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 obliga