at each reporting date, and the resulting loss is recognized in the statement of income when the inventories are overstated.

The Company has classified materials and spare parts into current and non-current, depending on the timing in which they are expected to be used for replacement or improvement on existing assets. The portion of materials and spare parts for maintenance or improvements on existing assets, is exposed under the heading “Property, plant and equipment”.

F-60

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

4.14Non-current assets (or disposal group) held for sale and discontinued operations

Non-current assets are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use and a sale is considered highly probable. They are measured at the lower of their carrying amount and fair value less costs to sell, except deferred tax assets, assets arising from employee benefits, financial assets and investment property that are carried at fair value and contractual rights from insurance contracts, which are specifically exempt from this requirement.

An impairment loss is recognised for any initial or subsequent write-down of the asset until fair value less costs to sell. A gain is recognised for any subsequent increases in fair value less costs to sell of an asset (or disposal group), but not in excess of any cumulative impairment loss previously recognised. The gain or loss not previously recognised by the date of the sale of the non-current asset is recognised at the date of derecognition.

 

Non-current assets (including those that are part of a disposal group) are not depreciated or amortized while they be classified as held for sale. Interest and other expenses attributable to the liabilities of a disposal group classified as held for sale continue to be recognized.

 

Non-current assets classified group of assets classified as held for sale are presented separately from the other assets in the balance sheet. The liabilities of a disposal group classified as held for sale are presented separately from other liabilities in the balance sheet. These assets and liabilities are not offset.

If it is a discontinued operation, that is, an item which has been disposed of or classified as held for sale; and (i) it represents a significant business line or geographic area which may be considered separate from the rest; (ii) it is part of a single coordinated plan to dispose of a significant business line or operating geographic area which may be deemed separate from the rest; or (iii) it is a subsidiary entity acquired solely for the purpose of reselling it; a single amount is disclosed in the statement of comprehensive income, which shows results of discontinued operations, net of tax, including the result for the valuation at fair value less cost of sales or asset disposal costs, if applicable.

4.15Cash and cash equivalents

For the purpose of presentation in the Consolidated Statement of Cash Flows, cash and cash equivalents includes cash on hand, deposits held at call with financial institutions, other short-term, highly liquid investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. If any, bank overdrafts are shown within borrowings in current liabilities in the Consolidated Statement of Financial Position and there are not disclosed under Cash and cash equivalents in the Consolidated Statement of Cash Flows since they are not part of the Company’s cash management.

4.16Shareholder´s equity

Equity’s movements have been accounted for in accordance with the pertinent decisions of shareholders' meetings and legal or regulatory standards.

All equity accounts have been restated in terms of the measuring unit current as of December 31, 2018, with the exception of Share capital and Treasury shares, which represent the subscribed and paid in, and the outstanding treasury capital, respectively. The adjustment resulting from its restatement as of December 31, 2018 is disclosed in the Comprehensive share capital adjustment and Comprehensive treasury shares adjustment lines, respectively.

F-61

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

As from the change in functional currency, on January 1, 2019 the Company discontinued the preparation and presentation of financial statements under IAS 29, and has considered equity figures expressed in terms of the measuring unit current as of December 31, 2018 as the basis for subsequent financial statements’ amounts.

4.16.1Share capital

 

Share capital represents the capital issued, composed of the contributions that were committed and/or made by the shareholders and represented by shares that comprise outstanding shares at nominal value.

 

4.16.2Share premium

It includes:

(i)The portion of the collected price exceeding the face value of the shares issued by the Company, net of absorbed accumulated losses.
(ii)The difference between the fair value of the consideration paid/collected and the accounting value of the equity interest in the subsidiary acquired/sold/diluted which does not represent a loss of control or significant influence.
(iii)The difference between the proportional equity value registered before the merger of subsidiary and the value resulting from applying to the subsidiary’s merged equity interest, the new ownership share resulting from the exchange relationship.
4.16.3Legal reserve

 

In accordance with the Argentine Commercial Companies General Law, 5% of the profit arising from the statement of income for the year, prior years' adjustments, the translation differences which are directly accumulated in Retained earnings (see Note 4.3.4), the amounts transferred from other comprehensive income and prior years' accumulated losses, must be appropriated to a legal reserve until such reserve equals 20% of the Company’s share capital, the related adjustment of share capital. When for any reason, the amount of this reserve will be shorter, dividends may not be distributed, until such amount is reached.

4.16.4Voluntary reserve

This reserve results from an allocation made by the Shareholders’ Meeting, whereby a specific amount is set aside to cover for the funding needs of projects and situations associated with Company policies.

4.16.5Other reserves

It includes the result of operations with non-controlling interest that do not result in a loss of control and reserves for stock compensation plans.

F-62

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

 

4.16.6Retained earnings (Accumulated losses)

Retained earnings comprise accumulated profits or losses without a specific appropriation; positive earnings can be distributable by the decision of the Shareholders' meeting, as long as they are not subject to legal restrictions. These earnings comprise prior years' earnings that were not distributed, translation differences which are directly accumulated in retained earnings pursuant to the policy described in Note 4.3.4, the amounts transferred from other comprehensive income and prior years' adjustments, according to IFRS.

General Resolution No. 593/11 issued by the CNV provided that Shareholders in the Meetings at which they should decide upon the approval of financial statements in which the Retained earnings account has a positive balance, should adopt an express resolution as to the allocation of such balance, whether to dividend distribution, capitalization, setting up of reserves or a combination of these. The Company’s Shareholders have complied with these requirements.

4.16.7Other comprehensive income

It includes gains and losses from the remeasurement process of foreign operations and the translation differences which are not classified and directly accumulated in retained earnings pursuant to the policy described in Note 4.3.4 and actuarial gains and losses for defined benefit plans and the related tax effect.

4.16.8Dividends distribution

 

Dividend distribution to Company shareholders is recognized as a liability in the Consolidated Financial Statements in the year in which the dividends are approved by the Shareholders' Meeting. The distribution of dividends is made based on the Company’s Stand-Alone Financial Statements.

4.17Compensation plans

The following guidelines under IFRS 2 have been taken into consideration for the registration of stock-based compensations:

4.17.1Compensations payable in cash:
(i)Compensation Agreements – Senior Management: fixed compensation and annual, variable and contingent long-term compensation established based on the Company’s annual market value appreciation, with a payment cap over the Company’s adjusted operating income, approved by the Company’s Board of Directors on June 2, 2017 with the purpose of efficiently aligning the senior management’s interests with those of the Company and its shareholders. With the purpose of avoiding duplication, any analogous compensation paid to senior managers by any of the Company’s subsidiaries will be deducted from the compensation amount in proportion to the Company’s interests in such subsidiaries.

 

The reasonable value of the received services is measured through a share appreciation estimate using the Black-Scholes-Merton financial valuation model. The fair value of the amount payable is accrued and acknowledged as an expense, with the corresponding increase in liabilities. Liabilities are revalued on each balance sheet date. Any change in the fair value of liabilities is disclosed under profit or loss.

F-63

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

 

(ii)Annual Variable Compensation granted to certain officers for the performance of technical and administrative duties amounting to 7% and 4% of the EBDA accrued until November 2020 and from December 2020, respectively (EBITDA less paid income tax, less total net financial costs, less interest on its own capital, considering an annual 10% dollar-denominated rate) of PEPASA´s continuing business in Pampa. The Company recognizes a provision (liability) and an expense for this EBDA Compensation based on the previously mentioned formula.

 

4.17.2Compensations payable in shares

 

Stock Compensation Plan – Officers and other key staff: a certain number of Company shares receivable within the term stipulated in the program to encourage the alignment of the employees’ performance with the Company’s strategy and to generate a clear and direct link between the creation of value for shareholders and the employees’ compensation; it was approved by the Board of Directors and the Shareholders’ Meeting on February 8 and April 7, 2017, respectively. Furthermore, the Company’s Board of Directors approved the market acquisition of own shares as a means of implementing the Plan (see Note 13.1.1).

 

The number of shares is calculated as from a percentage over the total annual remuneration, plus the bonus assigned to each covered employee, divided by the weighted average price, in pesos, of the Company’s share and ADR for the same period; with one-third vesting each year, which will be awarded together with the payroll for April of the year following the vesting date, with the requirement that the employment relationship continues at least until each vesting date. The fair value of the received services is measured at the fair value of the shares at the time of granting and is disclosed during the vesting period, together with the corresponding increase in equity.

4.18Trade payables and other payables

Trade payables and other payables are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

4.19Borrowings

Borrowings are recognized initially at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortized cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognized in profit or loss over the period of the borrowings, using the effective interest method.

 

Borrowings are removed from the statement of financial position when the obligation specified in the contract is discharged, cancelled or expired. The difference between the carrying amount of a financial liability that has been extinguished or transferred to another party and the consideration paid, including any non-cash assets transferred or liabilities assumed, is recognised in profit or loss as other income or finance costs.

 

Borrowings are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

F-64

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

 

4.19.1Borrowing costs

 

General and specific borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset are capitalized during the period of time that is required to complete and prepare the asset for its intended use or sale. Qualifying assets are assets that necessarily take a substantial period of time to get ready for their intended use or sale.

 

Investment income earned on the temporary investment of specific borrowings pending their expenditure on qualifying assets is deducted from the borrowing costs eligible for capitalization.

 

Other borrowing costs are expensed in the period in which they are incurred.

 

4.20Employee benefits
4.20.1Short-term obligations

Payroll liabilities, including non-monetary benefits and accumulated sick leave expected to be settled in full within 12 months after the end of the reporting period in which the employees provide the associated service are recognized for the amount expected to be paid when the liabilities are settled. The liabilities are disclosed as Salaries and social security payable in the consolidated statement of financial position.

 

4.20.2Defined benefit plans

Labor costs liabilities are accrued in the periods in which the employees provide the services that trigger the consideration.

Additionally, the Company operates several defined benefit plans. Defined benefit plans define an amount of pension benefit that an employee will receive on retirement, depending on one or more factors, such as age, years of service and compensation. In accordance with conditions established in each plan, the benefit may consist in a single payment, or in making complementary payments to those made by the pension system.

The defined benefit liability recognized in the financial statement balance sheet, at the end of the reporting period, is the present value of the defined benefit obligation net of the fair value of the plan assets, when applicable. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using future actuarial assumptions about demographic and financial variables that affect the determination of the amount of such benefits.

Actuarial gains and losses from experience adjustments and changes in actuarial assumptions, are recognized in other comprehensive income (loss) in the period in which they arise and past service costs are recognized immediately in the statement of income (loss).

F-65

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

4.21Provisions, contingent liabilities and contingent assets

Provisions are recognized when the group has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources will be required to settle that obligation, and the amount can be reliably estimated. Provisions are not recognised for future operating losses.

 

Provisions are measured at the present value of the expenditures expected to be required to settle the present obligation, taking into account the best available information as of the date of the Consolidated Financial Statements based on assumptions and methods considered appropriate and taking into account the opinion of Company’s legal advisors. As additional information becomes available to the Company, estimates are revised and adjusted periodically. The discount rate used to determine the present value reflects current market assessments of the time value of money and the risks specific to the liability. The increase in the provision due to the passage of time is recognised as other financial results.

Contingent liabilities are possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the control of the entity; or present obligations that arise from past events but it is not probable that an outflow of resources will be required to its settlement; or whose amount cannot be measured with sufficient reliability.

Contingent liabilities are not recognised. The Company discloses in notes to the Consolidated Financial Statements a brief description of the nature of material contingent liabilities.

Contingent liabilities, whose possibility of any outflow in settlement is remote, are not disclosed unless they involve guarantees, in which case the nature of the guarantee is disclosed.

Contingent assets are possible assets that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of uncertain future events not wholly within the control of the entity.

Contingent assets are no recognised. The Company discloses in notes to the Consolidated Financial Statements a brief description of the nature of material contingent assets, where the related inflows of economic benefits are estimated to be probable.

4.22Revenue from contracts with customers
4.22.1Generation segment:

4.22.1.1 Revenues from sales to the spot market (SE Resolution N°31/20)

The Company recognizes revenues from i) power availability on a monthly basis as the different power plants are available to generate; ii) power generated in those hours of maximum technical requirement of the month; and iii) energy generated and operated when the delivery of energy is effective, based on the price applicable depending on the technology of each plant and, in the case of thermal power plants, the application of the coefficient derived from the average usage factor over the last 12 months on the power capacity remuneration specified in the Resolution. Revenues are not adjusted for the effect of financing components as sales are made with an average credit term of 45 days, which is consistent with market practice.

 

 

F-66

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

 

4.22.1.2 Revenues from supply agreements with CAMMESA (SE Resolution No. 220/07, SEE Resolution No. 21/16, SEE Resolution No. 287/17 and Renovar Programs)

The Company recognizes revenues from supply contracts with CAMMESA for i) power availability, when applicable, on a monthly basis, as the different power plants are available to generate and ii) energy generated when the delivery of energy is effective, based on the price established in each contract. Revenues are not adjusted for the effect of financing components as sales are made with an average credit term of 45 days, which is consistent with market practice.

4.22.1.3 Revenues from sales contracts with large users within the MAT

The Company recognizes revenues from energy plus sales and renewable energy when the delivery of energy is effective based on the price established in each contract. Revenues are not adjusted for the effect of financing components as sales are made with an average credit term of 30 days, which is consistent with market practice.

 

4.22.2Oil and gas segment

The Company recognizes revenues from the sale of oil and gas, to third parties and intersegment, when control of the product is transferred, that is, at the output of each area, when the oil and gas is delivered to the carrier and to the extent there is no unfulfilled obligation that could affect the acceptance of the product by the client. In all cases the transport of the gas is in charge of the client. Revenues from these sales are recognized based on the price by product specified in each contract or agreement to the extent that it is highly probable that a significant reversal will not occur.

Revenues are not adjusted for the effect of financing components as sales are made with an average credit term not exceeding 45 days, which is consistent with market practice.

4.22.3 Petrochemical segment

The Company recognizes revenues from the sale of petrochemical products, whether in local or foreign market, when the control of the product is transferred, that is, when the products are delivered to the client and there is no unfulfilled obligation that could affect the acceptance of the product by the client. The delivery, as established in each contract, is occurs:

(a) when the products are dispatched and transported by and in charge of the client, or,

(b) when the products have been dispatched by the Company to a specific location, the obsolescence risks and loss have been transferred to the client, and the client has accepted the products according to the sale contract, the acceptance provisions have expired, or when the Company has objective evidence that all acceptance criteria have been met.

Revenues from these sales are recognized based on the price specified in each contract, to the extent that it is highly probable that a significant reversal will not occur. Revenues are not adjusted for the effect of financing components as sales are made with an average credit term not exceeding 24 days, which is consistent with market practice.

F-67

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

4.22.4 Holding and others segment

The Company recognizes revenues from contracts with customers in relation to advisory services to related companies as services are rendered based on the price established in each agreement. Revenues are not adjusted for the effect of financing components, as sales are made with an average credit term of 30 days, which is consistent with market practice.

4.23Other Income
4.23.1Government grants

Grants from the government are recognised at their fair value where there is a reasonable assurance that the grant will be received and the Group will comply with all attached conditions. The group did not benefit directly from any other forms of government assistance.

The Company recognizes revenues from natural gas production promotion or stimulus programs upon the actual delivery of gas and in accordance with the price established in the applicable regulation, only inasmuch as it is highly probable that there will be no significant reversal and the consideration is likely to be received, that is, to the extent that the procedure defined by the Government is formally complied with.

The recognition of revenues associated with the Argentine Natural Gas Production Promotion Plan (see Note 2.4.3.1.2) falls within the scope of IAS 20 as it involves a compensation as a result of the maintenance or increase in the committed production volume.

Revenues from natural gas production or stimulus programs are disclosed under Other operating income in the consolidated statement of comprehensive income. Furthermore, the fiscal costs of the above-mentioned programs are disclosed under Other operating expenses in the consolidated statement of comprehensive income.

 

4.23.2Interest income

Interest income from financial assets at fair value through profit or loss is included into the result of changes in the fair value of those assets. Interest income from financial assets at amortized cost and financial assets at fair value through other comprehensive income are recognised in the statement of income.

Interest income is calculated by using the effective interest rate to the gross carrying amount of a financial asset (without considering impairment provision), except for impaired financial assets, that is calculated by applying the effective interest rate to carrying amount net of impairment provision.

Commercial interest corresponding to late payment surcharges in the cancellation of sales receivables is disclosed under Other operating income as it provides relevant information on the business’ operations and operating flows.

 

4.23.3Dividends

Dividends are received from financial assets measured at fair value through profit or loss or through other comprehensive income. Dividends are recognized as revenue when the right to receive payment has been established. This applies even if they are paid out of pre-acquisition profits.

F-68

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

4.24Income tax

The tax expenses for the year include current and deferred tax. Tax is recognized in the income statement, except to the extent that it relates to items recognized in other comprehensive income or directly in equity, in which case, the tax is also recognized in other comprehensive income or directly in equity, respectively.

The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the balance sheet. Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.

Deferred income tax is recognized, using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the Consolidated Financial Statements. However, deferred tax liabilities are not recognized if they come from the initial recognition of goodwill; or if it arises from initial recognition of an asset or liability in a transaction other than a business combination that at time of the transaction affects neither accounting nor taxable profit or loss.

Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available and can be used against temporary differences.

Deferred income tax is provided on temporary differences from investments in subsidiaries and associates, except for deferred income tax liability where the timing of the reversal of the temporary difference is controlled by the group and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred assets or liabilities are recognized on account of gains or losses from fiscal tax inflation which, pursuant to Law No. 27,541, are deferred and accounted for in subsequent fiscal periods (see Note 2.6.1.5).

Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset the recognized amounts and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.

Current and deferred tax assets and liabilities have not been discounted, and are stated at their nominal value.

Income tax rates prevailing at year-end in Argentina (see Note 2.6.1), Venezuela, Ecuador, Bolivia and Uruguay are 30%, 50%, 25%, 25% and 25%, respectively. Additionally, a 3% surcharge is added to Ecuador’s income tax when the company’s shareholder residing in Ecuador is an entity established in a jurisdiction considered a tax haven under Ecuadorian laws.

In Bolivia, payment of Bolivian-source income to beneficiaries outside Bolivia is levied with a 12.5% withholding income tax. Furthermore, and pursuant to the last tax reform passed in Ecuador and effective as from January 1, 2020, dividends distributed to foreign shareholders will be subject to a 10% withholding.

Deferred tax assets and liabilities are measured using the tax rates expected to apply in the period when the asset is realized or the liability is settled.

Finally, receivables have been disclosed on account of the application of the minimum presumed income tax prior to its abrogation as from January 1, 2019, which are computable as an advance payment of income tax in any of the following ten years.

F-69

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 4: (Continuation)

The Company’s management evaluates the recoverability of the recorded receivables at the closing of each fiscal year, and allowances are created in as long as it is estimated that the computable amounts will not be recoverable within the statutory limitation period taking into consideration the Company’s current business plans.

 

4.25Leases

 

In leases where the Company is a lessee (Note 18.1), a right-of-use asset and a lease liability are recognized on the date on which the underlying asset is available for use by the Company.

 

At the commencement date the lease liability is measured at the present value of the payments that are not paid at that date, including:

-fixed payments, less any lease incentive receivable
-variable lease payments depending on an index or rate
-amounts that the Company expects to pay under residual value guarantee
-exercise price of a purchase option (if the Company is reasonably certain to exercise that option), and
-penalty payments for terminating the lease, if the lease term reflects the Company exercising that option.

 

Lease payments are discounted using the Company’s incremental borrowing rate, which is the rate the Company would have to pay to borrow over a similar term, security and conditions, the funds necessary to acquire an asset of a similar value to the right-of-use asset in a similar economic environment, or by using the interest rate implicit in the lease, if that rate can be readily determined.

 

The lease liability is disclosed in “Lease liability” under “Trade and other payables”. Each lease payment is apportioned between the principal and the financial cost. The financial cost is charged to income over the term of the lease to produce a constant periodic interest rate on the remaining liability balance for each period.

 

Right-of-use assets are measured at cost, which comprises:

-the amount of the initial measurement of the lease liability
-any lease payment made at or before the commencement date, less any lease incentive received
-any initial direct cost, and
-an estimate of costs to be incurred for decommissioning or restoring the underlying asset pursuant to the terms and conditions of the lease

 

Right-of-use assets are depreciated using the straight-line method over the asset’s useful life or, if shorter, during the lease term.

 

The Company recognizes lease payments associated with short-term leases (up to 12 months) and leases for which the underlying asset is of low value (IT equipment and office supplies) as an expense using the straight-line method over the lease term.

Leases in which the Company, as a lessor, has transferred all risks and rewards incidental to ownership of the underlying asset are classified as financial leases (Note 18.2). Financial leases are recognized at the commencement date at the fair value of the leased property or, if lower, the present value of the minimum lease payments to be received. The corresponding lease rights, net of financial charges, are included in “Trade and other receivables”. Each lease payment received is allocated between income receivable and financial income. Financial income is recognized as a profit or a loss over the term of the lease to produce a constant periodic interest rate on the remaining liability balance for each period. Property under financial leases is derecognized if there is reasonable certainty that the Company will transfer its ownership at the end of the lease term.

F-70

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 5: GROUP STRUCTURE

 

5.1Corporate reorganizations

 

The following corporate reorganizations are part of the strategy the Company has been developing since 2017 to attain a simpler and more agile, innovative and flexible organization, allowing it to derive important benefits, a higher operating efficiency, an optimized use of available resources, the streamlining of technical, administrative and financial structures, and the implementation of converging policies, strategies and goals. They also allow the Company to leverage the complementarity among the participating companies, thus reducing costs resulting from the duplication and overlapping of operating and administrative structures.

The following reorganizations were perfected by means of a merger through absorption process, under the terms of tax neutrality pursuant to articles 80 and following of the Income Tax Law, whereby the absorbed companies will be dissolved without liquidation subject to the stipulations of the PMC and the provisions of sections 82 to 87 of Argentine Commercial Companies General Law, the CNV provisions, the BCBA Listing Rules and other provisions, the IGJ provisions and all other applicable legal and regulatory provisions.

In 2019, the Company’s Board of Directors approved the process for the merger through absorption between the Company, as absorbing company, and PEFM, as absorbed company, establishing July 1, 2019 as the actual merger date, as from which all PEFM’s rights and obligations, assets and liabilities were incorporated into the Company’s equity. There was no exchange ratio as the Company directly and indirectly held 100% of PEFM’s capital stock. On October 15, 2019 and February 19, 2020, the respective Shareholders’ Meetings approved the merger process, and the CNV granted its administrative consent, respectively.

 

In 2020, the Company’s Board of Directors approved the following mergers through absorption between the Company, as absorbing company, and the following companies, as absorbed companies:

 

(i)CPB; actual merger date: January 1, 2020.
(ii)PACOGEN and PHA, establishing April 1, 2020 as the actual merger date, as from which the Company became simultaneously the beneficiary, remainder beneficiary and trustee under the CIESA Trust. On March 24, 2020, the Trustee transferred to PHA all common shares in book-entry form with a face value of $ 1 each and each granting the right to one vote issued by CIESA and held by the CIESA Trust, which represented 40% of CIESA’s capital stock and voting rights. Until all expenses and taxes associated with the transfer of the Trust Estate have been canceled, the CIESA Trust will remain in effect, with the Trustee maintaining such capacity, and the Company will assume all payment obligations for the applicable taxes and expenses resulting from the transfer of the Trust Estate.
(iii)PP, Transelec, Pampa FPK, Pampa Holding, Pampa Ventures and Pampa QRP; actual merger date: October 1, 2020.

 

As from the actual merger date, all the rights and obligations, assets and liabilities of the absorbed companies were incorporated into the Company’s equity, without any exchange ratios, as the Company directly and indirectly held 100% of the absorbed companies’ capital stock, with the exception of Pampa Holding, Pampa QRP, Pampa FPK and Pampa Ventures, where the valuation of the underlying asset was taken into consideration to establish the exchange ratio for each company.

 

 

F-71

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

These mergers were approved by the respective Extraordinary Shareholders’ Meetings, and their registration with the Public Registry is still pending as this proceeding was affected by the impediments inherent in functioning of enforcement agencies during the COVID-19 pandemic.

 

5.2Sale of participations and property, plant and equipment

 

5.2.1 Sale of interest in Oldelval

 

On November 2, 2018, the Company entered into an agreement with ExxonMobil Exploration Argentina S.R.L. for the sale of 21% of Oldelval’s capital stock and rights, maintaining the remaining 2.1% interest.

 

Subsequently, on November 27, 2018, the transaction was closed upon the meeting of the applicable precedent conditions, the purchase price paid by the purchaser amounted to US$ 36.4 million. As a result of the transaction, the Company has recognized a US$ 28 million gain, before taxes.

 

5.2.2 Sale of the Dock Sud storage terminal

 

On March 6, 2019, the Company agreed with Raízen Argentina, a licensee of the Shell brand, on the sale, subject to the meeting of certain conditions precedent which are customary for this kind of transactions, of the Dock Sud storage terminal, which tank yard has a total installed capacity of 228 thousand m3.

 

On March 30, 2019, after the meeting of all precedent conditions, the transfer of the Dock Sud Terminal to the purchaser was completed at a price of US$ 19.5 million, plus US$ 2 million on account of products. The transaction resulted in profits before income tax in the amount of US$ 1 million, which are disclosed in item “Gains/losses on the sale of Property, plant and equipment” under “Other operating income”.

 

5.3Assets held for sale, associated liabilities and discontinued operations

 

As of December 31, 2020, 2019 and 2018, the results for operations associated with the below-detailed sales transactions have been disclosed under “Discontinued operations” in the consolidated statement of comprehensive income.

5.3.1 Divestment of stake in Edenor

 

On December 28, 2020, the Company entered into with Empresa de Energía del Cono Sur S.A. and Integra Capital S.A., Daniel Eduardo Vila, Mauricio Filiberti and José Luis Manzano (the “Purchaser”) a share purchase agreement whereby it agreed to sell its controlling interest in Edenor through the transfer of all Class A shares representing 51% of the capital stock and voting rights of said company (the “Transaction”). The closing of the Transaction (the “Closing”) is subject to the fulfillment of certain precedent conditions. On February 17, 2021, Pampa’s shareholders meeting was held and the Transaction was approved, remaining outstanding, as of the date of issue of these Consolidated Financial Statements, the approval by the ENRE still being pending.

