| 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.
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 28, 2022. |
Pursuant to Argentine law, in case we pay dividends, we are required to pay them in cash 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 is a vulnerable economy and any significant decline may adversely affect our business, operational results and financial condition |
| · | The Argentine economy is 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 conflict between Russia and Ukraine could adversely affect the global economy, the Argentine economy and our 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. |
| · | The emergence and spread of a pandemic-level disease or threat to public health, such as Covid-19, may have a material adverse impact on the Argentine and global economy, our business operations, financial condition or results of operations |
| · | 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 |
| · | There is no certainty as to the effects that the measures that the Argentine Government may adopt in order to resolve the crisis in the energy sector will have on our business operations, financial condition or results of operations. |
| · | The Argentine economy and finances may be adversely affected as a consequence of a decrease in the international prices of commodities |
| · | The operating costs of the Company could increase as a result of the promotion or adoption of certain measures by the Argentine Government as well as pressure from union sectors |
| · | 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 |
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 |
| · | Our performance is largely dependent on recruiting and retaining key personnel |
| · | 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 |
| · | 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 |
| · | Our activities may be adversely affected by events in other countries in which we do business |
| · | The national antitrust authorities could decide not to approve the acquisition of the CTEB |
| · | We and our subsidiaries continue evaluating investment projects to expand our activity, which could imply an increase in our indebtedness |
| · | Climate change, energy transition and regulatory framework promoted for such purposes could affect our business, our results of operations and financial condition |
| · | Uncertainty relating to the LIBOR transition process and the phasing out of LIBOR may adversely affect us |
Risks Relating to Our Generation Business
| · | There are electricity transmission constraints in Argentina that may prevent us from dispatch, which could materially adversely affect the financial results of our generation business |
| · | 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 |
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| · | 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 other fuels), 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 which may adversely affect the revenues derived from such contracts or from our generation units |
| · | Penalties and or other sanctions may be applied for breaches to applicable regulation or for not having in a timely manner the required permits for the operation of our generation units, which may adversely affect the availability and revenues derived 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 |
| · | The guarantees granted by the Company to its affiliates could be enforced, which could have an adverse effect on results of our operations |
| · | Events that affected PEPE II and PEPE III or similar events may occur in our energy projects |
| · | We may face competition in the electricity sector and related industries |
| · | Risks arise for our business from technological changes in the energy market |
| · | 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 |
| · | Delays in obtaining the required permits and authorizations for new power generation projects may affect the estimated entry into commercial operations and affect the expected revenues from such projects. Moreover, penalties and fines may apply |
| · | Electricity demand may be affected by price increases, which could lead power generators such as the Company to record lower revenues |
| · | The generation activity involves the handling of dangerous elements such as fuels that have an associated potential risk for premises and people |
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 |
| · | The Company is exposed to contractions in the crude oil and natural gas demand and to contractions in the demand for any of their by-products |
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 |
| · | 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. |
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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.
In 2020 a new global financial crisis began as a result of the Covid-19. The stock market crash, which began in late February 2020 and intensified throughout 2020 and 2021, affected and continues to affect all stock markets in the world. The continued impact of Covid-19 on sectoral economic activity cannot be measured.
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 is a vulnerable economy 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 data published by the INDEC in 2021 and 2022, for the years ended December 31, 2020 and 2021, Argentina’s real GDP decreased by 9.9% compared to the year ended December 31, 2019 and increased by 10.3% compared to the year ended December 31, 2020, respectively; (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.
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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 “BCRA, which have also shown significant fluctuations in recent years. As of February 10, 2022, the international reserves of the BCRA totaled US$37,233 million. According to the exchange rate information published by the Banco de la Nación Argentina, the Argentine Peso depreciated by 22.1% against the U.S. Dollar during the year ended December 31, 2021 (compared to 58.9%, 102.2% and 17.4% in the years ended December 31, 2020, 2019 and 2018, respectively).
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.
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The Argentine economy is 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.
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.
As a consequence of the Covid-19, the estimated contraction in the world’s economy for 2020 was 3.5% according to what both the IMF and the Organization for Cooperation and Economic Development expressed. Additionally, the IMF published that the impact of Covid-19 on the world’s economy affects both the supply and the demand side. On the supply side, the virus increases not only morbidity and mortality, but also the efforts and measures taken by governments and companies to combat these effects, which lead to restrictions in freedom of movement, higher operating costs due to the reduction in the supply chain and the tightening of credit. On the demand side, the uncertainty that the virus generates, precautionary behaviors, quarantine efforts and high financing costs all reduce the possibility of spending money. According to a report published by the IMF in April 2021, despite the global recovery in 2021, the pandemic has not been defeated and virus cases are growing in many countries. Different parts of the world are currently experiencing divergent virus case growth rates which leads to recoveries also diverging dangerously between and within countries. (See “—The emergence and spread of a pandemic-level disease or threat to public health, such as the Covid-19, may have a material adverse impact on the Argentine and global economy, 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 of 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 conflict between Russia and Ukraine could adversely affect the global economy, the Argentine economy and our operational results and financial condition
On February 24, 2022, the President of Russia, Vladimir Putin, announced a military operation in the eastern Donbas region of Ukraine and began a full-scale invasion of the country.
The invasion received widespread international condemnation, with worldwide protests against the Russian invasion of Ukraine. The United States, the United Kingdom and other countries of the European Union imposed economic sanctions on Russia—such as the exclusion of certain Russian banks from the SWIFT financial system, airspace restrictions, export restrictions of Russian oil and gas, among others—which could eventually affect the supply of oil and gas from this country, and trigger higher inflation and market shocks.
Actual and threatened responses to Russia’s invasion, as well as a rapid peaceful resolution to the conflict, may also impact the markets for certain commodities, such as oil and natural gas, and may have collateral impacts, including increased volatility, and cause disruptions to the availability of certain commodities, commodity and futures prices and the supply chain globally. Rising wheat prices have raised tensions in countries like Egypt, which rely heavily on wheat exports from Russia and Ukraine, and sparked fears of social unrest. On the other hand, Russia is the second largest oil exporter in the world and the largest producer of natural gas, causing the world oil prices jumped over US$110 per barrel, and the cost of natural gas reached a new record high in Europe. In this sense, in Argentina, the natural gas supply for this next winter may be affected, with negative effects on the energy generation, especially for industries. The shortage on natural gas may adversely affect our generation dispatch assets.
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Although up to the date of this annual report the conflict is regional in nature, the possible involvement of other member countries of the North Atlantic Treaty Organization could result in a transnational conflict, which could significantly affect the world economy and Argentina and, therefore, our operational results. Volatility in oil and other commodity prices may adversely affect the Argentine economy and our business. The materialization of some or all of these risks, as well as the events that arise in the main regional partners, including the member countries of Mercosur, could have a material negative effect on the Argentine economy, on the interest of investors in Argentine companies, and, indirectly, on our business and operational results.
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 January, February and March 2022 were 3.9%, 4.7% and 6.7%, respectively; rates for July, August, September, October, November and December 2021 were 3.0%, 2.5%, 3.5%, 3.5%, 2.5% and 3.8%, respectively; and rates for July, August, September, October, November and December 2020 were 1.9%, 2.7%, 2.8%, 3.8%, 3.2% and 4.0%, 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 50.9% in 2021, 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.
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.
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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: as compared to the U.S. dollar, it depreciated by more than 102.2% in 2018, approximately 58.9% in 2019, 40.5% in 2020 and 22.1% in 2021. 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, 2021 was 50.9%.
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.
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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.
On January 28, 2022, Argentina signed an agreement with the IMF to refinance more than US$40 billion in debt, contracted in 2018 with this institution. The main measures agreed are related to the reduction of public spending and subsidy rates, focused on the energy sector. The agreement was approved by the Argentinean Congress and by the Board of the IMF.
Among other points, an economic and monetary policy was established, where the IMF will be the co-director, carrying out quarterly audits on Argentina's finances and economic development.
Our company cannot predict how this new agreement and the policies developed based on it will impact 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.
The emergence and spread of a pandemic-level disease or threat to public health, such as Covid-19, may have a material adverse impact on the Argentine and global economy, 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, 2022) 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 resulted in a decrease in the demand for crude oil, mainly in the second and third quarters of 2020, since industrial and domestic activity 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.
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.
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The Company is currently considering available alternatives to mitigate the effects this outbreak may have on its operations and ongoing projects, as well as with regards to measures adopted by the Argentine Government, which so far have resulted in a slowdown in economic activity that has further adversely affected economic growth in Argentina in 2020 and 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.
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, as a 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”.
Furthermore, on July 15, 2021, the Argentine Government issued Decree No. 389/2021, which, among other measures, partially repealed the provisions related to the restructuring of the assets of the energy sector of the National State provided for in Decree No. 882/ 17, within the framework of which, among others, the sale and transfer by IEASA of CTEB's goodwill was carried out. For more information, see “Item 4. Information on the Company – Generation”. In this regard, the Company cannot be sure that in the future the Argentine Government will not initiate actions or attempt to intervene or dispose of the assets of the National State that have been assigned, sold and/or transferred within the framework of Decree No. 882/17, which could adversely affect the business, financial situation and results of operations of the Company and, in particular, the assets of CTB.
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.
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 ability 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 2021, was a gap of approximately 92.56% as of December 31, 2021. 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.
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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. For more information, please 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.”
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.
There is no certainty as to the effects that the measures that the Argentine Government may adopt in order to resolve the crisis in the energy sector will have on our business operations, financial condition or results of operations.
The energy sector was one of the sectors most affected by the economic policies that the Argentine Government adopted from the crisis of 2001 onwards. At that time, a freeze on natural gas and electricity rates was imposed, which disincentivized investments in the sector. The Argentine government tried to boost investment by subsidizing energy consumption, but these measures were ineffective and caused both oil and gas production and electricity generation, transmission and distribution to stagnate, while consumption continued to grow. The energy crisis led to a scarcity scenario. The National Government’s response was to increase energy imports, generating adverse consequences for the trade balance and the international reserves of the BCRA.
The Macri administration declared a state of emergency with respect to the national electricity system in order to correct distortions in the sector and stimulate investment. The state of emergency allowed the National Government to adopt measures designed to stabilize the country’s electricity supply, such as eliminating certain energy subsidies and implementing significant adjustments to electricity rates to reflect generation costs. However, some measures of the Macri administration were challenged by the Argentine courts and resulted in injunctions or rulings that limited these measures, such as the injunction that suspended the increases in electricity rates implemented as of February 1, 2016 and holding a series of non-binding public hearings prior to approving the increases.
On May 21, 2021, Resolution No. 440/21 issued by the SE was published in the Official Gazette through which certain aspects of the remuneration scheme established by the SRRYME were modified through Resolution No. 1/19, effective as of as of February 1, 2020 and later modified by Resolution No. 31/2020. The new resolution establishes an increase in remuneration of around 29% retroactive to February 2021, and also eliminates the monthly adjustment contemplated in Resolution No. 31/2020.
On April 21, 2022, the remuneration scheme was modified by SE Resolution No. 238/22 that establishes a 30% increase in remuneration retroactive to February 2022 and a new 10% increase to be applied as from June 2022. It also eliminates the use factor used to calculate generators remuneration and the temporary energy export’s remuneration. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.
The failure to adopt new measures to correct problems in the generation, transportation and distribution of energy in Argentina could adversely affect the economic situation of Argentina and the business, financial condition and results of operations of the Company. Pampa cannot guarantee that the Argentine Government will not adopt measures that would have an adverse effect on the Company’s business and/or that the measures adopted by the Argentine Government will be sufficient to restore energy production in Argentina.
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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.
The operating costs of the Company could increase as a result of the promotion or adoption of certain measures by the Argentine Government as well as pressure from union sectors
In the past, the National Government has promoted and adopted laws and collective labor agreements that imposed on private sector employers the obligation to maintain certain salary levels and provide additional benefits to their employees. In addition, employers have come under strong pressure from their employees and from unions to grant wage increases and other benefits.
We cannot be sure that in the future the Argentine Government will not enact measures that result in increases in the minimum, vital and mobile salary and/or in benefits, compensation or other labor costs that employers must bear. Any salary increase and/or any other labor cost could result in higher costs and a decrease in the results of the Company’s operations (For more information, see “We employ a largely unionized labor force and could be subject to organized labor action, including work stoppages that could have a material adverse effect on our business”).
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, 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 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, if criminal cases against companies 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.
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We cannot estimate the impact that these investigations could have on the Argentine economy. Similarly, it is not possible to predict the duration of corruption investigations, nor which 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.
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. 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. 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, and in December 2021 by Decree No. 871/21. 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. On May 21, 2021 Resolution SE No. 440/21 modified Resolution SE No 31/20 and increased generators revenues by 29%; moreover, it repealed the application of the adjustment mechanism established in the previous resolution. The new resolution is applicable from February 2021, provided that the generator desists from any administrative or judicial claims against the lack of application of the automatic adjustment mechanism established in Resolution SE No. 31/20. For more information, please See “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.
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.
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Risks Relating to our Company
We operate a material portion of our business pursuant to public concessions granted by the Argentine Government, the revocation or termination of which would have a material adverse effect on our business
We conduct a material part of our businesses pursuant to public concessions granted by the Argentine Government. These concessions contain several requirements regarding the operation of those businesses and compliance with laws and regulations. Compliance with our obligations under our concessions is, in certain cases, secured by a pledge of our shares in the concessionaires in favor of the Argentine Government. Accordingly, upon the occurrence of specified events of default under these concessions, the Argentine Government would be entitled to foreclose on its pledge of the concessionaire and sell our shares in that concessionaire to a third party. Such sale would have a severe negative impact on our ability to operate a material portion of our business, and as a result, our 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.
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.
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, 2021, 53.58% of our workforce was represented by unions under collective bargaining agreements. Although our relations with trade unions have been historically stable, we cannot be sure that we or our operating subsidiaries will not experience work stoppages or disruptions in the future, which could have material adverse effects on our business and revenues. A primary reason for this is that our collective bargaining agreements are negotiated on an annual basis. As such, we are unable to guarantee the continuity of current terms and conditions in subsequent collective bargaining agreements, nor that we will not be subject to strikes or work stoppages before or during the negotiation process. If we are unable to negotiate salary agreements or are subject to strikes or work stoppages, our operations, financial condition and the market value of our shares and ADSs could be materially affected in an adverse way.
In the event of an accident or other event not covered by our insurance policies, we could face significant losses that could result in a material adverse effect on our business and operational results
We carry insurance policies that are consistent with industry standards in each of our different business segments. Although we believe our insurance coverage is commensurate with international standards, no assurance can be given of the existence or sufficiency of risk coverage for any particular risk or loss both in our ongoing businesses or in the construction stages of our ongoing or future projects. If an accident or other 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.
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We conduct a portion of our operations through joint ventures, and our failure to continue such joint ventures or to settle any potential material disagreements with our partners could have a material adverse effect on the success of these operations
We conduct a portion of our operations through joint ventures and as a result, the continuation of such joint ventures is vital to our continued success. In the event that any of our partners were to decide to terminate its relationship with us in any such joint venture or sell its interest in such joint venture, we may not be able to replace our partner or obtain the necessary financing to purchase our partner’s interest. Furthermore, in certain cases such as CITELEC, which holds a controlling interest of 52.65% in Transener and CIESA which has a controlling interest of 51% in TGS, we are not able to acquire our partners’ interests under applicable Argentine regulations. As a result, the failure to continue some of our joint ventures or to resolve any potential disagreement with our partners or to find new partners could adversely affect our ability to conduct the business that is the subject of such joint venture, which would in turn negatively affect our financial condition and operational results and the market value of our shares and ADSs.
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 440/2021 (now Resolution SE 238/2022 as from February 2022. For more information, see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”). 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”.
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 and DCS Software, Inc. 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. Our power generation operations are partially connected to the manufacturer systems for maintenance and control purposes. An attack on such third parties may affect our operations and information.
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In 2021, the Company carried out the following measures: (i) for the fourth consecutive year, an annual cybersecurity training plan for all its employees with the aim of deepening awareness and learning regarding risks, threats and good practices in information security, where different interactive initiatives were carried out in relation to risks, threats and good practices in security matters; (ii) a cybersecurity assessment on our assets to determine the current level of maturity, compared to the last one carried out in 2019 (sustained growth was evident since security levels went from a Medium-Low level to a Medium level according to NIST metrics (NIST Cybersecurity Framework)); (iv) disaster recovery plans for both the administrative and control environments, in order to be prepared and recover operations in the event of disasters that could put the normal operation of the Company on hold; and (v) the development of a process for the management of security incidents in order to identify, manage, record and analyze security threats or incidents that occur in the organization. Through these measures, the Company seeks to offer a solid and complete vision of any cybersecurity problem in both administrative and control environments.
During 2021, we were the target of different cybersecurity threats, but they did not result in a significant loss or a negative impact on our operations since no attack attempt achieved its objective due to the measures implemented by the Company. The Company's risk and exposure to these events cannot be fully calculated or mitigated due, among other things, to the evolution and nature of these threats.
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 (either targeting us or third-party infrastructure) 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.
Moreover, 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 operations in Argentina could significantly increase the costs of our activity.
We cannot predict the 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 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 producer’s claims against CAMMESA, CAMMESA’s payable account would grow over time. As of the date hereof, there is still a portion of the generation costs that is covered by the Argentine Government (approximately 47% during the year 2021, according to estimations of CAMMESA). 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. 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 “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 to 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 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 an 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.
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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 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[1] 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.
Our activities may be adversely affected by events in other countries in which we do business
Although most of our operations and activities are concentrated in Argentina, we have investments in other countries in Latin America, a region that has experienced significant economic, social, political and regulatory volatility. In recent periods, many governments in Latin America have taken steps to assert greater control or increase their share of revenues from the energy sector, spurred by soaring oil and gas prices and nationalist policies. The level of government intervention in the economy of Latin American countries has adversely affected our business and operational results, and it may adversely affect it in the future.
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 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.
We and our subsidiaries continue evaluating investment projects to expand our activity, which could imply an increase in our indebtedness
Some of our and our subsidiaries’ investment projects could be guaranteed by Pampa, 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.
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.
Climate change, energy transition and regulatory framework promoted for such purposes could affect our business, our results of operations and financial condition
Global climate change creates new challenges for the energy industry and its adverse effects are a common concern of humanity. Consequently, the United Nations and several countries have adopted, or are evaluating the adoption of new measures and/or regulatory requirements for the mitigation or reduction of GHG emissions in the atmosphere, such as taxes on carbon, raising efficiency standards or adopting cap and trade regimes. Certain mitigation actions could require radical changes to development models, such as the transition from the use of conventional energy sources to the use of renewable energy sources, which reduce environmental pollution, contribute to sustainable development and avoid global warming since the GHG emissions of renewable energy sources are usually very low.
[1] Divested in June 2021.
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The risks associated with climate change involve severe weather events; legal and regulatory risks, including eventual litigation with respect to environmental damage and climate change; market risk; reputational risk with investors; lower consumption of fossil fuels; and energy transitions in the global economy towards a lower carbon energy matrix with the inclusion of substitute products for fossil fuels and greater use of electricity, which may cause a negative impact on the demand for our products in the long term and could have an adverse effect on our results of operations.
The Argentine Government is carrying out different strategies to combat climate change with the help of the United Nations Development Program. For example, in 2006, Law No. 26,190, as amended, established a legal framework that promotes an increase in the participation of energy from renewable resources in electricity consumption in Argentina. Likewise, in 2019, the Argentine Government focused on implementing policies, programs and projects in order to prevent, mitigate or reduce impacts associated with climate change. If the Argentine Government adopts additional measures, such measures could generate higher production costs, negatively impacting our competitiveness. Likewise, the Argentine Government can modify the demand for hydrocarbons towards relatively low-carbon sources, such as renewable energies. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”. We cannot assure you that other regulations or measures that may be adopted by the Argentine Government will not have an adverse effect on our business and our results of operations.
The progress and challenges of the energy transition could have a significant adverse effect on the Company if it is unable to keep up with the pace of the global energy transition and allocate its resources towards efficient energy sources and resources to address the concerns related to climate change, which could have a material adverse effect on the results of our operations and our financial condition.
Uncertainty relating to the LIBOR transition process and the phasing out of LIBOR may adversely affect us.
On July 27, 2017, the Chief Executive of the FCA, which regulates the LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. Also, sterling, euro, Swiss franc and Japanese yen LIBOR panels, as well as panels for 1-week and 2-month US dollar LIBOR, have already ceased as of December 31, 2021, with the remaining US dollar LIBOR panels ceasing at end-June 2023. We have some financings that are indexed to LIBOR. We cannot predict whether and to what extent LIBOR will be supported or whether any additional reforms to LIBOR may be enacted. At this time, no consensus exists as to what rate or rates may become acceptable alternatives to LIBOR (with the exception of overnight repurchase agreements, which are expected to be based on the SOFR. When LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our financings, we may experience expenses in effecting the transition, and may be subject to disputes or litigation with lenders over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations.