 

The sale of the stake in Edenor is part of the Company’s strategic plan aiming to focus investments on its core businesses: continuing expanding the installed capacity for the generation of electricity and the development of unconventional natural gas reserves, specifically, the investments necessary to reach the committed production under the Gas.Ar Plan (see Note 2.3.2.1.2) and the closing to Combined Cycle at CTB (see Note 16.1.3).

 

F-72

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

The agreed sales price consists of: (i) 21,876,856 Class B shares of Edenor representing 2.41% of the capital stock and voting rights of Edenor (the “Price in Kind”); (ii) US$ 95 million (the “Price in Cash”); and (iii) a contingent payment of 50% of the earnings resulting from a change in control of the Purchaser or Edenor (the “Contingent Payment”), in case this situation takes place within the first year after the Closing, or the term during which the Price Balance (as defined in the following paragraph) is pending settlement, whichever is later.

 

The Price in Kind was paid upon the execution of the share purchase agreement and the Price in Cash will be paid in 3 installments as follows: (i) the first installment, in the amount of US$ 5 million, upon the execution of the share purchase agreement; (ii) the second installment, in the amount of US$ 50 million, on the Closing date, subject to the fulfillment of certain precedent conditions; and (iii) the third installment, in the amount of US$ 40 million, one year after the Closing date, except in cases of offsetting or prepayment (the “Price Balance”). The Price Balance will accrue interest at a 10% annual nominal fixed rate as from the Closing date, payable on a quarterly basis.

 

Within the previously described framework and pursuant to IFRS 5, and considering that the Transaction would involve loss of control over the subsidiary, all Edenor’s assets and liabilities have been classified as held for sale as of December 31, 2020 and have been measured at the lower between its fair value, net of costs associated with the sale, if applicable, and its book value, which involved the recognition of an impairment loss for US$ 589 million, which was disclosed together with the results corresponding the Electricity distribution segment under “Discontinued operations” of the statement of comprehensive income.

 

The Transaction does not include the transfer of Class B shares; therefore, after the Closing, the Company will keep a 4.1% stake in Edenor’s capital stock and voting rights (this stake includes the Price in Kind).

 

5.3.2 Sale of PELSA shares and certain oil areas

 

On January 16, 2018, the Company agreed to sell to Vista Oil & Gas S.A.B. de C.V. (“Vista”) its direct 58.88% interest in PELSA and its direct interests in the Entre Lomas, Bajada del Palo, Agua Amarga and Medanito-Jagüel de los Machos blocks, in line with the Company's strategy to focus its investments and human resources both on the expansion of its power generation installed capacity and on the exploration and production of natural gas, placing a special focus on the development and exploitation of unconventional gas reserves.

 

F-73

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

On April 4, 2018, upon the meeting of all applicable conditions precedent, the transaction was closed. The price paid by Vista, considering the agreed adjustments regarding interests in PELSA, amounted to US$ 389 million. This transaction generated a profit comprehensive income net of taxes in the amount of US$ 30 million, as follows:

 

    12.31.2018
Sale price(2)    270
Book value of assets sold and costs associated with the transaction   (226)
Result for sale   44
Interests (1)   4
Income tax   (22)
Imputed in results   26
     
Other comprehensive income (loss)     
Reclasification exchange differences on translation   6
Income tax   (2)
Imputed in Other comprehensive income    4
     
Total comprehensive income    30

 

(1)Are exposed in "Financial income" in the consolidated statement of comprehensive income related to discontinued operations.
(2)Sale price recorded as of December 31, 2018 arises from the Consolidated Financial Statements denominated in pesos in accordance with IAS 29, and was translated into U.S. Dollars using the exchange rate as of that date.

 

 

5.3.3 Sale of assets in the Refining and Distribution segment

 

On December 7, 2017, the Company executed with Trafigura Ventures B.V and Trafigura Argentina S.A. an agreement for the sale of certain assets in the Company’s refining and distribution segment based on the conviction that the oil refining and distribution business calls for a larger scale to attain sustainability.

 

The assets subject-matter of the transaction were: (i) the Ricardo Eliçabe refinery; (ii) the Avellaneda lubricants plant; (iii) the Caleta Paula reception and dispatch plant; and (iv) the network of gas stations currently operated under Petrobras branding. The Dock Sud storage facility was excluded from the sale, as well as the Company's investment in Refinería del Norte S.A.

Pursuant to the foregoing, and in relation with the measurement of the assets and liabilities subject to this transaction at the lower of fair value less cost to sell and the carrying value, as of December 31, 2017, the Company recognized an impairment of Intangible assets and Property, plant and equipment in the amount of US$ 28 million.

On May 9, 2018, upon the meeting of all applicable precedent conditions the transaction was subject to, the closing of the sale to Trafigura was carried out. After applying the adjustments stipulated in the purchase and sale agreement, the transaction price amounted to US$ 124.5 million. Furthermore, after the closing of the transaction, Trafigura paid to Pampa US$ 56 million for the purchase of crude oil.

F-74

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

As of December 31, 2018, the closing of the transaction did not generate additional profits or losses, according to the following detail:

 

    12.31.2018
Sale price(1)    28
Book value of assets sold and costs associated with the transaction   (28)
Result for sale   -

 

(1)Sale price recorded as of December 31, 2018 arises from the Consolidated Financial Statements denominated in pesos in accordance with IAS 29, and was translated into U.S. Dollars using the exchange rate as of that date.

 

5.3.4 Relevant information on discontinued operations

 

As of December 31, 2020, 2019 and 2018

 

  12.31.2020 12.31.2019   12.31.2018
  Distribution
of energy
  Distribution
of energy
  Distribution
of energy
  Oil and gas   Refining and distribution   Eliminations   Total
Revenue 1,085   1,502   1,484   66   422   (90)   1,882
Cost of sales (926)   (1,225)   (1,136)   (33)   (361)   91   (1,439)
Gross profit 159   277   348   33   61   1   443
                           
Selling expenses (129)   (122)   (134)   (2)   (33)   -   (169)
Administrative expenses (64)   (65)   (76)   (1)   (4)   -   (81)
Other operating income 29   19   16   1   6   -   23
Other operating expenses (25)   (43)   (44)   (6)   (10)   -   (60)
Impairment of property, plant and equipment and intangible assets (589)   -   -   -   -   -   -
Result from the sale of share of profit and property, plant and equipment -   -   -   44   -   -   44
Agreement on the regularization of obligations     285   -   -   -   -   -
Operating income (loss) (619)   351   110   69   20   1   200
                           
Gain on monetary position, net 115   187   226   7   2   (1)   234
Finance income 1   11   11   4   1   -   16
Finance costs (110)   (112)   (132)   (1)   -   -   (133)
Other financial results (20)   (62)   (50)   (4)   22   -   (32)
Financial results, net (14)   24   55   6   25   (1)   85
(loss) Income before income tax (633)   375   165   75   45   -   285
                           
Income tax 41   (178)   (49)   (26)   (14)   -   (89)
(Loss) Profit  of the year from discontinued operations (592)   197   116   49   31   -   196

 

 

  12.31.2020 12.31.2019   12.31.2018
  Distribution
of energy
  Distribution
of energy
  Distribution
of energy
  Oil and gas   Refining and distribution   Eliminations   Total
Other comprehensive income (loss)                          
Items that will not be reclassified to profit or loss                          
Results related to defined benefit plans 1   -   -   -   -   -   -
Income tax -   -   -   (2)   -   -   (2)
Exchange differences on translation (15)   (15)   -   4   -   -   4
Items that may be reclassified to profit or loss                          
Exchange differences on translation (19)   (13)   -   6   -   -   6
Other comprehensive (loss) income of the year from discontinued operations (33)   (28)   -   8   -   -   8
                           
Total comprehensive (loss) income  of the year from discontinued operations (625)   169   116   57   31   -   204
                           
                           
Total (loss) income of the year from discontinued operations attributable to:                          
Owners of the company (499)   98   61   47   31   -   139
Non - controlling interest (93)   99   55   2   -   -   57
  (592)   197   116   49   31   -   196
                           
Total comprehensive (loss) income of the year from discontinued operations attributable to:                          
Owners of the company (517)   84   61   53   31   -   145
Non - controlling interest (108)   85   55   4   -   -   59
  (625)   169   116   57   31   -   204

 

F-75

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

As of December 31, 2020, the assets and liabilities that comprise the assets held for sale and associated liabilities are:

 

  12.31.2020
ASSETS  
NON-CURRENT ASSETS  
Property, plant and equipment 1,185
Right-of-use assets 3
Financial assets at amortized cost 3
Trade and other receivables 1
Total non-current assets 1,192
   
   
Inventories 22
Financial assets at amortized cost 1
Financial assets at fair value through profit and loss 26
Trade and other receivables 176
Cash and cash equivalents 52
Total current assets 277
Assets classified as held for sale 1,469
   
LIABILITIES  
NON-CURRENT LIABILITIES  
Provisions 29
Deferred revenue 17
Deferred tax liabilities 282
Defined benefit plans 9
Salaries and social security payable 4
Borrowings 98
Trade and other payables 81
Total non-current liabilities 520
   
CURRENT LIABILITIES  
Provisions 4
Taxes payables 21
Defined benefit plans 1
Salaries and social security payable 44
Borrowings 2
Trade and other payables 429
Total current liabilities 501
Liabilities associated to assets classified as held for sale 1,021

 

 

F-76

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

The consolidated statement of cash flows related to discontinued operations is presented below:

 

 

  12.31.2020   12.31.2019   12.31.2018
           
Net cash generated by operating activities 211   170   224
Net cash used in investing activities (86)   (86)   (221)
Net cash used in financing activities (73)   (85)   (13)
           
Increase (decrease) in cash and cash equivalents from discontinued operations 52   (1)   (10)
           
           
Cash and cash equivalents at the begining of the year 9   1   10
Effect of devaluation and inflation on cash and cash equivalents (8)   9   1
Increase (decrease) in cash and cash equivalents 52   (1)   (10)
Cash and cash equivalents at the end of the year 53   9   1

 

 

F-77

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 5: (Continuation)

 

5.4Interest in subsidiaries, associates and joint ventures

5.4.1 Subsidiaries information

 

Unless otherwise indicated, the capital stock of the subsidiaries consists of common shares, each granting the right to one vote. The country of the registered office is also the principal place where the subsidiary develops its activities.

            12.31.2020   12.31.2019
Company   Country   Main activity   Direct and indirect participation %   Direct and indirect participation %
Corod   Venezuela   Oil   100.00%   100.00%
CPB (1)   Argentina   Generation             -   100.00%
CPB Energía S.A.   Argentina   Generation   100.00%   100.00%
EcuadorTLC   Ecuador   Oil   100.00%   100.00%
Edenor (2)   Argentina   Distribution of energy   57.12%   56.32%
EISA   Uruguay   Investment   100.00%             -
Enecor S.A.   Argentina   Transportation of electricity   69.99%   69.99%
HIDISA   Argentina   Generation   61.00%   61.00%
HINISA   Argentina   Generation   52.04%   52.04%
PACOSA   Argentina   Trader   100.00%   100.00%
PEB   Bolivia   Investment   100.00%   100.00%
PACOGEN (1)   Argentina   Investment             -   100.00%
PE Energía Ecuador LTD   Gran Cayman   Investment   100.00%   100.00%
Energía Operaciones ENOPSA S.A.   Ecuador   Oil   100.00%   100.00%
Petrolera San Carlos S.A.   Venezuela   Oil   100.00%   100.00%
PHA (1)   Argentina   Investment             -   100.00%
PISA   Uruguay   Investment   100.00%   100.00%
PP (1)   Argentina   Investment             -   100.00%
TGU   Uruguay   Gas transportation   100.00%   100.00%
Transelec (1)   Argentina   Investment             -   100.00%
Trenerec Energía Bolivia S.A. (3)   Bolivia   Investment             -   100.00%
Trenerec S.A.   Ecuador   Investment   100.00%   100.00%

 

(1)Merged companies. See Note 5.1.
(2)Corresponds to effective ownership interest in Edenor after consider treasury shares (55.14% nominal interest). See Note 5.3.1.
(3)Company liquidated in October 2020.

 

F-78

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

5.4.2Investments in associates and joint ventures

The following table presents the main activity and financial information used for valuation and percentages of participation in associates and joint ventures:

 

        Information about the issuer    
    Main activity   Date   Share capital   Profit (loss) of the period / year   Equity   Direct and indirect participation %
Associates                        
Refinor   Refinery   09.30.2020   1   (8)   57   28.50%
OCP   Investment   12.31.2020   100   (27)   73   15.91%
TGS (1)   Transport of gas   12.31.2020   9   39   785   2.093%
                         
Joint ventures                    
CIESA (1)   Investment   12.31.2020   8   25   401   50.00%
Citelec (2)   Investment   12.31.2020   7   26   171   50.00%
Greenwind   Generation   12.31.2020   -   5   (6)   50.00%
CTB   Investment   12.31.2020   7   129   356   50.00%

 

(1)The Company holds a direct and indirect interest of 2.093% in TGS and 50% in CIESA, a company that holds a 51% interest in the share capital of TGS. therefore, additionally the Company has an indirect participation of 25.50% in TGS. As of December 31, 2020, the quotation of TGS's ordinary shares and ADR published on the BCBA and the NYSE was $ 153,15 and US$ 5.20, respectively, granting to Pampa (direct and indirect) ownership an approximate stake market value of US$ 399 million.

 

(2)Through a 50% interest, the company joint controls Citelec, company that controlled Transener with 52.65% of the shares and votes. As a result, the Company has an indirect participation of 26.33% in Transener.

 

 

F-79

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

The details of the balances of investments in associates and joint ventures are as follows:

 

    12.31.2020   12.31.2019
Disclosed in non-current assets        
Associates        
Refinor   19   20
OCP   2   33
TGS   25   21
    46   74
Joint ventures        
CIESA   240   235
Citelec   85   88
CTB   178   114
    503   437
    549   511
Disclosed in non-current liabilities        
         
Greenwind (1)   (2)   (4)
    (2)   (4)

 

(1)The company receives financial assistance from partners.

 

The following tables show the breakdown of the result from investments in associates and joint ventures:

 

    12.31.2020   12.31.2019   12.31.2018
Associates            
Oldelval   -   -   3
Refinor   (2)   (3)   (4)
OCP   (5)   21   34
TGS   1   1   -
    (6)   19   33
             
Joint ventures            
CIESA   11   50   75
CTB   64   13   -
Citelec   13   19   21
Greenwind   3   -   (11)
    91   82   85
    85   101   118

 

F-80

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

The evolution of investments in associates and joint ventures is as follows:

 

    12.31.2020   12.31.2019   12.31.2018
At the beginning of the year   507   403   315
Compensation   (5)   (16)   -
Dividends   (34)   (75)   (19)
Decreases   -   -   (10)
Increases (1)   3   108   -
Share of profit   85   101   118
Other comprehensive income (loss)   -   -   (1)
Exchange differences on translation   (9)   (14)   -
At the end of the year   547   507   403

 

(1) In 2020, corresponds to the acquisition of TGS’ shares and in 2019, corresponding mainly to the financial receivable with OCP acquired under the transaction with AGIP (see Note 5.3.6.2) and capital contributions to CTB.

 

 

5.4.3 Investment in CIESA-TGS

 

5.4.3.1 Impairment of non-financial assets in TGS

 

As regards COVID-19 and the Government measures to contain its spread, TGS has mainly identified the following impacts: (i) delays in collections associated with the natural gas transportation business, where, although a recent improvement has been experienced, it cannot be guaranteed that this situation will be maintained over time, due to the suspension of public utility disconnections for non-payment and the implementation of several measures aiming to sustain the income of the most impacted economic sectors; and (ii) a scenario of high volatility in benchmark international prices for the liquid fuels produced and sold by TGS.

 

In this sense, TGS has assessed the impairment indicators under IAS 36 and has performed recoverable amount tests on the assets included in Property, plant and equipment. As of December 31, 2020, the assessment of recoverability of the CGU of the Natural Gas Transportation business resulted in the recognition of impairment losses for $ 3,114 million (before taxes).

F-81

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

5.4.3.2 Issuance of Corporate Bonds

 

TGS General Shareholders' Meeting held on August 15, 2019 approved the extension of TGS´s Corporate Bonds Program from US$ 700 million to US$ 1.2 billion. This extension was authorized on October 9, 2019, by the CNV.

Funds obtained by TGS are applied to: (i) the repurchase of its Class 1 corporate bonds for US$ 87 million; (ii) the cancellation and total redemption of Class 1 CBs for US$ 121 million; and (iii) use the balance of net funds to make investments in capital expenditures in process of execution.

 

5.4.3.3 Acquisition of own shares in TGS

During fiscal year 2019, TGS’s Board of Directors approved three share buyback programs on March 27, August 26 and November 19, which were executed in accordance with the conditions stipulated in each of them. On defining these programs, the Board of Directors took into consideration TGS’s strong cash position and approved them in view of the distortion existing between TGS’s economic value, measured by its current businesses and derived from ongoing projects, and its stock market listing price.

 

Own shares acquired by TGS as of October 31, 2019 were destined to the payment of a stock dividend.

 

On March 6, 2020, TGS’s Board of Directors approved the sixth Share Buyback Program for a maximum investment amount of $ 2,500 million (values effective as of its creation date).

 

Later on, on August 21, 2020, TGS’s Board of Directors approved a new Share Buyback Program for a maximum investment amount of $ 3,000 million (values effective as of its creation date), which will be effective until March 22, 2021.

 

5.4.3.4 Acquisition of TGS’s ADRs by the Company

During the fiscal years ended December 31, 2020 and 2019, the Company acquired a total number of 635.380 ADRs and 1,130,365 TGS’s ADRs, at an acquisition cost of US$ 3 million and US$ 8 million, respectively.

 

5.4.4 Investment in CITELEC

 

5.4.4.1 Employee Shareholding Program – Transba S.A.

 

In the year 1997, the Executive Branch of the Province of Buenos Aires awarded 100% of Transba’s Series “A”, “B” and “C” shares to Transener. Series “C” shares were awarded subject to the obligation to transfer them to the Employee Shareholding Program benefiting certain Transba employees, Transener holding 89.99% of Transba’s capital stock.

 

On June 28, 2019, Transener acquired all the shares under such program. Consequently, Transener holds 99.99% of Transba’s capital stock.

F-82

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

5.4.4.2 Repurchase of own Corporate Bonds - Transener

 

As of December 31, 2020 Transener’s Corporate Bonds Class 2 amounted to US$ 98.5 million, of which US$ 7 million have been acquired and by Transba. During the month of January 2021, Transba acquired an additional US$ 5.5 million

 

5.4.4.3 Acquisition of Transener’s CBs by the Company

 

During the fiscal year ended December 31, 2020, the Company acquired a total of US$ 1.3 million FV of Transener’s 2021 Class 2 CBs.

 

5.4.5 Investment in CTB

 

5.4.5.1 Acquisition of CTEB

On May 29, 2019, the Company, through subsidiaries, after filing a joint offer with YPF, received a notification from IEASA whereby were awarded National and International Public Tender No. 02/2019, launched pursuant to SGE Resolution No. 160/19, regarding the sale and transfer by IEASA of CTEB. The acquisition of CTEB also involves the assignment in favor of the awardee of the contractual capacity as trustor under the Enarsa-Barragán Financial Trust, the VRDs of which (excluding the VRDs to be acquired by the awardee) amount to US$ 229 million.

 

CTEB, which is located at the petrochemical complex of the town of Ensenada, Province of Buenos Aires, consists of two open-cycle gas turbines, and has a 567 MW installed capacity.

 

The awardee will have to obtain the commissioning of the closing of the combined cycle within a term of 30 months as from the Seventh Amendment to the Trust Agreement’s effective date, thus increasing the installed power capacity to 847 MW, with an estimated investment of US$ 200 million.

 

Both the open and the closed cycle have effective power purchase agreements with CAMMESA under Resolution No. 220/07 issued by the former SE: the first one, entered into on March 26, 2009 and terminating on April 27, 2022, as amended and modified from time to time, and the second one dated March 26, 2013 for a term of 10 years as from the commercial operation of the combined cycle.

 

On June 26, 2019, the acquisition by CTB, a company co-controlled by YPF and Pampa, through subsidiaries, of CTEB transferred by IEASA was completed. The acquisition’s relative price was US$ 282 million, an amount which includes the final (cash) amount offered in the Tender and the acquired VRDs’ purchase price, paid with a contribution of US$ 200 million received by CTB, settled in equal parts by its co-controlling companies, and with a loan received by CTB from a bank syndicate of US$ 170 million.

 

The Power Plant will be managed and operated by Pampa and YPF on a rotational basis over 4-year periods. Pampa will be responsible for managing CTEB’s operations until 2023. And YPF, through its subsidiary YPF Energía Eléctrica S.A., will supervise the necessary works for the closing of the combined cycle.

F-83

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

The following table details the consideration transferred and the fair value of the assets acquired and the liabilities assumed by CTB as of June 26, 2019:

  in million US$
Total consideration transferred (1) (272)
Financial assets at fair value 16
Property, plant and equipment 477
Inventories 8
VRDs (229)
Fair value of net assets 272

 

(1)Includes US$ 53 million for the purchase of the acquired VRDs and considers a US$ 10 million of a price adjustment in favor of CTB.

 

The fair value of property, plant and equipment items and inventories was calculated considering mainly the depreciated replacement cost of the acquired goods. For this purpose, CTB was assisted by an independent specialist engaged by management.

 

The replacement cost approach was applied to measure buildings, equipment, installations and works in progress. The methodology applied to determine their fair value entailed:

(i)the calculation of replacement costs (mainly based on consultations with suppliers and the analysis of specialized publications and information),
(ii)an estimate of residual values at the end of their useful life (based on the interest generated by the asset at the end of its useful life and the owner’s disposal policy), and
(iii)the application of deductions for physical, functional and/or economic impairment, if applicable.

 

The methodology for the determination of the remaining useful life was focused on the analysis of aging, wear and loss of service capacity of the assets resulting from normal use in the activities where they operate.

 

Regarding the work in progress for the closing of the combined cycle, which will allow a 280 MW rated power capacity increase, an estimate of the work progress’ percentage and the depreciation of the installed equipment was made based on physical inspections and the information supplied by the contracts to complete civil and electromechanical works for the closing of the combined cycle.

 

Lastly, a comparative sales approach was used to measure lands and vehicles. For this purpose relevant market data was gathered, mainly sales prices of lands in surrounding areas and published sales prices for vehicles.

 

Additionally, CTB has calculated the weighted present value of future cash flows it expects to receive from the assets to confirm that its fair value does not exceed their recoverable value.

 

As a result of the described process, CTB has not recorded intangible assets associated with the business acquisition.

F-84

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

5.4.5.2 Financial Trust Agreement

 

As a result of the award of CTEB’s goodwill, certain amendments were made to the Enarsa-Barragán Financial Trust Agreement entered into between BICE Fideicomisos S.A. (Nación Fideicomisos S.A.’ continuing company), acting as Trustee, and CTB, in its capacity as Trustor substituting IEASA (former ENARSA) (the “Trust Agreement” or the “Trust”).

 

Under the Trust, on April 25, 2011 publicly traded Series B VRDs for a face value of US$ 582,920,167 were issued. The Trust’s underlying flow is made up of the collection rights resulting from the Power Supply Agreements originally entered into between ENARSA (currently IEASA) and CAMMESA.

 

On June 26, 2019, date on which the sale of CTEB’s goodwill was perfected, the following operations and contractual amendments were executed:

 

-       IEASA and BICE Fideicomisos S.A. entered into the fifth amendment to the Trust Agreement, which mainly included the following modifications:

 

(i)the flow assignment to the Trust is reduced up to an amount equivalent to debt services plus the Trust expenses monthly disclosed by the Trustee to CAMMESA (previously, 90% of the monthly fixed charge for hired power capacity, for 23,255 US$/MW-month plus VAT, was assigned);
(ii)a total or partial early redemption option in favor of the Trustor, at the debt’s residual value;
(iii)the surety timely issued by the National Treasury is canceled; and
(iv)the endorsement of the insurance against all operating risks in CTEB regarding the loss of benefits in favor of the Trust is required, among others.

 

-       IEASA assigned its contractual position to CTB through the execution of a Contractual Position Assignment Agreement and, as a result, BICE Fideicomisos S.A. and CTB executed the sixth amendment to the Trust Agreement whereby CTB was incorporated as a Trustor under the Trust Agreement.

 

-       CTB and IEASA entered into a VRD transfer agreement whereby CTB acquired the outstanding Series B VRDs for a price of US$ 53.5 million (equivalent to 109,628,836 VRDs with a face value of US$ 1 each), thus becoming the holder of such VRDs (the “Trustor’s VRDs”).

 

On August 22, 2019, CTB and BICE Fideicomisos S.A., entered into the seventh amendment to the Trust Agreement, which incorporated, among others, the following amendments:

 

(i)as regards the VRDs: i) the granting of a 24-month grace period (during which only interest will be payable); ii) the modification of the interest rate by the Libor rate plus 6.5%; iii) the determination of principal amortization installments over a 60-month repayment period (to provide constant debt services);
(ii)the assignment to the Trust of the Steam Turbine Supply Agreement, integrating Collection Rights and the Trust Estate;
(iii)the obligation to complete CTEB’s closing to combined cycle to be commissioned within a term of 30 months as from the entry into effect of the seventh amendment, establishing that the breach of this obligation will be a ground for the acceleration of the VRDs;

 

F-85

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

(iv)the incorporation of additional collection rights for both the open and the closed-cycle Supply Agreements;
(v)the assignment to the Financial Trust of the collection rights net of VAT for a certain percentage to cover debt services and other items provided for in Section 8.3.1. of the Trust Agreement, stipulating that any remaining balance on each Service Payment Date (pursuant to the definition of this term in the Trust Agreement) will be transferred to the Trustor;
(vi)establishing the simultaneous collection for collection rights assigned to the Trust and for amounts unassigned under the Supply Agreements (pursuant to the definition of this term in the Trust Agreement);
(vii)establishing that payments to the Trust should be transferred pari passu, with the same payment priority and in the same kind as under the Syndicated Loan (and any other debt allowed under the Trust);

 

(viii)providing that in case CAMMESA pays an amount lower than that which should be settled, the collection rights and the amounts payable to the Trustor will be both reduced proportionately;
(ix)including provisions stipulating that upon the occurrence of a CAMMESA Event (pursuant to the definition of this term in the Trust Agreement): (i) the Trustor may request funds to meet the Power Plant’s Operating Expenses, and (ii) in case funds received as Collection Rights are insufficient, the payments under the VRDs will be rescheduled;
(x)including a Limited Recourse against the Trustor (pursuant to the definition of this term in the Trust Agreement) upon the occurrence of certain events;
(xi)incorporating certain commitments typical of this kind of contracts, such as limitations on the payment of dividends, etc.; and
(xii)modifying the amount of the Reserve Fund (pursuant to the definition of this term in the Trust Agreement) so that it is equivalent to the amount estimated for the next two services under the VRDs.