Risks Relating to Our Businesses
Risks Relating to Our Generation Business
There are electricity transmission constraints in Argentina that may prevent us from dispatch, 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. Moreover, if our wind farms projects cannot achieve dispatch priority, we may face energy sale curtailments. 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”.
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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
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, on 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 the following years, which increased the installed capacity, 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 of dispatch from our units 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 prohibitions to use certain consumables or materials, etc.) 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 you 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 or lack of availability or dispatch until such investments are made.
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 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”.
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”.
We cannot provide any assurance that the above mentioned 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 the Energy Plus program and MAT ER), 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. Although the SE granted spot market generators a temporary additional payment which was repealed as of February 2022 (See “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”), we cannot assure you that such revenues will repeat in the future.
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Our generation units, which sells its production under the Energy Plus regime and MAT ER, collect their revenues, mainly, from WEM Large Users. The Covid-19 outbreak, economic crisis and/or a failure of such customers to their payment obligations may affect our revenues.
The inability of generators, including us and certain of our subsidiaries, to collect their credits from CAMMESA or WEM Large Users, 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, 2021, 12% 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 GUMA to purchase their total energy demand from a generator of renewable sources that made an investment in generation (see “Item 4. Our Generation Business—Renewable Energy”). However, we cannot make any assurances that the implementation of this law and its regulation will not affect our generation sales, particularly sales under the Energy Plus regime, which, in turn, could adversely affect our operational results and financial condition.
Our ability to generate electricity in our thermal generation plants depends on the availability of natural gas (and other fuels), 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 Energía Plus 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”.
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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 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 III’s Expansion Project 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 loss of the priority dispatch with no claim for the payments made in consideration of such priority. For more information, please See “Item 4. Our Generation Business—Renewable Energy” and “Electricity Regulatory Framework”.
Penalties and or other sanctions may be applied for breaches to applicable regulation or for not having in a timely manner the required permits for the operation of our generation units, which may adversely affect the availability and revenues derived from our generation units
Our generation units are subject to an extensive regulation from local, provincial and national authorities. A breach to such regulation or to obtain and keep in a timely manner the relevant permits and authorizations may result in fines and other sanctions which affect our operational results.
For instance, 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”.
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).
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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 MAT ER 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 several ways which we cannot fully predict. 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.
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.
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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 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 238/2022 - ).
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 transitory dispatch overcharge and for GUDIs of 0 Ps./MWh. The CMIEE implies an indirect maximum limit of one of the components of the price that generators under the Energy Plus Program may charge. The detrimental effect that such limits could have on our generators could be exacerbated if the Peso continues to devalue. As a consequence, if the CMIEE is not adjusted or a higher devaluation of the Peso occurs, this could result in a decline in prices charged by our generators under their Energy Plus Program contracts or in a discontinuance of the Energy Plus contracts, forcing such generators to sell the capacity and energy unsold in the spot market at lower prices.
The guarantees granted by the Company to its affiliates could be enforced, which could have an adverse effect on results of our operations
The Company has guaranteed in due time and form the fulfillment of payment obligations and commercial obligations of some of its affiliates. In the event that the affiliates do not comply with the obligations assumed, the guarantees granted by the Company could be enforced in accordance with their terms and conditions.
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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 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 took 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, for example in PEPE III’s Expansion Project, 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.
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 expired: (i) the 10-year term contract for CTP expired in July 2021; and (ii) the 10-year term contract for CTLL expired in October 2021 (210 MW in total). Such PPAs could not be renewed. Moreover, the 10-year term contract for CTEB expires in April 2022 (567 MW). Consequently, energy not committed under sales contracts with CAMMESA will be remunerated at the Spot market, currently, under SE Resolution No. 238/22. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.
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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.
Delays in obtaining the required permits and authorizations for new power generation projects may affect the estimated entry into commercial operations and affect the expected revenues from such projects. Moreover, penalties and fines may apply
Our expansion projects require several permits and authorizations to be obtained at scheduled dates in order to accomplish entry into commercial operations at the estimated dates. We have recently experienced several delays from competent authorities in the issuance of such permits and authorizations.
We cannot assure you that, even when fulfilling all and any legal requirements, the relevant permits would be granted as scheduled. Delays in the entry into commercial operations may result in penalties, loss of sales and increased costs and payments, which would affect our operational results.
Electricity demand may be affected by price increases, which could lead power generators such as the Company to record lower revenues
During the economic crisis between 2001 and 2002 in Argentina, the demand for electricity was reduced. This reduction was due to the general decrease in economic activity and the difficulty of many consumers in paying their electricity bills. However, in the following years, electricity demand grew significantly: an average year-on-year increase of 3.5% was recorded in total between 2002 and 2017 (despite a drop in 2009), according to information provided by CAMMESA. This increase in electricity demand was mainly driven by the relatively low cost, in real terms, of electricity for consumers due to subsidies from the Argentine Government.
In 2019, the Social Solidarity and Productive Reactivation Law was enacted, which, among other measures, established a freeze on energy and natural gas rates and the re-launch of a comprehensive rate review for a term of 180 days and empowered the Power Executive to administratively intervene in the ENRE and the ENARGAS. Likewise, Resolution (SE) 31/2020 was issued, which modified the remuneration scheme of the energy generation segment and established prices denominated in Pesos (previously denominated in Dollars) and reduced said prices in different proportions depending on the technology. For further information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.
Additionally, in response to the Covid-19 outbreak, the Argentine Government issued DNU No. 311/2020, which established that, among other companies, the providers of public services of electricity, network gas and running water, may order the suspension or cut of the respective services to certain users, in case of delay or non-payment of a certain amount of consecutive or alternate invoices, including users with notice of cut in progress, whose measure was extended until December 31, 2020. We cannot be sure of the effects that measures adopted by the Argentine Government will have on the electricity demand.
We cannot guarantee that the measures to be adopted or other measures or regulations that may be adopted in the future by the Argentine Government in relation to tariffs could not have a significant adverse effect on our business, our operational results and our financial situation, or that a new public emergency law will not be sanctioned in the future. We cannot assure you that the regulatory obligations to which the Company is subject will not be further increased, including, but not limited to, higher taxes, unfavorable alterations in rate structures and other regulatory obligations, compliance with which could increase our costs and have a direct negative impact on the results of our operations and our financial condition.
The generation activity involves the handling of dangerous elements such as fuels that have an associated potential risk for premises and people
Although the Company complies with all standards and best practices related to environmental safety, an accident involving the materials with which the Company operates could have consequences of environmental impact, damage to industrial facilities, and damage to people, causing a damage to the Company due to the possible unavailability of the equipment and, consequently, could affect our financial condition and our operational results.
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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 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. With respect to the CENCH for the Sierra Chata block and the committed investment project, a consortium made up of the Company and Mobil Argentina S.A. has continued negotiations with the Province of Neuquén to settle a readjustment proposal for the current investment plan with the aim of reaching an agreement that allows for the continuity of activities in the CENCH. For more information, see Note 18.2 to our Consolidated Financial Statements.
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 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 Covid-19, resulted in a collapse of crude oil prices. For more information, please see “The emergence and spread of a pandemic-level disease or threat to public health, such as Covid-19, may have a material adverse impact on the Argentine and global economy, our business operations, financial condition or results of operation” 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”. Recently, due to the conflict between Russia and Ukraine (See “The conflict between Russia and Ukraine could adversely affect the global economy, the Argentine economy and our operational results and financial condition”), and the fact that Russia is the second largest oil exporter in the world and the largest producer of natural gas, world oil prices jumped over US$110 per barrel, and the cost of natural gas reached a new record high in Europe.
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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 Decree 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 SE 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. On April 27, 2021, through the Resolution No. 360/2021, the SE created a new natural gas exportation procedure regulating the procedure for obtaining natural gas export authorizations. The new procedure contemplates preferential basis for the successful bidders of Plan Gas.Ar. 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 “—The emergence and spread of a pandemic-level disease or threat to public health, such as Covid-19, may have a material adverse impact on the Argentine and global economy, our business operations, financial condition or results of operation” 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”. Recently, due to the conflict between Russia and Ukraine (See: The conflict between Russia and Ukraine could adversely affect the global economy, the Argentine economy and our operational results and financial condition), and the fact that Russia is the second largest oil exporter in the world and the largest producer of natural gas, world oil prices jumped over US$110 per barrel, and the cost of natural gas reached a new record high in Europe.
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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 Neuquén 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”.
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.
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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 and the Gas Plan II (described 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. On November 16, 2020, through the Decree No. 892/20, the Argentine Government created the Plan Gas.Ar with the purpose of promoting the production of Argentine natural gas. 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. 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. For more information, please see “Item 4. The Argentine Energy Sector—Oil & Gas Regulatory Framework”.
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, 2021 was audited by Gaffney, Cline & Associates, as the Independent Reserves Engineers Firm, based on in its year-end Reserves Report. Although classified as “proved reserves,” the reserves estimates set forth in the Reserves Report are based on certain assumptions that may prove inaccurate. The Independent Reserves Engineers Firm’s primary economic assumptions in estimates included oil and gas sales prices determined according to the guidelines described in the Reserves Report, future expenditures and other economic assumptions (including interests, royalties and taxes) provided by us.
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The estimation process is initiated with an initial review of the assets by geophysicists, geologists and engineers. A reserves coordinator protects the integrity and impartiality of the reserves estimates through supervision and technical support to technical teams responsible for the preparation of the reserves estimates. Our reserves estimates are approved by the Executive Director of Oil and Gas. Reserves engineering is a subjective process of estimating underground accumulations involving a certain degree of uncertainty. Reserves estimates depend on the quality of the available engineering and geological data as of the estimation date and on the interpretation and judgment thereof.
Oil and gas reserves engineering is a subjective process of estimating accumulations of oil and gas that cannot be measured in an exact way, and estimates of other engineers may differ materially from those set out in this annual report. Numerous assumptions and uncertainties are inherent in estimating quantities of proved oil and gas reserves, including projecting future rates of production, timing and amounts of development expenditures and prices of oil and gas, many of which are beyond our control. Results of drilling, testing and production after the date of the estimate may require revisions to be made. The estimate of our oil and gas reserves would be impacted if, for example, we were unable to sell the oil and natural gas we produced. Accordingly, reserves estimates are often materially different from the quantities of oil and gas that are ultimately recovered, and if such recovered quantities are substantially lower than the initial reserves estimate, this could have a material adverse impact on our operational results. For more information, please see “Item 4.—Our Oil and Gas Business—Reserves”.
We face significant competition in the acquisition of exploratory acreage and oil and natural gas reserves
The Argentine oil and gas industry is extremely competitive. When we bid for exploration or exploitation rights with respect to a hydrocarbon block, we face significant competition not only from private companies, but also from national or provincial public companies. In fact, the provinces of La Pampa, Neuquén and Chubut have formed companies to carry out oil and gas activities on behalf of their respective provincial governments. The state-owned energy companies IEASA, YPF and other provincial companies (such as G&P and Empresa de Desarrollo Hidrocarburífero Provincial S.A.) are also highly competitive in the Argentine oil and gas market. As a result, we cannot assure you that we will be able to acquire new exploratory acreage or oil and gas reserves in the future, which could negatively affect our financial condition and operational results. There can be no assurance that the participation of IEASA or YPF (or any province-owned company) in the bidding processes for new oil and gas concessions will not influence market forces in such a manner that could have an adverse effect on our financial condition and operational results.
We may incur significant costs and liabilities related to environmental, health and safety matters
Our operations, like those of other companies in the Argentine oil and gas industry, are subject to a wide range of environmental, health and safety laws and regulations. These laws and regulations have a substantial impact on our operations and could result in material adverse effects on our financial position and operational results.
Environmental, health and safety regulation and case law in Argentina is developing at a rapid pace and no assurance can be provided that such developments will not increase our cost of doing business and complying with applicable regulations. In addition, due to concern over the risk of climate change, a number of countries have adopted, or are considering the adoption of, new regulatory requirements to reduce greenhouse gas emissions, such as carbon taxes, increased efficiency standards, or the adoption of cap and trade regimes. If adopted in Argentina, these requirements could make our products more expensive as well as shift hydrocarbon demand toward relatively lower-carbon sources such as renewable energies.
Limitations on local pricing in Argentina may adversely affect our operational results
In recent years, due to regulatory, economic and government policy factors, domestic crude oil, gasoline, diesel and other fuel prices have differed substantially from the prices for such products prevailing on the international and regional markets, and the ability to increase or maintain prices to adjust to international price or domestic cost variations has been limited. International crude oil and related oil product prices have declined significantly from the second half of 2014 through December 2017. For example, in 2020, Decree No. 488/2020 (Barril Criollo) set forth that the barrel price of any crude oil deliveries made in the domestic 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”.
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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 you 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.
The Company is exposed to contractions in the crude oil and natural gas demand and to contractions in the demand for any of their by-products
Crude oil and natural gas demand are highly influenced by economic activity and growth locally and globally. While demand increased in the past, it had a recent significant contraction (as a result of Covid-19) and is subject to future volatility. Crude oil by-products demand may also contract under certain conditions, particularly during economic downturns. According to the latest OPEC estimates, global demand for crude oil is expected to increase by 4.2 million barrels per day during 2022.
A further contraction in demand or the maintenance of current demand levels for long periods of time could negatively affect our results of operations.
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.
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.
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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 the Official Gazette, 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.
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.
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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.
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 value of its assets (generally determined on the basis of a quarterly average) 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 2020, the Board of Directors approved the following mergers through absorption between the Company, as absorbing company, and the following companies, as absorbed companies: (i) CPB (merged January 1, 2020); (ii) Pampa Cogeneración and PHA (merged April 1, 2020); and (iii) PP, Transelec, Pampa FPK, Pampa Holding, Pampa Ventures and Pampa QRP (merged October 1, 2020). The respective Shareholders’ Meetings approved the mergers and the CNV granted its administrative consent to the mergers, which were registered with the IGJ.
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, 2021, we, our subsidiaries, joint businesses and our affiliates are engaged in the generation 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: 1 It includes 280 MW at CTEB and 81 MW at PEPE III. 2 It includes PEMC. 3 2021 average production of blocks in Argentina. 4 Source: The Company.
| · | Generation. Our generation installed capacity reached approximately 4,970 MW as of December 31, 2021, 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 361 MW (see “—Our Generation Business—Summary of the committed expansion projects”), which would bring our total installed capacity to 5,331 MW. |
As of December 31, 2021, we are engaged in the generation business through:
| o | CTGEBA, thermal generation plant located at the central node of the Argentine electricity grid, in Marcos Paz, in the western part of the Greater Buenos Aires area, comprised of two CC gas-fired generating units, one with a 684 MW power capacity which consists of two gas turbines of 223 MW each and a 238 MW steam turbine, repowered in October 2020. The second CC 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 2.9% of Argentina’s installed capacity; |
| o | CTLL, a gas-fired thermal generation plant located in the Province of Neuquén (close to one of Argentina’s largest gas fields bearing the same name as the plant) with an installed capacity of 780 MW, which represents 1.8% of Argentina’s installed capacity. CTLL 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 CC, a 105 MW GE aero-derivative gas turbine installed in May 2016, a 105 MW GE gas turbine installed in August 2017 and 15 MW MAN gas engines installed in August 2021; |
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| o | CPB, a thermal gas or fuel oil-fired generation plant located in Ingeniero White, Bahía Blanca, in the Province of Buenos Aires, with an installed capacity of 620 MW, which represents 1.4% 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’ main gas pipeline system. Furthermore, CPB has two tanks for the storage of fuel oil with a combined capacity of 60,000 m3; |
| o | 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; |
| o | 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 0.8% of Argentina’s installed capacity; |
| o | CTP, a thermal gas-fired generation plant located at Piquirenda, General San Martin, in the Province of Salta, with an installed capacity of 30 MW, which represents 0.1% of Argentina’s installed capacity; |
| o | 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; |
| o | 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 1.3% of Argentina’s installed capacity, and which is owned by CTB, an affiliate that we co-control with YPF. Furthermore, CTEB may consume natural gas or GO and has two tanks for the storage of fuel oil with a combined capacity of 45,000 m3. The committed expansion projects include the closing to CC with the incorporation of a 280 MW Siemens steam turbine, estimated for the third quarter of 2022; |
| o | 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; |
| o | Hidroeléctrica Los Nihuiles and Hidroeléctrica Diamante, two hydroelectric power generation systems located in the Province of Mendoza, with an aggregate installed capacity of 653 MW, which represents 1.5% of Argentina’s installed capacity, through our subsidiaries HINISA and HIDISA. Pampa holds 61% and 52% interests in HIDISA and HINISA, respectively; |
| o | 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; |
| o | PEMC, a wind farm located in Bahía Blanca, in the Province of Buenos Aires, owned by Greenwind, a company that we jointly control with Viento Solutions SL, 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; |
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| o | Parque 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 |
| o | Parque Eólico Pampa Energía / De la Bahía (“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. The committed expansion projects include the assembly and installation of 18 Vestas wind turbines, which will increase the existing gross capacity from 53.2 MW to 134.2 MW. These committed expansion projects are expected to be commissioned in stages, with full commissioning in the second quarter of 2023. |
Our generation business segment recorded US$656 million in revenue and an operating income of US$350 million for the year ended December 31, 2021.
| · | Oil and Gas. We are engaged in the oil and gas business through direct interests in oil and gas blocks in Argentina: |
| o | As of December 31, 2021, our combined crude oil and natural gas proved reserves amounted to approximately 157 million boe, 61% of which were proved developed reserves. Natural gas accounted for approximately 92% of our combined proved reserves and liquid hydrocarbons for 8%; |
| o | As of December 31, 2021, our combined oil and gas production in Argentina averaged 51.8 thousand boe per day, with operations in 13 production blocks, 5 exploratory blocks, and 884 productive wells. Crude oil accounted for approximately 4.7 thousand boe per day, while natural gas accounted for approximately 283 million standard cubic feet per day, or 47.1 thousand boe per day based on a measure of conversion of 6,000 cubic feet of gas per barrel of oil equivalent; and |
| o | In addition, we have 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. |
Our oil and gas business segment recorded US$453 million in revenue and an operating profit of US$130 million for the year ended December 31, 2021.
| · | Petrochemicals. We are engaged in the petrochemicals business through three plants that are entirely based in Argentina and produce styrene, SBR and polystyrene, with a domestic market share that ranged between 91% and 99% (per Company estimates) as of December 31, 2021. The petrochemicals division has the following assets: |
| o | an integrated petrochemicals complex at PGSM, 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 |
| o | a polystyrene plant located in the City of Zárate, in the Province of Buenos Aires, with a production capacity of 65,000 tons of polystyrene. |
Our petrochemicals business segment recorded US$490 million in revenue and an operating profit of US$45 million for the year ended December 31, 2021.
| · | Holding and Other Business. We also hold other interests, including: |
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| o | We hold a 29.2% direct and indirect interest in TGS, the country’s largest gas transportation company, owning 9,231 km of gas pipelines and a natural gas liquids plant, General Cerri, with a production capacity of 1 million tons/year. |
| o | We hold a 26.33% indirect interest in Transener. Additionally, Transener holds a 100% interest in Transba. As of December 31, 2021, our electricity transmission operations covered 21,414 kilometers of high voltage transmission lines, representing approximately 86% of the high voltage system in Argentina; |
| o | We 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, 2021, Refinor has a commercial network of 92 gas stations located in Argentina; |
| o | We hold a 30.1% indirect interest in OCP, licensee company of an oil pipeline in Ecuador that has a transportation capacity of 450,000 barrels/day; and |
| o | We 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$22 million in revenue and an operating profit of US$54 million for the year ended December 31, 2021.
Relevant Events
Corporate Reorganization Process
The following corporate reorganizations are part of the strategy the Company has been implementing since 2017 to attain a simpler and more agile, innovative and flexible organization, allowing it to obtain important benefits, a higher operating efficiency, an optimized use of available resources, the streamlining of technical, administrative and financial structures, and the implementation of converging policies, strategies and goals. They also allow the Company to leverage the complementarity among the participating companies, thus reducing costs resulting from the duplication and overlapping of operating and administrative structures. In 2020, the Board of Directors approved the following mergers through absorption between the Company, as absorbing company, and the following companies, as absorbed companies:
| (a) | 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. On January 5, 2022, the merger was registered with the IGJ. |
| (b) | 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. On January 5, 2022, the merger was registered with the IGJ. |
| (c) | 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. This merger was later approved by Pampa’s Ordinary and Extraordinary General Shareholders’ Meeting held on February 17, 2021. On December 17, 2021, the merger was registered with the IGJ. |
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Generation
PEPE III expansion
In the fourth quarter of 2021, the Company announced PEPE III’s expansion project, which will increase the existing gross capacity from 53.2 MW to 134.2 MW, with an estimated investment of US$128 million. Its output will be sold in the MAT ER through a US$-denominated PPA with private parties, and it is estimated to be commissioned in stages, fully commissioned in the second quarter of 2023.