In accordance with the commitment undertaken under the Trust Agreement, pursuant to a resolution dated October 24, 2019, the CNV authorized the cancellation of the Trustor’s VRDs, which was effected on October 29, 2019. Consequently, on October 31, 2019, the eighth amendment to the Trust Agreement was entered into in order to include the new payment schedule effective as from such cancellation.

 

On October 16, 2020, as approved by its Board of Directors on October 2, 2020, CTB, acting in its capacity as trustor under the Enarsa-Barragán Financial Trust Agreement entered into between CTB, BICE Fideicomisos S.A., in its capacity as trustee (the “Trustee”), and CAMMESA, in its capacity as assigned debtor, made a partial early redemption of the VRDs issued under the Enarsa-Barragán Financial Trust for a total amount of US$ 130 million, to be applied to the payment of the amortization installments and deferred interest, also paying the interest accrued as of the redemption date plus accessory expenses. Besides, as a result of the VRDs redemption, CTB and the holders of 100% of the outstanding VRDs agreed on a modification to the VRDs payment schedule. In this respect, CTB has requested the Trustee to cancel the redeemed VRDs, which was effected on December 4, 2020, and to perform all necessary acts and enter into all relevant agreements to make the necessary modifications to the applicable documents.

 

As of the issuance hereof, total outstanding VRDs (amortization installments plus deferred interest, pursuant to the definition of these terms in the Trust Agreement) amount to US$ 93.7 million.

F-86

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

5.4.5.3 Syndicated loan

 

On June 25, 2019, in order to partially finance the obligations undertaken as a result of the award and execution of the works for the closing of the combined cycle at CTEB, Citibank, N.A., Banco de Galicia y Buenos Aires S.A.U., Banco Santander Río S.A., HSBC Bank Argentina S.A. and Industrial and Commercial Bank of China (Argentina) S.A., in their capacity as lenders (the “Lenders”), granted a syndicated loan to CTB in the amount of US$ 170 million maturing on June 26, 2022, with US$ 136 million accruing a fixed 10.25% interest rate and US$ 34 million accruing a variable LIBOR rate+6.25.

 

On June 25, 2019, the Company executed a share pledge agreement in favor of the Lenders. Additionally, on August 22, 2019, YPF and PACOGEN entered into an amendment to the pledge agreement to include VRD holders as beneficiaries.

 

CTB endorsed the insurance policy, which covers CTEB’s open cycle’s operating risk, so that secured creditors should be the recipients of any payment, compensation and/or damages under such policy.

 

Additionally, CTB and Citibank, N.A.’s Branch (incorporated in the Republic of Argentina), in its capacity as trustee and sole beneficiary of the lenders, executed a trust assignment security agreement, which includes the assignment of the collection rights assigned to the Trustor for up to 42% of the amount to be settled, which CTB is entitled to collect pursuant to the power purchase agreements, net of added-value tax.

 

Finally, in order to coordinate the execution of the rights shared by the VRD holders and the Lenders under the Share Pledge Agreement and the endorsement of the policy, on August 22, 2019 BICE Fideicomisos S.A., in its capacity as Trustee under the Enarsa-Barragán Trust, executed with the Lenders an inter-creditor agreement that includes certain commitments regarding the exercise of its rights associated with the distribution of funds collected as a result of the possible execution of the guarantees shared by the VRD holders and the Lenders, and their interests in the payments to be made under such guarantees.

 

In order to implement the above-mentioned redemption, CTB and the Lenders entered into certain amendments to the terms of the Syndicated Loan Agreement so that the Lenders may allow for the application of CTB’s funds to the early partial redemption of the VRDs without observing the pari passu principle stipulated in such agreement and in the Inter-Creditor Agreement. Additionally, Pampa provided a contingent guarantee in favor of the Lenders under the Syndicated Loan Agreement in consideration of the granting of the above-mentioned modifications.

 

5.4.5.4 Granted guarantees

 

As regards the conclusion of the Enarsa-Barragán project and as stipulated in the contract, additionally to what has been described above the following guarantees have been granted:

 

(i)Financial Trust: YPF and Pampa jointly guarantee, at 50% each, the timely and proper performance of all payment obligations under the ENARSA-Barragán Financial Trust Agreement in case the closing to combined cycle’s commissioning is not achieved within 30 months as from the effective date of the seventh amendment to the agreement (plus, if applicable, the 3-month extension that may be granted by VRD holders).
(ii)Syndicated loan: YPF and Pampa jointly guarantee, at 50% each, the timely and proper performance of all payment obligations under the Syndicated Loan Agreement in case the combined cycle’s commissioning is not achieved by December 26, 2021 (extendable for a term of 3 months).

 

F-87

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

5.4.5.5 Application to enter the public offering system

 

On July 23, 2020, CTB’s Extraordinary General Shareholders’ Meeting resolved to approve CTB’s application to the CNV to enter the public offering system for the offering of corporate bonds, the creation of a global program of simple corporate bonds non-convertible into shares for up to US$200 million or its equivalent in other currencies or units of value, and the issuance of corporate bonds under such program up to its maximum amount, at any time, to be issued in one or more classes and/or series, which authorization was granted by the CNV on September 24, 2020.

5.4.6 Investment in OCP

The Company, through PEB, has an equity interest in OCP, an oil pipeline in Ecuador that has a transportation capacity of 450,000 barrels/day.

On December 6, 2018, OCP entered into a settlement agreement with the Republic of Ecuador to terminate all claims and legal actions brought by the parties regarding discrepancies with the Ecuadorian Treasury. As a result of the agreement, OCP has recorded profits for US$ 387 million.

For its part, as of December 31, 2018, the Company recognized a profit of US$ 35 million on its 11.42% equity interest in OCP’s results, after recognizing previously unrecognized losses regarding OCP’s negative equity until the execution of the transactional agreement.

On the other hand, on December 5, 2018, and before the execution of the settlement agreement, the Company, through its subsidiary PEB, executed an agreement with Agip Oleoducto de Crudos Pesados BV (“AGIP”) for the purchase of shares representing 4.49% OCP’s capital stock and of the financial credit that AGIP held with respect to the subordinated debt issued by OCP, in consideration of a base price equivalent to US$ 1 (one U.S. dollar).

On June 20, 2019, after meeting of all precedent conditions the transaction was subject to, including the authorization by the Ecuadorian Government, the transaction was closed and registered with the Shareholders’ Registry Book.

 

Taking into consideration the timeliness of the agreement with AGIP, the closing of the transaction involved the recognition of a profit of US$ 25 million under IAS 28.

 

F-88

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

The following table details the consideration transferred and the fair value of the assets acquired and the profit recorded by PEB as of June 20, 2019:

 

 

in million

US$

Acquisition cost (1) (0.4)
Contingent consideration (2) (0.1)
Total consideration (0.5)
Share value of the interest in the fair value of associates’s identifiable assets and liabilities (3)

 

9.0

Financial credit with OCP 14.2
Dividends to be received 2.5
Assets fair value 25.7
Profit (4) 25.2

 

 

(1)Including expenses paid by PEB to the Ecuadorian Government (Ministry of the Environment) of US$ 0.1 million for the granting of the authorization to transfer the shares held by AGIP and other advisory expenses related to the transaction.
(2)Contingent consideration for the reimbursement to AGIP calculated by estimating the probability of collection of the financial receivable with OCP Ltd. prior to its maturity in 2021.
(3)Calculated based on the present value of expected dividend flows.
(4)Disclosed under “Share of profit (loss) from associates and joint ventures”

 

Furthermore, as of December 31, 2019, the Company recorded an impairment loss regarding the 11.42% stake in OCP (before the acquisition of the additional 4.49%) in the amount of US$ 6.7 million in connection with 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%.

 

On April 8, 2020, a Force Majeure event occurred, consisting of the sinking and landslide in the San Rafael sector, on the border of the provinces of Sucumbíos and Napo, Ecuador, which caused the rupture of the “Oleoducto de Crudos Pesados” pipeline, at KP 93 + 469. This event also affected the “SOTE” Trans-Ecuadorian Pipeline System and the Shushufindi-Quito Pipeline. On May 7, 2020, OCP S.A. restarted operations and resumed the provision of the crude oil transportation service after completing the construction of a variant that allowed the restoration of the crude oil pipeline system.

 

As of December 31, 2020, OCP recorded a total of US$ 33 million as environmental cleanup and remediation costs, of which it expects to recover US$ 13 million from insurance companies. As of the issuance of these Consolidated Financial Statements, OCP has filed the claims with the applicable insurance companies and has received the first disbursement for US$ 2 million.

 

Additionally, on June 4, 2020, a contract for the implementation of the specific mutual support agreement was entered into between Petroecuador and OCP, which stipulated that the costs incurred in mitigating and remediating the social and environmental effects resulting from the Force Majeure event would be reimbursed by the other party proportionately to the spilled hydrocarbon volumes. To such effect, the Agency for the Regulation and Control of Energy and Non-Renewable Natural Resources established a 43% percentage for OCP.

 

F-89

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

The Company has performed recoverable amount tests for its investment in OCP as of December 31, 2020, considering the present value of the future cash flows it expects to obtain through the collection of dividends during the concession term, which extends until 2023, and a 15.01% discount rate, generating recognition of a US$ 0.1 million reversal in the recognized impairment loss.

 

Contingent liabilities in OCP

 

On January 16, 2020, OCP was served notice of an arbitration claim filed by Oxy Oleoducto SOP LLC (Oxy) requesting a compensation. On March 9, 2020, OCP S.A. answered the notice by rejecting the claims and filing a counterclaim. On November 24, 2020, Oxy and OCP entered into an agreement terminating, effective December 1, 2020 and by means of a joint waiver, the arbitration proceeding heard before the International Centre for Settlement of Investment Disputes regarding the Transportation Agreement known as ISTA.

 

Furthermore, upon the occurrence of the described Force Majeure event, several organizations and natural persons filed a constitutional protection complaint against OCP, as well as the Ministry of Energy, the Ministry of the Environment and Water, Petroecuador and the Ministry of Health, alleging the infringement of several constitutional rights. The safeguard action has been disallowed in the first instance by Orellana’s Provincial Court of Justice. As of the issuance of these Consolidated Financial Statements, this proceeding is pending resolution. Even though there is a low probability that this claim will be upheld, a second-instance judgment may only make a declaration of constitutional rights, which would not involve the recognition of any economic value.

 

 

5.5      OPERATIONS IN OIL AND GAS CONSORTIUMS

 

5.5.1 General considerations

 

The Company is jointly and severally liable with the other participants for meeting the contractual obligations under these arrangements.

 

The production areas in Argentina are operated pursuant to concession production agreements with free hydrocarbons availability.

 

According to Law No.17,319, royalties equivalent to 12% of the wellhead price of crude oil and natural gas are paid in Argentina. The wellhead price is calculated by deducting freight and other sales related expenses from the sale prices obtained from transactions with third parties. This rate may increase from 3% to 4% depending on the producing jurisdiction and market value of the product.

 

F-90

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

5.5.2 Oil and gas participation details

As of December 31, 2019, the Company and associates are part of the joint operations and consortia for the exploration and production of oil and gas as indicated below:

 

          Participation        Duration Up To
Name     Location   Direct   Indirect   Operator    
                       
Argentine production                      
Río Neuquén     Río Negro and Neuquén   31.43% and 33.07%     YPF    2027/2051
Sierra Chata     Neuquén   45.55%     PAMPA   2053
El Mangrullo     Neuquén   100.00%     PAMPA   2053
La Tapera - Puesto Quiroga     Chubut   35.67%     Tecpetrol   2027
El Tordillo     Chubut   35.67%     Tecpetrol   2027
Aguaragüe     Salta   15.00%     Tecpetrol    2023/2027
Gobernador Ayala     Mendoza   22.51%     Pluspetrol   2036
Anticlinal Campamento      Neuquén   15.00%       Oilstone   2026
Estación Fernández Oro      Río Negro   15.00%     YPF   2026
Río Limay este (Ex Senillosa) (1)     Neuquén   85.00%     PAMPA   2040
Veta Escondida y Rincón de Aranda     Neuquén   55.00%     PAMPA   2027
Rincón del Mangrullo     Neuquén   50.00%     YPF   2052
Chirete     Salta   50.00%     High Luck Group Limited   2020/2045
                       
Foreign (2)                      
Oritupano - Leona     Venezuela     -    22.00%   PDVSA   2025
Acema     Venezuela     -    34.49%   PDVSA   2025
La Concepción     Venezuela     -    36.00%   PDVSA   2025
Mata       Venezuela     -    34.49%   PDVSA   2025
                       
Argentine exploration                      
Parva Negra Este (3)     Neuquén   42.50%     PAMPA   2019
Río Atuel     Mendoza   33.33%     Petrolera El Trebol   2020
Borde del Limay (1)     Neuquén   85.00%     PAMPA   2015
Los Vértices (1)     Neuquén   85.00%     PAMPA   2015
Las Tacanas Norte     Neuquén   90.00%     PAMPA   2023
                       
                       

 

 

(1)In the process of being transferred to GyP
(2)Corresponding to the following stakes: 22% in Petroritupano S.A., 36% in Petrowayú S.A., 34.49% in Petroven-Bras S.A. and 34.49% in Petrokariña S.A (Venezuelan mixed companies) regulating the exploitation of the Oritupano Leona, La Concepción, Acema and Mata blocks, respectively, and incorporated as a result of the purchase of Petrobras Participaciones S.L.’s capital stock in July 2016, without obtaining the Venezuelan Government’s authorizations regarding the change of indirect control. The Company has expressed to the Venezuelan Government authorities its willingness to negotiate the transfer of its shares to Corporación Venezolana de Petróleo S.A.
(3)In the process of requesting appraisal.

 

5.5.3 New concessions and changes in oil and gas participations

5.5.3.1 Parva Negra Area

 

The exploration license for Parva Negra Este, an area located in the Province of Neuquén granted under concession to GyP and operated by Pampa since April 2014 for a term of 4 years, expired in the month of April 2018. As the original agreement had stipulated the possibility to extend it for a year, GyP requested such extension in due time and manner.

 

Upon the expiration of the exploration license’s extension in the month of April 2019, on March 29, 2019 GyP requested that the block should be classified as an evaluation block for a 3-year period.

 

F-91

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

5.5.3.2 Las Tacanas Norte area

 

On January 4, 2019, with the publication in the BO of Executive Order No. 2315/18 passed by the Executive Branch of the Province of Neuquén, this exploratory agreement, effective for a term of 4 years, entered into force. Pampa is the operator of Las Tacanas Norte area with a 90% interest, and GyP is the permit holder with a 10% interest.

 

The block has a 120 km2 surface and is adjacent to El Mangrullo block, which is currently operated by the Company. The accepted offer consists of a perforation of up to 8 wells with the objective toward Vaca Muerta formation, and other exploratory studies.

 

5.5.3.3 Río Atuel

 

As a result of the delay in the approval of the drilling project filed on December 19, 2018, Petrolera el Trebol, the area operator, on June 19, 2019 requested, to the applicable authorities, for the suspension of the term of the second exploratory period in progress. On June 7, 2019, the approval of the drilling project was obtained. On June 19, 2019, the suspension of the second exploration period requested was established by the relevant authorities, determining December 7, 2019 as the new expiration date.

 

Subsequently, upon operator´s request, on November 11, 2019, the Hydrocarbons Department granted a 12-months term extension, effective as from December 18, 2019, for the third exploratory period. In this same administrative decision, the applicable authority accepted the 50% reversal of the area.

 

5.5.3.4 Chirete

 

After the discovery of oil in late 2018, on February 22, 2019 the applicable authorities granted a 12-months term extension, effective as from November 18, 2018, for the third exploratory period. Since the field discovered in this block turned out to be commercially exploitable, on April 26, 2019 an application was filed for the granting of a hydrocarbon exploitation concession over the “Los Blancos” block, with a 95-km2 surface, and on April 30, 2019 a three-year extension of the third exploratory period for the permit’s remaining area was requested. which had been extended for 12 months from November 18, 2018.

 

On October 13, 2020, the Province of Salta issued Executive Order No. 662/20 granting an exploitation concession over Los Blancos block to the companies “Pampa Energía” and “High Luck Group Limited” for a term of 25 years as from its publication date.

 

In turn, the Executive Order establishes an Investment Plan in this lot for a total amount of US$57 million for the 2020-2024 period. Additionally, this Executive Order provides for the relinquishment of the remaining area of the Chirete block, which totals 801 square kilometers.

F-92

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

5.5.3.5 Anticlinal Campamento

 

On December 1, 2010, YPF, owner of the exploitation concession over the block, organized on December 1, 2010, a Joint Venture for the drilling of 9 wells, in which the company has a 15% interest. On August 1, 2019, the concession over the “Anticlinal Campamento” block was transferred from YPF to Oilstone Energía S.A, including the transfer of operations and agreements thus remaining unchanged Pampa´s participation in the Anticlinal Campamento.

 

5.5.3.6 Sierra Chata

 

On December 27, 2019, through Decree 129/19, the province of Neuquén has approved the assignment of Total Austral´s participation to Mobil Argentina SA, resulting in a Mobil participation of 54.4477% in the area.

 

5.5.3.7 El Tordillo – La Tapera / Puesto Quiroga

 

On May 21, 2020, the Partners and the Province of Chubut signed a Memorandum of Understanding extending compliance commitments until June 30, 2021. The block is operated by Tecpetrol and the Company has a 35.6706% stake.

 

5.6 Exploratory well costs

 

The following table provides the year end balances and activity for exploratory well costs, during the years ended December 31, 2020, 2019 and 2018:

 

    12.31.2020   12.31.2019   12.31.2018
             
At the beginning of the year   33   19   12
Increases   24   30   8
Transferred to development   (7)   (11)   -
Loss of the year   -   (5)   (1)
At the end of the year   50   33   19
             
Number of wells at the end of the year   12   9   7

 

F-93

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 5: (Continuation)

 

5.7 Termination of the Participation Agreements in Ecuador

 

Pursuant to a resolution dated November 25, 2010, the Secretariat of Hydrocarbons notified EcuadorTLC of the termination of the Participation Agreements in Block 18 and in Campo Unificado Palo Azul, the Ecuadorian Government being under a duty to compensate contractors for an amount equivalent to unamortized investments, adjusted at an annual interest rate appropriate for this type of projects in Ecuador, and establishing a term for the Company and the Ecuadorian Government to reach a settlement regarding the agreement.

 

After bringing several administrative and judicial proceedings, not having reached an agreement with the Ecuadorian government, EcuadorTLC, Cayman International Exploration Company and Teikoku Oil Ecuador, members of the joint operation, presented, on February 26, 2014 the request for arbitration against Ecuador and EP Petroecuador under the arbitration Rules of the United Nations Commission on International Trade Law.

 

On January 16, 2018 the Arbitration Court issued the Award, which determined a Settlement Value of US$ 176 million for EcuadorTLC based on its interest in the Block.

 

As regards the Arbitration proceeding, on March 19, 2018, the Republic of Ecuador and the Plaintiff Partners entered into an agreement whereby the Plaintiff Partners agreed not to request the collection of the Award in consideration of the award of consequential damages, which for EcuadorTLC consisted of: (i) the release from tax and labor claims in dispute in the amount of US$132 million, and (ii) the collection of US$54 million. Additionally, the parties agreed that EcuadorTLC would be the sole beneficiary of the collection of the amount of US$ 9 million corresponding to a commitment undertaken by Petromanabí (a partner of the Block 18 Consortium but not a petitioner). The associated receivable has not been recognized in view of its contingent nature (see Note 15.6).

As a result of the agreement, the Company recognized net income in the amount of US$ 40 million as of December 31, 2018, which was made up as follows: i) US$ 133 million income as compensation for consequential damages after the write-off of the receivable on account of unamortized investments in the amount of US$ 53 million recoverable from the Ecuadorian Government, and ii) a US$ 93 million loss associated with the agreement to the terms of the tax claims assigned to EcuadorTLC pursuant to the agreement.

 

During 2018, EcuadorTLC collected the agreed amount and 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.

 

 

F-94

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: RISKS

 

6.1 Critical accounting estimates and judgments

The preparation of financial statements requires the Company’s Management to make future estimates and assessments, to apply critical judgment and to establish assumptions affecting the application of accounting policies and the amounts of disclosed assets and liabilities, income and expenses.

The applied estimates and accounting judgments are evaluated on a continuous basis and are based on past experiences and other reasonable factors under the existing circumstances. Actual future results might differ from the estimates and evaluations made at the date of preparation of these Consolidated Financial Statements. The estimates which have a significant risk of producing adjustments on the amounts of the assets and liabilities during the following year are detailed below:

6.1.1 Impairment of non-financial long-lived assets

Non-financial long-lived assets, including identifiable intangible assets and right-of-use assets, are reviewed for impairment at the lowest level for which there are separately identifiable cash flows (CGU). For this purpose, each assets group with independent cash flows, each subsidiary, associate and each jointly controlled company has been considered a single CGU, as all of their assets jointly contribute to the generation of cash inflows, which are derived from a single service or product; thus cash inflows cannot be attributed to individual assets.

In order to evaluate if there is evidence that a CGU could be affected, both external and internal sources of information are analyzed. Specific facts and circumstances are considered, which generally include the discount rate used in the estimates of the future cash flows of each CGU and the business condition as regards economic and market factors, such as the cost of raw materials, oil and gas, international petrochemical product’s price, the regulatory framework for the energy industry, the projected capital investments and the evolution of the energy demand.

The value in use of each CGU is estimated on the basis of the present value of future net cash flows expected to be derived on the UGE. Management uses approved budgets up to one year as the base for cash flow projections that are later extrapolated into a term consistent with the assets’ remaining useful life, taking into consideration the appropriate discount rates. The discount rates used to discount future net cash flows is the WACC, for each asset or CGU a specific WACC was determined which considered the business segment and the country conditions where the operations are performed. In order to calculate the fair value less the costs of disposal, the Company Management uses the estimated value of the future cash flows that a market participant could generate from the appropriate CGU, less the necessary costs to carry out the sale of the corresponding CGU.

The Company Management is required to make judgments at the moment of the future cash flow estimation. The actual cash flows and the values may differ significantly from the expected future cash flows and the related values obtained through discount techniques.

6.1.2 Current and deferred Income tax

The Company’s Management periodically evaluates tax treatments affecting the determination of taxable profit regarding uncertain tax treatment under tax law considering the acceptability of a particular tax treatment by the relevant taxation authority, and, if applicable, recognizes tax provisions to reflect the effect of the uncertainty for each tax treatment based on the amount estimated to be paid to the tax authorities.

 

F-95

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

If the final tax resolution regarding uncertain tax treatments differs from recognized figures, such differences will have an effect on income tax and deferred income tax at the year of such determination.

Deferred tax assets are reviewed at each reporting date and reduced in accordance with the probability that the sufficient taxable base will be available to allow for the total or partial recovery of these assets. In assessing the recoverability of deferred tax assets, Management considers if it is likely that a portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets depends on the generation of future taxable income in the periods in which these temporary differences become deductible. To make this assessment, Management takes into consideration the scheduled reversal of deferred tax liabilities, the projections of future taxable income and tax planning strategies.

The generation of future taxable profits may differ from those estimated affecting the deductibility of deferred tax assets.

6.1.3 Provision for contingencies

The Company is subject to various claims, lawsuits and other legal proceedings that arise during the ordinary course of its business. The Company’s liabilities with respect to such claims, lawsuits and other legal proceedings cannot be estimated with certainty. Periodically, the Company reviews the status of each contingency and assesses potential financial liability, applying the criteria indicated in Note 4.22, for which elaborates the estimates mainly with the assistance of legal advisors, based on information available to the Management at Consolidated Financial Statements date, and taking into account our litigation and resolution/settlement strategies.

Contingencies include outstanding lawsuits or claims for possible damages to third parties in the ordinary course of the Company’s business, as well as third party claims arising from disputes concerning the interpretation of legislation.

The Company evaluates whether there would be additional expenses directly associated with the ultimate resolution of each contingency, which will be included in the provision if they may be reasonably estimated.

The final resolutions of the litigation could differ from Management's estimates, generating current provisions to be inadequate, which could have a material adverse effect on the statement of financial position, comprehensive income, changes in equity and cash flows.

6.1.4 Asset retirement obligations

Asset retirement obligations in oil and gas areas after completion of operations require the Company’s Management to estimate the number of wells, long-term well abandonment costs and the time remaining until abandonment.

In the same way, the obligations related to the decommissioning of wind turbines in wind farms require the Company’s Management to estimate long-term dismantling costs and the time remaining until the dismantling.

Technology, costs and political, environmental and safety considerations constantly change and may result in differences between actual future costs and estimates.

Asset retirement obligations’ estimates are adjusted at least once a year or more frequently if there are changes in the assumptions considered in the assessment.

F-96

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

6.1.5 Impairment of financial assets

The Group is exposed to losses for uncollectible receivables. The Company Management estimates the final collectability of the accounts receivable.

The accounting of expected credit losses for trade receivables and other receivables with similar risk characteristics is based on the Company's best estimate of the default risk and the calculation of the expected credit losses rates, based on historical information of the behavior of the Company's clients, current market conditions and forward-looking estimates at the end of each reporting period.

In order to estimate collections related to the sale of gas and energy (in the spot market), the Company mainly considers CAMMESA’s capacity to meet its payment obligations to generators and the resolutions issued by the SE, which allow the Company to collect its receivables from CAMMESA through different mechanisms.

Future adjustments to the allowance may be necessary if future economic conditions differ substantially from the assumptions used in the assessment for each year.

6.1.6 Actuarial assumptions in defined benefit plans

Commitments with defined benefit plans to employees are recognized as liabilities in the statement of financial position based on actuarial estimates revised annually by an independent actuary, using the projected unit credit method.

The present value of defined benefit pension plan depends on multiple factors that are determined according to actuarial estimates, net of the fair value of the plan assets, when applicable. For this purpose, certain assumptions are used including the discount rate and wage growth rate assumptions. It may be necessary to make adjustments in the future if future economic conditions materially differ from the assumptions used in the valuation of each year.

6.1.7 Oil and gas reserves

Reserves include oil and gas volumes (in m3 of oil equivalent) that are economically producible, in the areas where the Company operates or has a (direct or indirect) interest and over which the Company has exploitation rights, including oil and gas volumes related to those service agreements under which the Company has no ownership rights on the reserves or the hydrocarbons obtained and those estimated to be produced for the contracting company under service contracts.

There are numerous uncertainties in estimating proved reserves and future production profiles, development costs and prices, including several factors beyond the producer’s control. Reserve 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.

Periodic revisions and adjustments to the estimated oil and gas reserves and related future net cash flows may be necessary as a result of changes in a number of factors, including reservoir performance, new drilling, oil and gas prices, cost, technological advances, new geological or geophysical data, and other economic factors or at least once a year.

F-97

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

The Company’s estimates of oil and gas reserves have been developed by the Company’s internal specialists, specifically petroleum engineers, and audited by independent specialists engaged by Company.

The Company uses the information obtained from the calculation of reserves in the determination of depreciation of properties, plant and equipment used in oil and gas areas, as well as assessing the recoverability of these assets and including, when applicable, goodwill allocated to oil and gas segment (see Notes 4.6 to 4.9).

 

6.1.8 Environmental remediation

The costs incurred to limit, neutralize or prevent environmental pollution are only capitalized if at least one of the following conditions is met: (a) such costs relate to improvements in safety; (b) the risk of environmental pollution is prevented or limited; or (c) the costs are incurred to prepare the assets for sale and the book value (which considers those costs) of such assets does not exceed their respective recoverable value.

 

Liabilities related to future remediation costs are recorded when, on the basis of environmental assessments, such liabilities are probable to materialize, and costs can be reasonably estimated. The actual recognition and amount of these provisions are generally based on the Company’s commitment to an action plan, such as an approved remediation plan or the sale or disposal of an asset. The provision is recognized on the basis that a future remediation commitment will be required.

The Company measures liabilities based on its best estimation of present value of future costs, using currently available technology and applying current environmental laws and regulations as well as the Company’s own internal environmental policies.

6.1.9 Business Combinations

 

The acquisition method involves the measurement at fair value of the identifiable assets acquired and the liabilities assumed in the business combination at the acquisition date.

For the purpose to determine the fair value of identifiable assets, the Company uses the valuation approach considered the most representative for each asset. These include: i) the income approach, through indirect cash flows (net present value of expected future cash flows) or through the multi-period excess earnings method, ii) the cost approach (replacement value of the good adjusted for loss due to physical deterioration, functional and economic obsolescence) and iii) the market approach through comparable transactions method.

 

Likewise, in order to determine the fair value of liabilities assumed, the Company’s Management considers the probability of cash outflows that will be required for each contingency, and elaborates the estimates with assistance of legal advisors, based on the information available and taking into account the strategy of litigation and resolution / liquidation.

 

Management critical judgment is required in selecting the approach to be used and estimating future cash flows. Actual cash flows and values ​​may differ significantly from the expected future cash flows and related values ​​obtained through the mentioned valuation techniques.

 

F-98

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

 

6.2 Financial risk management

 

6.2.1 Financial Risk Factors

The Company’s activities are subject to several financial risks: market risk (including the exchange rate risk, the interest rate risk and the price risk), credit risk and liquidity risk.

Financial risk management is encompassed within the Company’s global policies, there is an integrated risk management methodology, where the focus is not placed on the individual risks of the business units’ operations, but there is rather a wider perspective focused on monitoring risks affecting the whole portfolio. The Company’s risk management strategy seeks to achieve a balance between profitability targets and risk exposure levels. Financial risks are those derived from financial instruments the Company is exposed to during or at the closing of each fiscal year. The Company uses derivative instruments to hedge certain risks when it deems it necessary according to its risk management internal policies.

Financial risk management is controlled by the Financial Department, which identifies, evaluates and covers financial risks. Risk management systems and policies are reviewed on a regular basis to reflect changes in market conditions and the Company’s activities, and have been applied consistently during the periods comprised in these Consolidated Financial Statements. This section includes a description of the main risks and uncertainties which may adversely affect the Company’s strategy, performance, operational results and financial position.

6.2.1.1 Market risks

6.2.1.1.1 Foreign exchange risk

The Company’s results of operations and financial position are exposed to changes in the exchange rate between the Company’s functional currency, which is the U.S. dollar and other currencies, primarily with respect to the Argentine peso (which is the legal currency in Argentina). In some cases, the Company may use derivative financial instruments to mitigate the associated exchange rate risk.

In fiscal year 2020, the U.S. dollar recorded an approximate 40.5% increase against the Argentine peso, from $59.89 in December 2019 to $84.15 in December 2020, and taking into consideration that during the year the Company mostly had a net passive position in Argentine pesos, as of December 31, 2020 the Company recorded net foreign exchange gain in the amount of US$ 11 million. Taking into account the net active financial position in Argentine pesos as of December 31, 2020, excluding the assets and liabilities available for sale, the Company estimates that provided all other variables remain constant, a 10% revaluation/(devaluation) of U.S. dollar as compared to the Argentine peso would generate in absolute values a (decrease)/increase of US$ 7 million in the 2020 fiscal year’s income/(loss), before income tax.

The Group´s exposure to other foreign currency movements is not material.

F-99

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

6.2.1.1.2 Price risk

The Company’s financial instruments are not significantly exposed to hydrocarbon international price risks on account of the current regulatory, economic, governmental and other policies in force, oil and gas domestic prices are not directly affected in the short-term due to variations in the international market.

Additionally, the Company’s investments in financial assets classified as “at fair value through profit or loss” are sensitive to the risk of changes in the market prices resulting from uncertainties as to the future value of such financial assets.

The Company estimates that provided all other variables remain constant, a 10% revaluation/(devaluation) of each market price would generate the following increase/(decrease) in the 2019 fiscal year’s income/(loss), before income tax in relation to financial assets at fair value through profit and loss detailed in Note 12.2 to these Consolidated Financial Statements:

    Increase of the result for the year
Financial assets   12.31.2020   12.31.2019
Shares   4   2
Government securities   21   11
Investment funds   9   24
Variation of the result of the year   34   37

6.2.1.1.3 Cash flow and fair value interest rate risk

 

The management of the interest rate risk seeks to reduce financial costs and limit the Company’s exposure to interest rate increases.

 

Indebtedness at variable rates exposes the Company to the interest rate risk on its cash flows due to the possible volatility they may experience. Indebtedness at fixed rates exposes the Company to the interest rate risk on the fair value of its liabilities, since they may be considerably higher than variable rates.

 

As of December 31, 2020, only approximately 10% of the indebtedness was subject to variable interest rates. Likewise, most of the Company’s indebtedness subject to variable interest rates is denominated in U.S. dollar, based on Libor rate plus an applicable margin and a small portion is denominated in pesos accruing interest based on the private Badlar rate.

As of December 31, 2020, just 13.6% of the indebtedness was subject to variable interest rates. Furthermore, regarding the Company’s debt accruing variable interest rates, 61.8% is denominated in pesos, mainly at Private Badlar rate, and the remaining 38.2% is denominated in U.S. dollars, mainly at Libor rate plus an applicable spread.

The Company seeks to mitigate its interest-rate risk exposure through the analysis and evaluation of: (i) the different liquidity sources available in the financial and capital market, both domestic and (if available) international; (ii) interest rates alternatives (fixed or variable), currencies and terms available for companies in a similar sector, industry and risk than the Company; (iii) the availability, access and cost of interest-rate hedge agreements. On doing this, the Company evaluates the impact on profits or losses resulting from each strategy over the obligations representing the main interest-bearing positions.

F-100

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

In the case of fixed rates and in view of the market’s current conditions, the Company considers that the risk of a significant decrease in interest rates is low and, therefore, does not foresee a substantial risk in its indebtedness at fixed rates.

As of the date of issuance of these Consolidated Financial Statements, the Company is not exposed to a significant risk of variable interest rate increases since most of the financial debt is subject to fixed rate.

The following chart shows the breakdown of the Company’s borrowings classified by interest rate and the currency in which they are denominated:

    12.31.2020   12.31.2019
Fixed interest rate:        
Argentinian pesos   53   143
U.S dollar   1,318   1,687
Subtotal loans granted at a fixed interest rate   1,371   1,830
         
Floating interest rates:        
Argentinian pesos   133   10
U.S dollar   82   64
Subtotal loans granted at a floating interest rate   215   74
         
Non interest accrued        
Argentinian pesos   8   17
U.S dollar   20   26
Subtotal no interest accrued   28   43
Total borrowings   1,614   1,947

Based on the conducted simulations, and provided all other variables remain constant, a 10% increase/decrease in variable interest rates would generate the following (decrease)/increase in the 2020 fiscal year's year’s income/(loss), before income tax, of US$ 5 million.

6.2.1.2 Credit risk

The Company establishes individual credit limits according to the limits defined by the Board of Directors and approved by the Financial Department based on internal or external ratings. The Company makes constant credit assessments on its customers’ financial capacity, which minimizes the potential risk for bad debt losses.

The credit risk represents the exposure to possible losses resulting from the breach by commercial or financial counterparties of their obligations taken on with the Company. This risk stems mainly from economic and financial factors or a possible counterparty default.

The credit risk is associated with the Company’s commercial activity through customer trade receivables, as well as available funds and deposits in banking and financial institutions.

The Company, in its ordinary course of business and in accordance with its credit policies, grants credits to a large customer base, mainly large sectors of the industry, including petrochemical companies, natural gas distributors and electricity large users.

F-101

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

As of December 31, 2020, the Company’s trade receivables totaled US$ 246 million, of which 99.98% are short-term and the remaining 0.02% is classified as non-current. With the exception of CAMMESA, which represents approximately 72% of such trade receivables, the Company does not have a significant credit risk concentration, as this exposure is distributed among a large number of customers and other counterparties.

The impossibility by CAMMESA to pay these receivables may have a substantially adverse effect on cash income and, consequently, on the result of operations and financial situation which, in turn, may adversely affect the Company’s repayment capacity.

The credit risk of liquid funds and other financial investments is limited since the counterparties are high credit quality banking institutions. If there are no independent risk ratings, the risk control area evaluates the customer’s creditworthiness, based on past experiences and other factors.

The Company applies the simplified approach of IFRS 9 to measure the expected credit losses trade receivables and other receivables in accordance with the policy described in Note 4.10.4.

The expected credit loss on trade receivables and financial assets as of December 31, 2020, 2019 and 2018 amounts to US$ 12 million, US$ 1 million and US$ 13 million, respectively and was determined based on credit loss rates calculated for days past due detailed below:

 

12.31.2020 Undue 30 days 60 days 90 days 120 days 150 days 180 days + 180 days
Generation 0.35% 1.11% 5.74% 9.78% 11.23% 19.77% 20.87% 22.71%
Oil and Gas 0.49% 0.72% 5.96% 16.21% 16.23% 17.74% 17.76% 17.79%
Petrochemicals 0.02% 0.06% 0.72% 2.26% 9.95% 23.84% 19.14% 36.92%
Holding 12.58% 0.94% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
                 
                 
 12.31.2019 Undue 30 days 60 days 90 days 120 days 150 days 180 days + 180 days
Generation 0.10% 0.35% 1.99% 2.95% 4.03% 5.59% 9.79% 16.13%
Oil and Gas 0.53% 1.49% 9.45% 18.03% 18.50% 18.81% 18.90% 18.92%
Distribution of energy 3.00% 3.00% 8.00% 18.00% 20.00% 45.00% 72.00% 72.00%
Petrochemicals 0.39% 0.73% 6.88% 16.66% 25.32% 29.59% 30.97% 43.05%
Holding 1.85% 2.81% 6.84% 17.15% 26.77% 43.21% 49.89% 65.29%
                 
                 
 12.31.2018 Undue 30 days 60 days 90 days 120 days 150 days 180 days + 180 days
Generation 0.04% 0.09% 2.62% 3.39% 9.37% 13.56% 19.82% 28.88%
Oil and Gas 2.20% 4.42% 11.11% 20.42% 42.85% 47.32% 49.20% 56.32%
Distribution of energy 8.00% 8.00% 12.00% 19.00% 26.00% 59.00% 69.00% 69.00%
Petrochemicals 0.03% 0.08% 1.41% 4.98% 11.52% 20.36% 24.91% 25.24%
Holding 0.96% 1.25% 2.03% 2.85% 19.86% 26.41% 32.95% 32.97%

 

F-102

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

 

The loss allowance for financial assets and other receivables adjustment as of January 1, 2018 for the application of the expected credit losses methodology to the loss allowance as of December 31, 2017, based on the incurred loss model, is detailed as follows:

 

    Financial assets   Other receivables
Loss allowance under IAS 39 as of 12.31.2017   22   7
Adjustment to the opening balance of retained earnings   4   (1)
Loss allowance calculated under IFRS 9 as of 01.01.2018   26   6

 

The detailed adjustments to the opening balance in equity as a result of the application of IFRS 9, are disclosed net of tax effect for a total amount of US$ 2 million, with counterpart in retained earnings of US$ 1 million and in non-controlling interest of US$ 1 million.

Finally, although cash, cash equivalents and financial assets are also subject to the impairment requirements of IFRS 9, the identified impairment loss is immaterial.

Loss allowance evolution as of December 31, 2020, 2019 and 2018, is detailed in Note 12.3.

The Company’s maximum exposure to credit risk is based on the book value of each financial asset in the Consolidated Financial Statements. On the basis of the change in an assumption, while holding all other assumptions constant, a 5% increase/(decrease) in the estimated trade receivables’ uncollectibility rate would result in US$ 1.5 million (decrease)/increase in 2019 fiscal year’s results, before income tax.

6.2.1.3 Liquidity risk

The liquidity risk is associated with the Company’s capacity to finance its commitments and conduct its business plans with stable financial sources, as well as with the indebtedness level and the financial debt maturities profile. The cash flow projection is made by the Financial Department.

The Company Management supervises updated projections on liquidity requirements to guarantee the sufficiency of cash and liquid financial instruments to meet operating and financing needs of the Company while keeping at all times a sufficient margin for unused credit facilities. In this way, the aim is that the Company does not breach indebtedness levels or the Covenants, if applicable, of any credit facility. Those projections take into consideration the Company’s debt financing plans, the meeting of the covenants and, if applicable, the external regulatory or legal requirements such as, for example, restrictions on the use of foreign currency. Additionally, the Financial Department regularly monitors the available credit for the Company, both in local and international, capital market as well as banking sector.

Excess cash and balances above working capital management requirements are managed by the Company’s Treasury Department, which invests them in marketable securities, term deposits and mutual funds, selecting instruments having proper currencies and maturities, and an adequate credit quality and liquidity to provide a sufficient margin as determined in the previously mentioned projections.

F-103

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

The Company keeps its sources of financing diversified between banks and the capital market, and it is exposed to the refinancing risk at maturity.

It should be noted that the Company operates in an economic context which main variables have recently suffered significant volatility as a result of political and economic events both domestically and internationally, as described in Note 1.2.

The impact of COVID-19, added to the special circumstances of the sovereign debt renegotiation being conducted since the end of 2019, affected the international financial markets, which in turn also adversely affected the cost of access to financing, hedging activities, liquidity and access to capital for emerging markets in general, and particularly for Argentina. As regards to access to domestic financing, an increase in liquidity in pesos has been experienced throughout the market, which has significantly reduced the cost of financing, especially in the very short term.

All these impacts may potentially affect the Company’s capacity to obtain financing for its operations in a timely manner and under acceptable and efficient terms, costs and conditions in line with the Company’s business needs.

Furthermore, the restrictions imposed by the BCRA (see Note 2.7) with the purpose of regulating inflows and outflows in the MLC to maintain the exchange rate stability and protect international reserves in view of the high degree of uncertainty and volatility in the exchange rate and other new restrictions which may be imposed in the future may affect the Company’s capacity to access the MLC to acquire the foreign currency necessary to meet its financial obligations, such as debt principal and interest payments (including the CBs debt), and other additional payments abroad, or otherwise affect the Company’s business and the results of its operations.

The Company’s Management permanently monitors the evolution of situations affecting its business to determine possible steps to take and identify potential impacts on its assets and financial position. The Company’s Consolidated Financial Statements should be read in the light of these circumstances.

It is worth highlighting that the Company currently has a strong level of liquidity that allows it to properly face such volatility.

The determination of the Company’s liquidity index for fiscal years ended December 31, 2020 and 2019 is detailed below:

 

    12.31.2020   12.31.2019
         
Current assets   948   1,362
Current liabilities   448   854
         
Index   2.12   1.59

 

F-104

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

The following table includes an analysis of the Company financial liabilities, grouped according to their maturity dates and considering the period remaining until their contractual maturity date from the date of the Consolidated Financial Statements. Derivative financial liabilities are included in the analysis if their contractual maturities are essential for the understanding of the cash flow calendar. The amounts shown in the table are the contractual undiscounted cash flows.

 

As of December 31, 2020   Trade receivables   Trade and other payables (1)   Borrowings
Less than three months   244   -   82
Three months to one year   3   116   228
One to two years   -   7   111
Two to five years   -   3   645
More than five years   -   6   1,145
Total   247   132   2,211
             
             
             
As of December 31, 2019   Trade receivables   Trade and other payables (1)   Borrowings
Less than three months   495   -   95
Three months to one year   5   454   188
One to two years   8   11   288
Two to five years   -   70   834
More than five years   -   9   1,233
Total   508   544   2,638

 

(1) Includes Lease Liabilities (see Note 18.1.2)

F-105

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 6: (Continuation)

6.3 Capital risk management

The aims of managing capital are safeguard its capacity to continue operating as an on-going business with the purpose of generating return for its shareholders and benefits to other stakeholders, and keeping an optimal capital structure to reduce the cost of capital.

To keep or adjust its capital structure, the Company may adjust the amount of the dividends paid to its shareholders, reimburse capital to its shareholders, issue new shares, conduct stock repurchase programs or sell assets to reduce its debt.

In line with industry practices, the Company monitors its capital based on the leverage ratio. This ratio is calculated by dividing the net debt by the total capital. The net debt equals the total indebtedness (including current and non-current indebtedness) minus cash and cash equivalents and current financial assets at fair value through profit and loss. The total capital corresponds to the shareholders’ equity as shown in the statement of financial position, plus the net debt.

Financial leverage ratios as at December 31, 2020 and 2019 were as follows:

 

    12.31.2020   12.31.2019
Total borrowings   1,614   1,947
Less: cash and cash equivalents, and financial assets at fair value through profit and loss   (466)   (590)
Net debt   1,148   1,357
Total capital attributable to owners   2,576   3,274
Leverage ratio   44.57%   41.45%

 

F-106

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 7: SEGMENT INFORMATION

 

The Company is a fully integrated power company in Argentina, which participates in the electricity and oil and gas value chains.

Through its own activities, subsidiaries and share holdings in joint ventures, and based on the business nature, customer portfolio and risks involved, we were able to identify the following business segments:

Electricity Generation, principally consisting of the Company’s direct and indirect interests in HINISA, HIDISA, Greenwind, CTB, TMB, TJSM and through its own electricity generation activities through thermal plants Güemes, Piedra Buena, Piquirenda, Loma de la Lata, Genelba and Ecoenergía, Pilar, I. White, the Pichi Picún Leufú hydroelectric complex and Pampa Energía I and II wind farms.

Electricity Distribution, consisting of the Company’s direct interest in Edenor. As of December 31, 2020, 2019 and 2018, the Company has classified the results corresponding to the divestment mentioned in Note 5.3.1 as discontinued operations, for each of the years ended December 31, 2020, 2019 and 2018.

 

Oil and Gas, consisting of the Company’s own interests in oil and gas areas and through its direct interest in PACOSA and indirectly interest in OCP. As of December 31, 2018 the Company has classified the results corresponding to the divestment mentioned in Note 5.3.2 as discontinued operations.

Petrochemicals, comprising of the Company’s own styrenics operations and the catalytic reformer plant operations conducted in Argentine plants.

Holding and Other Business, principally consisting of financial investment transactions, holding activities, interests in the associate Refinor and interests in joint businesses CITELEC and CIESA and their respective subsidiaries, which hold the concession over the high voltage electricity transmission nationwide and over gas transportation in the South of the country, respectively. As of December 31, 2018 includes the results corresponding to the divestment mentioned in Note 5.3.3 as discontinued operations.

 

The Company manages its operating segment based on its individual net results.

 

F-107

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 7: (Continuation)

     
Consolidated profit and loss information for the year ended December 31, 2020   Generation   Distribution
of energy
  Oil and gas   Petrochemicals   Holding and others   Eliminations   Consolidated
Revenue   559   -   227   265   20   -   1,071
Intersegment revenue   -   -   67   -   -   (67)   -
Cost of sales   (254)   -   (243)   (233)   -   67   (663)
Gross profit   305   -   51   32   20   -   408
                             
Selling expenses   (2)   -   (28)   (8)   -   -   (38)
Administrative expenses   (30)   -   (42)   (3)   (18)   -   (93)
Exploration expenses   -   -   -   -   -   -   -
Other operating income   35   -   9   2   10   -   56
Other operating expenses   (6)   -   (17)   (6)   (7)   -   (36)
Impairment of property, plant and equipment, intangible assets and inventories   (128)   -   -   (11)   -   -   (139)
Share of profit from associates and joint ventures   67   -   (5)   -   23   -   85
Operating income   241   -   (32)   6   28   -   243
                             
Finance income   3   -   7   -   1   (2)   9
Finance costs   (73)   -   (100)   (3)   (3)   2   (177)
Other financial results   1   -   44   5   34   -   84
Financial results, net   (69)   -   (49)   2   32   -   (84)
Profit before income tax   172   -   (81)   8   60   -   159
                             
Income tax   (33)   -   23   (2)   (23)   -   (35)
Profit (loss) for the year from continuing operations   139   -   (58)   6   37   -   124
Loss for the year from discontinued operations   -   (592)   -   -   -   -   (592)
 (Loss) profit for the year   139   (592)   (58)   6   37   -   (468)
                             
Depreciation and amortization   95   81   108   2   -   -   286

 

 

F-108

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 7: (Continuation)

 

     
Consolidated profit and loss information for the year ended December 31, 2020   Generation   Distribution
of energy
  Oil and gas   Petrochemicals   Holding and others   Eliminations   Consolidated
Total profit (loss) attributable to:                            
Owners of the company   147   (499)   (58)   6   37   -   (367)
Non - controlling interest   (8)   (93)   -   -   -   -   (101)
                             
                             
Consolidated statement of financial position as of December 31, 2020                            
Assets   1,595   1,356   1,085   107   832   (85)   4,890
Liabilities   707   1,021   1,174   126   178   (85)   3,121
                             
Net book values of property, plant and equipment   1,015   -   543   19   33   -   1,610
                             
Additional consolidated information as of December 31, 2020                            
Increases in property, plant and equipment, intangibles assets and right-of-use assets   61   135   41   3   2   -   242

 

 

F-109

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 7: (Continuation)

 

     
Consolidated profit and loss information for the year ended December 31, 2019   Generation   Distribution
of energy
  Oil and gas   Petrochemicals   Holding and others   Eliminations   Consolidated
Revenue   819   -   178   321   20   -   1,338
Intersegment revenue   -   -   270   -   -   (270)   -
Cost of sales   (470)   -   (313)   (298)   -   270   (811)
Gross profit  (loss)   349   -   135   23   20   -   527
                             
Selling expenses   (3)   -   (12)   (9)   (2)   -   (26)
Administrative expenses   (32)   -   (47)   (4)   (22)   -   (105)
Exploration expenses   -   -   (9)   -   -   -   (9)
Other operating income   58   -   5   5   11   -   79
Other operating expenses   (11)   -   (11)   (9)   (12)   -   (43)
Impairment of property, plant and equipment, intangible assets and inventories   (52)   -   (10)   -   -   -   (62)
Share of profit (loss) from joint ventures and associates    13   -   21   -   67   -   101
Operating income    322   -   72   6   62   -   462
                             
Finance income   2   -   17   -   5   (1)   23
Finance costs   (82)   -   (94)   (8)   (4)   1   (187)
Other financial results   86   -   89   18   (18)   -   175
Financial results, net   6   -   12   10   (17)   -   11
Profit before income tax   328   -   84   16   45   -   473
                             
Income tax    (80)   -   (16)   (5)   231   -   130
Profit for the year from discontinuing operations   248   -   68   11   276   -   603
Profit for the year from discontinued operations   -   197   -   -   -   -   197
Profit for the year   248   197   68   11   276   -   800
Depreciation and amortization   71   79   112   1   -   -   263

 

F-110

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 7: (Continuation)

 

     
Consolidated profit and loss information for the year ended December 31, 2019   Generation   Distribution
of energy
  Oil and gas   Petrochemicals   Holding and others   Eliminations   Consolidated
Total profit attributable to:                            
Owners of the company   239   98   68   11   276   -   692
Non - controlling interest   9   99   -   -   -   -   108
                             
                             
                             
                             
Consolidated statement of financial position as of December 31,2019                          
Assets   1,472   1,480   1,261   136   1,527   (192)   5,684
Liabilities   1,226   1,792   465   122   (160)   (170)   3,275
                             
Net book values of property, plant and equipment   1,152   1,691   612   18   34   -   3,507
                             
Additional consolidated information as of December 31, 2019                            
Increases in property, plant and equipment   240   173   191   4   3   -   611

 

F-111

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 7: (Continuation)

 

     
Consolidated profit and loss information for the year ended  December 31, 2018   Generation   Distribution
of energy
  Oil and gas   Petrochemicals   Holding and others   Eliminations   Consolidated
Revenue   604   -   458   338   36   -   1,436
Intersegment revenue   2   -   63   -   -   (65)   -
Cost of sales   (273)   -   (287)   (334)   -   63   (831)
Gross profit  (loss)   333   -   234   4   36   (2)   605
                             
Selling expenses   (1)   -   (19)   (13)   (4)   -   (37)
Administrative expenses   (41)   -   (56)   (6)   (27)   -   (130)
Exploration expenses   -   -   (1)   -   -   -   (1)
Other operating income   61   -   141   6   15   -   223
Other operating expenses   (17)   -   (114)   (20)   (6)   1   (156)
Impairment of property, plant and equipment   -   -   -   (32)   -   -   (32)
Share of profit (loss) from joint ventures and associates    (11)   -   37   -   92   -   118
Income from the sale of associates   -   -   28   -   -   -   28
Operating income (loss)   324   -   250   (61)   106   (1)   618
                             
Gain on net monetary position   233   -   107   49   12   2   403
Finance income   2   -   15   -   14   (1)   30
Finance costs   (85)   -   (79)   (15)   (6)   1   (184)
Other financial results   (365)   -   (512)   (39)   108   -   (808)
Financial results, net   (215)   -   (469)   (5)   128   2   (559)
Profit (loss) before income tax   109   -   (219)   (66)   234   1   59
                             
Income tax    (3)   -   57   12   (34)   -   32
Profit (loss) for the year from continuing operations   106   -   (162)   (54)   200   1   91
Profit for the year from discontinued operations   -   116   49   -   31   -   196
Profit (loss) for the year   106   116   (113)   (54)   231   1   287
                             
Depreciation and amortization   66   69   92   6   1   -   234

 

 

F-112

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 7: (Continuation)

 

     
Consolidated profit and loss information for the year ended  December 31, 2018   Generation   Distribution
of energy
  Oil and gas   Petrochemicals   Holding and others   Eliminations   Consolidated
Total profit (loss) attributable to:                            
Owners of the company   100   61   (115)   (54)   231   1   224
Non - controlling interest   6   55   2   -   -   -   63
                             
                             
                             
                             
Consolidated statement of financial position as of December 31,2018                          
Assets   1,414   2,133   1,237   153   872   (137)   5,672
Liabilities   1,054   1,241   1,273   198   247   (136)   3,877
                             
Additional consolidated information as of December 31, 2018                            
Increases in property, plant and equipment   235   227   192   4   7   -   665
Net book values of property, plant and equipment   1,036   1,657   554   15   54   -   3,316

 

Accounting criteria used by the subsidiaries to measure results, assets and liabilities of the segments is consistent with that used in the Consolidated Financial Statements. Transactions between different segments are conducted under market conditions. Assets and liabilities are allocated based on the segment’s activity.