PEPE III is located in Coronel Rosales, 45 km from the City of Bahía Blanca, Province of Buenos Aires. Currently, it comprises 14 Vestas wind turbines and during 2021 its load factor reached 58%, highlighting the outstanding wind quality in the area. The expansion project consists of the assembly and installation of 18 wind turbines of the same brand.
Once the work is completed, our wind farms will contribute to the national grid a total of 287.4 MW of renewable energy. This expansion, in addition to the closing to CCGT at CTEB and the investments committed under Plan Gas.Ar, are part of the Company’s strategy to focus its investments in our core businesses: power generation and natural gas production.
Updates to the remuneration scheme for capacity not covered by contracts
SE Resolution No. 31/20, which modified certain aspects of the remuneration scheme set by SRRYME Resolution No. 1/19, was in effect until January 2021. The entire remuneration scheme was converted to the local currency at an exchange rate of Ps. 60/US$, and an update factor was established from the second month of its application, with a formula consisting of 60% CPI and 40% IPIM. Moreover, it modified power capacity payments and incorporated an additional monthly remuneration in the HMRT. However, the update factor was not implemented.
Furthermore, SE Resolution No. 440/21, issued on May 21, 2021, increased the remuneration scheme established by SE Resolution No. 31/20 by an average of 29%, retroactive as of February 2021. This resolution also canceled the update factor.
On April 21, 2022, the remuneration scheme was modified by SE Resolution No. 238/22 that established a 30% increase in remuneration retroactive to February 2022 and a new 10% increase to be applied as from June 2022. It also eliminates the use factor used to calculate generators remuneration and the temporary energy export’s remuneration. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.
Transitional pricing adjustment for legacy energy
To guarantee the supply of CAMMESA’s electricity exports and procure power plants’ availability and maintenance, SE Resolution No. 1037/21, issued on November 2, 2021, established an additional and transitional recognition for legacy power plants (except for binational hydros) to be remunerated from September 2021 to February 2022.
On November 9, 2021, the SE, through Note NO-2021-108163338-APN-SE#ME, instructed CAMMESA to assume that covered thermal power plants have a use factor of 70%, for which 100% of the power remuneration, would be settled and an additional amount equivalent to Ps. 1,000/MWh of exported energy will be paid in proportion to the energy generated by each generator in such month. This remuneration was repealed by SE Resolution No. 238/22 as from February 2022.
Maturity of PPA at CTP and CTLL’s steam turbine
After fulfilling the 10-year PPA under SE Resolution No. 220/07, CTP (30 MW) and CTLL’s CC steam turbine (180 MW) started to be remunerated under the spot energy scheme (SE Resolution No. 440/21) from July 15 and November 1, 2021, respectively.
Commissioning of MAN engines at CTLL
On August 3, 2021, CAMMESA granted the commissioning of LDLMDI01 unit for a capacity of 15 MW. The unit consists of two gas-fired MAN engines, priced under spot energy through SE Resolution No. 440/21.
Technical problem at CTGEBA
On May 31, 2021, a technical problem occurred at a gas turbine, part of CTGEBA’s new CC. Consequently, the CC’s generation capacity was reduced by approximately 50%. Jointly with the turbine manufacturer, Siemens and the Company performed the necessary work to dismantle and repair the failure; these operations were successfully completed in July 2021.
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Moreover, the Company is making all required filings before the insurance companies to collect the damages compensation resulting from the failure and minimize losses related to the breach of availability commitments.
Assignment of fuel supply agreements for thermal power generators
Under Plan Gas.Ar, SE Resolution No. 354/20 defined the priority usage of natural gas firm volumes from different sources (gas from Bolivia, contracts with Plan Gas.Ar producers, etc.) to be acquired by CAMMESA from 2021. On this basis, CAMMESA’s unified dispatch and a dispatch priority order were set depending on the assigned natural gas.
Generators under Energía Plus and PPA with CAMMESA under SEE Resolution NO. 287/17 have the option to accede to the unified dispatch, with CAMMESA supplying natural gas to cover their obligations. To such effect, they should maintain the necessary natural gas transportation capacity and waive their claims under SE Resolution No. 354/20. The Company executed contracts with CAMMESA acceding to this unified dispatch and assigned the operation of the executed gas and firm transportation contracts.
Hydroelectric concessions termination
On March 10, 2022, the SE issued Resolution No. 130/22 that created a “work team” to analyze the situation of the hydroelectric concessions that are due to terminate in the next years, including HIDISA, HINISA and HPPL. The work team must present in a one-year period the respective reports regarding the concessions that terminate in 2023 (Alicurá, El Chochón, Arroyito, Planicie Banderita and Piedra del Águila), and within a two-years for the rest (including HIDISA and HINISA), except for HPPL and F. Ameghino whose terms ends on 2029 and 2044, respectively.
Oil and Gas
Gas Plan
Plan Gas.Ar
According to Decree No. 892/20, on November 16, 2020, Plan Gas.Ar program was created to promote Argentine natural gas production, reduce and replace LNG and liquid fuels imports, provide supply chain predictability, and manage the impact of the cost of gas on the tariff of the priority demand. The on-shore production term is four years, with an additional four years for offshore production, as from January 2021.
On December 15 and 29, 2020, the SE awarded 67.4 million m3/day of natural gas (55% destined for power plants) at an average annual base price of US$3.5/MBTU and an additional volume of 3.6 million m3/day during the winter period 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.
In the second round (SE Resolution No. 129/21 issued on February 22, 2021), a total of 3.3 million m3/day at an average of US$4.7/MBTU was awarded for the winter period (May – September) 2021 – 2024, with deliveries from June 2021. The Company participated in this round and was awarded 0.8 million m3/day at an average of US$4.7/MBTU.
Moreover, in the third round (SE Resolution No. 984/21 issued on October 19, 2021), a total of 3 million m3/day was awarded at US$3.43/MBTU for the May 2022 – December 2024 period under a gas supply agreement on the same conditions of the first round awarded in December 2020. The Company participated and was awarded 2 million m3/day at US$3.347/MBTU.
It is worth highlighting that in April 2021, some protest roadblocks in the Province of Neuquén slightly affected the 2021 winter production commitments. Consequently, the Company, with other affected producers, sent the respective force majeure communications to the SE, CAMMESA, and gas distributors with whom it had supply agreements in place under Plan Gas.Ar. On August 11, 2021, the SE notified the Company of the upholding of the force majeure ground. Notwithstanding the above-mentioned, the Company managed to reach the committed gas production.
All-time-high gas production record at El Mangrullo
On December 9, 2021, we reached a record production of 6.7 million m3/day in this block, representing a 48% increase compared to 2020 average volumes and more than three times 2016’s average annual production.
El Mangrullo block is the fourth largest producer in the Neuquina Basin, with an almost 200 km2 surface and access to tight (Mulichinco and Agrio) and shale (Vaca Muerta) formations. Pampa operates and holds 100% of the exploration and exploitation concession until 2053.
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Natural gas for power generation
Since 2021, most gas supplies to CAMMESA are being channeled through Plan Gas.Ar, for the volumes committed under this program over a term of 4 years. Generators covered by Energía Plus and SEE Resolution No. 287/17 contracts have the option to assign the natural gas operation and transportation to CAMMESA. The Company acceded to this scheme.
It is worth mentioning that since 2021 new reference PIST prices were set for production outside Plan Gas.Ar (SE Res. No. 354/20), at US$2.3/MBTU in the summer (October – April) and US$3.5/MBTU in the winter period (May – September) for the Neuquina Basin.
Therefore, in addition to Plan Gas.Ar, in 2021 CAMMESA continued calling for tenders monthly, at the maximum prices stated above, on an interruptible basis for Plan Gas.Ar’s awardees and under a 30% DoP clause for the rest. However, from September 2021, these calls were declared unawarded.
Moreover, from mid-July 2021, CAMMESA launched, on average, fortnightly calls for Plan Gas.Ar’s awardees that can offer surplus volumes on an interruptible basis, with a maximum price equivalent to that awarded in the first round. In 2021, an average of 25.2 million m3/day was awarded at US$3.4/MBTU (US$4.4/MBTU until September and US$2.9/MBTU onwards). After the end of 2021, an average of 22.1 million m3/day was awarded at US$2.9/MBTU.
Natural gas for gas distribution companies and CNG
In 2021, the Company was granted awards under Plan Gas.Ar, agreeing to supply fixed amounts to gas distributors and IEASA over a term of 4 years. Gas distributors must pay the amount stated in the current tariff scheme, and the difference with the awarded price is compensated by the Federal Government. IEASA pays 100% of the price awarded under Plan Gas.Ar.
Regarding CNG, Plan Gas.Ar does not guarantee its provision following the abrogation of MEyM Resolution No. 80/17. However, in the 2021 winter period, the SE instructed IEASA to supply, through gas distributors, CNG stations that have not managed to execute an agreement with a producer/seller (Note NO-2021-37656867-APN-SE#MEC). CNG is currently traded privately, with no government price regulation.
Gas export
On April 27, 2021, a new procedure to authorize natural gas exports was implemented (SE Resolution No. 360/21). New permissions contemplate exports on a firm and preferential basis for Plan Gas.Ar’s awardees and set a minimum sales price equivalent to the off-peak price awarded in round 1. It should be clarified that natural gas is subject to an export duty rate that, as of the date hereof, amounts to 8%.
In May and December 2021, the Company was cleared to export gas to Chile on a firm basis for a maximum volume of 1.5 million m3/day and 1.22 million m3/day for the October 2021 – April 2022 and January – April 2022 periods, respectively.
In the summer season, the Company exports to its clients in Chile on a spot basis. In November 2020, the Company was granted permits to export gas to Chile on an interruptible basis, expiring between April 2021 and January 2022. Moreover, between September and December 2021, new interruptible permits to Chile, Brazil, and Uruguay were granted, with expirations between November 2022 and December 2024. For more information, please see “Item 4. The Argentine Energy Sector—Oil & Gas Regulatory Framework Regulation Specifically Applicable to the Gas Market—Natural Gas Export”.
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 consisted 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 did not include the transfer of Pampa’s current Class B shares of Edenor. The Transaction was approved at Pampa’s Ordinary and Extraordinary General Shareholders’ Meeting held on February 17, 2021. The ENRE approval was obtained on June 24, 2021, through Resolution No. 207/21. Finally, the closing of the Transaction was on June 30, 2021. As of March 2022, the Company’s indirect equity stake amounts to 4.2% of Edenor’s issued capital stock.
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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 would 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, was paid on the closing date; and (iii) US$40 million one year after the closing date, 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, and considering that the Transaction involved loss of control over the subsidiary, all Edenor’s assets and liabilities were classified as held for sale as of December 31, 2020 and had been measured at the lower of its fair value, net of costs associated with the sale, if applicable, and its book value, which involved the recognition of an impairment loss for US$589 million. It is included together with the results corresponding to the Distribution of Energy segment under “Discontinued operations” of the Consolidated Statement of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019.
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 CC.
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 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 was permitted (“Aislamiento, Social, Preventivo y Obligatorio”) (“ASPO”), which was later superseded by a “Distanciamiento Social, Preventivo y Obligatorio”, extended on several occasions, 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; (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 implemented 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; (5) the suspension of certain penalties and disqualifications applicable to checking accounts with insufficient funds; (6) 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; (7) double compensation for those people who are dismissed without just cause (with some exceptions); (8) measures to protect production, work, and supply; (9) family support allowance for the deceased by coronavirus, applicable to the most vulnerable sectors; (10) several fiscal measures; (11) suspension of the automatic adjustment mechanism for the spot remuneration set by Resolution No. 31/20; and (12) 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), among others.
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On October 1, 2021, the Argentine Government issued the Decree No. 678/2021, which provided for several additional preventive measures in order to open certain restrictions imposed to limit the effects of the Covid-19 outbreak, such as: (i) authorize activities with large crowds in open places; (ii) authorize 100% capacity in economic, industrial, commercial, religious, cultural and sports activities that are carried out in closed places; (iii) authorize massive events with a capacity of 50% to the extent that the complete vaccination schedule is available, among others. These measures were in force until December 31, 2021.
Moreover, on December 24, 2021, the Argentine Government, through Decree 867/2021, extended the health emergency established by Decree 260/2020 for one more year (which was previously extended by Decree No. 678/2021). On December 31, 2021, new health measures were announced, including changes in the requirements to enter the country, both for foreigners and residents. In addition, as of January 1, 2022, the National Health Pass is in force, which accredits a complete vaccination scheme against Covid-19.
For more information regarding the measures currently 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 this websites is not part of and shall not be deemed incorporated into, this annual report.
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 segment, it is worth highlighting that SE Resolution No. 440/21 provided for a 29% increase in spot remuneration values, after a suspension of remuneration increases since March 2020.
· As for the oil and gas segment, the application by the Federal Government of the Plan Gas.Ar and the recovery in international prices allowed for a strong recovery in hydrocarbons production and wellhead prices. However, in the second quarter of 2021, some social conflicts and wage protest demonstrations affected access and transportation to the Province of Neuquén’s routes in the month of April 2021. Although the protest roadblocks did not significantly affect the Company’s asset production in this basin, they temporarily impacted the ordinary execution of the investment plan necessary to reach the committed gas production under the Plan Gas.Ar. The Company sent the respective force majeure communications to the SE, CAMMESA and the Gas Distributors with which it had executed gas supply agreements for the volumes awarded under this plan. On August 11, 2021, the SE notified the Company that it would uphold the force majeure ground. It is worth highlighting that the Company managed to reach the committed gas production.
· With regards to the petrochemical segment, the Covid-19 pandemic affected the recoverability of inventories of several raw materials and stock for sale. This led the Company to record a provision for impairment of inventories for US$2 million and US$11 million as of December 31, 2021 and 2020, respectively.
The Argentine economy was in midst of a recession process, which was deepened by the described Covid-19 pandemic, with an accumulated 9.9% year-on-year fall in the GDP in 2020, and a 9.7% recovery in 2021, in line with the recovery in production and economic activity levels; a 36.1% and 50.9% cumulative inflation (CPI) for fiscal years 2020 and 2021, respectively, and a 40.5% and a 22.1% depreciation of the Peso against the U.S. dollar for 2020 and 2021, respectively, 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).
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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.
Measures Designed by the Company to Address the Covid-19 Outbreak
During 2021, not only were the originally set objectives met, but new challenges and goals were promoted to drive the Company towards high standards of quality, reliability and sustainability. 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, allowing the Company to sustain and ensure the continuity of its operations. In accordance with this, we performed the following strategic planning:
| · | The Company continued with hygiene measures: symptoms self-monitoring, disinfection with UV radiation or quaternary ammonium, adaptation of cafeterias and ventilation systems, social distancing at work positions, and others; |
| · | The Company has moved forward with a hybrid working scheme alternating between bubbles and remote work for positions allowing it; |
| · | The Company focused on prevention and forward-looking management for operational continuity: as of the closing of 2021, more than 30,000 rapid tests were administered for the early detection of asymptomatic cases; |
| · | Covid-19 protocols were audited in each of our facilities; |
| · | Covid-19 immunization was promoted: training and onboarding were facilitated through our Occupational Health professionals in all our facilities; open talks were given by our team of specialists in infectious diseases, and immunization activities were performed through mobile units together with official entities at CTEB’s expansion works; |
| · | In-person and virtual interventions were developed on risk factors such as obesity, diabetes, high blood pressure, and smoking; talks were organized with professionals in the fields of addictions, smoking cessation, depression, and stress management, and the wellness legal and psychological support service continued; and |
| · | The health team was reinforced in all our facilities through the incorporation of ten licensed nutritionists; |
It is worth highlighting that none of our activities were affected by in-company outbreaks. We have performed preventive maintenance works in our plants, making progress with the expansions in the power generation business and reinforcing our commitment to Plan Gas.Ar in our oil and gas business.
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Organizational structure
The following chart sets forth our corporate structure as of December 31, 2021. For more information please see“Exhibit 8.1 – List of subsidiaries, Joint Ventures and Associates of Pampa Energía S.A.”and, for those companies that as of December 31st, 2021 were in process of merger, please see “Item 4. Information on the Company – Relevant Events – Corporate Reorganization Process”.
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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, Greenwind and CTB.
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, 2021, 2020 and 2019. 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 2021 (GWh) | 467 | 325 | 550 | 367 | 215 | 256 | 2,181 |
| Market Share | 0.3% | 0.2% | 0.4% | 0.3% | 0.2% | 0.2% | 1.5% |
| Sales 2021 (GWh) | 467 | 325 | 550 | 367 | 247 | 256 | 2,212 |
| Net Generation 2020 (GWh) | 481 | 323 | 742 | 409 | 207 | 243 | 2,404 |
|
Variation Net Generation 2021-2020 |
-3% | 1% | -26% | -10% | +4% | +5% | -9% |
| 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 |
| In US$/MWh | |||||||
| Avg. Price 2021 | 18 | 34 | 18 | 71 | 73 | 67 | 41 |
| Avg. Gross Margin 2021 | -6 | 12 | 7 | 61 | 55 | 58 | 25 |
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(1) | Subtotal | Total | |
| Installed Capacity (MW) | 780 | 361 | 30 | 620 | 100 | 100 | 1,253 | 14 | 567 | 3,826 | 4,970 |
| Market Share | 1.8% | 0.8% | 0.1% | 1.4% | 0.2% | 0.2% | 2.9% | 0.03% | 1.3% | 8.9% | 11.6% |
|
Net Generation 2021 (GWh) |
4,682 | 392 | 53 | 312 | 299 | 301 | 8,594 | 75 | 546 | 15,252 | 17,433 |
| Market Share | 3.3% | 0.3% | 0.0% | 0.2% | 0.2% | 0.2% | 6.1% | 0.1% | 0.4% | 10.8% | 12.3% |
| Sales 2021 (GWh) | 4,692 | 624 | 53 | 313 | 299 | 300 | 9,266 | 153 | 546 | 16,246 | 18,458 |
|
Net Generation 2020 (GWh) |
4,406 | 368 | 55 | 576 | 193 | 229 | 7,912 | 72 | 255 | 14,065 | 16,470 |
|
Variation Net Generation 2021-2020 |
6% | 7% | -4% | -46% | 55% | 31% | 9% | 5% | 114% | 8% | 6% |
| 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 |
| In US$/MWh | |||||||||||
| Avg. Price 2021 | 31 | 45 | 84 | 75 | 126 | 100 | 34 | 33 | N/A | 47 | 46 |
|
Avg. Gross Margin 2021 |
26 | 10 | 41 | 12 | 103 | 78 | 17 | 12 | N/A | 31 | 30 |
Sources: Pampa Energía S.A. and CAMMESA.
Note: gross margin before amortization and depreciation. All figures have been subject to rounding, so figures shown as totals may not add up.(1) Operated by Pampa, which holds an interest of 50% in CTB.
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Summary of the committed expansion projects
| Project | MW | Marketing | Currency |
Date of Commissioning | ||
| Thermal | ||||||
| CTEB(1) | 280 | PPA for 10 years | US$ | CC: Third Quarter 2022 (estimated) | ||
| Renewable | ||||||
| PEPE III | 81 | MAT ER | US$ | Second Quarter 2023(estimated) | ||
.(1) Operated by Pampa, which holds an interest of 50% in CTB.
Thermal Generation plants
CTLL
CTLL is located in the Province of Neuquén, which has an installed capacity of approximately 780 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 CC and repowered in January 2018, a 105 MW General Electric aeroderivative gas turbine installed in May 2016, the incorporation in August 2017 of a 105 MW General Electric gas turbine and 15 MW from MAN gas engines in August 2021. 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 2021, CTLL’s average annual generation was 2,197 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 CC, 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 CC 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 CC process and steam turbine of 199 MW which was incorporated on July 2, 2020. CTGEBA’s CC 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 CC, 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 2.9% of Argentina’s installed capacity. From 2000 to 2021, CTGEBA’s historical average annual generation was 5,080 GWh, with a generation record high of 8,594 GWh in 2021, and a record low of 3,438 GWh in 2001.