 

 

F-113

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 8: REVENUE

 

    12.31.2020   12.31.2019   12.31.2018
             
Energy sales to the Spot Market   179   249   274
Energy sales by supply contracts   323   285   278
Fuel self-supply   54   282   51
Other sales   3   3   1
Generation sales subtotal   559   819   604
             
Oil, gas and liquid sales   217   171   454
Other sales   11   7   4
Oil and gas sales subtotal   228   178   458
             
Technical assistance services and administartion sales   19   20   36
Holding and others subtotal   19   20   36
             
Petrochemicals products   265   321   338
Petrochemicals sales subtotal   265   321   338
Total revenue   1,071   1,338   1,436

 

 

 

F-114

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 9: COST OF SALES

 

    12.31.2020   12.31.2019   12.31.2018
Inventories at the beginning of the year   153   137   113
             
Plus: Charges for the year            
Purchases of inventories, energy and gas    153   353   378
Salaries and social security charges   51   57   66
Benefits to employees   11   9   6
Accrual of defined benefit plans   4   4   2
Works contracts, fees and compensation for services   55   60   61
Depreciation of property, plant and equipment   194   171   153
Intangible assets amortization   5   6   6
Right-of-use assets amortization   1   2   -
Transport of energy   5   4   4
Transportation and freights   20   22   14
Consumption of materials   17   21   43
Penalties   -   1   1
Maintenance   26   27   24
Canons and royalties   42   59   74
Environmental control   4   3   5
Rental and insurance   23   21   13
Surveillance and security   2   6   6
Taxes, rates and contributions   3   4   5
Other   2   (4)   (6)
Subtotal   618   826   855
             
Gain on monetary position   8   1   -
             
Less: Inventories at the end of the year   (116)   (153)   (137)
Total cost of sales   663   811   831

 

 

 

F-115

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 10: OTHER ITEMS OF THE STATEMENT OF COMPREHENSIVE INCOME

 

10.1 Selling expenses

 

      12.31.2020   12.31.2019   12.31.2018
Salaries and social security charges     3   5   5
Benefits to employees     -   1   -
Fees and compensation for services     3   2   2
Compensation agreements      1   (1)   2
Depreciation of property, plant and equipment     -   -   1
Taxes, rates and contributions     8   10   17
Net impairment losses on financial assets     12   (2)   2
Transport      9   9   6
Other     2   2   2
Total selling expenses     38   26   37

 

 

10.2 Administrative expenses

 

      12.31.2020   12.31.2019   12.31.2018
Salaries and social security charges     34   38   57
Benefits to employees     4   8   5
Accrual of defined benefit plans     7   7   1
Fees and compensation for services     26   29   40
Compensation agreements     -   -   3
Directors' and Syndicates' fees     7   9   4
Depreciation of property, plant and equipment     5   7   5
Consumption of materials     -   1   1
Maintenance     1   1   2
Transport and per diem     1   1   2
Rental and insurance     1   1   1
Surveillance and security     1   -   2
Taxes, rates and contributions     2   1   4
Communications     1   2   2
Other     3   -   1
Total administrative expenses     93   105   130

 

 

10.3 Exploration expenses

 

      12.31.2020   12.31.2019   12.31.2018
Geological and geophysical expenses     -   4   -
Decrease in unproductive wells      -   5   1
Total exploration expenses     -   9   1

 

F-116

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 10: (Continuation)

 

10.4 Other operating income and expenses

 

Other operating income   12.31.2020   12.31.2019   12.31.2018
             
Recovery of doubtful accounts   3   -   -
Insurrance recovery   3   4   -
Services to third parties   6   10   11
Profit for property, plant and equipment sale   1   -   3
Dividends received   1   1   1
Reversal of contingencies    2   1   4
Contractual penalty   7   -   -
Commercial interests   30   52   51
Natural Gas Surplus Injection Promotion Program   -   -   23
Compensation for transaction agreement in Ecuador   -   -   99
Other   3   11   31
Total other operating income   56   79   223
             
Other operating expenses            
Provision for contingencies   (7)   (5)   (16)
Decrease in property, plant and equipment    (1)   -   (2)
Allowance for tax credits   -   (4)   -
Tax on bank transactions    (11)   (16)   (14)
Cost for services provided to third parties   -   -   (1)
Donations and contributions   (3)   (2)   (2)
Institutional promotion   (2)   (2)   (3)
Extraordinary canon    -   -   (3)
Onerous contract (Ship or Pay)   -   -   (7)
Tax contingencies in Ecuador    -   -   (69)
Other   (12)   (14)   (39)
Total other operating expenses   (36)   (43)   (156)

 

 

F-117

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 10: (Continuation)

 

10.5. Financial results

 

  Note 12.31.2020   12.31.2019   12.31.2018
Gain on monetary position, net   -   -   403
Finance income            
Financial interest   1   11   23
Other interest   8   12   7
Total finance income   9   23   30
             
Finance cost            
Commercial interest   -   (2)   -
Fiscal interest   (3)   (6)   (7)
Financial interest (1)   (164)   (165)   (157)
Other interest   (3)   (10)   (15)
Other financial expenses   (7)   (4)   (5)
Total financial expenses   (177)   (187)   (184)
             
Other financial results            
Foreign currency exchange difference, net   14   (6)   (780)
Changes in the fair value of financial instruments   30   88   44
Gains (losses) from present value measurement   2   55   (74)
Results for the repurchase of corporate bonds   38   25   2
Other financial results   -   13   -
Total other financial results   84   175   (808)
             
Total financial results, net   (84)   11   (559)

 

(1) Net of US$ 10 million, US$ 17 million and US$ 8 million capitalized in property, plant and equipment for the years ended December 31, 2020, 2019 and 2018, respectively.

 

 

10.6 Income tax

 

The breakdown of income tax charge is:

 

      12.31.2020   12.31.2019   12.31.2018
Current tax      13   22   9
Deferred tax      22   (186)   (38)
Other comprehensive income     -   -   1
Difference in the estimate of previous fiscal year income tax and the income tax statement     -   -   (4)
Optional tax revaluation     -   34   -
Total loss income tax     35   (130)   (32)

 

F-118

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 10: (Continuation)

Below is a reconciliation between income tax expense and the amount resulting from application of the tax rate on the income before taxes:

 

      12.31.2020   12.31.2019   12.31.2018
Profit before income tax     159   473   59
Current tax rate     30%   30%   30%
Result at the tax rate     48   142   18
Share of profit of associates and joint ventures     (26)   (25)   (3)
Non-taxable results     (5)   (38)   7
Effects of exchange differences and traslation effect of property, plant and equipment and intangible assets, net     88   93   -
Adjustment of valuation of property, plant and equipment and intangible assets     (156)   (202)   -
(Loss) gain on monetary position, net     -   -   (38)
Effect of tax rate change in deferred tax     19   37   (26)
Adjustment effect for tax inflation      74   82   -
Payment of optional tax revaluation     -   34   -
Special tax, revaluation of property, plant and equipment      -   (169)   -
Difference in the estimate of previous fiscal year income tax and the income tax statement     (7)   (86)   4
Deferred tax not previously recognized     -   -   4
Other     -   2   2
Total  loss income tax     35   (130)   (32)

As of December 31, 2020 and 2019 consolidated accumulated tax losses amount to US$ 504 million and US$ 444 million, respectively, which may be offset, pursuant to the applicable tax laws, with tax profits corresponding to future fiscal years, at the tax rate that is estimated to apply, based on the following breakdown:

 

Fiscal year generation     Fiscal year prescription   12.31.2020   12.31.2019
               
2016     2021   3   4
2017     2022   2   3
2018     2023   26   38
2019     2024   59   66
2020     2025   36   -
          126   111

 

F-119

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 10: (Continuation)

 

Income tax assessment

As of December 31, 2020 and 2019, the cumulative variation in the IPC has exceeded the 15% and 30% condition set for the third and second transition year pursuant to Act No. 27,430 and, therefore, the effect of the tax inflation adjustment has been accrued in the calculation of the current and deferred income tax provision, except in the case of the Company and its subsidiaries PEFM, PHA and PACOGEN regarding the interim fiscal periods resulting from the corporate reorganizations where, taking into consideration the merger effective dates, the mentioned legal parameters have not been exceeded.

 

Investment companies

A literal application of the tax inflation adjustment mechanism set forth by Title VI of the Income Tax Act is inconsistent in certain aspects that have not been applied by some investing subsidiaries in the assessment of the income tax for fiscal years 2020 and 2019.

 

HIDISA and HINISA

 

HIDISA and HINISA have assessed the income tax for fiscal years 2012 - 2019 taking into consideration the application of the inflation adjustment mechanisms set forth in Title VI of the Income Tax Act, charging all its income in fiscal year 2019, thus failing to apply Section 194 of the Law, the update of Property, plant and equipment amortizations (Sections 87, 88 and 85.e), and a cost restatement on account of the disposal of shares and mutual funds quotas (Section 65), to such effect using the relevant indexes published by the INDEC and relying on the similarity with the parameters stated in re “Candy S.A.”, resolved by the CSJN on July 3, 2009, which ruling ordered the application of the inflation adjustment mechanism.

 

As of December 31, 2020, the companies hold a provision for the additional income tax liabilities which should have been assessed for the reasons mentioned above. The provision for the period, including compensatory interest, and is disclosed under “Non-current income tax liabilities”.

 

 

 

F-120

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: NON-FINANCIAL ASSETS AND LIABILITIES

11.1. Property, plant and equipment

 

    Original values
Type of good   At the beginning    Increases   Impairment Transfers   Decreases   Traslation effect   Reclasification to assets clasified as held for sales   At the end 
             
             
Land   14   -   - -   -   -   -   14
Buildings   202   1   (29) 8   -   (1)   (43)   138
Equipment and machinery   1,254   2   (158) 268   (3)   -   -   1,363
High, medium and low voltage lines   1,049   2   (111) 49   (2)   (34)   (953)   -
Substations   367   15   (47) 50   -   (11)   (374)   -
Transforming chamber and platforms   219   3   (26) 14   (2)   (5)   (203)   -
Meters    226   1   (23) 16   -   (7)   (213)   -
Wells   672   3   - 93   (4)   -   -   764
Mining property   253   -   - -   -   -   -   253
Vehicles   22   3   (1) -   -   (1)   (23)   -
Furniture and fixtures and software equipment   74   6   (1) 3   -   (1)   (29)   52
Communication equipments   15   -   - 4   -   -   (16)   3
Materials and spare parts   37   15   (2) (12)   -   -   (7)   31
Petrochemical industrial complex   14   -   - 3   -   -   -   17
Work in progress   792   175   (1) (490)   -   (10)   (333)   133
Advances to suppliers   18   13   - (6)   -   -   (3)   22
Other goods   6   -   (4) -   -   -   -   2
Total at 12.31.2020   5,234   239   (403) -   (11)   (70)   (2,197)   2,792
Total at 12.31.2019   4,868   591   (112) -   (40)   (73)   -   5,234

 

F-121

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

      Depreciation   Net book values
Type of good     At the beginning    Decreases    Impairment For the year (1)   Traslation effect   Reclasification to assets clasified as held for sales   At the end    At the end    At 12.31.2019
                 
                 
Land     -   -   - -   -   -   -   14   14
Buildings     (75)   -   13 (7)   -   8   (61)   77   127
Equipment and machinery     (411)   2   68 (96)   -   -   (437)   926   843
High, medium and low voltage lines     (344)   1   - (36)   11   368   -   -   705
Substations     (115)   -   - (14)   4   125   -   -   252
Transforming chamber and platforms     (63)   -   - (8)   3   68   -   -   156
Meters      (87)   -   - (10)   3   94   -   -   139
Wells     (386)   -   - (74)   -   -   (460)   304   286
Mining property     (144)   -   - (17)   -   -   (161)   92   109
Vehicles     (21)   -   - (3)   -   18   (6)   (6)   1
Furniture and fixtures and software equipment     (57)   -   1 (8)   -   20   (44)   8   17
Communication equipments     (10)   -   - (1)   -   10   (1)   2   5
Materials and spare parts     (3)   -   - (1)   -   1   (3)   28   34
Petrochemical industrial complex     (8)   -   - (1)   -   -   (9)   8   6
Work in progress     -   -   - -   -   -   -   133   792
Advances to suppliers     -   -   - -   -   -   -   22   18
Other goods     (3)   -   3 -   -   -   -   2   3
Total at 12.31.2020     (1,727)   3   85 (276)   21   712   (1,182)   1,610    
Total at 12.31.2019     (1,552)   12   50 (255)   18   -   (1,727)       3,507

 

(1)Includes US$ 77 million corresponding to discontinued operations for 2020 and 2019.

 

F-122

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

Borrowing costs capitalized in the book value of property, plant and equipment during the year ended December 31, 2020 and 2019 amounted to US$ 10 million and US$ 17 million, respectively (see Note 12.5).

11.1.1 Impairment of Property, plant and equipment

The Company regularly monitors the existence of events or changes in circumstances which may indicate that the book value of property, plant and equipment may not be recoverable in accordance with the policy described in Notes 4.9 and 6.1.1.

 

In the Power Generation segment, spot market prices that suffered reductions in 2019 were again affected by the change in currency of the whole remuneration scheme as from February 1, 2020 and the temporary suspension of the automatic price adjustment mechanism replicating inflation, which has not been restored as of the issuance of these Consolidated Financial Statements.

 

In the Oil and Gas segment, the market for gas, a product which represents approximately 90% of our hydrocarbon production, experienced a reduction in the domestic sale price on account of oversupply in 2019, and in 2020 the lockdown measures to prevent the spread of COVID-19 (see Note 1.2) caused a decrease in the SADI’s electricity generation, which resulted in a lower thermal dispatch and, consequently, lower gas consumptions by CAMMESA which, added to the decrease in the non-essential industrial demand, exacerbated oversupply in the summer months and led to lower tendered gas prices and decreases in domestic gas production. The above-mentioned lockdown measures also greatly affected the demand for oil, which experienced a collapse in sold volumes as a result of the sharp drop in the demand for refined products and the exhaustion of the storage capacity.

 

Therefore, in view of the above-mentioned indications of impairment, the Company has determined the recoverable amount of the CGUs making up the Generation and Oil & Gas segments as of December 31, 2020 and 2019.

 

The methodology used in the estimation of the recoverable amount consisted on calculating the present value of future net cash flows expected to be generated by the CGU, discounted with a rate reflecting the weighted average costs of the capital employed.

 

Cash flows were prepared based on estimates on the future behavior of certain variables that are sensitive in the determination of the value in use, including the following: (i) reference prices for products; (ii) demand projections per type of product; (iii) costs evolution; and; (iv) macroeconomic variables such as inflation and exchange rates, etc.

11.1.1.1 Generation segment

 

As of December 31, 2020 and 2019, the assessment of recoverability, determined through the value in use of the Güemes and Piedra Buena thermal power plants and the Pichi Picun Leufú, Diamante and Nihuiles hydroelectric power plants, with revenues fully generated in the spot market, and the Loma de la lata and Piquirenda thermal power plants, with revenues fully generated in the spot market as from the termination of the contracts in 2021, which make up the Power Generation segment, resulted in the recognition of impairment losses for US$ 110 million and US$ 52 million, respectively.

 

 

 

F-123

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

The projections used in the calculation of the recoverable amount as of December 31, 2020 take into consideration 5 alternative scenarios with a probability of occurrence ranging between 10% and 40%, assigned based on historical experience on regulations set by the SE, which weigh: i) price restructuring increases ranging between 9% and 30% in 2021 and up to an additional 30% in 2022; ii) the total or partial implementation of the automatic inflation adjustment mechanism to the spot remuneration set by SE Resolution No. 31/20 as from 2022; iii) the gradual regularization towards 2023 of the financing term granted to CAMMESA to the levels observed in 2019; and iv) a 10.34% WACC rate after taxes.

 

Actual values may substantially differ from projections, mainly on account of: i) the timeliness and magnitude of price restructuring updates for energy estimated for 2021 and 2022, ii) the modality for the reimplementation as from 2022 of the price inflation adjustment mechanism suspended by the SE, and/or iii) the date of regularization of the financing term granted to CAMMESA. Even though this variation has been taken into consideration when weighing the scenarios, the Company estimates that any sensitivity analysis that considers changes in any of them taken individually may lead to distorting conclusions, generating an adverse effect on the Company’s results.

 

The key assumptions used in the calculation of the recoverable amount as of December 31, 2019 considered: i) the remuneration for sales in the spot market set by SE Resolution No. 31/20 (including the automatic price adjustment mechanism), and ii) an 9.7% after tax WACC discount rate.

 

As regards these projections, it is worth highlighting that the Management has considered: i) that the Energía Plus contracted volume remains allocated to Genelba to maximize efficiency in cost structure, and ii) the entry into effect of co-generation and closing to combined cycle projects under SEE Resolution No. 287/17 and the resulting dispatch reduction for less efficient power plants such as Güemes and Piedra Buena.

 

11.1.1.2 Oil & Gas segment

 

As of December 31, 2020 and 2019, the recoverability of the assets in the Oil and Gas segment was assessed through the determination of their value in use. As of December 31, 2019, impairment losses for US$ 10 million were recognized in the Sierra Chata block.

 

The projections used in the calculation of the recoverable amount as of December 31, 2020 take into consideration the following assumptions for gas: i) Years 2021 through 2024: sale of gas volumes at an annual average price of 3.46 US$/MMBTU; ii) Year 2025 onwards: the break-even price is reached, consistent with a prudent development of unconventional reserves in Vaca Muerta. In the case of oil, an average price of US$ 65 was estimated for the Brent barrel (reference price for the Company) until 2026 inclusive, as well as a gradual increase until reaching an average price of US$ 73 in 2030. The after tax WACC discount rate is 13.1%.

 

The key assumptions used in the calculation of the recoverable amount as of December 31, 2019 consider i) a 2020 price of natural gas similar to the 2019 price, and a 20-25% gas price increase for 2021, price that is maintained in subsequent years considering a moderate development of unconventional resources (Vaca Muerta) tending to achieve gas domestic demand supply and a decrease in gas imports, and ii) a 12.6% after tax WACC discount rate before tax. It is worth highlighting that the gas price is maintained in the projections, which in turn affects the estimated investment profile.

F-124

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

Finally, it is important to highlight that as of December 31, 2020 and 2019, the book value of the Oil and gas segment assets, including the goodwill assigned to the segment, does not exceed its recoverable value.

 

11.2 Intangible assets

    Original values
Type of good   At the beginning   Impairment   Traslate Effect   Reclasification to assets clasified as held for sales    
          At the end
           
Concession agreements   270   (147)   (3)   (100)   20
Goodwill   35   -   -   -   35
Intangibles identified in acquisitions of companies   7   -   -   -   7
Total at 12.31.2020   312   (147)   (3)   (100)   62
Total at 12.31.2019   314   -   (2)   -   312
                     
                     
    Depreciation
Type of good   At the beginning   Impairment   For the year (1)   Reclasification to assets clasified as held for sales   At the end
         
         
Concession agreements   (159)   129   (5)   16   (19)
Intangibles identified in acquisitions of companies   (2)   -   -   -   (2)
Total at 12.31.2020   (161)   129   (5)   16   (21)
Total at 12.31.2019   (154)   -   (7)   -   (161)

 

    Net book values
Type of good   At the end   At 12.31.2019
         
         
Concession agreements   1   111
Goodwill   35   35
Intangibles identified in acquisitions of companies   5   5
Total at 12.31.2020   41    
Total at 12.31.2019       151

(1)As of December 31, 2020, and considering the assumptions detailed in Note 11.1, the assessment of recoverability for the Diamante and Nihuiles hydroelectric power plants from the Power Generation segment, with income generated in the spot market, resulted in the recognition of impairment losses for US$ 18 million.
(2)It includes US$ 1 million and US$ 1 million corresponding to Discontinued operations for fiscal year 2020 and 2019, respectively.

 

 

F-125

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

11.3 Deferred tax assets and liabilities, income tax and minimum notional income tax

 

The composition of the deferred tax assets and liabilities is as follows:

 

  12.31.2019   Profit (loss)   Gain on monetary position, net   Reclasification to assets clasified as held   Other reclasifications   12.31.2020
Tax loss carryforwards 111   18   -   (3)   -   126
Intangible assets -   3   -   -   -   3
Trade and other receivables 13   9   -   (16)   -   6
Trade and other payables 13   (2)   -   (8)   -   3
Salaries and social security payable  2   4   -   (3)   -   3
Defined benefit plans 7   (1)   -   (1)   -   5
Provisions 39   (1)   -   (10)   -   28
Adjustment for tax inflation 8   (4)   -   -   -   4
Other -   1   -   -   -   -
Deferred tax asset 193   27   -   (41)   -   178
Property, plant and equipment (384)   89   10   271   -   (13)
Adjustment for tax inflation (99)   (81)   1   41   136   (2)
Investments in companies (8)   (17)   -   -   -   (25)
Intangible assets (13)   2   -   -   -   (11)
Inventory (10)   (1)   -   5   -   (6)
Trade and other receivables (4)   (3)   -   -   -   (7)
Financial assets at fair value through profit and loss (11)   3   -   4   -   (4)
Taxes payable (4)   1   -   -   -   (3)
Other -   -   -   -   -   -
Deferred tax liabilities (533)   (7)   11   321   136   (71)

 

 

F-126

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

    12.31.2018   Profit (loss)   Gain on monetary position, net   12.31.2019
Tax loss carryforwards   52   59   -   111
Trade and other receivables   12   1   -   13
Trade and other payables   52   (37)   (2)   13
Salaries and social security payable    1   1   -   2
Defined benefit plans   9   (2)   -   7
Provisions   32   7   -   39
Taxes payable   6   (6)   -   -
Adjustment for tax inflation   -   8   -   8
Other   2   (2)   -   -
Deferred tax asset   166   29   (2)   193
Property, plant and equipment   (334)   (55)   5   (384)
Adjustment for tax inflation   -   (99)   -   (99)
Investments in companies   (19)   11   -   (8)
Intangible assets   (193)   175   5   (13)
Inventory   -   (10)   -   (10)
Trade and other receivables   (7)   3   -   (4)
Financial assets at fair value through profit and loss   (9)   (2)   -   (11)
Borrowings   (3)   3   -   -
Taxes payable   -   (4)   -   (4)
Other   (6)   6   -   -
Deferred tax liabilities   (571)   28   10   (533)

 

 

Deferred tax assets and liabilities are offset in the following cases: a) when there is a legally enforceable right to offset tax assets and liabilities; and b) when deferred income tax charges are associated with the same fiscal authority. The following amounts, determined after their adequate offset, are disclosed in the statement of financial position:

 

  12.31.2020   12.31.2019
Deferred tax asset 108   28
Deferred tax liabilities (1)   (368)
Deferred tax assets (liabilities), net 107   (340)

 

 

 

F-127

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

11.4 Inventories

 

    12.31.2020   12.31.2019
         
Materials and spare parts   79   95
Advances to suppliers   3   21
In process and finished products   34   37
Total   116   153

 

11.5 Provisions

 

    12.31.2020   12.31.2019
Non-Current        
Provisions for contingencies   91   123
Asset retirement obligation and dismantling of wind turbines   19   20
Environmental remediation   1   1
Other provisions   -   1
    111   145
         
Current        
Provisions for contingencies   12   16
Asset retirement obligation and dismantling of wind turbines   2   2
Environmental remediation   2   2
    16   20

 

 

F-128

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

    12.31.2020
    For contingencies   Asset retirement obligation and dismantling of wind turbines   For environmental remediation
             
At the beginning of the year   139   22   3
Increases   21   2   -
Decreases   (1)   -   -
Exchange differences on translation   (15)   -   -
Reversal of unused amounts   (8)   (3)   -
Reclasification liabilities associated to assets classified as held for sale   (33)   -   -
At the end of the year   103   21   3

 

    12.31.2019
    For contingencies   Asset retirement obligation and dismantling of wind turbines   For environmental remediation
             
At the beginning of the year   142   22   5
Increases   41   3   -
Exchange differences on translation   (4)   -   -
Gain on monetary position, net   (17)   -   -
Decreases   (10)   -   (2)
Reversal of unused amounts   (13)   (3)   -
At the end of the year   139   22   3

 

    12.31.2018
    For contingencies   Asset retirement obligation   For environmental remediation
             
At the beginning of the year   141   42   6
Increases   106   37   6
Reclasification   -   (18)   -
Gain on monetary position, net   (52)   (18)   (2)
Decreases   (23)   (5)   (5)
Reversal of unused amounts   (30)   (16)   -
At the end of the year   142   22   5

 

 

F-129

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

11.5.1Provision for Environmental remediation

The Company is subject to extensive environmental regulations in Argentina. The Company’s management believes that its current operations are in compliance with applicable environmental requirements, as currently interpreted and enforced, including regulatory remediation commitments assumed. The Company undertakes environmental impact studies for new projects and investments and, to date, environmental requirements and restrictions imposed on these new projects have not had any material adverse impact on Pampa’s business.