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CPB
CPB is a thermal generation plant (which we own through our subsidiary Piedra Buena) located in Ingeniero White, Bahía Blanca, Province of Buenos Aires, approximately 600 kilometers away from the City of Buenos Aires.
CPB is an open-cycle thermal generation plant with an installed capacity of 620 MW, consisting of two identical conventional units (Unit 29 and Unit 30) with an installed capacity of 310 MW each, which represents 1.4% 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 2021, CPB’s average annual generation was 1,920 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 0.8% of Argentina’s installed capacity. From 1993 to 2021, its average annual generation was 1,657 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 2021, its average annual generation was 109 GWh, with a generation record high of 156 GWh in 2017, and a record low of 53 GWh in 2021.
ECOENERGÍA
EcoEnergía is a co-generation power plant located at TGS’ 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 2012 to 2021, EcoEnergía’s average annual generation amounted to 92 GWh, with a generation record high of 108 GWh in 2018, and a record low of 72 GWh in 2020.
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.
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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 from 2018 to 2021 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.
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 from 2018 to 2021 was 279 GWh.
CTEB
CTEB is located in the City of Ensenada, Province of Buenos Aires, owned by CTB, a company that we jointly co-control 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 1.3% 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 2013 to 2021, the average annual generation amounted to 1,287 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 CC. 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 three 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 1.6% of the capital stock of TJSM and 1.4% of the capital stock of TMB. From 1990 to 2021, the average annual generation was 797 GWh, with the highest level of generation (1,250 GWh) recorded in 2006 and the lowest level (467 GWh) recorded in 2021.
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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.”
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 0.9% of the capital stock of TJSM and 0.8% of the capital stock of TMB. From 1990 to 2021, the average annual generation has been 538 GWh, with the highest level of generation (943 GWh) recorded in 2006 and the lowest level (322 GWh) recorded in 2014.
Summary of HINISA and HIDISA concessions
HINISA’s and HIDISA’s main purpose is the generation, sale and bulk trading of electric power through the exploitation of hydroelectric systems pursuant to the terms and conditions of the following concessions: (i) Provincial concessions granted by the Argentine Government of the Province of Mendoza with similar terms and conditions (for HINISA and HIDISA) and at each company’s own risk for the hydroelectric exploitation of the Atuel River, in the case of HINISA, and the Diamante River, in the case of HIDISA. These concessions were granted pursuant to Provincial Law No. 6,088 dated December 21, 1993 and related provisions; and (ii) national concessions granted by the Argentine Government with similar terms and conditions (for HINISA and HIDISA) and at each company’s own risk for hydroelectric power generation through HINISA’s and HIDISA’s respective hydroelectric systems. These concessions were granted pursuant to Laws No. 15,336, No. 23,696 and No. 24,065 and related provisions.
Term. The term of the HINISA and HIDISA concession agreements is 30 years, starting from June 1, 1994 in the case of HINISA and October 19, 1994 in the case of HIDISA.
Royalty payments. Each of HINISA and HIDISA is required under the respective concessions to make the following monthly royalty payments: (i) royalties in favor of (1) the Province of Mendoza, of up to 12% in the case of HIDISA and up to 6% in the case of HINISA, and (2) the Province of La Pampa, up to 6% in the case of HINISA, in each case, of the amount resulting from the application of the corresponding bulk sale rate to the electricity sold, pursuant to the provisions of Section 43 of Law No. 15,336, as amended by Law No. 23,164. Pursuant to applicable regulations, in order to establish the basis for the calculation of such royalties, the monomic price (the price of electricity that includes both the price of energy and the capacity charge) of the electricity produced resulting from the following formula should be used: the sum of the value of power generated at the hour value fixed by the wholesale market plus the amount receivable for the power rendered to the spot market if such power were sold within a certain month, divided by the total power generated during the given month; (ii) royalties in favor of the Argentine Government of (1) up to 2.5% of the amount used as the basis for the royalties calculation in the case of HIDISA, and (2) up to 1.5%, estimated on the same basis in the case of HINISA; and (iii) royalties in favor of the Province of Mendoza of up to 2.5% of the amount used as the basis for the royalties calculation for both HINISA and HIDISA.
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On February 2, 2017, SEE Resolution No. 19/2017 terminated the remuneration scheme of SEE Resolution 22/2016 as from the economic transactions for February 2017, which represented a new increase in HIDISA’s and HINISA's revenues mainly due to: (i) greater availability of power determined independently of the level of the dam, eliminating the risk of hydrology; and (ii) a higher price as a result of its dollarization, minimizing the risk associated with exchange rate fluctuations.
Moreover, on April 10, 2017, and as a result of the claims filed by the HINISA, the SEE recategorized Nihuil I, Nihuil II and Nihuil III hydroelectric plants as “small”, which had an impact in the base price applicable to such plants under SEE Resolution 19/2017 increasing from 3,000 US$/MW per month to 4,500 US$/MW per month.
As of February 2021, SE Resolution No. 440/21 increased the values defined in SE Res. No. 31/20 by 29%. It also repealed the automatic adjustment mechanism included in SE Resolution No. 31/20 (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 Coeficiente de Estabilización de Referencia (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 work) and from 1% to 10% (in cases of any actions considered by the governing authorities as termination events under the concessions). In the event that the fines levied over a 12-month period exceed 20% of the gross amount invoiced for power sales, the granting authority would be entitled to terminate the relevant concession agreement.
Performance guarantees. As security for the performance of their obligations under the respective concessions, HINISA and HIDISA have each deposited the amount required for the benefit of the relevant granting authority under the respective concession. Absent any set off by the relevant granting authority in the event of a breach or any other event of non-compliance under the terms of the respective concession agreements, the guarantee amounts would be released to HINISA and HIDISA, respectively, upon the expiration or termination of the respective concession agreement.
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Termination of concessions. HIDISA’s and HINISA’s concession agreements may be terminated for the following reasons (i) breach of material contractual and legal obligations, (ii) certain bankruptcy events in respect of HINISA or HIDISA (as applicable), including any liquidation or winding-up proceedings. In such case, the termination of the relevant concession shall be automatic; (iii) force majeure or certain actions by third parties that prevent the compliance by HINISA and HIDISA with their respective obligations under their respective concession agreements; or (iv) expiration of the respective terms of the concession agreements. In case of termination pursuant to item (i), HINISA or HIDISA, as applicable, shall remain in charge of their concessions during a transitional period established by the granting authority, not exceeding 12 months, and shall indemnify the Argentine Government and the Province of Mendoza for any damages caused (the granting authorities may also apply the performance guarantee amounts toward the payment of any damages). Within 90 days following the receipt of the relevant termination notice, a new company must be incorporated, which would be granted a similar concession and a public bidding process would be called for the purpose of selling the shares of such newly formed company. After deducting all fines, interest and withholdings for prospective claims, the balance would be distributed to HINISA or HIDISA, as applicable, as the only compensation for the transfer of the concessions.
In addition, Section 14(d) of Law No. 6,088 of the Province of Mendoza provides for the termination of the concessions for reasons of public interest or expropriation for public use.
After the termination of the concession agreements for any cause, any assets transferred to HINISA and HIDISA under the respective concession agreements shall be transferred back to the Province of Mendoza and the Argentine Government, as applicable.
HPPL
A 30-year concession fully-owned by Pampa, it was awarded for hydroelectric power generation at HPPL beginning in August 1999. The HPPL complex has three electricity generating units with an installed capacity of 285 MW, and is located in the Comahue region, Province of Neuquén. The dam is made up of loose materials with a waterproof concrete side. It has a total length of 1,045 m, a total height of 54 m at the deepest point of the foundation, and a crest at 480.2 m above sea level. From 2000 to 2021, HPPL’s average annual generation was 1,430 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.
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Fines and Penalties. HPPL is subject to potential penalties and fines under the concessions that are calculated on the basis of the aggregate gross amount invoiced for the 12-month period preceding the imposition of any such penalty. Such penalties and fines range from 0.1% to 1% (in cases of breach of the terms of the agreement or regulations applicable to power generation, dam safety, water management, environmental protection, and non-compliance of instructions from the ORSEP, CAMMESA, any of the regulatory authorities or the ENRE); from 0.02% to 0.2% (in cases of delays or lack of payment of contributions to the contingency fund and insurance policies and for taking action without prior authorization of the respective regulatory authorities), from 0.01% to 0.1% (in cases of failure to submit any requested information or failure to file mandatory reports); from 0.03% to 0.3% (in cases of failure to keep routes and roads open to traffic and free from soil, air or water pollution, and delays in the fulfillment of mandatory work) and from 1% to 10% (in cases of any actions considered by the regulatory authorities as termination events under the concessions). In the event that the fines levied over a 12-month period exceed 20% of the gross amount invoiced for power sales, the granting authority would be entitled to terminate the relevant concession agreement.
Termination of concessions. HPPL’s concession agreements may be terminated for the following reasons (i) breach of material contractual and legal obligations, in which case, HPPL, shall remain in charge of the concessions during a transitional period established by the granting authority, not exceeding 12 months, and shall indemnify the Argentine Government for any damages caused (the granting authorities may also apply the performance guarantee amounts toward the payment of any damages). Within 90 days following the receipt of the relevant termination notice, a new company must be incorporated, which would be granted a similar concession and a public bidding process would be called for the purpose of selling the shares of such newly-formed company. After deducting all fines, interest and withholdings for prospective claims, the balance would be distributed to HPPL as the only compensation for the transfer of the concessions; (ii) certain bankruptcy events in respect of HPPL, including any liquidation or winding-up proceedings, in which case, the termination of the relevant concession shall be automatic; (iii) force majeure or certain actions by third parties that prevent the compliance by HPPL of its obligations under their concession agreement; or (iv) expiration of the term of the concession agreements.
Renewable Energy
PEMC
On April 18, 2016, we acquired 100% of Greenwind, for an amount of US$2.1 million. Greenwind is a company incorporated under the laws of Argentina whose purpose was to develop the PEMC. For such purpose, Greenwind has the legal right to use and obtain a profit from over 1,500 hectares of land where wind measurements have been 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 Pampa Participaciones S.A.U. 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”). From 2019 to 2021, its historical average annual generation was 386 GWh.
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PEPE II
PEPE II is located in the area known as Corti, 20 kilometers away from the City of Bahía Blanca, in the Province of Buenos Aires, near PEMC. PEPE II consists of 14 wind turbines; each turbine is made up of four tower sections, a nacelle and three blades driving the turbine with a total diameter of 120 meters.
PEPE II was commissioned on May 10, 2019 under Res. No. 281-E/2017, which was passed by the former MEyM for the Renewable Energy Term Market (MAT ER) and sells its energy to large electricity consumption users through PPAs between private parties.
PEPE II has an installed capacity of 53 MW, which represents 0.1% of the installed capacity in Argentina. From 2020 to 2021, its historical average annual generation was 211 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 120 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. From 2020 to 2021, its historical average annual generation was 211 GWh.
In the fourth quarter of 2021, Pampa announced PEPE III’s expansion project, which will increase the existing gross capacity from 53.2 MW to 134.2 MW, with an estimated investment of US$128 million. Its output will be sold in the MAT ER through a US$-denominated PPA with private parties, and it is estimated to be commissioned in stages, with full commissioning in the second quarter of 2023.
Both PEPE II and PEPE III are assets fully owned by Pampa, and in August 2021, Pampa registered PEPE II and III wind farms under the IREC standard, issued by the International REC Standard Foundation, and became the first Argentine power generator to certify wind power. The IREC are internationally recognized certificates that companies employ to offset carbon emission mitigation targets and support renewable energy development. Pampa could issue about 500,000 certificates per year, representing approximately 10% of the total certificates issued in the country.
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, which was extended several times. The Company, as owner of the PEPE IV project notified its decision to waive the timely granted dispatch priority and recovered the guarantee it had provided. As a result, CAMMESA notified that the already initiated enforcement of the guarantee was determined to be moot as it had no further claim against the Company; therefore, as of September 30, 2021, the amount of US$12.5 million recorded for to such effect was recovered and disclosed under the item “Other operating income” of the Consolidated Statement of Comprehensive Income.
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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, 2021:
| · | our combined crude oil and natural gas proved reserves were 157 million boe, 61% of which were proved developed reserves. Natural gas accounted for approximately 92% of our combined proved reserves and liquid hydrocarbons for 8%; |
| · | our combined oil and gas production in Argentina averaged 51.8 thousands of boe per day. Crude oil accounted for approximately 4.7 thousands of boe per day, while natural gas accounted for approximately 283 million standard cubic feet per day, or 47.1 thousands of boe 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 2021, according to the ME&M, gas gross production in Argentina increased by 1% (4.7 billion cubic feet per day on average), whereas oil gross production increased 6% and stood at 513 thousand barrels per day (on average). In December 2021, according to the ME&M, our consolidated oil and gas production accounted for approximately 1% and 7% 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 OCP.
Key Information Relating to Oil and Gas
As of December 31, 2021, 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, 2021, 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, 2021, 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, 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, 2021, our total gross and net productive wells were as follows. The table includes the total gross and net productive wells by the Company, joint operations and associates.
| Oil | Gas | Total (3) | |||||
| Gross (1) | Net (2) | Gross (1) | Net (2) | Gross (1) | Net (2) | ||
|
Argentina
|
470 | 151 | 414 | 199 | 884 | 350 | |
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 2021, we carried out investment plans aligned with our reserves replacement and production goals, as a means to achieve sustainable growth. A development well, for purposes of the following table, is one that justifies the installation of permanent equipment for the production of oil or gas. A well is deemed to be a dry well if it is determined to be incapable of commercial production. “Gross wells drilled” in the table below refers to the number of wells completed during each fiscal year, regardless of the spud date, and “net wells drilled” relates to our fractional ownership working interest in wells drilled. This table includes wells drilled by the Company, joint operations and associates (includes our discontinued operations). The following table sets forth the number of total wells we drilled in Argentina and the results for the relevant periods.
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| Year ended December 31, | ||||||
| 2021 | 2020 | 2019 | ||||
| Argentina | ||||||
| Gross wells drilled: | ||||||
| Production: | ||||||
| Development wells: | ||||||
| Oil | 34 | 14 | 39 | |||
| Gas | 31 | 1 | 9 | |||
| Dry wells | ||||||
| Total | 65 | 15 | 48 | |||
| Exploration: | ||||||
| Discovery wells: | ||||||
| Oil | - | - | 1 | |||
| Gas | 1 | - | 2 | |||
| Dry wells | - | - | - | |||
| Total | 1 | - | 3 | |||
| Net wells drilled: | ||||||
| Production: | ||||||
| Development wells: | ||||||
| Oil | 9 | 4 | 11 | |||
| Gas | 20 | 0 | 5 | |||
| Dry wells | - | - | - | |||
| Total | 29 | 4 | 16 | |||
| Exploration: | ||||||
| Discovery wells: | ||||||
| Oil | - | - | 1 | |||
| Gas | 0 | - | 2 | |||
| Dry wells | - | - | - | |||
| Total | 0 | 0 | 3 | |||
Note: All figures have been subject to rounding, so figures shown as totals may not add up.
In 2021, our activity was focused on complying with the production commitments within the Plan Gas.Ar. The core of the activity was concentrated in the Neuquén Basin, mainly in El Mangrullo, where 13 wells were drilled, and Río Neuquén, with 14 wells were drilled. In Sierra Chata, 4 development wells were drilled, together with a successful exploration shale gas well. On the oil side, 13 wells were drilled in El Tordillo and 21 wells were drilled in Gobernador Ayala.
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 operate 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 2021, our production was concentrated in three basins: 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 76% 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, 2021, we lifted hydrocarbons from 884 productive wells in Argentina.
For the year 2021, our average daily production was 4,699 barrels of crude oil and 283 million cubic feet of natural gas. Oil production increased by 6% and gas production increased 16% compared to 2020 average.
The following table sets forth our oil and gas production during 2021. 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, 2021.
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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.
|
|
|
2021 Production | ||||||
| Production Blocks | Location | Basin | Oil (1) | Gas (2) |
Oil (3) |
Operator | Direct and Indirect Interest | Expiration |
| El Mangrullo | Neuquén | NQN | 20 | 71,347 | 11,911 | Pampa | 100.00 % | 2053 |
| Sierra Chata | Neuquén | NQN | 22 | 6,897 | 1,172 | Pampa | 45.55% | 2053 |
| Río Neuquén | Neuquén/Río Negro | NQN | 208 | 15,704 | 2,825 | YPF | 33.07%(4)/31.42%(5) | 2027/2051 |
| Rincón del Mangrullo (6) | Neuquén | NQN | 20 | 6,744 | 1,144 | YPF | 50.00% | 2052 |
| Estación Fernández Oro | Río Negro | NQN | 1 | 100 | 18 | YPF | 15.00%(7) | 2026 |
| Anticlinal Campamento | Neuquén | NQN | - | 74 | 12 | Oilstone | 15.00%(8) | 2026 |
| Río Limay Este (Ex Senillosa) | Neuquén | NQN | - | - | - | Pampa | 85.00% | 2040 |
| Aguaragüe(9) | Salta | NOA | 72 | 1,940 | 395 | Tecpetrol | 15.00% | 2023/2027 |
| El Tordillo | Chubut | CGSJ | 905 | 297 | 955 | Tecpetrol | 35.67% | 2027 |
| La Tapera – Puesto Quiroga | Chubut | CGSJ | 13 | - | 13 | Tecpetrol | 35.67% | 2027 |
| Gobernador Ayala | Neuquén | NQN | 344 | - | 344 | Pluspetrol | 22.51% | 2036 |
| Veta Escondida - Rincón de Aranda | Neuquén | NQN | 0 | - | 0 | Pampa | 55.00% | 2027 |
| Los Blancos(10) | Salta | NOA | 109 | - | 109 | High Luck | 50,00% | 2045 |
| Total | 1,715 | 103,104 | 18,899 | |||||
Note: All figures have been subject to rounding, so figures shown as totals may not add up.
| (1) | In thousands of boe. |
| (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 boe. 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 9 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 for the relevant periods:
| Year ended December 31, | |||||||||||
| 2021 | 2020 | 2019 | |||||||||
| Argentina | Oil (1) | Gas (2) | Oil (1) | Gas (2) | Oil (1) | Gas (2) | |||||
| Río Neuquén (3) | 208 | 15,704 | 169 | 11,788 | 216 | 15,287 | |||||
| El Mangrullo (3) | 20 | 71,347 | 17 | 58,338 | 23 | 53,631 | |||||
| Rincón del Mangrullo (3) | 20 | 6,744 | 23 | 9,836 | 46 | 14,991 | |||||
| Other blocks | 1,467 | 9,308 | 1,409 | 9,154 | 1,475 | 10,574 | |||||
| Total | 1,715 | 103,104 | 1,617 | 89,117 | 1,760 | 94,483 | |||||
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.
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Exploration
Our strategy is focused on constantly searching for new exploration opportunities aligned with our growth targets. In Argentina, we own substantial acreage containing undeveloped unconventional reservoirs, including both tight and shale gas in the Neuquén basin. The following table lists our exploration blocks, joint operations and permits in Argentina as of December 31, 2021, the location and basin of each area, our net working interest and the expiration date for the exploration authorization.
| 2021 Production | ||||||||||||||
| Blocks/UTE | Location | Basin | Oil kbbl | Gas mcf | Total kboe | Operator | Interest | Expiration | ||||||
| Parva Negra Este | Neuquén | NQN | - | 65 | 11 | Pampa | 42,50% | 2019(1) | ||||||
| Rio Atuel | Mendoza | NQN | - | - | - | Petrolera El Trébol | 33,33% | 2021(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 | 65 | 11 | |||||||||||
| Total Production | 1,715 | 103,168 | 18,900 | |||||||||||
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, 2021, we held interests in approximately 223,000 gross exploration acres in Argentina.
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, 2021, 2020 and 2019. This table includes our net share of production, joint operations and associates.
| Year ended December 31, | |||||
| Argentina | 2021 | 2020 | 2019 | ||
| (in US$ per barrel of oil equivalent) | |||||
| Production cost | 6 | 6 | 8 | ||
| Royalties | 3 | 2 | 3 | ||
| Depreciation | 6 | 7 | 6 | ||
| Total | 15 | 15 | 17 | ||
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, 2021, 2020 and 2019.
| Year ended December 31, | ||||
| 2021 | 2020 | 2019 | ||
| Argentina | ||||
| (in millions of US$) | ||||
| Oil | 99 | 64 | 98 | |
| Gas | 344 | 219 | 342 | |
| Others | 10 | 11 | 8 | |
| Total | 453 | 294 | 448 | |
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The following table sets forth the average sales price per barrel of oil and per million cubic feet of gas for each geographic area for the fiscal years ended December 31, 2021, 2020 and 2019.
| Year ended December 31, | ||||||
| Average price of sale for barrel of Oil and for million cubic feet of Gas | 2021 | 2020 | 2019 | |||
| Argentina | ||||||
| Oil (In US$ per barrel of Oil) | 58 | 40 | 54 | |||
| Gas (In US$ per thousand cubic feet) | 3 | 2 | 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.
In October 2021, in the third Round of the Plan Gas.Ar, Pampa was awarded an additional 2 million m3/day at a price of 3.347 dollars per million BTU, for the period beginning in May 2022, ending in December 2024. Jointly, the contracts awarded to Pampa, sum up to a commitment to delivering 9 million m3/day per day all year, an additional 2 million m3/day during the winter period.
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 (Title 17 of the Code of Federal Regulations Part 210), 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 96% of our estimated proved reserves as of December 31, 2021. We provided all information required during the course of the audit process to the satisfaction of GaffneyCline. See the Reserves Report by GaffneyCline, dated January 25, 2022 included as Exhibit 13.2 to this annual report. As of December 31, 2021, 2020 and 2019, 96%, 98% and 94%, respectively, of our estimated proved reserves were audited by GaffneyCline.
As of December 31, 2021, our liquid hydrocarbon and natural gas proved developed and undeveloped reserves totaled 157.0 million of oil equivalent barrels (boe), 12.6 million barrels of liquid hydrocarbons and 866.5 billion cubic feet, or 144.4 million boe, of natural gas, of which 837.3 billion cubic feet were estimated to be sales gas and 29.2 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 8% and 92%, respectively, of our total proved reserves as of December 31, 2021. The reserves outside Argentina (Venezuela) were reclassified as contingent in December 2016, due to profitability and the economic situation of Venezuela.
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As of December 31, 2021, proved developed reserves of crude oil equivalent represented 61% of our total proved reserves of crude oil equivalent and we had proved reserves equal to approximately eight years of production at 2021 volumes.
The following table sets forth our estimated net proved developed and undeveloped reserves of crude oil and natural gas as of December 31, 2021, including joint operations and associates.
|
Reserves as of December 31, 2021 |
|||||||
| Reserves Category | Crude oil, condensate and natural gas liquids (millions of barrels) |
Natural Gas (billions cubic feet) |
Oil Equivalent (million boe) |
||||
| Proved Developed | 8.0 | 527.9 | 95.9 | ||||
| Proved Undeveloped | 4.7 | 338.7 | 61.1 | ||||
| Total proved reserves | 12.6 | 866.5 | 157.0 | ||||
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, 2021, 2020 and 2019:
| 2021 | 2020 | 2019 | |||||||||
| Millions of boe (1) | % of total proved reserves | Millions of boe | % of total proved reserves | Millions of boe | % of total proved reserves | ||||||
| Proved developed reserves | 95.9 | 61.1% | 69.8 | 49.2% | 70.8 | 52.3% | |||||
| Proved undeveloped reserves | 61.1 | 38.9% | 72.0 | 50.8% | 64.6 | 47.7% | |||||
| Total Proved Reserves | 157.0 | 100.0% | 141.8 | 100% | 135.4 | 100% | |||||
Note: All figures have been subject to rounding, so figures shown as totals may not add up.
During 2021, forty-seven wells were drilled and 15 drilled uncompleted wells were completed in El Mangrullo, Río Neuquén, El Tordillo, Gobernador Ayala and Sierra Chata areas, of which thirty-four and thirteen, respectively, were changed from proven undeveloped reserves to proven developed reserves from the first four areas just mentioned. In Sierra Chata one well was completed aimed at developing Vaca Muerta shale gas reservoir.
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. Since December 2016, and as of December 31st, 2021, the reserves in Venezuela have been reclassified as contingent resources 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, 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 | 13,527 | 769,519 | 141.8 | |||
| Proved developed reserves as of December 31, 2020 | 7,761 | 371,99 | 69.8 | |||
| Increase (decrease) originated in: | ||||||
| Revisions of previous estimates | 205 | 44,993 | 7.7 | |||
| Improved recovery | 2 | 7,696 | 1.3 | |||
| Extensions and discoveries | 607 | 145,564 | 24.9 | |||
| Year’s production | -1,716 | -101,231 | -18.6 | |||
| Total proved developed and undeveloped reserves as of December 31, 2021 | 12,625 | 866,541 | 157 | |||
| Proved developed reserves as of December 31, 2021 | 7,970 | 527,870 | 95.9 | |||
(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, 2021, our liquid hydrocarbon and natural gas proved developed and undeveloped reserves totaled 157.0 million boe (12.6 million boe of liquid hydrocarbons and 866.5 billion cubic feet, or 144.4 million boe, of natural gas), representing a 11% increase compared to proved reserves as of December 31, 2020 (a decrease of 7% and an increase of 13% for liquid hydrocarbons and natural gas, respectively).
During 2021, previous estimates of our fields located in Argentina were subject to revisions representing an increase of 7.7 million boe mainly attributable to better natural gas production performance in the El Mangrullo area. Extension and discoveries increased by 24.9 million boe through drilling activities, mostly in the El Mangrullo, Río Neuquén and Sierra Chata areas. In addition, an increase of 1.3 million boe was attributable to improved recovery in the El Mangrullo area.
As of December 31, 2021, 61% of our proved reserves were developed, while 39% were undeveloped. Proved developed reserves were 95.9 million boe. During 2021, we invested US$152.1 million mainly in drilling, completion and facilities to convert approximately 26.0 million boe of proved undeveloped reserves to proved developed reserves. Our proved undeveloped reserves were 61.1 million boe, all of which corresponded to wells located within one offset of proved developed reserves and gas fields where the activity has been scheduled to maintain production levels in accordance with contracts and installed facilities. We plan to put approximately 91% of these proved undeveloped reserves into production through activities to be implemented over the next five years. The balance of 9% (5.5 million boe) 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.
The 15% decrease (10.9 million boe) in our proved undeveloped reserves in 2021 compared to 2020 was mainly attributable to:
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| (1) | a decrease of 26.0 million boe by the conversion of proved undeveloped reserves to proved developed reserves, mainly through drilling, completion and workovers activities performed in our production areas in the Neuquén basin, mainly in the El Mangrullo and Río Neuquén areas; |
| (2) | an increase of 14.9 million boe of proved undeveloped reserves by extensions and discoveries, through additional drilling activities, mainly in the Río Neuquén, El Mangrullo and Sierra Chata areas in the Neuquén basin; and |
| (3) | an increase of 0.2 million boe of proved undeveloped reserves, came from revisions of previous estimates and adjustments to production estimates based on performance of drilling activities. |
The activities described in items (1), (2) and (3) above resulted in a net decrease of 10.9 million boe in our proved undeveloped reserves in 2021 compared to 2020.
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, 2021. 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.
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.
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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 96% 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.
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.
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Our estimated proved reserves as of December 31, 2021 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, 2019, 2020 and 2021.
Ecuador
On October 31, 2008, Pampa Bloque18, 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 Pampa Bloque18 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.
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After taking the required administrative and judicial steps and being unable to reach an agreement with the Ecuadorian Government, on June 21, 2013, Pampa Bloque18, 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.
Pampa Bloque18’s participation in the Bloque 18 Consortium is 30% and the final award by the arbitration tribunal corresponding to Pampa Bloque18 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 Pampa Bloque18 comprises (i) a release from fiscal and labor claims currently in the trial stage, amounting to more than US$132 million, and (ii) an additional compensation of US$54 million, which was paid by the end of first half of 2018 (including the recovery of granted guarantees).
Moreover, the Republic of Ecuador has declared and acknowledged within the Arbitration Settlement that (i) such agreement is completely valid and binding for the Republic of Ecuador, (ii) any payment default by the Republic of Ecuador under the Arbitration Settlement will allow the Plaintiff Parties to fully enforce the final award, and (iii) there is no pending obligation remaining by the Plaintiff Parties in relation to the Bloque 18 Consortium’s operation’s and exploitation.
As a result of the Arbitration Settlement, we have disclosed net profits for US$40 million (Ps. 1,116 million) as of December 31, 2018, consisting of: (i) a profit of US$133 million in consequential damages after writing off of the receivable of US$53 million to be recovered from the Ecuadorian Government pursuant to the Amending Agreements, and (ii) a US$93 million loss associated with the agreement to the terms of the tax claims assigned to Pampa Bloque18 in accordance with the Arbitration Settlement.
In 2018, Pampa Bloque18 collected the agreed amount and waived (without this implying an admission of facts or rights) the proceedings brought in the Ecuadorian Internal Revenue System Claims, and the Ecuadorian Government has made the withholding to cancel all tax debts. On September 20, 2019, through an official letter issued by the Ministry of Labor, Pampa Bloque18 was notified of the payment on employee participation profits from 2002 to 2010, to the former consortium workers.
Crude Oil Transportation OCP Agreement
On November 10, 2003, Pampa Bloque18, entered into a “ship or pay” agreement with OCP, whereby it secured an oil transportation capacity of 80,000 barrels per day for a 15-year term (the “OCP Agreement”).
Under the OCP Agreement, Pampa Bloque18 must comply with its contractual obligations for the aggregate committed capacity, regardless of the amount of crude oil actually transported, and pay a rate that covers OCPs operating costs and financial services, among other items.
Pampa Bloque18 is entitled to sell transportation capacity through OCP’s pipeline to mitigate the negative effect of excess contracted capacity. In this respect, Pampa Bloque18 periodically negotiates the sale of committed transportation capacity. On December 31, 2008, Pampa Bloque18 and Petroecuador entered into an agreement under which, as from January 1, 2009, transportation of crude oil through OCP’s pipeline is charged by Petroecuador to the transportation capacity committed to under the agreement entered into between Pampa Bloque18 and OCP, up to a maximum of 70,000 barrels per day. In addition, Pampa Bloque18 sold transportation capacity for approximately 8,000 oil barrels per day to third parties for the July 2004-January 2012 period.
In January 2018, Pampa Bloque18 assigned to ENOPSA a transportation capacity of 10,000 barrels per day. As a result, Pampa Bloque18 will pay to PEO US$2.9 million.
In January 2018, PEO declared the Equity Expropriation Event, whereby, under certain circumstances stipulated in the agreement, we, in our capacity as guarantor, will bear the payments for the capital charges associated with the assigned transportation capacity.
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In April 2018, Pampa Bloque18 assigned to Trenerec S.A. (a subsidiary company in Ecuador) the remaining transportation capacity of 70,000 barrels per day held with OCP. Additionally, Pampa Bloque18 assigned to Trenerec S.A. the rights and obligations held under the agreement entered into with Petroecuador by which Trenerec will be able to sell to Petroecuador transportation capacity for 70,000 barrels per day.
The OCP Agreement expired on November 10, 2018, and, therefore collaterals held to ensure compliance with related financial commitments were gradually released as those commitments became extinguished. As of December 31, 2019, we do not hold any collateral in this respect.
During 2019 Pampa Bloque18 initiated a mediation process together with Petroecuador due to certain breaches of contract related to a transportation agreement signed in December 2008 between Petroecuador and Pampa Bloque18. This process ended with no settlement being agreed between the parties.
On February 17, 2021 Pampa Bloque18 initiated an arbitration process against Petroecuador due to breach of contract by Petroecuador. Up to this date the arbitration is still in process.
OCP
In 2001, the Ecuadorian government awarded to OCP the rights to construct and operate for a 20-year term the 503 km-long pipeline that runs from the northeastern region of Ecuador to the Balao distribution terminal on the Pacific Ocean coast. The oil pipeline has a transportation capacity of approximately 450,000 barrels per day, of which at least 350,000 barrels per day are committed under transportation agreements that include a Ship or Pay clause. Because the oil pipeline runs across ecologically sensitive areas, the pipeline was constructed following stringent environmental and technical standards. The construction of the oil pipeline was completed in 2003, when it began operations. As of the date of this Annual Report, we have a 30.06% equity interest in OCP.
Our subsidiary, Pampa Bloque18, entered into a transportation agreement with OCP that includes a Ship or Pay clause whereby OCP has committed to transport 80,000 barrels per day of our oil for a 15-year term, beginning in November 2003. For more information, see “—Others—Ecuador”.
As of December 31, 2017, OCP had negative shareholders’ equity as a result of certain tax assessments in favor of the Government of Ecuador in issues where OCP and the Ecuadorian Treasury have differences in interpretation. We have not committed to make capital contributions or provide financial assistance to OCP; therefore, our equity interest in OCP was valued at Ps. 0 in our financial statements as of and for the year ended December 31, 2017.
However, on December 6, 2018, OCP and the Republic of Ecuador executed an agreement to settle all claims and legal actions between them in relation to certain tax assessments in favor of the Government of Ecuador in issues where OCP and the Ecuadorian Treasury had differences in interpretation. As a result, a total amount of US$182 million was established for all concepts, of which: (i) US$64 million corresponded to credits for income tax withholdings made by OCP in the following periods: 2004-2005 and 2007-2014; (i) US$7 million was offset by a payment previously made by OCP related to a tax determination for the fiscal period 2003; and (iii) US$111 million was paid in cash in two payments. Following the satisfaction of all obligations in accordance with the agreement, on December 21, 2018, the closing of the agreement between OCP and the Republic of Ecuador took place. As a result of this agreement, OCP recorded a gain of US$387 million. We have resumed the recognition of our equity interest in OCP, through our subsidiary PEB, after recognizing previously unrecognized losses and, therefore, we recognized a gain for our equity interest in OCP of US$35 million as of December 31, 2018.
Furthermore, on December 5, 2018, through our subsidiary PEB, we executed an agreement with Agip Oleoducto de Crudos Pesados BV to purchase shares representing 4.49% of OCP’s capital stock and subordinated debt issued by us. The closing of this transaction is subject to the approval of the Government of Ecuador, among other conditions precedents. On June 20, 2019, upon satisfaction all conditions precedent, the transaction was closed and registered with the Shareholders’ Registry Book.
Subsequently, on August 12, 2021, the Company, through its subsidiary PEB, executed an agreement with Occidental International Exploration and Production Company for the acquisition of all the shares of Occidental del Ecuador Inc. (currently Pampa Ecuador Inc.) for US$5 million. Pampa Ecuador Inc. holds a 14.15 % equity interest in OCP Ltd. The closing of the transaction on the mentioned date involved the recognition of profits for US$25 million and US$17 million, respectively, under IAS 28.
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Recoverable value of the investment
On April 8, 2020, a force majeure event occurred, consisting of the sinking and landslide in the San Rafael sector, on the border of the provinces of Sucumbíos and Napo, Ecuador, which caused the rupture of the “Oleoducto de Crudos Pesados” pipeline. This event also affected the “SOTE” Trans-Ecuadorian Pipeline System and the Shushufindi-Quito Pipeline. On May 7, 2020, OCP S.A. restarted operations and resumed the provision of the crude oil transportation service after completing the construction of a variant that allowed the restoration of the crude oil pipeline system.
Additionally, on June 4, 2020, a contract for the implementation of the specific mutual support agreement was entered into between Petroecuador and OCP, which stipulated that the costs incurred in mitigating and remediating the social and environmental effects resulting from the force majeure event would be reimbursed by the other party proportionately to the spilled hydrocarbon volumes. To such effect, the Agency for the Regulation and Control of Energy and Non-Renewable Natural Resources established a 43% percentage for OCP.
On December 3, 2021, OCP declared the “Operational Urgency” due to an accelerated side erosion in the Rio Quijos, Piedra Fina sector, the boundary between the Napo and Sucumbíos provinces, Ecuador, which caused cracks in the Quito - Lago Agrio road and the subsequent destruction of a section of the road. The applicable competent authorities were immediately notified that a temporary bypass would be constructed to ensure the pipeline’s operational continuity and avoid an environmental incident. On December 8, 2021, OCP suspended crude oil pumping and ordered the complete draining of the pipeline at KP95+736. On December 11, 2021, OCP notified the Ministry of Energy and Non-Renewable Natural Resources of the occurrence of the force majeure event, and operations were restarted on December 31, 2021.
On January 28, 2022, a new force majeure event occurred due to a landslide causing the rupture of the “Oleoducto de Crudos Pesados” pipeline at KP96+526. OCP started the repairs and the cleanup and remediation work on the affected pipeline. The crude oil transportation service was restarted on February 7, 2022.
PEB has performed recoverable amount tests for its investment in OCP as of December 31, 2020 and 2021, considering the present value of the future cash flows it expects to obtain through the collection of dividends during the concession term, the term extension due to the suspension of contractual obligations resulting from the detailed force majeure events and a discount rate of 15.01% and 17.12% for 2020 and 2021, respectively.
As of December 31, 2020, PEB recognized an impairment reversal of US$0.1 million, while no impairment loss was recorded as a result of the recoverability assessment performed as of December 31, 2021.
Contingent liabilities in OCP
Due to the force majeure event resulting from the described rupture at the KP93 pipeline in 2020, several organizations and natural persons filed a constitutional protection complaint against OCP, as well as the Ministry of Energy, the Ministry of the Environment and Water, Petroecuador and the Ministry of Health, alleging the infringement of several constitutional rights. The safeguard action has been disallowed in the first and second instance by Orellana’s Provincial Court of Justice. As of the date of this annual report, the plaintiffs have filed a constitutional protection proceeding, which has been admitted to be heard by the Constitutional Court.
The Company's Management together with its legal advisors have classified an unfavorable ruling as remote, therefore, no provision has been recognized on this matter.
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Oldelval
In line with our strategy to focus resources on our core businesses, on November 2, 2018 we executed an agreement with ExxonMobil Exploration Argentina S.R.L. (“ExxonMobil”) for the sale of 21% of the capital stock of Oldelval, which closed on November 27, 2018. As a result, we hold a 2.1% interest in Oldelval.
Oldelval operates main oil pipelines providing access to Allen, in the Comahue area, and the Allen - Puerto Rosales oil pipeline, which allow for the transportation of the oil produced in the Neuquina Basin to Puerto Rosales (a port in the City of Bahía Blanca) and the supply of the Plaza Huincul and Luján de Cuyo distilleries, all located in the pipeline’s area of influence.
In 2021, Allen’s oil transportation from Allen to Puerto Rosales reached 32,047 m3/day on average, and transportation to the refineries located in the provinces of Neuquén and Mendoza totaled an average of 1,865 m3/day and 619 m3/day, respectively. The total transported volume was 34,532 m3/day, equivalent to 79.3 million bbl in 2021, representing a 19.5% increase compared to 2020.
It is worth highlighting that the Allen – Puerto Rosales main pipeline’s transportation capacity as of the closing of 2021 was 28,800 m3 per day without polymer and 36,000 m3 per day with polymer.
On December 10, 2021, a hydrocarbon spill occurred in the Medanito area, Province of Río Negro and was contained on the same day. There were no injuries, and no nearby watercourses were affected. Moreover, all work necessary for oil recovery have been performed, and soil and vegetation cleanup is expected to soon be completed. The total amount of the incident is estimated at US$6 million, and Oldelval is making the necessary filings before the insurance companies.
It is worth highlighting that in 2021 Oldelval managed to maintain its transportation service, ensuring operational continuity and a reliable pumping system.
Our Petrochemicals Business
Our petrochemical operations are entirely based in Argentina where we own three high-complexity plants producing styrene, SBR and polystyrene, with a domestic market share ranging between 91% and 99% (per Company estimates). We produce a wide array of products, such as intermediate gasoline, aromatic solvents, hexane and other hydrogenated paraffinic solvents, propellants for the cosmetic industry, monomer styrene, as well as rubber and polymers for the domestic and foreign markets from natural gas, virgin naphtha, propane and other supplies.
In Argentina, we are the only producer of styrene, polystyrene and elastomers, and the only integrated producer of plastics derived from oil production. As part of our efforts to integrate our operations, we use a substantial amount of styrene for the production of polystyrene and SBR.