The Company has performed a sensitivity analysis relating to the discount rate. The 1% increase or decrease in the discount rate would not have a significant impact on the Company’s results of operations.

 

11.5.2Asset retirement obligations

 

Pursuant to the regulations in force in Argentina, where it develops its oil and gas exploration and production operations, the Company is under an obligation to incur costs associated with the plugging and abandonment of wells. Furthermore, pursuant to the associated usufruct agreements, the Company is under an obligation to decommission wind turbines in wind farms. The Company does not have legally restricted assets for the cancellation of these obligations.

The Company has performed a sensitivity analysis relating to the discount rate. The 1% increase or decrease in the discount rate would not have a significant impact on the Company’s results of operations.

11.5.3Provision for legal proceedings

The Company (directly or indirectly through subsidiaries) is a party to several civil, commercial, contentious administrative, tax, custom and labor proceedings and claims that arise in the ordinary course of its business. In determining a proper level of provision, the Company has considered its best estimate mainly with the assistance of legal and tax advisors.

The determination of estimates may change in the future due to new developments or unknown facts at the time of evaluation of the provision. As a consequence, the adverse resolution of the evaluated proceedings and claims could exceed the established provision.

 

The Company has recorded provisions for civil, commercial, administrative, labor, tax and customs complaints brought against the Company corresponding to atomized claims with individual unsubstantial amounts, as well as charges for judicial costs and expenses which, as of December 31, 2020, amount to US$ 17 million.

 

F-130

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

We hereinafter detail the nature of significant proceedings for which provisions have been recorded as of December 31, 2019:

 

-Relevant Customs Summary Proceedings - Gasoline Exports: there is an important number of customs summary proceedings and proceedings in process before the National Tax Court in which the tax authority challenges the tariff heading used by Petrobras during 2008-2014. The Fiscal authority’s position involves a higher export duty rate. As December 31, 2020, the associated provision amounts to US$ 86 million.

 

 

11.6 Income tax and minimum notional income tax liability

 

  Note 12.31.2020   12.31.2019
Non-current        
Income tax, net of witholdings and advances 10.6 131   10
Total non current   131   10
         
Current        
Income tax, net of witholdings and advances   11   53
Total current   11   53

 

11.7 Tax liabilities

 

    12.31.2020   12.31.2019
Non-current        
Sales tax   2   1
Extraordinary Canon    -   3
Total non-current   2   4
         
Current        
Value added tax   12   38
Municipal, provincial and national contributions   -   3
Personal assets tax provision    1   3
Payment plans   1   1
Municipal taxes   -   2
Tax withholdings to be deposited   2   6
Royalties   4   4
Extraordinary Canon    16   12
Other   -   3
Total current   36   72

 

 

 

F-131

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

11.8 Defined benefits plans

The main characteristics of benefit plans granted to Company employees are detailed below.

(i)Pension and retirement benefits: Benefit plan whereby Company employees, in some cases covered by certain collective bargaining agreements, meeting certain conditions are eligible to receive upon retirement, and in some cases, disability or death, a certain number of salaries according to the provisions of the plan or collective bargain agreement, if applicable.

 

(ii)Compensatory plan: Benefit plan whereby some of the Company employees meeting certain conditions are eligible to receive upon retirement a certain amount according to the provisions of the plan (based on the last computable salary and the number of years working for the Company) after deducting the benefits from the pension system. The plan, until 2003, called for a contribution to a fund exclusively by the Company and without any contribution by the employees. These contributions were derived to a trust fund and were invested in US dollar-denominated money market instruments in order to preserve the accumulated capital and obtain a return in line with a moderate risk profile. Funds were mainly invested in US government bonds, commercial papers rated A1 or P1, AAAm-rated mutual funds and time deposits in banks rated A+ or higher in the United States of America, in accordance with the Trust Agreement dated on March 27, 2002 entered with The Bank of New York Mellon, duly amended by the Permitted Investment Letter dated on September 14, 2006. The Bank of New York Mellon is the trustee and Willis Towers Watson is the managing agent. In case there is an excess (duly certified by an independent actuary) of the funds to be used to settle the benefits granted by the plan, the Company will be entitled to choice to use it, in which case it may have to notify the trustee thereof.

 

F-132

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

As of December 31, 2020, 2019 and 2018, the most relevant actuarial information corresponding to the described benefit plans is the following:

 

  12.31.2020
  Present value of the obligation   Fair value of plan assets   Net liability at the end of the year
Liabilities at the beginning  36   (5)   31
Items classified in profit or loss           
Current services cost 3   -   3
Cost for interest 16   (2)   14
Items classified in other comprehensive
 income
         
Actuarial (gains) losses (3)   1   (2)
Benefit payments (2)   -   (2)
Reclasification liabilities associated to assets classified as held for sale (10)   -   (10)
Gain on monetary position, net (15)   2   (13)
At the end 25   (4)   21

 

 

  12.31.2019
  Present value of the obligation   Present value of assets   Net liability at the end of the year
Liabilities at the beginning  40   (5)   35
Items classified in profit or loss          
Current services cost 3   -   3
Cost for interest 15   (2)   13
Items classified in other comprehensive
 income
         
Actuarial (gains) losses  (2)   -   (2)
Benefit payments (2)   -   (2)
Gain on monetary position, net (18)   2   (16)
At the end 36   (5)   31

 

 

F-133

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

  12.31.2018
  Present value of the obligation   Present value of assets   Net liability at the end of the year
Liabilities at the beginning  47   (3)   44
Items classified in profit or loss          
Current services cost 2   -   2
Cost for interest 9   (1)   8
Past services cost (5)   -   (5)
Items classified in other comprehensive
 income
         
Actuarial (gains) losses 6   (2)   4
Benefit payments (3)   -   (3)
Gain on monetary position, net (16)   1   (15)
At the end 40   (5)   35

 

As of December 31, 2020, 2019 and 2018, the breakdown of net liabilities per type of plan is as follows: a) US$ 12 million, US$ 21 million and US$ 24 million correspond to the Pension and Retirement Benefits Plan and b) US$ 9 million, US$ 10 million and US$ 11 million correspond to the Compensatory Plan, respectively.

 

Estimated expected benefits payments for the next ten years are shown below. The amounts in the table represent the undiscounted cash flows and therefore do not reconcile to the obligations recorded at the end of the year.

 

  12.31.2020
Less than one year 4
One to two years 2
Two to three years 2
Three to four years 2
Four to five years 2
Six to ten years 10

 

F-134

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

Significant actuarial assumptions used were as follows:

 

  12.31.2020   12.31.2019   12.31.2018
Discount rate 4%   5%   5%
Salaries increase 1%   1%   1%
Average inflation 46%   27%   27%

 

The following sensitivity analysis shows the effect of a variation in the discount rate and salaries increase on the obligation amount:

 

  12.31.2020
Discount rate: 4%  
Obligation 27
Variation 2
  10%
   
Discount rate: 6%  
Obligation 23
Variation (2)
  (9%)
   
Salaries increase: 0%  
Obligation 24
Variation (1)
  (4%)
   
Salaries increase: 2%  
Obligation 26
Variation 1
  5%

 

The sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. Therefore, the presented analysis may not be representative of the actual change in the defined benefit obligation. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the prior period.

F-135

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 11: (Continuation)

 

11.9 Salaries and social security payable

 

    12.31.2020   12.31.2019
Non-current        
Seniority - based bonus   -   3
Early retirements payable   -   1
Total non-current   -   4
         
         
Current        
Salaries and social security contributions   3   22
Provision for vacations   7   17
Provision for gratifications and annual bonus for efficiency 13   26
Total current   23   65

 

 

NOTE 12: FINANCIAL ASSETS AND LIABILITIES

 

12.1 Financial assets at amortized cost

 

    12.31.2020   12.31.2019
Non-current        
Public securities (1)   -   18
Term deposit   100   -
Total non-current   100   18
         
Current        
Public securities (1)   25   54
Total current   25   54

 

 

(1)The public securities were received in accordance with the mechanism set forth by SGE Resolution No. 54/19 for the settlement of receivables under Natural Gas Surplus Injection Promotion Programs. See Note 2.4.3.1.

 

F-136

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 12: (Continuation)

 

12.2 Financial assets at fair value through profit and loss

 

    12.31.2020   12.31.2019
Non-current        
Shares   11   11
Total non-current   11   11
         
Current        
Government securities    204   113
Shares   29   8
Investment funds   92   244
Total current   325   365

 

12.3 Trade and other receivables

 

  Note   12.31.2020   12.31.2019
Non-Current          
Receivables from oil and gas sales      -   8
Trade receivables, net     -   8
           
Non-Current          
Tax credits     5   3
Related parties 17   29   53
Prepaid expenses     -   1
Credit with RDSA   -   35
Allowance for doubtful accounts     -   (35)
Other     9   14
Other receivables, net     43   71
           
Total non-current     43   79

 

F-137

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

 

  Note   12.31.2020   12.31.2019
Current          
Receivables from energy distribution sales     -   226
Receivables from MAT     15   17
CAMMESA     178   168
Receivables from oil and gas sales      23   48
Receivables from petrochemistry sales     39   54
Related parties 17   4   6
Government of the PBA and CABA by Social Rate     -   4
Other     4   10
Allowance for doubtful accounts     (16)   (33)
Trade receivables, net     247   500
           
Current          
Tax credits     5   10
Advances to suppliers      -   -
Related parties 17   41   8
Prepaid expenses     4   2
Receivables for non-electrical activities     5   11
Financial credit     4   5
Guarantee deposits     3   5
Contractual penalty to collect     3   -
Insurance to recover     6   -
Expenses to be recovered     7   10
Credits for the sale of property, plant and equipment     -   1
Credit with RDSA   -   1
Other     16   14
Allowance for other receivables     -   (6)
Other receivables, net     94   61
           
Total current     341   561

 

 

F-138

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

 

Due to the short-term nature of trade and other receivables, its book value is not considered to differ from its fair value. For non-current trade and other receivables, fair values do not significantly differ from book values.

 

 

The movements in the allowance for the impairment of trade receivables are as follows:

 

  Note   12.31.2020   12.31.2019   12.31.2018
At the beginning  ###   68   34   26
Allowance for impairment     63   58   34
Utilizations     (7)   (13)   (10)
Reversal of unused amounts     (3)   (2)   (1)
Exchange differences on translation     (2)   (1)   -
Gain on monetary position, net     (28)   (8)   (15)
Reclasification to assets clasified as held for sales     (75)   -   -
At the end of the year     16   68   34

 

The movements in the allowance for the impairment of other receivables are as follows:

 

  Note   12.31.2020   12.31.2019   12.31.2018
At the beginning  -   6   8   6
Allowance for impairment     2   1   7
Gain on monetary position, net     -   (1)   (3)
Reversal of unused amounts     (7)   (2)   (2)
Reclasification to assets clasified as held for sales     (1)   -   -
At the end of the year     -   6   8

 

 

F-139

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

 

12.4 Cash and cash equivalents

 

    12.31.2020   12.31.2019
Banks   70   57
Investment funds   71   4
Time deposits   -   164
Total   141   225

 

12.5 Borrowings

 

  Note   12.31.2020   12.31.2019
Non-Current          
Financial borrowings     75   161
Corporate bonds (1)     1,297   1,603
      1,372   1,764
           
Current          
Bank overdrafts     37   -
Financial borrowings     88   137
Corporate bonds     117   32
Related parties 17   -   14
      242   183
Total     1,614   1,947

 

(1)Net of repurchase of own ONs

 

 

As of December 31, 2020 and 2019, the fair values of the Company’s Corporate Bonds amount approximately to US$ 1,309 million and US$ 1,436 million, respectively. Such values were calculated on the basis of the determined market price of the Company’s corporate notes at the end of each year (fair value level 1).

 

The carrying amounts of short-term borrowings approximate their fair value due to their short-term maturity.

 

The other long-term borrowings were measured at amortized cost, which does not differ significantly from its fair value.

As of the date of issuance of these Consolidated Financial Statements, the Company is in compliance with the covenants established in its indebtedness

 

 

F-140

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

 

NOTE 12: (Continuation)

 

The movements in the borrowings are as follows:

 

 

  Note   12.31.2020   12.31.2019   12.31.2018
At the beginning      1,947   2,177   1,683
Proceeds from borrowings     353   556   245
Payment of borrowings     (300)   (550)   (240)
Accrued interest     176   185   179
Payment of borrowings' interests     (201)   (148)   (133)
Net foreign currency exchange difference     (18)   50   1,244
Results for the repurchase of corporate bonds 12.5.2   (43)   (27)   (2)
Costs capitalized in property, plant and equipment 11.1   10   17   8
Decrease through offsetting  with trade receivables     -   (135)   -
Cancellation through dividend compensation     (12)   -   -
Gain on monetary position, net     (43)   (87)   (794)
Repurchase and redemption of corporate bonds     (155)   (91)   (13)
Reclasification liabilities associated to assets classified as held for sale     (100)   -   -
At the end of the year     1,614   1,947   2,177

 

 

F-141

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

 

12.5.1 Details of borrowings:

 

Type of instrument   Company   Currency   Residual value     Interest   Rate   Expiration   Book value as of 12.31.2020
               
                               
Corporate bonds(1)                              
                               
Serie 6 CB (2)   PAMPA   $   76     Variable   Badlar + 2.5%   Aug-21   77
T Series CB (3)   PAMPA   US$   389     Fixed   7.38%    Jul-23   399
Class 1 CB (3)   PAMPA   US$   636     Fixed   7.50%   Jan-27   647
Serie 3 CB    PAMPA   US$   293     Fixed   9.13%   Apr-29   291
                              1,414
Financial loans (4)                              
                               
    PAMPA   $   18     Fixed   33%   Apr-21   19
    PAMPA   $   57     Variable   Badlar + 7%   may-21   61
    PAMPA   US$   31     Variable   Libor + 4.21%   May-24   31
                              111
Other financial operations (5)                              
                               
    PAMPA   US$   2     Variable   Libor   Jul-21   2
    PAMPA   US$   50     Variable   Libor   Aug-23   50
                              52
Bank overdrafts                              
                               
    PAMPA   $   36     Fixed   Between 30% and 34%   Jan-21   37
                               
                               
                              1,614

 

(1)In the months of July, October and November 2020, the Company paid at maturity Class 4, Class 5 and Series E CBs, the first two issued on April 30, 2020, for a face value of $ 1,238 million, $ 565 million and $ 575 million at a Badlar rate +3%, Badlar rate + 5% and Badlar rate + 0%, respectively.

 

(2)Issued on July 29, 2020.

 

(3)During the fiscal year ended December 31, 2020, the Company and its subsidiaries acquired Series T and Class 1 corporate bonds at their respective market values for a face value of US$ 148 million; therefore, the Company recorded profits for US$ 38 million, which are disclosed in the “Gain (Loss) on the repurchase of corporate bonds” line item under Other financial results. As of December 31, 2020, the Company, through its subsidiaries, held in its portfolio: Series T and Class I CBs for a face value of US$ 35 million and US$ 11 million, respectively.

 

(4)During the fiscal year ended December 31, 2020, the Company took on new financing with domestic financial entities, net of cancellations and early cancellations, for a total $1,600 million, and paid at maturity financing loans in the amount of US$ 92 million.

 

(5)On October 2, 2020, the Company was granted a credit facility for up to US$50 million at Libor rate plus 0.0%, which is secured by a Total Return Swap, the underlying asset of which is own CBs held in treasury by the Company for a total amount of US$185.9 million. Any disbursement requested by the Company under this agreement should be secured with term deposits held in BNP by the Company, and the owed principal may not exceed 95% of these funds. The cash flow generated by the assigned assets may be destined to: i) the extension of the above-mentioned credit facility; and/or ii) the cancellation of expenses, interest and/or disbursements. It is worth highlighting that BNP is not empowered to dispose of the Total Return Swap’s underlying asset, and may only use it to a limited extent to guarantee certain transactions, but may under no circumstances lose its condition as asset holder. The Company may cancel the agreement at any time, in whole or in part, without incurring any penalty, with no other requirement than the giving of notice by a reliable means or automatically in case any of the events of default stipulated in the agreement is verified. Finally, at the transaction’s maturity date, the counterparty should return to the Company the Total Return Swap’s underlying asset and any associated cash flow. The Company has received disbursements in the amount of US$ 51.5 million under certain credit facilities with BNP.

 

F-142

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

 

Type of instrument   Company   Currency   Residual value     Interest   Rate   Expiration   Book value as of 12.31.2019
               
                               
Corporate bonds(1)                              
                               
2022 CB    Edenor   US$   166     Fixed   9.75%   2022   139
Class E CB   PAMPA   $   575     Fixed   Badlar   Nov-20   10
Class 1 CB (1)   PAMPA   US$   687     Fixed   7.50%   Jan-27   698
T Series  CB (1)   PAMPA   US$   487     Fixed   7.38%    Jul-23   497
Serie 3 CB (1)   PAMPA   US$   293     Fixed   9.13%   Apr-29   291
                              1,635
Financial loans(2)                              
    PAMPA   US$   84     Fixed   Between 4.25% and 7.65%   Jan-2020 to
May-2020
  88
    PAMPA   US$   39     Variable   4.21% + Libor   May-2024   39
    PAMPA   $   7,775     Fixed   Between 40% and 44.14%   Apr-2021 to
Apr-2024
  146
Related parties                             273
                               
    PAMPA   US$   13     Fixed   6.00%   2020   14
Financial loans                              
    Edenor   US$   1,885     Fixed   Libor + 4.27%   Oct-20   25
                              25
                              1,947

 

(1)During the fiscal year ended December 31, 2019, the Company acquired own corporate bonds at their respective market values for a face value of US$ 62 million; therefore, the Company recorded consolidated profits for US$ 25 million, which are disclosed in the “Gain (Loss) on the repurchase of corporate bonds” line item under Other financial results.

 

As of the closing of fiscal year 2019, Pampa held in its portfolio: Series T Corporate Bonds for a face value of US$ 14 million, Series 1 Corporate Bonds for a face value of US$ 63 million and Series 3 Corporate Bonds for US$ 7 million, the latter issued on July 10, 2019.

 

(2)During the fiscal year ended December 31, 2019, the Company canceled banking debt (including pre-export finance facilities) for US$ 420 million and $ 550 million, and took on new debt for US$ 25 million and $ 8,349 million.

 

 

 

F-143

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

 

12.6. Trade and other payables

 

  Note   12.31.2020   12.31.2019
Non-Current          
Customer contributions     -   3
Customer guarantees     -   4
Trade payables     -   7
           
ENRE Penalties and discounts     -   64
Compensation agreements      6   7
Lease liability     10   12
Other payables     16   83
Total non-current     16   90
           
           
Current          
Suppliers     92   212
CAMMESA     -   155
Customer contributions     -   1
Customer advances     2   7
Related parties 17   5   8
Trade payables     99   383
           
ENRE Penalties and discounts     -   57
Related parties 17   -   5
Compensation agreements      1   3
Payment agreements with ENRE     -   1
Lease liability     2   4
Advances received for sales of subsidiary     12   -
Other     2   1
Other payables     17   71
           
Total current     116   454
           

Due to the short-term nature of the trade payables and other payables, their carrying amount is considered to be the same as their fair value, except non-current customer contributions.

 

The fair values of non-current customer contributions as of December 31, 2019 amount to US$ 0.8 million, respectively. The fair values are determined based on estimated discounted cash flows in accordance with a market rate for this type of transactions. This fair value is classified as level 3.

 

The book value of the compensation agreements approximates their fair value given its valuation characteristics (Note 4.17).

F-144

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

 

12.7 Financial instruments by category

 

The following chart presents financial instruments by category:

 

As of December 31, 2020   Financial assets/liabilities at amortized cost   Financial assets/liabilities at fair value through profit and losss   Subtotal financial assets/liabilities   Non financial assets/liabilities   Total
Assets                    
Trade receivables and other receivables 366   3   369   15   384
Financial assets at amortized cost                    
Term deposit   100   -   100   -   100
Corporate securities   25   -   25   -   25
Financial assets at fair value through profit
and loss
                   
Government securities    -   204   204   -   204
Shares   -   40   40   -   40
Investment funds   -   92   92   -   92
Derivative financial instruments   -   -   -   -   -
Cash and cash equivalents   70   71   141   -   141
Total   561   410   971   15   986
                     
Liabilities                    
Trade and other liabilities   130   -   130   2   132
Borrowings   1,614   -   1,614   -   1,614
Derivative financial instruments   -   -   -   -   -
Total   1,744   -   1,744   2   1,746

 

As of December 31, 2019   Financial assets/liabilities at amortized cost   Financial assets/liabilities at fair value through profit and losss   Subtotal financial assets/liabilities   Non financial assets/liabilities   Total
Assets                    
Trade receivables and other receivables 622   4   626   14   640
Financial assets at fair value through profit and loss                    
Government securities    -   113   113   -   113
Shares   -   19   19   -   19
Investment funds   -   244   244   -   244
Derivative financial instruments   -   4   4   -   4
Cash and cash equivalents   221   4   225   -   225
Total   843   388   1,231   14   1,245
                     
Liabilities                    
Trade and other liabilities   408   7   415   129   544
Borrowings   1,947   -   1,947   -   1,947
Instrumentos financieros derivados   -   3   3   -   3
Total   2,355   10   2,365   129   2,494

 

 

F-145

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

The categories of financial instruments have been determined according to IFRS 9.

The income, expenses, gains and losses derived from each of the financial instrument categories are indicated below:

As of December 31, 2020   Financial assets/liabilities at amortized cost   Financial assets/liabilities at fair value through profit and losss   Subtotal financial assets/liabilities    Non Financial assets/ liabilities    Total
Interest income   9   -   9   -   9
Interest expense   (164)   -   (164)   (6)   (170)
Foreign exchange, net   38   (35)   3   11   14
Results from financial instruments at fair value   -   30   30   -   30
Gains (losses) from present value measurement   6   -   6   (4)   2
Other financial results   36   -   36   (5)   31
Total   (75)   (5)   (80)   (4)   (84)

 

As of December 31, 2019   Financial assets/liabilities at amortized cost   Financial assets/liabilities at fair value through profit and losss   Subtotal financial assets/liabilities    Non Financial assets/ liabilities    Total
Interest income   72   3   75   -   75
Interest expense   (163)   -   (163)   (20)   (183)
Foreign exchange, net   5   (14)   (9)   3   (6)
Results from financial instruments at fair value   -   88   88   -   88
Gains (losses) from present value measurement   55   -   55   -   55
Other financial results   32   -   32   2   34
Total   1   77   78   (15)   63

 

As of December 31, 2018   Financial assets/liabilities at amortized cost   Financial assets/liabilities at fair value through profit and losss   Subtotal financial assets/liabilities    Non Financial assets/ liabilities    Total
Interest income   76   5   81   -   81
Interest expense   (157)   -   (157)   (22)   (179)
Foreign exchange, net   (719)   23   (696)   (84)   (780)
Results from financial instruments at fair value   -   44   44   -   44
Gains (losses) from present value measurement   (74)   -   (74)   -   (74)
Other financial results   (1)   -   (1)   (2)   (3)
Total   (875)   72   (803)   (108)   (911)

 

F-146

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

12.8 Fair value of financial Instruments

The Company classifies the fair value measurements of financial instruments using a fair value hierarchy, which reflects the relevance of the variables used to perform those measurements. The fair value hierarchy has the following levels:

-Level 1: quoted prices (not adjusted) for identical assets or liabilities in active markets.
-Level 2: data different from the quoted prices included in Level 1 observable for the asset or liability, either directly (i.e. prices) or indirectly (i.e. derived from prices).
-Level 3: Asset or liability data based on information that cannot be observed in the market (i.e., unobservable data).

 

The following table shows the Company’s financial assets and liabilities measured at fair value as of December 31, 2020 and 2019:

 

As of December 31, 2020   Level 1   Level 2   Level 3   Total
Assets                
Financial assets at fair value through
profit and losss
               
Government securities   204   -   -   204
Shares   29   -   11   40
Investment funds   92   -   -   92
Cash and cash equivalents                
Investment funds   71   -   -   71
Other receivables   72   -   -   72
Total assets   468   -   11   479

 

 

As of December 31, 2019   Level 1   Level 2   Level 3   Total
Assets                
Financial assets at fair value through
 profit and losss
               
Government securities   113   -   -   113
Shares   8   -   11   19
Investment funds   244   -   -   244
Cash and cash equivalents                
Investment funds   4   -   -   4
Derivative financial instruments   -   4   -   4
Other receivables   4   -   -   4
Total assets   373   4   11   388
                 
Liabilities                
Derivative financial instruments   -   3   -   3
Trade and other liabilities   -   7   -   7
Total liabilities   -   10   -   10

 

 

F-147

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 12: (Continuation)

The value of the financial instruments negotiated in active markets is based on the market quoted prices as of the date of these Consolidated Financial Statements. A market is considered active when the quoted prices are regularly available through a stock exchange, broker, sector-specific institution or regulatory body, and those prices reflect regular and current market transactions between parties that act in conditions of mutual independence. The market quotation price used for the financial assets held by the Company is the current offer price. These instruments are included in Level 1.