The petrochemicals division has the following assets:
| · | an integrated petrochemicals complex at PGSM, located in the Province of Santa Fe, with an annual production capacity of 50,000 tons of gases (LPG), which are used as raw material, and propellants, 155,000 tons of aromatics, 290,000 tons of gasoline and refines, 160,000 tons of styrene, 55,000 tons of SBR, 180,000 tons of ethyl benzene and 31,000 tons of ethylene; and |
| · | a polystyrene plant located in the city of Zárate, Province of Buenos Aires, with a production capacity of 65,000 tons of polystyrene. |
The following table sets forth main indicators of sales by major product for the petrochemical division in Argentina for the fiscal year ended December 31, 2021 and 2020:
| 2021 | 2020 | |
| Technical Information | ||
| Sales (in thousand ton): | ||
| Styrene (incl. propylene y ethylene) | 57 | 47 |
| SBR | 49 | 37 |
| Polystyrene | 48 | 47 |
| Others | 254 | 205 |
| Sales destination (*) | ||
| Argentina | 63% | 66% |
| Outside | 37% | 34% |
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Styrene Division
In 2021, the monomer styrene sales volume totaled 49 thousand tons, 26% higher than in 2020, with a 27% increase in domestic sales and a 17% increase in exports, destined for the expanded polystyrene, emulsions, and polyester resin markets. Propylene sales volumes reached 8 thousand tons, 6% lower than in 2020, mainly due to maximized ethylene production. The polystyrene sales volume was 58 thousand tons, experiencing a 23% increase compared to 2020, with a 10% increase in domestic sales and an 89% increase in exports, mainly to Chile and Uruguay. Moreover, in 2021 the Company sold 49 thousand tons of rubber, a figure 32% higher than in 2020, with a 53% increase in domestic sales and a 25% increase in exports to Brazil.
Reforming Gasoline Division
Sales of the Reforming division increased by 24% compared to 2020. In 2021, octane bases and gasoline sales totaled 197 thousand tons, a volume 41% higher than in 2020, with a 52% increase in domestic sales, associated with the fuel consumption recovery, against the year 2020 affected by the lockdown. Hexane, paraffin solvents, and aromatics sales volumes totaled 45 thousand tons in 2021, representing a 14% decrease compared to 2020, associated with the higher formulation of octane bases. In 2021, propellant sales totaled 10 thousand tons, experiencing an 18% increase compared to 2020, associated with the higher processing of raw gasoline.
Our Holding and Other Business
Our holding and other business segment is comprised, among other holdings, of our direct and indirect interest in TGS, Argentina’s major gas transportation company, which owns a 9,231 km-long gas pipeline network and a gas fuel processing plant, General Cerri, with an output capacity of one million tons a year. Furthermore, we jointly control Transener with IEASA. Transener is a company that operates and maintains the Argentine high voltage transmission grid covering 14,648 km of proprietary lines, as well as 6,766 km of Transba-owned high voltage lines. Transener transports 86% of the electricity in Argentina. In addition, we participate in the refining and distribution operations through Refinor, which owns a refinery located at Campo Durán in the Province of Salta with an installed capacity of 25.8 thousand oil barrels per day and a commercial network of 92 gas stations.
Our Interest in TGS
TGS is the most important gas transportation company in Argentina, and it operates the biggest pipeline system in Latin America. It is also a leading company in the production and sale of natural gas liquids for both domestic and export markets, conducting its business from the General Cerri Complex located in Bahía Blanca, in the Province of Buenos Aires. TGS also provides comprehensive solutions in the natural gas area and, since 1998, it has also acted in the telecommunications area through its controlled company Telcosur. As of December 31, 2021, Pampa holds a 29.2% interest in TGS.
Description of TGS’ Business Segments
Regulated Segment: Gas Transportation
Revenues from this segment result mainly from firm natural gas transportation agreements, whereby the gas pipeline capacity is reserved and paid for regardless of its actual use. TGS provides an interruptible service, where natural gas transportation is subject to the gas pipeline’s available capacity. Moreover, TGS provides operation and maintenance services for assets allocated to the natural gas transportation service for the expansions fostered by the Federal Government and held under trusts created for such effects. For this service, TGS receives from customers with incremental natural gas transportation capacities the charge of access and use established by ENARGAS, which remained unchanged from its creation in 2005 until its first update in May 2015.
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In constant terms, as of December 31, 2021, annual revenues from this business segment amounted to Ps.24,503 million in 2021, representing 27% of TGS’ total revenues and evidencing a 31% decrease compared to 2020.
It is worth recalling that in 2021 transportation contracts on a firm basis represented 81% of revenues from sales in this segment, without changes compared to 2020. As of December 31, 2021, the total capacity hired on a firm basis amounted to 82.6 million m3/day with a weighted average life of 11 years. In 2021, natural gas daily average injection into the system operated by TGS amounted to 69.5 million m3/day, a volume slightly higher than in 2020 due to Plan Gas.Ar’s impact, especially on account of the higher injection at the Neuquina Basin (+9% vs. 2020), offset by the decrease in the Austral Basin (-7% vs. 2020). In this scenario, TGS’ gas pipeline system was reasonably responsive to the demand needs.
In the commercial area, in 2021 TGS launched an open call for tenders to renew firm transportation agreements expiring in 2022 and 2023, renewing agreements for 5.04 million m3/day for an average term of 20 years. Routes for the Neuquina Basin were renewed for 35 years and for the Austral Basin for 12 years, consolidating TGS’ business sustainability, also ensuring contractual continuity for routes in the Austral Basin considering the injection reduction risk.
Non-Regulated Segment: Production and Marketing of Gas Liquids
Unlike the gas transportation business, the production and commercialization of liquids are not regulated by ENARGAS. In 2021, this segment’s revenues accounted for 63% of TGS’ total revenues, amounting to Ps. 55,731 million, 34% higher than in 2020. The main cause of the increase was the rise in international reference prices, the impact of the revenue restatement (inflation-adjusted as of the closing of 2021, higher than the Ps. devaluation) on US$-denominated sales, and, to a lesser extent, the higher demand for propane in the domestic market. These effects were partially offset by lower exported volumes. Moreover, lower ethane volumes will be offset by the annual ToP review clause.
Liquids production and commercialization activities are conducted at the Cerri Complex, located close to the city of Bahía Blanca, supplied by all of TGS’ main gas pipelines. Ethane, propane, butane, and natural gasoline are recovered at this complex. TGS sells liquids to both domestic and foreign markets. In the domestic market, propane and butane are sold to reseller companies. In the foreign market, these products and natural gasoline are sold at international reference prices. Moreover, ethane is sold to Polisur at a price agreed between the parties.
In 2021, total sales volumes reached 1,119,419 tons, a figure 2% lower than in 2020, 31% of which were destined for exports. Out of the total sales destined for the domestic market, 73% were made at US$-denominated prices or with a US$-based adjustment clause.
Regarding the foreign market, average sales prices for natural gasoline, butane, and propane recorded 85%, 89%, and 104% increases in 2021, respectively, due to substantial increases in international reference prices, which had been affected by the pandemic in 2020.
It is worth highlighting that Decree No. 488/20 established an export duty on liquids, among other products, of 8% in 2021, except for January (3.1%) and February (5.7%). Moreover, in addition to seaborne exports, TGS makes inland exports to neighboring countries. Although their volumes are substantially lower than those conducted by sea, they allow TGS to capitalize on a higher operating margin. In 2021 and 2020, propane and butane deliveries overseas were made in the spot market, seizing opportunities related to different market niches, enabling a considerable increase in fixed premiums. Natural gasoline was sold both through term contracts and spot transactions.
Regarding the domestic market, TGS continued participating in the Household Gas Bottles’ Program and the Propane for Grids Agreement in 2021. Prices are regulated by a set of resolutions, provisions, and agreements. The participation in these programs forces TGS to sell at prices ostensibly lower than market prices. Moreover, participation in this program requires the Federal Government to reimburse TGS an economic compensation denominated in Ps., which is currently being collected with delays. Outside these programs, TGS sold 196,990 tons of propane and 17,072 tons of butane, mainly to the reseller market and, to a lower extent, to the industrial, propellant, and automotive market.
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In 2021 TGS continued selling ethane under the long-term agreement executed with Polisur in September 2018. This agreement has commercial guidelines stipulated in 2020, with improvements in the ToP clause (to be met annually), which guarantees TGS a gradual increase in sales volumes over the first five years of the contract. In fiscal year 2021, there was a mild decrease in the volume of ethane sold to Polisur, reaching 353,078 tons, slightly lower than the 360,870 tons sold in 2020, due to the customer’s inability to take a higher volume.
Furthermore, in 2021 TGS continued effectively rendering logistic services at the Puerto Galván facilities, selling LPG by inland transport, dispatching approximately 17,348 trucks (410,029 tons) of its products, vs. 16,543 trucks (379,635 tons) recorded in fiscal year 2020.
Additionally, in May 2021, an LPG dispatch contract was executed with Compañía Mega S.A. for loading tankers in case they cannot use their own quay, effective until December 2023.
Regarding US$-denominated prices for natural gas acquired as PTR (plant thermal reduction) for processing at the Cerri Complex, a 41% increase was recorded compared to 2020 due to Plan Gas.Ar’s impact. However, Plan Gas.Ar reversed the decrease in natural gas production over the last few years, and supports the LNG business.
Non-Regulated TGS’ Segment: Other Services
The other services segment is not regulated by ENARGAS. TGS provides midstream services, which mainly consist of treatment, impurity separation and gas compression. It may also include gas extraction and transportation in gas fields, construction services, inspection and maintenance of compression plants and gas pipelines, as well as steam generation services for the production of electricity. This business segment also includes revenues from telecommunication services provided through its subsidiary Telcosur.
This segment represented 10% of TGS’s total 2021 revenues, experiencing a 21% increase in real terms vs. 2020. This increase was mainly due to higher natural gas transportation and conditioning services at Vaca Muerta and the impact of revenue restatement (adjusted by inflation as of the closing of 2021, higher than AR$ devaluation) over US$-denominated sales, partially offset by lower telecommunication services, as well as operation and maintenance services.
The gathering gas pipeline in the Vaca Muerta formation has a 147-km length, with a 60 million m3 per day transportation capacity and a plant in Tratayén with an initial conditioning capacity of 5 million m3 per day. Moreover, to face the increase in flows, the 2.4 million m3/day capacity expansion on this plant was completed in 2021, and two projects were approved, comprised of the installation of: (i) two gas conditioning modular plants with a capacity of 3.5 million m3/day each, and a gasoline stabilizer tower; and (ii) a conditioning plant with a capacity of 6.6 million m3/day. The estimated investment will amount to US$22 million and US$82 million, commissioning in 2022 and mid-2023, respectively.
Midstream service expansion in Vaca Muerta
Driven by the growth in gas production linked to Plan Gas.Ar, TGS completed the Tratayén plant’s expansion works in September 2021, increasing the treatment capacity from 5.4 a 7.8 million m3/day, with an approximate investment of US$16 million.
Moreover, in the last quarter of 2021, two projects were approved, consisting of the installation of: (i) two gas processing modular plants, with a capacity of 3.5 million m3/day each, and a gasoline stabilizer tower; and (ii) a conditioning plant with a 6.6 million m3/day capacity. The investment is estimated at US$22 million and US$82 million, and commissioning is expected for 2022 and mid-2023, respectively.
Our Interest in Transener
Transelec owns 50% of CITELEC’s capital stock, which in turn owns 52.65% of the capital stock of Transener, the largest high voltage electricity transmission company in Argentina. Transener’s Class B common shares are listed on the BASE, and the remaining 47.3% of Transener is held by minority public shareholders and the ANSES. The remaining 50% of CITELEC’s capital stock was acquired equally by Electroingeniería S.A., which in turn transferred its participation to Grupo Eling S.A. and IEASA. More recently, Grupo Eling S.A. transferred its participation to IEASA.
Transener was privatized in July 1993, when CITELEC was awarded the Argentine Government’s controlling stake in Transener. In August 1997, the Province of Buenos Aires privatized Transba, a company organized in March 1996 to own and operate the regional electricity transmission system of the Province of Buenos Aires. Transener acquired 90% of Transba’s capital stock on August 5, 1997. On September 30, 2016, Grupo Eling S.A sold its interest in CITELEC and all of their rights and obligations under the technical assistance agreement for the operation, maintenance and administration of system of the high voltage electric energy transport system dated November 9, 1994, were transferred to IEASA, except for amounts accrued to Grupo Eling S.A until September 30, 2016.
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Transener’s operations
Transener is the leading company in the utility service of high voltage electricity transmission in Argentina, which directly operates 86% of the high voltage lines of the country. Transener operates and maintains the leading electricity transmission system in Argentina at the 500 kV level under a concession agreement under which Transener holds an exclusive 95-year concession to provide high voltage electricity transmission services throughout the Transener network spanning 14,648 km and 58 transforming substations.
Transener also indirectly owns one of the seven regional transmission networks in Argentina, the Transba network. The Transba concession grants Transba an exclusive 95-year concession to provide electricity transmission services (from the 66 kV to the 220 kV levels) in the Province of Buenos Aires via trunk lines, which are the main transmission lines that connect to all other lower voltage transmission systems owned and maintained by distribution companies in a certain region, throughout the Transba network spanning approximately 6,766 km and 108 transforming substations.
Transener also generates additional revenues from, among others, the operation and maintenance of the fourth line, and services provided to third parties.
Operation and Maintenance
The extra high voltage power transmission grid operated and maintained by Transener is subject to significant load conditions year after year. The record-breaking demand for the power capacity, of 26,320 MW on February 8, 2018, was surpassed in 2021, recording 27,088 MW on December 29, 2021. Moreover, a new record-breaking demand for power capacity of 28,231 MW was registered on January 14, 2022, 4% higher than the maximum peak recorded in 2021.
Despite the great number of power grid requests in 2021, service quality has been wholly acceptable for the values required from a company like Transener, ending the year with a rate of 0.32 failures per each 100 km-line, consistent with international parameters accepted for companies that operate and maintain extra high voltage transmission systems. Moreover, in March and April 2021, an all-time record low of 0.19 failures per each 100 km-line was recorded.
Business Development
Engineering Services
Taking into consideration its electrical system projects, Transener has focused on projects with competitive advantages by giving priority to those within the 500kV and 132kV systems.
In 2021, Transener continued supporting renewable energy generation work for supplementary services to implement power generation and demand monitoring systems (Automatic Export Demand and Generation Disconnection systems) and transforming stations’ testing and commissioning. Transener’s expertise has been a key factor for customers to entrust it with the execution of critical work. Among the most important projects, we can mention the 132-kV expansion works for power input from wind farms, such as replacing 132kV busbars in the Miramar transforming station.
Simultaneously with this work, Transener continued supplying power equipment to remote sites from the collector wire system for communication systems related to third-party fiber optic leases.
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Services related to the Transmission of Electric Energy
Activities relating to the operation, maintenance and other services such as specific tests hired by private clients who own transmission facilities, used for private and/or utility services (independent and international transporters) have been conducted by Transener since the beginning of its activity.
Furthermore, Transener also performs tasks such as bushing replacements, oil analysis, diagnosis tests, optical fiber repairs, electric and magnetic field measurement, implementation of automatisms, line and equipment maintenance of transformer stations, among others.
All necessary proceedings to maintain the actual value of Transener’s remuneration have been fulfilled in every Service Agreement and most of them have been renewed without interruption from the beginning, confirming the quality of the service provided by Transener and customer’s satisfaction.
Communications
In 2021, Transener has continued to provide infrastructure services to different communication companies, including the assignment of dark fiber optics over the system property (line IV), and the lease of space in microwave station and in antenna support structure. The increasing demand from cell phone companies has increased the income through additional volume and higher prices. In addition, Transener continued support services in operative communication and data transmission to the WEM agents.
Others
Service outage in the Argentine Electricity Grid
On June 16, 2019 at 7:07 a.m., the SADI experienced a total outage. The outage was a result of the concurrence of multiple shortcomings within the SADI, some of them unrelated to the transmission system operated and maintained by Transener.
Regarding the transmission system under the responsibility of Transener, the outage was due to a specific technical issue, and not to the lack of investment and maintenance. This technical issue resulted from a modification to the Litoral corridor configuration due to the bypass between the 500 kV Colonia Elía – Campana and Colonia Elía –Manuel Belgrano lines. This in turn meant the Auto-Disconnect Generation (“DAG”) mechanism was not properly adapted to the mentioned modification of corridors, and did not recognize signals sent out by the protection system. This bypass was made on account of the relocation of Tower 412 to support the highest possible power transmission capacity in the Litoral corridor.
Due to the great volume of electricity dispatched from this corridor and the DAG failure, there was an imbalance between supply and demand which could not be redressed by the system’s other restraint barriers external to the electric power transmission service, resulting in a total outage.
The 500 kV transmission system was available immediately after the disruption, and 100% of the transmission lines were available to come into operation and allow for the restoration of the system. Service restoration was overall fast (within just 8.5 hours, 75% of the country’s demand had been restored).
The occurrence of this event had an impact in 2020 on the amount of both penalties, which were increased, and awards, which were reduced, on account of the Additional Service Quality and Penalties Regime established by Resolutions No. 552/16 and No. 580/16.
As a result of this event, on May 14, 2021, the ENRE, pursuant to Resolution No. 121/21, imposed a penalty on Transener for the previously described event, which does not significantly differ from the provision held by Transener under liabilities.
Moreover, the ENRE filed new charges against Transener on account of its liability for alleged breaches in this event. Transener rejected the charges alleging the illegality and irrationality of the filing of a new summary proceeding after the termination of the proceeding that imposed the applicable penalties. If this proceeding is resolved unfavorably for Transener, any penalty or other monetary fine may have an adverse impact on its results. As of the date of this annual report, there is uncertainty on the possible imposition of a penalty and its amount.
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Transener and TGS’ Tariff Situation
The Social Solidarity and Productive Reactivation Law delegates the PEN with the power to administratively intervene the ENRE and ENARGAS (implemented through the Decrees No. 277/20, 278/20, and 963/20, as amended) until December 31, 2022.
On December 17, 2020, DNU No. 1020/20 was issued, launching the RTI renegotiation for a term not to exceed two years from its publication. Until then, all agreements under the respective RTI in force would be suspended, with the scopes to be determined in each case by the ENRE and ENARGAS. The renegotiation process would be completed with the execution of the RTI Final Memorandum of Understanding.
The public hearings to consider TGS, and Transener and Transba’s transitional tariff regime took place on March 16 and 29, 2021, respectively. Despite presenting all documentation required by the ENRE timely and in due form, Transener and Transba have received no instructions from the ENRE. In the case of TGS, as no agreement was reached, on June 2, 2021, it was established that tariff schemes effective in April 2019 would remain unchanged (Decree No. 353/21, ME & ENARGAS Joint Res. No. 1/21, and ENRE Res. No. 149/21). TGS filed a motion for reconsideration and requested the nullity of these provisions.
Moreover, on February 25, 2022, ENRE Res. No. 68/22 and 69/22 were issued, granting the 25% and 23% transitory tariff update to Transener and Transba, respectively, retroactively as of February 1, 2022. Given the differences between these companies’ tariff proposals and the final tariff schemes, Transener and Transba submitted a motion to review the file and a preliminary challenge and will appeal both resolutions.
Furthermore, the Decree No. 91/22 and ENARGAS Res. No. 60/22, issued in February 2022, granted the 60% transitory tariff update to TGS, effective from March 1, 2022. Among other conditions, this grant did not establish a mandatory investments plan and set a prohibition on: (i) distributing dividends; and (ii) early canceling financial and commercial debts taken on with shareholders, acquiring other companies, or granting loans.
Under the 2022 Transitional Agreement, TGS committed not to file new claims, remedies, actions, complaints, or motions of any kind; and/or to suspend or maintain or postpone the suspension of any claims and remedies filed in any way associated with the current Integral Tariff Structure Review, Social Solidarity and Productive Reactivation Law, Decree No. 278/20 and DNU No. 1020/20.
It is worth highlighting that Transener, Transba, and TGS’ tariff schemes had not been modified since August and April 2019, respectively. Moreover, in their respective 2022 public hearings, they had informed the relevant authorities that their transmission costs represented about 2% and 13% of a residential consumer’s final bill (consisting of raw materials, transmission, distribution, and tax).
Our interest in Refinor
We have a 28.5% interest in Refinor, whose other shareholders are YPF (50%) and Pluspetrol S.A. (21.5%). Refinor is engaged in crude oil refining, natural gas processing, product transportation, marketing and sales.
Refinor owns the only refinery in the northern region of Argentina, which is located in Campo Durán, in the Province of Salta. Refinor’s refining capacity is 25.8 thousand barrels per day and its natural gas processing capacity is 20.3 million cubic meters of gas per day (“mcm/d”).
Refinor owns and operates the following processing plants: an atmospheric distillation unit (topping), a vacuum distillation unit, a gasoline hydro-treatment unit, a catalytic reformer plant, an isopentane plant using fractional distillation of gasoline turbex, two turbo expander and fractioning plants for LPG production, as well as a plant for the production of auxiliary services (industrial water, steam, electricity, compressed air) used in the different processing plants.
The Campo Durán refinery receives crude oil/condensate and natural gas from the northwestern basin and from Bolivia. Refinor holds the concession on a 1,108 km multiproduct pipeline extending from RCD (Salta) to Montecristo (Córdoba). After executing an agreement with YPF in 2020, the pipeline started to operate from Montecristo to Refinor’s fuel plant, located at Banda del Río Salí, Tucumán, in 2021. In 2021, the average daily processing of crude oil amounted to 4,000 bbl. In turn, gas processing reached a daily average of 2.9 million m3.