The fair value of financial instruments that are not negotiated in active markets is determined using valuation techniques. These valuation techniques maximize the use of market observable information, when available, and rely as little as possible on specific estimates of the Company. If all significant variables to establish the fair value of a financial instrument can be observed, the instrument is included in Level 2.

If one or more variables used to determine the fair value cannot be observed in the market, the financial instrument is included in Level 3.

The techniques used for the measurement of assets at fair value with changes in income, classified as Level 2 and 3, are detailed below:

- Derivative Financial Instruments: calculated from variations between market prices at the closing date of the year, and the amount at the time of the contract.

- Shares: they were determined based on Income approach through the Indirect Cash Flow method (net present value of expected future cash flows) and the discount rates used were estimated taking the WAAC rate as a parameter.

 

 

NOTE 13: EQUITY COMPONENTS

 

13.1 Share capital

 

As of December 31, 2020, the share capital amounts to $ 1,455 million, including $ 4 million treasury shares.

 

13.1.1.Share buyback programs

 

Taking into consideration the market volatility experienced as from 2018 and the persisting divergence between the Company’s share price and the economic reality its assets currently or potentially have, which is detrimental to the interests of its shareholders, and considering the Company’s history of strong cash position and fund availability, the Board of Directors has implemented several share buyback programs, considering in each case that treasury shares may not exceed the 10% capital stock capitalization.

During fiscal year 2020, the Board of Directors approved Programs 6 and 7 for US$ 27 million and $ 3,600 million, with a maximum price of US$ 13 per ADR, which have been completed and for which all repurchased shares have been canceled.

 

 

F-148

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 13: (Continuation)

Program 8 approved on October 30, 2020 for a maximum amount of US$ 30 million and an initial term of 120 calendar days, with a maximum price of US$ 15 per ADR and $ 85.20 per common share, was in effect as of December 31, 2020, and has terminated as of the issuance of these Financial Statements.

As of December 31, 2020, there are no own shares held in treasury under the buyback programs.

Program 8 approved by the Company’s Board of Directors on March 1, 2021 for a maximum amount of US$ 30 million and an initial term of 120 calendar days, under which shares may be acquired up to a maximum price of US$ 16 per ADR and $ 92.16 per common share, is in effect as of the issuance of these Financial Statements. After the closing of the fiscal year, the Company directly and indirectly acquired 34.7 million own shares for a value of US$ 18.6 million.

 

13.1.2Stock Compensation Plan

 

During fiscal year ended December 31, 2020, the Company delivered 0.7 million own shares as payments under the stock compensation plan for officers and other key staff. As of December 31, 2020, the Company acquired 6 million own shares, out of which 2 million were allocated to the compensation of senior managers and, as of the closing of the fiscal year, 4 million remained in treasury to be delivered to employees under such plan (see Note 4.17).

 

13.1.3Capital reductions

 

On April 7, 2020 and December 10, 2020, the Company’s Extraordinary General Meeting of Shareholders resolved to reduce its capital stock through the cancellation of 152 million and 141 million own shares, respectively, held in treasury by the Company and its subsidiaries as of the last business day prior to such dates acquired under the share buyback programs. These reductions are pending with the Public Registry.

 

13.2Earnings per share

 

13.2.1 Basic

 

Basic earnings per share are calculated by dividing the result attributable to the Company’s equity interest holders by the weighted average of outstanding common shares during the year.

 

13.2.2 Diluted

Diluted earnings per share are calculated by adjusting the weighted average of outstanding common shares to reflect the conversion of all dilutive potential common shares.

Potential common shares will be deemed dilutive only when their conversion into common shares may reduce the earnings per share or increase losses per share of the continuing business. Potential common shares will be deemed anti-dilutive when their conversion into common shares may result in an increase in the earnings per share or a decrease in the losses per share of the continuing operations.

F-149

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 13: (Continuation)

The calculation of diluted earnings per share does not entail a conversion, the exercise or another issuance of shares which may have an anti-dilutive effect on the losses per share, or where the option exercise price is higher than the average price of ordinary shares during the period, no dilutive effect is recorded, being the diluted earnings per share equal to the basic. As of December 31, 2020, 2019 and 2018, the Company does not hold any significant potential dilutive shares, therefore there are no differences with the basic earning per share.

 

    12.31.2020   12.31.2019   12.31.2018
Earning for continuing operations attributable to the equity holders of the Company    132   594   85
Weighted average amount of outstanding shares   40   48   52
Basic and diluted earnings per share    3.30   12.38   1.63
             
             
(Loss) Earning for discontinued operations attributable to the equity holders of the Company    (499)   98   139
Weighted average amount of outstanding shares   40   48   52
Basic and diluted (loss) earnings per share from
 discontinued operations
  (12.48)   2.04   2.68
             
(Loss) earning attributable to the equity holders of the Company    (367)   692   224
Weighted average amount of outstanding shares   40   48   52
Basic and diluted (loss) earnings  per share   (9.18)   14.42   4.31

 

 

13.3 profit distributions

 

Dividends

 

Pursuant to Law No. 27,430, enacted in December 2017, and the suspension provided for by Law No. 27,541 (Note 2.6.1.2), dividends distributed to individuals, undivided estates or beneficiaries residing abroad, derived from profits generated during fiscal years beginning on or after January 1, 2018 through December 31, 2021, are subject to a 7% withholding tax. The distribution of dividends is made based on the Company’s Stand-Alone Financial Statements.

 

F-150

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 14: STATEMENT OF CASH FLOWS’ COMPLEMENTARY INFORMATION

 

14.1 Adjustments to reconcile net profit (loss) to cash flows generated by operating activities

 

  Note   12.31.2020   12.31.2019   12.31.2018
Income tax 10.6   35   (130)   (32)
Accrued interest     132   110   105
Depreciations and amortizations 9, 10.1 and 10.2   205   186   165
Constitution of allowances, net 10.4 and 10.1   9   2   2
Provision of provisions and tax payables, net 10.4   5   4   12
Share of profit from joint ventures and associates 5.4.2   (85)   (101)   (118)
Income from the sale of companies 5.2.1   -   -   (28)
Accrual of defined benefit plans 9, 10.1 and 10.2   11   11   3
Net exchange differences 10.5   (14)   6   780
Result from measurement at present value 10.5   (2)   (55)   74
Changes in the fair value of financial instruments 10.5   (19)   (88)   (44)
Results from property, plant and equipment sale and decreases 10.4 and 10.3   -   5   4
Results for the repurchase of corporate bonds 10.5   (38)   (25)   (2)
Impairment of property, plant and equipment, intangible assets and inventories 1.2 and 11.1   139   62   32
Dividends received 10.4   (1)   (1)   (1)
Compensation agreements  10.1 and 10.2   1   (1)   5
Result from the sale of shareholdings in companies, property, plant and equipment  5.3.2   -   -   (44)
Onerous contract (Ship or pay) 10.4   -   -   7
Gain on monetary position, net 10.5   -   -   (403)
Other     2   (8)   4
Total adjustments to reconcile net profit to cash flows generated by operating activities     380   (23)   521

 

14.2 Changes in operating assets and liabilities

 

      12.31.2020   12.31.2019   12.31.2018
Decrease (Increase) in trade receivables and other receivables     19   65   (59)
(Increase) Decrease in inventories     (6)   (20)   2
Increase (Decrease) in trade payables and other payables     3   46   (114)
(Decrease) Increase in salaries and social security payable      (1)   (2)   (1)
Decrease in defined benefit plans     (2)   (1)   (2)
(Decrease) Increase in tax payables      (20)   4   37
Decrease in provisions     (5)   (7)   (51)
Income tax and minimum notional income tax paid     (5)   (42)   (14)
(Payments) Proceeds from derivative financial instruments, net     (5)   9   (24)
Total changes in operating assets and liabilities     (22)   52   (226)

 

 

F-151

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 14: (Continuation)

 

14.3 Significant non-cash transactions

 

      12.31.2020   12.31.2019   12.31.2018
Acquisition of property, plant and equipment through an increase in trade payables     (8)   (36)   (56)
Borrowing costs capitalized in property, plant and equipment     (10)   (17)   (7)
Compensation of loans through the assignment of dividends     12   -   -
Decrease in asset retirement obligation provision through property, plant and equipment     (3)   (1)   (34)
Dividends pending collection     20   -   -
Constitution of guarantee of derivative financial instruments, net through the delivery of financial assets at fair value through profit or loss     (1)   3   (20)
Cancellation of other credits for capital contributions in associates     -   (17)   -
Compensation of investments at amortized cost through the transfer of other credits     -   (126)   -
Loan compensation through the transfer of trade receivables     -   135   -
Increase of right-of-use assets through an increase in other debts     -   13   -

 

NOTE 15: CONTINGENT LIABILITIES AND ASSETS

 

We hereinafter detail the nature of significant proceedings as of December 31, 2019, not considered as probable by the Company based on the opinion of the Company’s internal and external counselors.

 

15.1 Labor Claim – Compensatory Plan

 

The Company faces several legal proceedings associated with the Defined Benefit Plan “Compensatory Plan” (see Note 11.8). We hereinafter describe the nature of currently-pending labor claims:

-            Claims by former employees not covered by the plan, seeking their inclusion. In one of the causes, the Company obtained a favorable judgment, which has been appealed by the plaintiff.

-Claims by former employees seeking a compensation under the plan on account of terminations due to changes in shareholding control.
-Claims on considering that the index (IPC) used to update the plan benefits are ineffective to keep their “constant value”. In one of the causes, the Company obtained a favorable judgment, which has been appealed by the plaintiff.
-Claims on an alleged underfunding of the plan upon the elimination of the Company’s contributions based on earnings.
F-152

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 15: (Continuation)

 

15.2 Tax claim

 

-Tax on Liquid Fuels and Natural Gas:

The AFIP filed a claim in the amount of $ 54 million against the Company for an alleged omission in the payment of Taxes on Liquid Fuels and Natural Gas during fiscal periods January 2006 through August 2011, plus compensatory interest and a penalty of $ 38 million for such omission. The tax entity supports its claim on the allegation that the tax benefit granted to sales to areas declared exempt by the tax law has been misappropriated. The proceeding is currently being heard before the Federal Tax Court, and the evidentiary period has been completed.

 

15.3 Environmental claims

 

-The Association of Land Owners of Patagonia (ASSUPA) has brought a complaint for an indefinite amount against the Company and other companies seeking the restoration of the environment to the state prior to the exploration, exploitation, production, storage and transportation of hydrocarbon works conducted by the plaintiffs and the prevention of alleged future environmental impacts on certain areas in the Austral Basin. The National Government and the Provinces of Santa Cruz and Tierra del Fuego have been summoned as third parties. The proceeding is at the complaint answer stage.

 

-ASSUPA has instituted a complaint before the CSJN against 10 companies, including the Company. The National Government and the Provinces of Buenos Aires, La Pampa, Mendoza, Neuquén and Río Negro have been summoned as third parties. The main claim seeks that the plaintiffs should be ordered to redress the alleged environmental damage caused by the hydrocarbon activity developed in the Neuquina Basin and to set up the environmental restoration fund provided for by section 22 of the General Environmental Law. Subsidiarily, and in case restoration is not possible, it seeks the redress of the allegedly sustained collective damages for an amount estimated at US$ 547 million based on a United Nations Development Program report. The proceeding is in the complaint answer stage.

 

-Beatriz Mendoza and other 16 plaintiffs brought a complaint before the CSJN against the National Government, the Province of Buenos Aires, the Government of the Autonomous City of Buenos Aires and 44 companies, including the Company, conducting industrial activities along the Matanza-Riachuelo River Basin. The plaintiffs seek compensation for alleged damages sustained as a result of an alleged environmental impact, its cessation, the environmental recomposition and redress, for an estimated amount of US$ 500 million for the financing of the Matanza-Riachuelo River Basin Environmental Management Plan aiming at the restoration of the basin. The proceeding is in the third-party summoning stage.

 

-Inertis S.A. Has filed a complaint against the Company for alleged damage to the environment in a lot owned by this company as a result of the activities conducted by the Dock Sud Plant seeking the redress of alleged damages for a nominal amount estimated at $ 1 million and US$ 1 million, or the difference between the value of the allegedly affected lot and its valuation. The proceeding is in the evidentiary stage.

 

F-153

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 15: (Continuation)

 

-Fundación SurfRider Argentina has requested the performance of preliminary proceedings on account of alleged indications of environmental damage in the City of Mar del Plata. The plaintiff seeks the recomposition of the alleged environmental damage having collective impact, or the compensation for the alleged damages caused by all companies owning gas stations in the coastal area of the City of Mar del Plata for an alleged fuel leakage from gas stations’ underground storage tanks into the water, soil and marine system. The Foundation estimates damages in the amount of $ 200 million. The proceeding is pending the resolution of the admissibility of CSJN’s jurisdiction.

 

-Some neighbors of the Dock Sud area brought a complaint against 14 oil companies, including the Company, petrochemical companies and waste incineration plants located in the Dock Sud Petrochemical Complex for an alleged damage to the environment and alleged individual damage to their goods, health and morale. The CSJN determined it had jurisdiction over the environmental issue, and maintained the civil and commercial jurisdiction regarding the compensation for the alleged damages.

 

-A neighbor of the Province of Salta owning a lot where a joint venture made up of the plaintiffs (the Company and other companies) conducted hydrocarbon activities seeks environmental protection and restoration for alleged damage caused by hydrocarbon prospecting, exploration and/or exploitation activities or, alternatively, a compensation in case such environmental restoration is not possible. The Province of Salta has been summoned as a third party. The proceeding is in the complaint answer stage and with a negative conflict of jurisdiction.

 

-Owners of a lot in the town of Garín, Province of Buenos Aires, seek the performance of preliminary proceedings for alleged indications of damage to the environment in their place of residence which would result from an alleged leakage from the adjacent gas station under the Company’s branding. Preliminary measures are being conducted in this proceeding.

 

-Neighbors of the Province of Neuquén brought a proceeding against the Company for alleged environmental damage resulting from the hydrocarbon exploration, exploitation, transportation and well abandonment activities in which that plaintiff has been taking part. Should this not be feasible, they claim a compensation for alleged damages to support the Environmental Restoration Fund. Additionally, they request the redress of alleged moral damages to be allocated to the Environmental Restoration Fund. The presence of all involved parties has been properly verified, and the lawsuit has been referred to the administrative litigation jurisdiction.

 

-The Company initiated a legal claim against the Province of La Pampa requesting the annulment and revocation of administrative acts through which said Province through its Undersecretary of Hydrocarbons and Mining and its Undersecretariat of Environment, intends that the Company carries out definitive abandonment of 13 hydrocarbon wells located within the Jagüel de los Machos Area that were inactive by the time the concession belonged to the company -September 2015-, as well as the presentation of a plan for the remediation of certain environmental liabilities. It is worth clarifying that an environmental audit was carried out at the time of the reversal of the hydrocarbon area, and the deviations observed therein are currently corrected. The presence of all involved parties under the lawsuit is currently being verified
F-154

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 15: (Continuation)

 

--Plaintiff Martinez Lidia and other three plaintiffs claim financial compensation for alleged damage to their health and property caused by the alleged environmental affectation sustained as a result of living next to Puerto General San Martin petrochemical plant (Rosario-Santa Fe). The proceeding is currently in the evidentiary stage. The evidentiary stage is closed and the setting of the date for the hearing to choose by lot the Public Defender for the heirs of the deceased plaintiff is pending.

 

-A neighbor of the Province of Buenos Aires brought a complaint against the Company seeking the removal of three fuel storage tanks and pumps and the remediation and restoration of the soils where such tanks are located on account of an alleged environmental affectation. The proceeding is in the evidentiary stage.

 

-Neighbors of the Province of Santa Fe have brought a complaint against the Company for alleged environmental damage. The Company obtained a favorable judgment, which has been appealed by the plaintiff.

 

15.4 Civil and Commercial Claims

 

-The “Consumidores Financieros Asociación Civil Para Su Defensa” claim the nominal amount of US$ 3,650 million as compensation for damages, Pampa, Petrolera Pampa S.A. and certain Pampa directors in office during 2016 being co-plaintiffs together with Petroleo Brasileiro S.A. A complaint has been brought against Petrobras Brasil for the depreciation of the share quotation value as a result of the “lava jato operation” and the so-called “Petrolao”, and the plaintiffs claim Pampa, Petrolera Pampa S.A. and the directors’ joint and several liability alleging the acquisition of indirect control in Petrobras Argentina S.A. may have thwarted the enforcement of a possible judgment favorable to the plaintiff (for up to the amount of the price paid by Pampa for the acquisition of control over Petrobras Argentina S.A.). The plaintiff appealed the Arbitration Court’s decision declaring the dismissal of the main claim upon the failure to pay the arbitration fee. The Chamber of Appeals in Commercial Matters upheld the filed extraordinary appeal. On its part, Petróleo Brasileiro S.A. filed an appearance, requested that the lack of substance of the filed appeal should be declared, and subsidiarily answered it. The Company has still not been served notice of the appeal.

 

-The Company was notified of the institution of a collective action in the City of Rio de Janeiro, Brazil, by a lawyer of that nationality, Felipe Machado Caldeira, alleging that Petróleo Brasileiro S.A. has not conducted Petrobras Argentina’s sales process pursuant to a competitive bidding process in accordance with Brazilian laws applicable to mixed public-private firms in Brazil, for a nominal amount of R$ 1,000 million. In this proceeding, no specific accusation against Pampa has been filed. The proceeding is currently suspended in the integration and complaint answer stage. Upon the death of the plaintiff and the Public Prosecution Service’s statement that it is not interested in pursuing the complaint, a legal notice was published so that any citizen may express its interest in pursuing it and judgment was rendered, thus terminating the proceeding, which judgment is final and conclusive and deemed res judicata.

 

F-155

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 15: (Continuation)

 

--Messrs. Candoni, Giannasi, Pinasco and Torriani brought arbitration complaints against the Company before the Buenos Aires Stock Exchange’s Arbitration Court seeking to challenge the price and tender offer for the merger through absorption of Petrobras Argentina S.A. into Pampa Energía S.A. for a nominal amount of $ 148 million. The complaints have been joined. The Court issued a partial award upholding the challenge under the capital markets law used by the plaintiff to dispute the exchange ratio used in the merger and dismissed the Company’s position, which stated that the proper course of action would be to challenge the shareholders’ meeting pursuant to the Business Organizations Law. The Company filed an appeal against this partial award and filed a motion for appeal and nullity which will be resolved by the Chamber of Appeals in Commercial Matters. This Chamber upheld the motion for appeal and nullity filed by the Company, revoking the partial award and sustaining that the proper proceeding for raising objections is to contest the shareholders’ meetings under the Business Organizations Law, and not to challenge the fair price established in the Capital Markets Law for MTOs. This judgment is deemed final and conclusive as the plaintiffs have not filed an extraordinary appeal before the CSJN.

 

-Petrobras Operaciones S.A. (“POSA”) has filed an international arbitration claim against the Company before the International Chamber of Commerce (“ICC”) on account of alleged breaches to the Assignment Agreement entered into between Petrobras Argentina S.A. (currently Pampa Energía S.A.) and POSA in 2016 for the transfer of a 33.6% interest in the “Río Neuquén” Concession. The breaches alleged by POSA in its arbitration claim consist of the failure to transfer certain assets associated with the assigned interest, and differences in the calculation of adjustments in the assignment price. The arbitration will be conducted according to the ICC Rules of Arbitration, the applicable law will be that of the Republic of Argentina, and the seat of arbitration will be Buenos Aires, Argentina. The Company timely answered the arbitration claim, and also filed a counterclaim for differences in the calculation of adjustments in the assignment price which were not paid by POSA. The Arbitration Court that will hear the arbitration proceeding has been set up, and the Mission Statement and Procedural Order No. 1 have been executed.

 

We hereinafter detail the nature of significant legal proceedings brought by the Company as of December 31, 2020 where the related inflows of economic benefits are estimated to be probable by the Company.

 

15.5 Administrative claims

 

-CTLL (currently Pampa) filed an administrative litigation complaint against the Federal Government for contractual breach during the January 2016-July 2016 period. CTLL claims that CAMMESA’s decision regarding the renewal and recognition of costs associated with natural gas supply agreements should be reversed and that, subsidiarily, sustained damages should be redressed. The rendering of judgment was requested. Later on, CTLL filed a new contentious administrative litigation complaint against the Federal Government for contractual breach during the April 2016-October 2018 period. The Federal Government has answered the complaint.

 

-Upon the determination of the expiration of the Veta Escondida block concession granted by the Province of Neuquén, the Company filed a declaratory judgment action to achieve certainty under the original jurisdiction of the CSJN pursuant to section 322 of the Federal Code of Civil and Commercial Procedure. Both parties agreed to suspend the proceeding to pursue a private settlement and, therefore, the closing of the evidentiary stage will be requested.

 

F-156

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 15: (Continuation)

 

-The Company brought an administrative litigation action against the Road Authority (DNV) of the Province of Buenos Aires seeking the nullity of DNV Resolution No. 1715/19 dated December 10, 2019, which modified the regulatory framework applicable to aerial and underground power lines in Urban and Rural Road Areas of the Province of Buenos Aires, compliance with which may generate economic losses to the Company. Based on the analysis of this Resolution, the Company withdrew the filed complaint, and keeps the right to individually challenge the administrative actions ordered pursuant to DNV Resolution No. 1715/2019.

 

15.6 Civil and Commercial Claims

  

- The Company has filed an international arbitration claim against Petrobras International Braspetro B.V. on account of fraudulent representations and omissions associated with certain export transactions under the share purchase agreement executed on May 13, 2016, whereby the Company acquired 67.2% of Petrobras Argentina S.A.’s capital stock.The arbitration will be held pursuant to the ICC’s Arbitration Rules, the applicable law will be that of the State of New York and the seat of arbitration will be New York. Petrobras International Braspetro B.V. timely answered the request for arbitration and also filed a counterclaim seeking the payment of a percentage over the difference between the amount estimated for certain contingencies detected in the purchase process and the amount actually paid for them. The Arbitration Court that will hear the arbitration proceeding has been set up, and the Mission Statement and Procedural Order No. 1 have been executed.

 

- EcuadorTLC, in its capacity as assignee of the Ecuadorian company Petromanabí S.A., has filed an international arbitration proceeding against the Republic of Ecuador seeking the payment of 12% of the Settlement Value, the latter pursuant to the terms of the Hydrocarbon Exploration and Crude Oil Exploitation Participation Agreement in Block 18 entered into on December 19, 1995 and/or the Hollín Common Field Unified Exploitation Operating Agreement executed on August 7, 2002 —in both cases, as amended—. The arbitration will be conducted according to the Arbitration Rules of the United Nations Commission on International Trade Law, the applicable law will be the Ecuadorian law, and the seat of arbitration will be the City of Santiago de Chile. The procedure for the appointment of the arbitrators who will make up the arbitration court is currently underway.

 

-EcuadorTLC is currently making claims to Petroecuador as a result of certain breaches to the transportation agreement entered into on December 31, 2008 whereby the Ecuadorian Government undertook the crude oil transportation commitment through the OCP, to be charged to the oil transportation capacity hired by EcuadorTLC. To such effect, a mediation proceeding was brought before the Center for Mediation of the Attorney General’s Office of the Government of Ecuador sitting in the City of Quito, which ended without agreement. EcuadorTLC retains its claim rights for the aforementioned breaches

 

-The Company reached a settlement agreement with Petrominera Chubut Sociedad del Estado on account of the latter’s breach of Inversora Ingentis S.A.’s share purchase agreement and the decision issued by the BCBA’s Arbitration Court in this respect. In accordance with the agreement, as of December 31, 2020 the Company received a payment of US$ 3.5 million and has recognized a US$ 2.8 million profit under “Other operating income” in the Statement of Comprehensive Income.
F-157

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 15: (Continuación)

 

- After the commissioning of PEPE II and PEPE III wind farms, certain defects were evidenced in the blades of some wind turbines, which resulted in their withdrawal from service for their subsequent repair and/or replacement. As a result of the failure, the generation capacity of the wind farms has been partially reduced. The Company submitted the corresponding claims to the supplier and the insurance company in order to move forward with the repair of the wind turbines and cover the incurred damages. In this sense, the Company, together with the wind turbines supplier, performed the tasks for the progressive repair of the wind turbines in 2020, with the exception of a wind turbine in PEPE II wind farm, which remains unavailable, and has disclosed a receivable with an offsetting entry in the item “Other operating income” of the Statement of Comprehensive Income in the amount of US$ 6.6 million regarding the claims made to the supplier and the insurance company. As of December 31, 2020, the Company has received payments for US$ 3.2 million on account of compensation for the claimed damages, and as of the issuance hereof, US$ 1.2 million are pending collection.

 

 

NOTE 16: INVESTMENT COMMITMENTS

 

16.1 New generation projects

 

Under the National Government’s call for the expansion of the generation offer, the Company participates in the following thermal generation projects:

 

16.1.1 PEPE II and PEPE III wind farms

 

On May 10, 2019, CAMMESA declared the commercial commissioning of PEPE II (Pampa Energía wind farm) for a 50.4 MW power capacity and PEPE III (de la Bahía wind farm) for a 28.8 MW power capacity, the commercial commissioning for a 50.4 MW power capacity of the latter being completed on June 10, 2019. PEPE II is located in an area adjacent to Mario Cebreiro Wind Farm, in the area known as Corti, 20 kilometers from the City of Bahía Blanca. PEPE III is located in Coronel Rosales, near the City of Bahía Blanca. Both projects called for an investment of US$ 130 million.

 

The production of both wind farms is sold under agreements between private parties pursuant to the Term Market of Electric Power from Renewable Sources (MATER) Regime within the framework of SEE Resolution No. 281/17. Non-contracted energy will be remunerated according to the spot market remuneration (see Note 2).

 

16.1.2 Genelba Thermal Power Plant

 

The Genelba Plus’ closing to combined cycle project was selected under SEE Resolution No. 926-E/17 within the framework of the “Call for the Execution of New Co-generation and Closing to Combined Cycles Projects” provided for by SEE Resolution No. 287-E/17. Upon the commercial commissioning of the closing to combined cycle, the Wholesale Power Purchase Agreement executed with CAMMESA for a maximum committed capacity of 377 MW and a term of 15 years will enter into effect.

 

On June 12, 2019, CAMMESA declared the commercial commissioning of Genelba power plant’s fourth gas turbine for a power capacity of up to 187.7 MW. Furthermore, CAMMESA enabled the 13 MW repowering of the GEBATG03 unit’s power capacity, as of June 1, 2019.These units are part of Genelba Plus’ closing to combined cycle project.

 

F-158

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 16: (Continuation)

CAMMESA commissioned CTGEBA’s GEBATV02 effective as from 00:00 on July 2, 2020 for a gross capacity of 199 MW, milestone that marked the beginning of operations of CTGEBA’s second combined cycle, a project where the Company invested approximately US$ 320 million to add 400 MW and employed an average of 1,500 people during the 30-month work period. With the completion of the new combined cycle, the total installed capacity of CTGEBA amounts to 1,243 MW, becoming the largest thermal power plant in the country, with an outstanding efficiency of 55% on average and the capacity to supply electricity to 2.5 million households in the Buenos Aires metropolitan area.

 

On October 7, 2020, CAMMESA informed that, after performing certain improvements in the CC consisting of units GEBATG01, GEBATG02 and GEBATV01, a total additional power capacity of 11 MW was achieved.

In this way, the Company has fulfilled its commitments with CAMMESA under the electricity wholesale supply agreement entered into pursuant to former SEE Resolution No. 287/17.

 

In line with the Company’s strategy to develop its core businesses, this milestone adds to the efforts put forth over the last 12 years to increase the power generation infrastructure, demanding investments for more than US$ 1,500 million, hence becoming Argentina’s largest independent power producer, operating a total 4,955 MW of installed capacity, which represents 12% of the national grid.

 

16.1.3 CTB

 

Regarding the commitment to CTB’s closing to combined cycle project, detailed in Note 5.3.5, for increasing the installed power capacity from 567 MW to 847 MW, with an estimated investment of US$ 200 million, on September 27, 2019, CTB and a joint venture made up of SACDE and Techint Compañía Técnica Internacional S.A.C.E.I, executed an engineering, procurement, construction, commissioning and turnkey agreement for the execution of the closing of the combined cycle at CTEB (the “EPC Agreement”).

 

The evolution of the measures resulting from the COVID-19 pandemic has affected the execution of the works for CTB’s closing to combined cycle from the beginning. The stiffening of social lockdown measures experience from July 1, 2020 excluded private infrastructure works from the exempted activities. Later on, pursuant to Resolutions No. 1197-MJGM-2020 and No. 1690-MJGM-2020 passed by the Buenos Aires Chief of the Cabinet of Ministers’s Office, as amended, the Company resumed the execution of construction works following their critical path as from July 20, 2020.

 

Within this framework, on July 28, 2020, the Company and the Joint Venture made up of SACDE Sociedad Argentina de Construcción y Desarrollo Estratégico S.A. and Techint Compañía Técnica Internacional S.A.C.E.I. entered into an addendum to the construction agreement within the framework of the restrictions currently imposed as a result of the COVID-19 pandemic, reaching an agreement on the impact on costs and works’ execution terms, and launching a new stage for the execution of the closing to combined cycle.

 

Even trough, the commercial commissioning of the steam turbine is estimated for the first quarter of 2022, it is impossible to foresee how measures will continue evolving or to which extent terms and costs may be affected in the future.

 

F-159

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 16: (Continuation)

 

16.1.4 PEPE IV wind farm

 

The Company, as assignee of the rights under the PEPE IV project, requested to CAMMESA an extension of the term for the commercial commissioning of the wind farm, as well as its relocation. The request was authorized by the SGE and, to make it effective, CAMMESA asked the Company to meet certain requirements, including making several disbursements and increasing the originally granted guarantee pursuant to SGE Resolution No. 230/19.

 

However, as a result of events occurred during 2019, including the devaluation of the peso and the increase in interest rates, which have resulted in a growing macroeconomic instability, the Company requested an extension of the term to meet the above-mentioned requirements in order to evaluate the feasibility of the project under the new conditions, as well as to negotiate 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 canceled the suspension. On October 30, 2019, CAMMESA served on the Company a formal demand requiring certain payments associated with the postponement of the commercial commissioning of the project and its relocation under penalty of enforcing the guarantee. The Company rejected the demand 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 process to be developed until January 31, 2020 inclusive, during which CAMMESA should suspend the enforcement of the guarantee. The agreement term was extended until January 31, 2021. Despite the expiration of the extension it is estimated that it will be re-extended once CAMMESA receives the corresponding instruction from the SE.

 

16.2 Investment commitment for the exploration and exploitation of hydrocarbons

 

As of the issuance of these Consolidated Financial Statements, the Company has committed investments for an estimated total amount of US$ 383 million, based on its participation, to be disbursed between 2020 and 2023, mainly regarding the Sierra Chata, Las Tacanas, El Mangrullo, Rincón del Mangrullo and Chirete areas.

 

In turn, as mentioned in Note 2.3.2.1.2, the Company has committed an investment of approximately US$ 250 million over the four years of the GasAr Plan.

 

 

F-160

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 17: RELATED PARTIES´ TRANSACTIONS

 

 

17.1Operations related parties

 


Operations for the year
 
Sales of goods and services (1)
  Purchases of goods and services (2)   Fees for services (3)   Other operating expenses and income (4)
  2020   2019   2018   2020   2019   2018   2020   2019   2018   2020   2019   2018
Associates and joint ventures                                                
CTB   2   1   -   -   -   -   -   -   -   -   -   -
Greenwind   1   1   -   -   -   -   -   -   -   -   (1)   -
OCP   -   -   -   -   -   -   -   -   -   -   -   (7)
Refinor   10   18   16   (5)   (19)   (34)   -   -   -   -   -   -
TGS   20   29   51   (24)   (22)   (21)   -   -   -   -   -   -
Transener   -   -   1   -   -   -   -   -   -   -   -   -
                                                 
Other related parties                                                
Fundación   -   -   -   -   -   -   -   -   -   (2)   (2)   (2)
SACDE   -   -   1   -   -   (2)   -   -   -   -   1   -
Salaverri, Dellatorre, Burgio & Wetzler   -   -   -   -   -   -   (1)   (1)   (1)   -   -   -
Other   -   -   -   -   (1)   (2)   -   -   -   -   -   -
    33   49   69   (29)   (42)   (59)   (1)   (1)   (1)   (2)   (2)   (9)
                                                 
(1) Corresponds mainly to advisory services provided in the field of technical assistance and sales of gas and refined products.
(2) Imputed cost of sales. Correspond mainly to natural gas transportation services, purchases of refined products and other services.
(3) Disclosed within administrative expenses.
(4)  Corresponds mainly to donations and ship or pay.

 

 

F-161

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 17: (Continuation)

 


Operations for the year
  Finance income (1)   Dividends received   Payment of dividends
  2020   2019   2018   2020   2019   2018   2020   2019   2018
Associates and joint ventures                                    
Ciesa   -   -   -   -   53   19   -   -   -
Citelec   -   -   -   13   16   -   -   -   -
OCP   1   -   -   21   6   -   -   -   -
TGS   3   3   3   -   -   -   -   -   -
                                     
Other related parties                                    
                                     
EMESA   -   -   -   -   -   -   (9)   (1)   (2)
Other   -   -   -   1   1   -   -   -   -
    4   3   3   35   76   20   (9)   (1)   (2)
(1) Corresponds mainly to financial leases and accrued interest on loans granted.

 

17.2Key management personnel remuneration

 

During the years ended December 31, 2020 2019 and 2018, the total remuneration to executive directors accrued amounts to US$ 6.9 million (US$ 5.8 million for Directors' and Sindycs' fees and US$ 1.1 million in the accrual of EBDA Compensation and Stock-based Compensation Plans), US$ 9.6 million (US$ 4.6 million in Directors' and Sindycs' fees and US$ 5.0 million in the accrual of the Company-Value Compensation, EBDA Compensation and Stock-based Compensation Plans) and US$ 31.2 million (US$ 4.1 million in Directors' and Sindycs' fees and US$ 27.1 million in the accrual of the Company-Value Compensation, EBDA Compensation and Stock-based Compensation Plan), respectively.

 

F-162

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 17: (Continuation)

 

17.3Balances with related parties

 

As of December 31, 2020   Trade receivables   Other receivables   Trade  payables
  Current   Non Current   Current   Current
Associates and joint ventures                
Greenwind   -   -   -   5
OCP   -   -   36   -
Refinor   2   -   -   -
TGS   2   29   5   -
    4   29   41   5

 

 

As of December 31, 2019   Trade receivables   Other receivables   Trade  payables   Other payables   Borrowings
  Current   Non Current   Current   Current   Current   Current
Associates and joint ventures                        
Citelec   -   -   -   -   -   14
Greenwind   -   4   -   5   -   -
OCP   -   15   -   -   5   -
Refinor   2   -   -   1   -   -
SACME   -   -   -   2   -   -
TGS   4   34   5   -   -   -
Other related parties                        
SACDE   -   -   2   -   -   -
Other   -   -   1   -   -   -
    6   53   8   8   5   14

 

F-163

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

 

NOTE 18: LEASES

 

18.1 Lessee

 

The Company leases a key part for thermal power plants operation for a 20-year term and has entered into certain oil services agreements (mainly gas compression services) which, considering their characteristics, contain the lease of the assets for the rendering of the services with terms ranging between 2 and 6 years.

 

The terms of the lease agreements are negotiated on an individual basis and comprise a broad range of terms and conditions.

 

The evolution of right-of-use assets and lease liabilities recognized as of December 31, 2020 and 2019 is disclosed below:

 

18.1.1 Right of use assets

 

 

 

Original values
            Reclasification to assets clasified as held      
Type of good   At the beginning   Increase       At the end
        (1)        
Machinery and equipment   13   -   -     13
Buildings   7   3   (10)     -
Total at 12.31.2020   20   3   (10)     13
Total at 12.31.2019   -   20   -     20

 

Depreciation
            Reclasification to assets clasified as held      
Type of good   At the beginning   For the year       At the end
                 
Machinery and equipment   (2)   (1)   -     (3)
Buildings   (2)   (4)   6     -
Total at 12.31.2020   (4)   (5)   6     (3)
Total at 12.31.2019   -   (4)   -     (4)

 

    Net book values
Type of good   At the end   At 12.31.2019
     
         
Machinery and equipment   10   11
Buildings   -   5
Total at 12.31.2020   10    
Total at 12.31.2019       16

 

 

 

(1) Includes US$ 8 million incorporated as of January 1, 2019 on the adoption of IFRS 16 (see Note 4.1.1)

F-164

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 18: (Continuation)

 

18.1.2 Lease liabilities

 

    12.31.2020   12.31.2019
At the beginning of the year   16   -
Incorporation by adoption of IFRS 16   -   8
Increases   4   13
Discounted value measurement (1)   -   3
Payments   (10)   (5)
Reclasification to liabilities clasified as held for sales   (4)   -
Exchange differences on translation   5   (3)
At the end of the year   11   16

 

(1) Included in the “Gains (losses) from present value measurement” under Other financial results

 

As of December 31, 2020 and 2019, this liability is disclosed under Other current payables in the amount of US$ 2 million and US$ 4 million and Other non-current payables for US$ 10 million and US$ 12 million, respectively.

 

The following table includes an analysis of the Company lease liabilities, grouped according to their maturity dates. The amounts shown in the table are the contractual undiscounted cash flows:

 

    12.31.2020
Three months to one year   1
One to two years   1
Two to three years   2
Three to four years   2
Four to five years   2
More than five years   14
Total   22

 

18.1.3 Short-term or low value leases

 

As of December 31, 2020 and 2019, the Company has recognized administrative costs and expenses in the amount of US$ 4 and US$ 10 million on account of lease payments associated with short-term leases and low-value underlying assets, respectively.

F-165

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 18: (Continuation)

 

18.2Lessor

 

Financial leases

 

Corresponding to the financing granted to TGS for the sale of certain property, plant and equipment belonging to the Oil & Gas business segment. This agreement was entered into on August 11, 2016, and consists of the collection of 119 monthly consecutive installments of US$ 623 thousand, without considering taxes, and a purchase option for a like amount payable at the end of the 120 months of the contract life.

 

As of December 31, 2020 and 2019, this receivable is disclosed under Other current receivables in the amount of US$ 5 million and US$ 5 million, respectively and under Other non-current receivables for US$ 29 million and US$ 34 million, respectively.

 

The following table includes an analysis of the Company receivable, grouped according to its maturity dates. The amounts shown in the table are the contractual undiscounted cash flows:

 

    12.31.2020
Less than three months   1
Three months to one year   4
One to two years   5
Two to three years   6
Three to four years   6
Four to five years   7
More than five years   4
Total   33

 

F-166

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 19: DOCUMENTATION KEEPING

 

On August 14, 2014, the National Securities Commission issued General Resolution No. 629, which introduced modifications to the provisions applicable to the keeping and conservation of corporate and accounting books and commercial documentation. To such effect, the Company and its subsidiary Edenor, have sent non-sensitive work papers and information corresponding to the periods not covered by the statute of limitations for their keeping in the Administración de Archivos S.A (AdeA)’s data warehouse located at Ruta 36, km 34.5, Florencio Varela, Provincia de Buenos Aires and in the Iron Mountain Argentina S.A.’s data warehouses located at the following addresses:

 

-Azara 1245 –C.A.B.A.
-Don Pedro de Mendoza 2163 –C.A.B.A.
-Amancio Alcorta 2482 C.A.B.A.
-San Miguel de Tucumán 601, Carlos Spegazzini, Municipality of Ezeiza, Province of Buenos Aires.

 

A list of the documentation delivered for storage, as well as the documentation provided for in Article 5.a.3) Section I, Chapter V, Title II of the PROVISIONS (2013 regulatory provisions and amending rules), is available at the Company headquarters.

 

 

NOTE 20: OIL AND GAS RESERVES (Information not covered by the auditors’ report)

 

The table below presents the estimated proved reserves of oil (including crude oil, condensate and LNG) and natural gas, by geographic area as of December 31, 2020.

 

  Proved Developed   Proved Undeveloped   Total Proved Reserves
                 
  Oil and LNG (1)

Natural Gas(2)

  Oil and LNG (1)

Natural Gas(2)

  Oil and LNG (1)

Natural Gas(2)

                 
                 
                 
Argentina 7,761 10,534   5,765 11,256   13,526 21,790
                 
                 
Total at 12.31.2020 7,761 10,534   5,765 11,256   13,526 21,790

 

 

(1) In thousands of barrels.

(2) In millions of cubic meters.

 

 

F-167

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

For the years ended December 31, 2020, 2019 and 2018 (Continuation)

(in millions of US$ – unless otherwise stated)

NOTE 21: SUBSEQUENT EVENTS

 

GasAr Plan

 

On March 9, 2021, Resolution No. 169/21 was published in the BO, awarding the volumes of natural gas offered under the GasAr Plan - Round II call for tenders. In this case, the Company was awarded with a volume of 0.70 million m3/day, 0.90 million m3/day and 1 million m3/day for the months of June, July and August-September 2021, respectively, as well as 0.86 million m3/day to meet the winter peak for years 2022 through 2024, at a price of US$ 4.68 MMbtu.

 

With this offer, Pampa's injection commitment increases to 9 million m3/day for winter periods 2021-2024 which, compared to 2020, represents a 15% growth in annual production and 28% in the winter period, the months of greatest need for gas supply in the country.

 

F-168 

 

SUPPLEMENTARY INFORMATION ON OIL AND GAS ACTIVITIES (UNAUDITED)

 

The following information on oil and gas activities has been prepared in accordance with the methodology prescribed by ASC No. 932 "Extractive Activities - Oil and Gas". This information includes the Company’s and its subsidiaries’ oil and gas production activities.

 

We changed our functional and presentation currencies from the Peso to the U.S. dollar, therefore, as from January 1, 2019, we record our operations 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, since the Peso was our functional currency up to that date, and was translated into U.S. Dollars using the exchange rate as of that date.

 

Costs incurred

 

The following table presents those costs capitalized as well as expensed that were incurred during each of the years ended as of December 31, 2020, 2019 and 2018. The acquisition of properties includes the cost of acquisition of proved or unproved oil and gas properties. Exploration costs include geological and geophysical costs, costs necessary for retaining undeveloped properties, drilling costs and exploratory well equipment. Development costs include drilling costs and equipment for developmental wells, the construction of facilities for extraction, treatment and storage of hydrocarbons and all necessary costs to maintain facilities for the existing developed reserves.

 

  Consolidated companies (Argentina)
  12.31.2020   12.31.2019   12.31.2018
  (in million of US$)
Acquisition of properties          
Proved -   -   -
Unproved -   -   -
Total property acquisition -   -   -
Exploration 24   34   9
Development 17   159   183
Total costs incurred 41   193   192

 

Capitalized cost

The following table presents the capitalized costs as of December 31, 2020, 2019 and 2018, for proved and unproved oil and gas properties, and the related accumulated depreciation as of those dates.

 

  Consolidated companies (Argentina)
  12.31.2020   12.31.2019   12.31.2018
  (in million of US$)
Proved properties          
Equipment, camps and other facilities 122   126   140
Mineral interests and wells 967   892   813
Other uncompleted projects 91   146   109
Unproved properties 50   33   19
Gross capitalized costs 1,230   1,197   1,081
Accumulated depreciation (687)   (585)   (527)
Total net capitalized costs 543   612   554
           
 
S-1 
 

 

Results of operations

The breakdown of results of the operations shown below summarizes revenues and expenses directly associated with oil and gas producing activities for the years ended December 31, 2020, 2019 and 2018 (including results of operations related to oil and gas discontinued operations - See Note 5.3.2 to the consolidated financial statements). Income tax for the years presented was calculated utilizing the statutory tax rates.

 

  Consolidated companies (Argentina)
  12.31.2020   12.31.2019   12.31.2018
 

(in million of US$)

 

Revenue 227   174   524
Intersegment sales 67   270   63
Surplus Gas Injection Compensation -   -   24
           
Production costs, excluding depreciation          
   Operating costs and others (138)   (193)   (203)
   Royalties (39)   (56)   (83)
Total production costs (177)   (249)   (286)
Exploration expenses -   (9)   (1)
Depreciation, depletion and amortization (108)   (112)   (92)
Results of operations before income tax 9   74   232
Income tax (3)   (22)   (70)
Results of oil and gas operations 6   52   162
 
S-2 
 

 

Estimated oil and gas reserves

 

Proved reserves estimated quantities of oil (including crude oil, condensate and natural gas liquids) and natural gas, which available geological and engineering data demonstrates with reasonable certainly to be recoverable in the future from known reservoirs under existing economic and operating conditions. Proved developed reserves are proved reserves that can reasonably be expected to be recovered through existing wells with existing equipment and operating methods. The choice of method or combination of methods employed in the analysis of each reservoir was determined by the stage of development, quality and reliability of basic data, and production history.

 

The Company believes that its estimates of remaining proved recoverable oil and gas reserve volumes are reasonable and such estimates have been prepared in accordance with the SEC rules, which were issued by the SEC at the end of 2008.

The Company estimates its reserves at least once a year. The Company reserves estimation as of December 31, 2020 was audited by Gaffney, Cline & Associates. Gaffney, Cline & Associates is an independent petroleum engineering consulting firm. The independent audit covered 98% of the estimated reserves located in areas operated and non-operated by the Company. Gaffney, Cline & Associates audited the proved oil and natural gas reserve estimates in accordance with Rule 4-10 of Regulation S-X, promulgated by the SEC, and in accordance with the oil and gas reserves disclosure provisions of ASC Topic 932 of the FASB. We provided all information required during the course of the audit process to Gaffney, Cline & Associates’s satisfaction.

 

Proved reserves are estimated by the Company’s reservoir engineers. Reserves engineering is a subjective process of estimation of hydrocarbon accumulation, which cannot be accurately measured, and the reserve estimation depends on the quality of available information and the interpretation and judgment of the engineers and geologists. Therefore, the reserves estimations, as well as future production profiles, are often different than the quantities of hydrocarbons which are finally recovered. The accuracy of such estimations depends, in general, on the assumptions on which they are based.

 

The following table sets forth the estimated oil (including crude oil, condensate and natural gas liquids) and natural gas (including natural gas estimated to be consumed as fuel in operations) net proved reserves as of December 31, 2020, 2019 and 2018:

 

  Reserves as of December 31, 2020   Reserves as of December 31, 2019   Reserves as of December 31, 2018
  Crude oil,
condensate
and natural gas liquids
  Natural Gas   Crude oil,
condensate
and natural gas liquids
  Natural Gas   Crude oil,
condensate
and natural gas liquids
  Natural Gas
                       
Reserves category (million of barrels)   (billion of cubic feet)   (million of barrels)   (billion of cubic feet)  

(million of

barrels)

  (billion of cubic feet)
                       
PROVED Developed 7.8   372.0   8.8   372.0   9.2   409.8
                       
PROVED Undeveloped 5.8   397.5   4.7   359.1   5.8   282.2
                       
Total proved reseves
(developed and undeveloped)
13.5   769.5   13.6   731.1   15.0   692.0
 
S-3 
 

 

The following table sets forth the reconciliation of our reserves data between December 31, 2018, December 31, 2019 and December 31, 2020:

  Consolidated companies (Argentina)
  Crude Oil, Condensate and natural gas liquids   Natural Gas
Proved reserves (developed and undeveloped) (in thousand of barrels)   (in millions of cubic feet)
Reserves as of December 31, 2017 (*) 41,631   752,686
Increase (decrease) attributable to:      
Revisions of previous estimates 1,003   (54,588)
Extension and discoveries 1,942   99,950
Purchases of proved reserves in place 80   65,115
Sales of proved reserves in place (27,814)   (85,125)
Year's production (1,845)   (86,073)
Reserves as of December 31, 2018 (*) 14,997   691,965
Increase (decrease) attributable to:      
Revisions of previous estimates (645)   1,247
Improved recovery -   3,530
Extension and discoveries 970   128,831
Year's production (1,771)   (94,491)
Reserves as of December 31, 2019 (*) 13,551   731,082
Increase (decrease) attributable to:      
Revisions of previous estimates 152   25,633
Improved recovery 44   57,119
Extension and discoveries 1,406   44,825
Year's production (1,627)   (89,140)
Reserves as of December 31, 2020 (*) 13,526   769,519
       
(*) Includes proved developed reserves:      
As of December 31, 2018    9,179   409,782
As of December 31, 2019      8,805   372,000
As of December 31, 2020    7,761   371,999
 
S-4 
 

 

Standardized measure of discounted future net cash flows

 

The following table discloses estimated future cash flows from future production of proved developed and undeveloped reserves of crude oil, condensate, natural gas liquids and natural gas (excluding natural gas estimated to be consumed as fuel in operations). As prescribed by SEC Modernization of Oil and Gas Reporting rules and ASC 932 of the FASB Accounting Standards Codification (ASC) relating to Extractive Activities - Oil and Gas, such future net cash flows were estimated using the average first day of the month price during the twelve-month period for 2020, 2019 and 2018 using a 10% annual discount factor. Future development and abandonment costs include estimated drilling costs, development and exploitation installations and abandonment costs. These future development costs were estimated based on evaluations made by the Company and operators of the fields in which the Company has an interest. The future income tax was calculated by applying the statutory tax rate in effect in the respective countries in which we have interests, as of the end of the reporting period.

 

This standardized measure is not intended to be and should not be interpreted as an estimate of the market value of the Company’s reserves. The purpose of this information is to give standardized data to help the users of the financial statements to compare different companies and make certain projections. It is important to point out that this information does not include, among other items, the effect of future changes in prices costs and tax rates, which past experience indicates that are likely to occur, as well as the effect of future cash flows from reserves which have not yet been classified as proved reserves, of a discount factor more representative of the value of money over the lapse of time and of the risks inherent to the production of oil and gas. These future changes may have a significant impact on the future net cash flows disclosed bellow. For all these reasons, this information does not necessarily indicate the perception the Company has on the discounted future net cash flows from the reserve of hydrocarbons.

 

  12.31.2020   12.31.2019   12.31.2018
 

(in million of US$)

 

Future cash inflows 3,067   2,965   4,063
Future production costs (1,256)   (1,306)   (1,634)
Future development and abandonment costs (524)   (451)   (508)
Future income tax (240)   (178)   (445)
Undiscounted future net cash flows 1,029   1,030   1,476
10% annual discount (398)   (390)   (594)
Standarized measure of discounted future net cash flows 631   640   882
 
S-5 
 

 

Changes in the standardized measure of discounted future net cash flows

 

The following table discloses the changes in the standardized measure of discounted future net cash flows for the years ended December 31, 2020, 2019 and 2018:

  Consolidated companies (Argentina)
  12.31.2020   12.31.2019   12.31.2018
  (in million of US$)
Standarized measure at the beginning of year 640   882   715
Changes related to Oil & Gas Activities:          
Sales Net of Production costs (117)   (195)   (324)
Net Change in sales prices, net of future production costs (86)   (619)   159
Changes in future development costs (51)   (84)   (215)
Extensions, discoveries and improved recovery, net of futures production and assocciated costs 170   201   212
Development costs incurred 17   159   183
Revisions of quantity estimates 44   (8)   (66)
Purchase of reserves in place 7   -   98
Sale of reserves in place -   -   (168)
Net change in income tax (42)   175   33
Accretion of discount 76   117   107
Changes in production rates (29)   3   51
Other changes 2   9   97
Standarized measure at the end of year 631   640   882

 

 

 

 
S-6