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In 2012, Refinor executed an agreement with IEASA to supply compression services for the gas IEASA imports from Bolivia. This agreement was amended to increase the gas compression capacity (up to a volume of 26 million m3/day), effective until April 2019. The agreement was renewed in 2019 and 2021 and will be in effect until April 2023, with a compression capacity of 21 million m3 of gas/day.
As of December 31, 2021, Refinor had a commercial network of 92 gas stations located in the Provinces of Tucumán, Salta, Santiago del Estero, La Rioja, Jujuy, Catamarca, and Chaco. The network offers a high-performance fuel line: Premium Max (97 octanes), Super Max (95 octanes), Eco Diesel Max, and Eco Diesel Premium Max.
In 2021, gasoline, gasoil, raw gasoline, and other liquid fuel sales amounted to 442 dam3, representing a 22% year-on-year increase. LPG sales amounted to approximately 47 thousand tons in 2021, similar to last year’s volume.
During April 2022, the Company received an offer to buy its interest in Refinor for a purchase price that is below its registered book value. If this transaction is closed in the offered terms and conditions, the Company would have to register a loss (before taxes) of approximately US$11 million.
Enecor
Pampa holds a 70% interest in Enecor, an independent power transportation company which provides operation and maintenance services, by subcontracting Transener, for 21 km of 132 kV double-triad electricity lines from the Paso de la Patria transforming station, in the Province of Corrientes. It is under a 95-year concession, which expires in 2088.
IT and Cybersecurity
With a focus on the hybrid work modality implemented since the lockdown and searching for more agility and flexibility to enhance our teammates’ experience, some floors at the Pampa Building were refurbished. Improvements included enhanced fixed and wireless network connectivity, flexible desk spaces, and modern meeting areas. 600 teammates received new cell phones, and Teams was integrated into the central telephone system for all facilities, replacing landline phones. In line with technological obsolescence reduction, firewalls were updated, minimizing information security risks.
In the power generation business, after working for over a year, we completed the implementation of OSIsoft’s PI software, which provides real-time information on the power plant’s operating variables, optimizing, monitoring and accelerating digital business transformation. In line with this innovation, an application was implemented to record and follow up on associated notes between governmental bodies and power plants to ensure they are answered properly and promptly.
In the E&P business, we continued with the plan launched in 2020 for well information digitalization on a data storage platform, optimizing decision-making and consolidating data flows. Moreover, digital cameras were installed to monitor our facilities, and an office and warehouse access control system was installed in El Mangrullo block to preserve the business’ assets security. In addition, under Plan Gas.Ar, necessary adjustments were made to the commercial system according to the SE requirements.
In corporate sectors, together with the processes sector, initiatives were implemented to enable more agile working and minimize office paper use. The administration sector was assisted in implementing a set of accounting enhancements, and in the insurance sector policies application was updated. Additionally, in collaboration with the finance and commercial sectors, a portal was implemented to improve communication with the Company’s customers. In the human resources sector, a new knowledge management platform was incorporated, and process digitalization improvements continued. The QHSE integrated system was expanded, implementing findings, hazardous waste, and water resources modules, and incorporating automatic file generation facilitating information for third parties. In the procurement area, the procurement and supplier functionality was expanded, and supplier advance payment functionality was incorporated. In the PGSM petrochemical plant, a new truck scale operation application was developed.
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Regarding information security, and considering the global increase in cybersecurity crimes, awareness-raising efforts were intensified, continuing with our teammates’ training and the execution of an industrial cybersecurity plan maximizing security at the Company’s critical facilities. Additionally, a cybersecurity platform was implemented, focusing on early incident detection and fraud prevention, and the corporate antivirus scope was extended to employees’ mobile devices.
Quality, Health, Safety and Environment
We are committed to developing our businesses to observe the highest quality, safety, environmental, and labor health standards, prioritizing personal welfare, environmental care, and energy efficiency. We want to meet current needs without compromising future generations, pursuing sustainable development.
In 2021 our 2017 QHSE Policy evolved towards a new integrated management policy, reinforcing the commitments to the health, well-being, and safety of individuals, the environment, and our shareholders. Its scope incorporates the efficient use of energy and natural resources, the reliability and integrity of our facilities and operations, and their management optimization. The new policy reaffirms that integrated management is an essential part of our operations; it includes ten management principles that constitute a simple and agile guide facilitating and promoting its implementation.
In 2021, although the pandemic and the required special practices and protocols continued, the Company moved forward with management programs in all its operations, training the staff under our integrated management policy described above and strengthening Pampa’s culture on QHSE issues.
Quality
We further our management quality using ISO standards and the Argentine National Quality Prize model as references, seeking continuous improvement. The primary Management Quality methodologies applied are RMM (Operational Risk Management Matrix), the QHSE performance cycle, the administration of certified management systems, and daily management quality.
RMM seeks to reduce the risks inherent in our operations. In 2021, 60% of the improvement plans defined in the assessments conducted in 2020 were implemented to address the major identified risks.
We evaluate QHSE performance in all our assets based on target setting and the systematic monitoring and measurement of QHSE indicators developed on the QlikView platform, allowing us to make real-time decisions and know their evolution. We continued improving the dashboard by incorporating an RMM plan progress indicator and new views to monitor the Covid-19 situation. In 2021, we maintained the zero major environmental anomalies goal and met most strategic goals set for the year, which were even stricter than in 2020.
Moreover, in 2021 we completed the maintenance and recertification program under ISO standards, showing efficiency in goal fulfillment and commitment to our shareholders. We also maintained the following certifications: ISO 9001 (Quality Management), 14001 (Environmental Management), and 50001 (Energy Management), and completed the migration from OHSAS 18001 to ISO 45001 (Occupational Health and Safety). Furthermore, all our power plants were certified under ISO 55001 (Asset Management). This innovative milestone, the most relevant in the region regarding this standard, seeks to optimize asset management, reaching a balance among performance, risks, and costs.
Additionally, some applications developed on the SharePoint platform were enhanced, seeking more agility and a better user experience. In addition, the TERV application was consolidated, which allows for managing legal compliance with QHSE in all our operations.
Finally, since 2013, Pampa has been selected to share our experiences and knowledge on outstanding improvement practices at Pampa in the annual national meeting of the Argentine Society for Continuous Improvement (Sociedad Argentina Pro Mejoramiento Continuo). In the 26th annual meeting in 2021, with 21,000 visitors from 10 countries, we submitted the work: “The Company’s preventive Covid-19 rapid testing”, a successful initiative implemented to manage the pandemic crisis properly.
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Safety
In 2021, we continued developing initiatives to improve the safety management and performance of each of our facilities. Specific training was developed based on a critical accident rate analysis to prevent upper and lower extremity accidents. Moreover, the risk management standard was subject to a comprehensive review based on the ISO 31000 standard.
Regarding industrial hygiene, we continued working on improving hygiene, chemical, physical, and ergonomic risk maps. In 2021, maps were reviewed and submitted for periodic health checkups, which in 2020 had been postponed by the enforcement authority due to the pandemic. Moreover, we continued with the “Carcinogenic Substances and Compounds Surveillance System” established by the superintendence of labor risks.
Environment
The Company’s operations are conducted within a context of sustainable development. The Company is committed to protecting the environment and endeavors to use natural resources in its projects with proper and economically viable technologies.
In 2021, we continued implementing and spreading the Environmental Principles, which facilitate compliance with our integrated management policy. The Principles are aligned with SDG 4, 6, 7, 8, 9, 12, 13, and 17, and we contribute to the 2030 Agenda goals through specific actions. Specifically, in line with the country’s energy requirement, we seek to reduce air emissions and foster the responsible consumption of energy in our activities. Furthermore, as in 2020, we joined CEADS-EY Argentina’s Connecting Companies with the SDG program to diffuse good practices, showing our commitment to sustainable development.
Response to Emergency
The Company acts to prevent undesirable events and is prepared to provide a prompt and effective response to emergencies. The Company continued conducting periodic emergency response simulations, promoting established practices and specific improvements incorporated into the integrated management system.
In 2021, the Company conducted training in line with the Emergency Response Plans, with more than 500 training hours to develop skills and competencies and coordinate the necessary activities if an undesired event occurs. The Company has also made progress on assessing and updating critical emergency scenarios for all businesses.
Moreover, the Company continued assessing the condition of its fire detection and suppression systems, evaluating and ensuring their proper working condition and response capacity. The Company implemented an emergency response methodology called the “Incidents Command System” through theoretical and practical training. The Company also performed the first field simulations, mobilizing resources with the participation of active forces at CTGEBA and HPPL. Finally, relationship-building and training activities were performed with firefighters, the Gendarmerie, Civil Defense, and other organizations in the communities where we operate.
Occupational Health
In 2021, the Company continued developing health promotion programs at Pampa, focusing on prevention and generating healthy work environments, contributing to SDG 3.
Together with the human resources team, the Company implemented SUMA Bienestar, a program centered on the teammates’ personal life and physical, emotional, labor, and financial wellness. In this context, actions were developed to generate healthy habits and behaviors through the Health Promotion and Protection Program. These actions were developed based on a health diagnosis using annual medical checkups for all employees. Occupational and epidemiological risks are taken into consideration, enabling the design of a specific health program according to the surveyed risk groups.
Additionally, the Company continues offering Cardiopulmonary Resuscitation (CPR) and First Aid training courses, a physical activity plan, and flu and tetanus vaccination campaigns. In 2021, the Company continued developing the Cardiac Protection program according to international standards, and we were recertified before Experta ART as a ‘Cardiac Protected Company’ until 2023.
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The Company is a blood-donation-friendly company; therefore, in 2021 it continued promoting voluntary blood drives for the staff in its facilities.
Corporate Responsibility
Programs and social investment actions performed by Pampa are embedded in a strategic relational model with our stakeholders led jointly with the Foundation. With a strong commitment to the community, we develop programs oriented towards improving the quality of life of individuals and strengthening the capabilities of the institutions of the communities where we operate.
As a company committed to managing our business’s economic, social and environmental impacts through our social investments and our employees’ voluntary support, we intend to contribute to the Sustainable Development Goals (SDG) in which we can contribute the most to the common good, through our different programs: SDG 4 (quality education), SDG 7 (affordable and clean energy), SDG 8 (decent work and economic growth) and SDG 12 (responsible consumption and production). We strongly rely on the background and the importance of the efforts by social organizations and public entities. In this context, we have partnered with them for the development of social investment initiatives. SDG 17 (partnerships for the goals) cross-cuts all our initiatives.
In 2021, our Educational Paths Escort Program was recognized among more than 50 companies in the XIII ACDE Enrique Shaw Award and by the CEADS under the Connecting Companies with the SDG program, thanks to the four initiatives submitted contributing to SDG 4 and 7. In addition, we were selected to participate in the international event Future Conversations: SDG-COVID to present the Sustainable Energy for the Community program’s contributions to SDG 7.
To support the development of the community and set clear, measurable and assessable goals and intervention modalities, we have framed our social investment strategy on three axes: education, employment and social inclusion. Set forth below is a brief description of our programs.
Education and Labor Placement Training
We believe that education is the key to development and social and labor market inclusion, strengthening knowledge to expand horizons. Therefore, we seek to provide equal opportunities to children and young people in vulnerable situations.
We seek to support the completion of technical secondary education studies and the entry into university and college of teenagers living in the Provinces of Neuquén, Salta, Mendoza, Buenos Aires and Santa Fe. Young people participating in our program receive monthly financial assistance and personalized support, training and educational trips. Our scholarship grantees can get acquainted with formal work environments and perform activities so that they may envision concrete employment possibilities in the future.
In 2021, we supported 1,574 students, 1,170 of whom were attending the last three years of technical secondary education, and 404 university and college students, of whom 404 secondary students and 35 university students graduated from courses of study associated with our businesses, mainly engineering.
We also developed more than 30 complementary activities with the participation of 677 students. We organized 13 meetings with the Foundation’s director and 102 grantees to learn how they were affected by the pandemic and gather ideas to improve our accompaniment. We continued developing Building Tomorrow, a cycle of 17 workshops with 274 attendees. We made virtual visits to the Holocaust Museum, with the participation of 20 students, to learn the history of the Shoa, its consequences, and the importance of memory and empathy to combat hate speech. We also participated in the Live Sustainability virtual exhibition, offering two Energy Guardians workshops for 281 4th- to 7th-grade students from 10 primary schools.
At Pampa, we believe that the students’ environment should also be taken into account when thinking of their educational paths. In 2021, we provided tools to 415 teachers and school authorities, who implemented what they learned with more than 10,000 students. We performed ten editions of Energy Researchers, an initiative seeking to develop the scientific spirit at the kindergarten and primary school levels, with the participation of 292 teachers from 238 schools. Additionally, we offered distance learning workshops via Google Classroom to 37 teachers from PGSM.
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Regarding school authorities’ accompaniment, we continued strengthening the Foundation’s Schools Network: 27 technical schools participated, and 86 educators completed the training. We offered six workshops for teachers and 80 hours of synchronous and asynchronous training for school authorities, making 17 institutional improvement diagnoses for their schools.
As part of our commitment to improving educational institutions, we contributed to the schools, universities, and training centers of the communities where we operate. In 2021, we invested Ps. 6.9 million. Contributions included donations for the safe return to in-person classes in a context marked by Covid-19 and energy efficiency kits for six schools in Neuquén and Buenos Aires.
Additionally, we conducted professionalizing practices, first job workshops, and training spaces for secondary, college, and university students. Their goal is to consolidate, integrate, and expand knowledge and capabilities matching the students’ developing professional profile, thus increasing their employability. In 2021, we organized different experiences for 1,193 young students.
We continued fostering professionalizing trainings in the last years of technical schools. The number of students participating increased by 81%, thanks to internal practices and partnerships with other entities. The program was held virtually for 263 students; over 11 weeks, they completed 15,281 theoretical and practical training hours with the aid of 137 internal and external volunteers. We made alliances with Fundación Siemens, 500RPM, and Planta Piloto de Ingeniería Química to offer professionalizing trainings to an additional 154 high-school students. At the university and college level, we facilitated 200-hour supervised professional trainings for five scholarship grantees from universities in Salta and Buenos Aires, with the accompaniment of six volunteers.
For the second year, we have celebrated the Youth Project, a call for innovation and triple impact projects for university and college students and graduates. We organized four 2.5-hour training seminars on topics such as economic planning, innovation, and emotional intelligence, with 409 participants and 48 projects received; three of them were selected to receive seed capital and counseling for their development in 2022.
Finally, in Neuquén and Buenos Aires, seven Pampa professionals offered professional and labor placement workshops for 130 university and 37 high-school students. As in previous years, together with the AcercaRSE group, we organized the Technician Day’s Annual Meeting on first employment and entrepreneurship for 200 students from Zárate, Campana, and other neighboring towns.
Local Assessment and Development of Community Impact Projects
We understand that the relationship between the Company and its stakeholders is cross-cutting throughout the business. In 2021, we implemented nine action plans with groups prioritized by the Production and Engineering Department, with a 91% goal fulfillment. We also organized six workshops with more than 60 leaders and heads in different areas to update the matrix and shareholder mapping. We have accompanied 15 sustainable development institutions throughout the country at social responsibility tables and workgroups, in addition to providing funding. In 2021, the following were our most relevant activities:
(1) Sustainable energy: As a power company, we develop social projects facilitating access to energy through renewable sources and energy efficiency improvement. In the Province of Salta, since 2017 we have worked with Fundación Solar Inti in the Self-construction of Eco-Stoves to develop autonomy and entrepreneurship among women from the guaraní community in Piriquenda. In 2021, we equipped ten soup kitchens with efficient stoves jointly with the Industrial Union of Salta, reducing fuel consumption by 90% and improving comfort.
In solar energy, we moved forward with the project to install solar water heaters in Derqui (Pilar, Buenos Aires), where neighbors do not have access to gas. In 2020 and 2021, we accompanied 40 families and provided training to maximize the equipment’s performance and maintenance. As a result, we recorded 40% savings in kWh household consumption.
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Moreover, we offered levels 1 and 2 of the Energy Efficiency program to 102 students and 18 teachers from 7 technical schools in Buenos Aires and Neuquén, promoting commitment to environmental care and carbon footprint reduction. Twenty-nine efficiency kits were delivered, and 83 trees were planted, achieving a 44.17 TCO2e emissions reduction. In CTGEBA, together with students from local technical schools, we developed a social and educational project to manufacture and install a low-power 350 W Piggott wind turbine. The system will supply 500 kWh/year to the plant’s cafeteria. We also performed maintenance works on two other units installed in Coronel Rosales’s rural schools together with 29 students and teachers.
(2) Skills training and support for productive undertakings: We continued fostering productive activities and creating employment through job skills courses for people whose profiles are associated with our business or demanded in the community. We also supported productive undertakings generating social and/or environmental benefits.
In Buenos Aires, we accompanied the Good Job program, which seeks to improve the employability of young people aged 18-35 with no formal occupation. There were 541 enrollees in the six job skills courses, reaching 300 training hours. 117 persons graduated from the program (51% of the original enrollees), 19% of whom were women. In Neuquén, together with the municipalities of Cutral Co and Plaza Huincul, we offered five job skills courses of 318 training hours each, allowing 86 persons to be certified in their trades. In Salta, in partnership with the Ministry of Education and the Municipality of General Güemes, we offered a 120-hour drywall construction assistant course for 20 people.
Searching for virtual alternatives, we launched Programming Inclusion in partnership with the Formar Foundation and Digital House. This proposal provides full stack web programming training, with high demand in the labor market. The 7-month 2-hour/day synchronous training targeted 50 unemployed young people from different parts of the country. The course finished in March 2022.
Additionally, we granted scholarships to three Baccigalupo Foundation’s students so that they may graduate as sports assistants, accompanying labor placement for people with disabilities. Since 2016, we have granted scholarships to 24 students. In the same line, we continued providing supplies to the Accervil Protected Workshop for product manufacturing by 40 workers with motor disabilities. Finally, in 2021 we moved forward with the Responsible Inclusive Purchases program, included in the Company’s procurement procedure. We trained 65 persons and promoted the formation of a high-impact purchase ambassadors team to leverage its scope. Twenty new productive units were incorporated into the social catalog. In turn, we organized five in-person and virtual fairs in Neuquén and Buenos Aires, calling 36 social entrepreneurs to offer their products.
(3) Enhancement of local organizations: We assist in improving organizations’ institutional management by making contributions and supporting the projects they develop. Based on different community meetings held under the Health Promoters program jointly developed with the Saberes Foundation, we seek to empower leaders so that they may play a key role in detecting critical health issues in their spaces. A training cycle on acute malnutrition community management was offered to 46 health workers of the Dr. Luis Adolfo Güemes Hospital in Aguaray. In addition, we offered five food and nutrition workshops to 30 female leaders of the Piquirenda community. We also worked so that they may gradually acquire the necessary tools to become community leaders. Moreover, in 2021 we contributed more than Ps.8.5 million to social and community organizations, health and Covid-19-healthcare centers, and active forces in the towns where we operate.
Volunteering Actions
We are convinced that our employees are our main asset, and that we are responsible for the creation of shared value in and with the communities where we operate our assets. Through the volunteering committees, we seek that our employees may draw up proposals contributing to solving social difficulties identified at the local level and allowing, in turn, to reinforce each asset’s links with the community. Hence, Pampa can contribute to its socio-economic and community development, and strengthen the organizational culture and the employees’ sense of belonging. We currently have 10 active volunteering committees, with 145 persons in total. Committee members of facility meet periodically to define activities, create action plans, and coordinate actions with strategic partners at the local level. In 2021 we fostered 27 actions, with 1,813 volunteers, dedicating more than 5,900 hours to humanitarian activities.
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Capital Expenditures
For a discussion of our capital expenditures, see “Item 5. Operating and Financial Review and Prospects—Capital Expenditures”.
Seasonality
See “Item 5 - Operating and Financial Review and Prospects Factors Affecting Our Operational results -Electricity Demand and Supply – Seasonality”.
Property, Plant and Equipment
Most of our property, consisting of power plants (thermal plants, hydroelectric complexes and wind farms), oil and gas assets that allow us to explore and exploit oil and gas reserves (mainly wells, facilities and pipelines), petrochemical industrial complex, and corporate office buildings is located in Argentina.
Insurance
In our generation business, we carry full insurance for each of our generation assets, including business interruption and general liability insurance. As of December 31, 2021, the total generation assets covered under these policies are valued at US$5,765 million.
In our oil and gas business, we carry full insurance, including business interruption and general liability insurance. As of December 31, 2021, the total oil & gas assets covered under these insurance policies are valued at US$446 million.
In our petrochemical business and distribution business, we also carry full insurance, including business interruption and general liability insurance. As of December 31, 2021, the total assets covered under insurance policies are valued at US$1,344 million.
Patents and Trademarks
Certain portions of our commercial activities are conducted under licenses granted by third parties. Royalties related to sales associated with such commercial activities are paid under the relevant licenses.
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THE ARGENTINE ENERGY SECTOR
Electricity Regulatory Framework
Overview
Until 1990, virtually all of the electricity supply in Argentina was controlled by the public sector. In 1991, the Argentine Government undertook the privatization of state-owned electricity generation, transmission and distribution companies. In January 1992, the Argentine Congress enacted Law No. 24,065 (the “Regulatory Framework Law”), which established guidelines for the restructuring and privatization of the electricity sector. The Regulatory Framework Law, which continues to provide the framework for regulation of the electricity sector, distinguished between the generation, transmission and distribution of electricity as separate businesses and made each subject to its own regulatory framework.
The ultimate objective of the privatization process was to reduce rates paid by users and improve the quality of the electricity supply service through competition. The privatization process commenced in February 1992 with the sale of several large thermal generation facilities, and continued with the sale of transmission and distribution facilities (some of which we currently own) and additional thermoelectric and hydroelectric generation facilities.
The Public Emergency Law combined with the devaluation of the Peso and high rates of inflation had a severe effect on public utilities in Argentina. Because public utilities were no longer able to increase tariffs, inflation led to decreases in their revenues in real terms and a deterioration of their operating performance and financial condition. Most public utilities had also incurred large amounts of foreign currency indebtedness under the Convertibility Law regime and, following the devaluation of the Peso, the debt service burden of these companies increased sharply, which led many of them to suspend payments on their foreign currency debt in 2002. This situation caused many Argentine electricity generators, transmission companies and distributors to defer making further investments in their networks. As a result, Argentine electricity market participants, particularly generators, are currently operating at near full capacity, which could lead to insufficient supply to meet a growing national energy demand.
To address the electricity crisis, the Argentine Government has repeatedly intervened in and modified the rules of the WEM since 2002. These modifications included the imposition of caps on the prices paid by distributors for electricity power purchases (pursuant to SE Resolution No. 8/02) and the requirement that all prices charged by generators be calculated based on the price of natural gas (which is also regulated by the Argentine Government), regardless of the fuel actually used in generation activities (pursuant to SE Resolution No. 240/03), which together created a huge structural deficit in the operation of the WEM.
In December 2004, the Argentine Government adopted new rules for the electricity market (pursuant to SE Resolutions Nos. 826/04 and 712/04), which come into effect once the construction of two new 800 MW CC generators had been completed. These two generators commenced commercial operations in open cycle during 2008 and in CC during the first quarter of 2010. Construction was partially financed with credit balances of generators resulting from the spread between the sales price of energy and generation variable cost, which were transferred to the FONINVEMEM.
Electricity generators accepted the opportunity under SE Resolution No. 1,427/04 to participate in the FONINVEMEM projects.
The construction of these new generators evidenced a decision by the Argentine Government to take a more active role in promoting energy investments in Argentina. In addition to these projects, in April 2006 the Argentine Congress enacted a law that authorized the Argentine Government to create a special fund to finance infrastructure improvements in the Argentine energy sector through the expansion of generation, distribution and transmission infrastructure relating to natural gas, propane and electricity. Contributions to this fund were made through specific charges passed on to customers as an item on their energy bills.
In 2006, the SE implemented the Energy Plus Program (pursuant to SE Resolution No. 1,281/06) to create an incentive for increased electricity generation. Projects implemented under the Energy Plus Program are not subject to market regulations regarding prices. Instead, prices can be freely negotiated between generators and users within the cap authorized by the former Ministerio de Planificación Federal, Inversión Pública y Servicios.
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The Energy Plus Program sought to increase electricity generation and satisfy domestic demand. For that purpose, CAMMESA requires that all large users (those consuming more than 300 kW) purchase their incremental demand (any volumes exceeding their 2005 consumption) from new generators under the Energy Plus Program.
Through Law No. 26,350, it also modified the official time zone for the summer periods, in order to promote a decrease in the use of electric power.
In order to increase the electric power supply, the Argentine Government also established a program called Delivered Electric Energy, through the supply of small transportable thermal plants and/or embarked power plants. The investment was made by a private investor with a power purchase agreement with IEASA. The generator in the WEM was IEASA. As of the date of this annual report almost every generator installed within this scheme, has become a “generator” in the WEM and the contracts with IEASA have been terminated.
The Argentine Government additionally continued to implement various measures in order to regulate the operation of the WEM and of the intervening agents. SE Resolution No. 95/13, established values for the remuneration of fixed and variable costs to be paid to generators, co-generators and self-generators for energy sales, and an additional remuneration was added. These values were not applicable to bi-national hydroelectric power plants, nuclear generation or to generation committed in contracts regulated by the SE, such as those under the Energy Plus Program. Such resolution temporarily suspended new contracts under the WEM Term Market, other than those regulated by the SE, and it provided that upon the termination of existing contracts in the Term Market, large users must purchase their energy demand from CAMMESA. In addition, the resolution provides that commercial management and fuel delivery to the WEM plants will be centralized in CAMMESA. Resolution No. 95/2013 of the SE, as amended by Resolution No. 529/2014 of the SE, was updated on several occasions to reflect increases to the remuneration of generators. Moreover, SEE Resolution No. 19/2017 modified the entire generation remuneration regime. As of the date of this Annual Report, the current remuneration scheme as from February 2020 is established by SE Res. No. 31/20 (see “—The Argentine Energy Sector— Remuneration Scheme for Generation Not Covered by Contracts— SE Res. No. 31/20: February 2020 – January 2021).
In December 2015, through Decree No. 134/2015, the Argentine Government declared a state of emergency with respect to the national electricity system that remained in effect until December 31, 2017. The state of emergency allowed the Argentine Government to take actions designed to guarantee the supply of electricity in Argentina such as instructing the ME&M to elaborate and implement, with the cooperation of all federal public entities, a coordinated program to guarantee the quality and security of the electricity system and rationalize public entities’ consumption of energy. In spite of the fact that the emergency was not extended, the Argentine Government continued its intervention in the energy sector and measures allowing its return to normal are still pending.
In 2019, SEE Resolution No. 1/2019, amended the remuneration scheme established in SEE Resolution No. 19/2017. The SEE Resolution No. 1/2019 was recently amended by SE Resolution No. 31/2020 which modified the power generation segment’s remuneration scheme and established prices denominated in Argentine Pesos (formerly denominated in U.S. Dollars) and reduced such prices in different proportions according to the technology employed. For more information on Resolution No. SEE 1/19 see (“—The Argentine Energy Sector— Remuneration Scheme for Generation Not Covered by Contracts— SE Res. No. 31/20: February 2020 – January 2021”).
In December 2019, the Social Solidarity and Productive Reactivation Law was enacted, which, among other measures, established a 180-day freeze in energy and natural gas tariffs and the relaunching of RTI (this period has been extended by Decree No. 543/2020 and Decree No. 1020/2020 until the RTI process concludes or the transitional tariff increase is put into effect) and enabled the President to intervene the regulatory authorities (ENRE and ENARGAS). On March 16, 2021, a public hearing was held to discuss the transitory tariff increases. As of the date of this annual report, the determination of the new tariffs is still pending.
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Regulatory Authorities
As of the date of this annual report, the principal regulatory authorities responsible for the Argentine electricity market are:
(1) the MDP, which assumed the responsibility of the ME&M and the SE;
(2) the ENRE; and
(3) CAMMESA.
The SE advised the Argentine Government on matters related to the electricity sector and was responsible for the application of the policies concerning the Argentine electricity industry. On December 10, 2019, Decree No. 7/2019 modified the Ministries Law No. 22,520. Among other changes, it created the MDP, which assumed the functions and is responsible for the execution of the national policies in relation with the energy sector. The responsibilities of the MDP include participating “in the management of the State’s shareholdings in the corporations and companies operating in the area of its competence.” Later, in September 2020, Decree No. 706/2020 and Decree No. 743/2020 modified the functions of the Ministry of Economy and transferred the SE from the MDP to the Ministry of Economy (ME).
The ENRE is an autonomous agency created by the Regulatory Framework Law. The ENRE has a variety of regulatory and jurisdictional powers, including, among others:
| · | enforcement of the Regulatory Framework Law and related regulations; |
| · | control of the delivery of electric services and enforcement of the terms of concessions; |
| · | adoption of rules applicable to generators, transmitters, distributors, electricity users and other related parties concerning safety, technical procedures, measurement and billing of electricity consumption, interruption and reconnection of supplies, third-party access to real estate used in the electricity industry and quality of services offered; |
| · | prevention of anticompetitive, monopolistic and discriminatory conduct between participants in the electricity industry; |
| · | imposition of penalties for violations of concessions or other related regulations; and |
| · | arbitration of conflicts between electricity sector participants. |
Until the ENRE intervention pursuant to Decree No. 277/2020, the ENRE was managed by a five-member board of directors appointed by the Argentine Government. Two of these members were nominated by the Federal Council on Electricity (Consejo Federal de la Energía Eléctrica) (the “CFEE”). The CFEE is funded with a percentage of revenues collected by CAMMESA for each MWh sold in the market. Sixty percent of the funds received by the CFEE are reserved for the Fondo Subsidiario para Compensaciones Regionales de Tarifas a Usuarios Finales (regional tariff subsidy fund for end users), from which the CFEE makes distributions to provinces that have met certain specified tariff provisions. The remaining forty percent are used for investments related to the development of electrical services in the interior of Argentina.
The Annual Budget Law for 2019, established the transfer of the ENRE’s jurisdiction over Edenor and Edesur to the local authorities (City of Buenos Aires and the Province of Buenos Aires). However, the Social Solidarity and Productive Reactivation Law, established that during the term of the emergency declared therein, the tariffs shall continue to be defined by the ENRE.
On March 16, 2020, the Executive Branch ordered the intervention of the ENRE as authorized by the Social Solidarity and Productive Reactivation Law (Decree No. 277/2020). On December 16, 2020, the Executive Branch extended the ENRE’s intervention until December 31, 2021 or until the end of the RTI, whichever occurs first. On December 24, 2021, the Executive Branch extended the ENRE’s and ENARGAS’ intervention until December 31, 2022 (Decree No. 871/2022).
The creation of the WEM made it necessary to create an entity in charge of the management of the WEM and the dispatch of electricity into the National Interconnection System (the “SIN”). The duties were entrusted to CAMMESA, a private company created for this purpose.
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CAMMESA is in charge of:
| · | the dispatch of electricity into the SIN, maximizing the SIN’s safety and the quality of electricity supplied and minimizing wholesale prices in the spot market; |
| · | planning energy capacity needs and optimizing energy use in accordance with the rules set forth from time to time by the SE; |
| · | monitoring the operation of the term market and administering the technical dispatch of electricity under agreements entered into in that market; |
| · | acting as agent of the various WEM agents and carrying out the duties entrusted to it in connection with the electricity industry, including billing and collecting payments for transactions between WEM agents (upon enactment of SE Resolution No. 95/2013, this was limited to the contracts then in force and, thereafter, to those contracts executed under Energy Plus Program); |
| · | purchasing and/or selling power from abroad or to other countries by performing the relevant import/export transactions; |
| · | purchasing and administering of fuels for the WEM generators (according to section 8 of SE Resolution No.95/2013 and section 4 of SE Resolution No. 529/2014, as amended); and |
| · | providing consulting and other related services. |
Five groups of entities each hold 20% of the capital stock of CAMMESA. The five groups are the Argentine Government, the associations that represent: (i) the generation companies, (ii) the transmission companies, (iii) the distribution companies and (iv) the large users.
CAMMESA is managed by a board formed by representatives of its shareholders. The board of CAMMESA is composed of ten regular and ten alternate directors. Each of the associations that represent generation companies, transmission companies, distribution companies and large users are entitled to appoint two regular and two alternate directors of CAMMESA. The other directors of CAMMESA are under the SE, who is the board chairman and an independent member, who acts as vice chairman. The decisions adopted by the board of directors require the affirmative vote of the board’s chairman. CAMMESA’s operating costs are financed through mandatory contributions by the WEM agents.
Key Participants
Generators
Generators are companies with electricity generating plants that sell output either partially or wholly through the SIN. Generators are subjected to the scheduling and dispatch rules set out in the regulations and managed by CAMMESA. Privately owned generators may also enter into direct contracts with distributors or large users. However, this possibility was suspended by SE Resolution No. 95/2013, which in this respect, remains in effect except for the Energy Plus Program and, as of 2017, renewable energy supply contracts. As of December 31, 2021, Argentina had a nominal installed capacity as reported by CAMMESA of 43.0 GWh. In 2021, thermal generation generated 90,073 GWh (64%), hydroelectrically energy generated 23,580 GWh (17%), renewable energy generated 17,435 GWh (12%) and the nuclear energy generated 10,170 GWh (7%). In 2021, imports amounted to 819 GWh and exports to 3,850 GWh.
Transmitters
Transmission companies hold a concession to transmit electric energy from the bulk supply point to electricity distributors. The transmission activity in Argentina is subdivided into two systems: the High Voltage Transmission System (“STEEAT”), which operates at 500 kV and transports electricity between regions, and the regional distribution system (“STEEDT”) which operates at 132/220 kV and connects generators, distributors and large users within the same region. Transener is the only company in charge of the STEEAT, and six regional companies operate within the STEEDT (Transcomahue, EPEN, Transnoa, Transnea, Transpa, Transba and Distrocuyo). In addition to these companies, there are also independent transmission companies that operate under a technical license provided by the STEEAT or STEEDT companies.
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Transmission and distribution services are carried out through concessions. These concessions are re-distributed periodically based on a re-bidding process. Transmission companies are responsible for the operation and maintenance of their networks, but not for the expansion of the system. The transmission concessions operate under the technical, safety and reliability standards established by the ENRE. Penalties are applied whenever a transmission concessionaire fails to meet these criteria, particularly those regarding outages and grid downtime. Generators can only build lines to connect to the grid, or directly to customers. Users pay for new transmission capacity undertaken by them or on their behalf. A public hearing process for these projects is conducted by the ENRE, which issues a “Certificate of Public Convenience and Necessity.” Transmission or distribution networks connected to an integrated system must provide open access to third parties under a regulated toll system unless there is a capacity constraint.
Distributors
Distributors are companies holding a concession to distribute electricity to consumers. Distributors are required to supply any and all demand of electricity in their exclusive areas of concession, at prices (tariffs) and conditions set forth in regulations. Penalties for non-supply are included in the concession’s agreements. The three distribution companies divested from SEGBA (Edenor, Edesur and Edelap) represent more than 41% of the electricity market in Argentina. Only a few distribution companies (i.e., Empresa Provincial de Energía de Córdoba, Empresa de Energía de Santa Fe and Energía de Misiones) remain in the hands of the provincial governments and cooperatives. Edelap has been transferred to the jurisdiction of the Province of Buenos Aires.
The Organismo de Control de Energía Eléctrica de la Provincia de Buenos Aires (“OCEBA”) monitors compliance by the Province of Buenos Aires distributors, including Eden, Edes and Edea as well as the municipal distributors with the provisions of their respective concession agreements. We and Edesur are the largest distribution companies and, together with Edelap, originally comprised SEGBA, which was divided into three distribution companies at the time of its privatization in 1992.
Concessions were issued for distribution and retail sale, with specific terms for the concessionaire stated in the contract. The concession periods are divided into “management periods” that allow the concessionaire to give up the concession at certain intervals.
Large users
The WEM classifies large users of energy into three categories: (1) GUMAs, (2) GUMEs and, (3) Grandes Usuarios Particulares (Major Particular Users or “GUPAs”).
Each of these categories of users has different requirements with respect to purchases of their energy demand. For example, GUMAs are required to purchase 50% of their demand through supply contracts and the remainder in the spot market, while GUMEs and GUPAs are required to purchase all of their demand through supply contracts.
Limits and restrictions
To preserve competition in the electricity market, participants in the electricity sector are subject to vertical and horizontal restrictions, depending on the market segment in which they operate.
Vertical restrictions
The vertical restrictions apply to companies that intend to participate simultaneously in different sub-sectors of the electricity market. These vertical restrictions were imposed by Law No. 24,065, and apply differently according to each sub-sector as follows:
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Generators
| · | Under Section 31 of Law No. 24,065, neither a generation company nor any of its controlled companies or its controlling company, can be the owner or a majority shareholder of a transmitter company or the controlling entity of a transmitter company; and |
| · | Under Section 9 of Decree No. 1,398/1992, since a distribution company cannot own generation units, a holder of generation units cannot own distributions concessions. However, the shareholders of the electricity generator may own an entity that holds distribution units, either by themselves or through any other entity created with the purpose of owning or controlling distribution units. |
Transmitters
| · | Under Section 31 of Law No. 24,065, neither a transmission company nor any of its controlled companies or its controlling entity, can be the owner or majority shareholder or the controlling company of a generation company; |
| · | Under Section 31 of Law No. 24,065, neither a transmission company nor any of its controlled companies nor its controlling company, can be the owner or majority shareholder or the controlling company of a distribution company; and |
| · | Under Section 30 of Law No. 24,065, transmission companies cannot buy or sell electric energy. |
Distributors
| · | Under Section 31 of Law No. 24,065, neither a distribution company, nor any of its controlled companies or its controlling company, can be the owner or majority shareholder or the controlling company of a transmission company; and |
| · | Under Section 9 of Decree No. 1,398/1992, a distribution company cannot own generation units. However, the shareholders of the electricity distributor may own generation units, either by themselves or through any other entity created with the purpose of owning or controlling generation units. |
Definition of control
The term “control” referred to in Section 31 of Law No. 24,065 (which establishes the vertical restrictions), is not defined in the Regulatory Framework. Section 33 of the BCL states that “companies are considered as controlled by others when the holding company, either directly or through another company: (1) holds an interest, under any circumstance, that grants the necessary votes to control the corporate will in board meetings or ordinary shareholders’ meetings; or (2) exercises a dominant influence as a consequence of holding shares, quotas or equity interest or due to special linkage between the companies.” We cannot assure you, however, that the electricity regulators will apply this standard of control in implementing the restrictions described above.
The regulatory framework outlined above prohibits the concurrent ownership or control of (1) generation and transmission companies, and (2) distribution and transmission companies. Although we are a fully integrated electricity company engaged in the generation, transmission and distribution of electricity in Argentina, we are in compliance with these legal restrictions, as we do not hold a controlling interest, either directly or indirectly, in Transener.
Horizontal restrictions
In addition to the vertical restrictions described above, distribution and transmission companies are subject to horizontal restrictions, as described below.
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Transmitters
| · | According to Section 32 of Law No. 24,065, two or more transmission companies can merge or be part of the same economic group only if they obtain an express approval from the ENRE. Such approval is also necessary when a transmission company intends to acquire shares of another electricity transmission company; |
| · | Pursuant to the concession agreements that govern the services rendered by private companies operating transmission lines above 132Kw and below 140Kw, the service is rendered by the concessionaire on an exclusive basis over certain areas indicated in the concession agreement; and |
| · | Pursuant to the concession agreements that govern the services rendered by the private company operating the high-tension transmission services equal to or higher than 220Kw, the company must render the service on an exclusive basis and is entitled to render the service throughout the entire country, without territorial limitations. |
Distributors
| · | Two or more distribution companies can merge or be part of the same economic group only if they obtain an express approval from the ENRE. Such approval is necessary when a distribution company intends to acquire shares of another electricity transmission or distribution company; and |
| · | Pursuant to the concession agreements that govern the services rendered by private companies operating distribution networks, the service is rendered by the concessionaire on an exclusive basis over certain areas indicated in the concession agreement. |
GENERATION
Electricity Prices
Spot prices
The emergency regulations enacted after the Argentine crisis in 2001 had a significant impact on energy prices. Among the measures implemented pursuant to the emergency regulations were the pesification of prices in the WEM, known as the spot market, and the requirement that all spot prices be calculated based on the price of natural gas, even in circumstances where alternative fuel such as diesel is purchased to meet demand due to the lack of supply of natural gas.
Prior to the crisis, energy prices in the spot market were set by CAMMESA, which determined the price charged by generators for energy sold in the spot market of the WEM on an hourly basis. The spot price reflected supply and demand in the WEM at any given time, which CAMMESA determined using different supply and demand scenarios that dispatched the optimum amount of available supply, taking into account the restrictions of the transmission grid, in such a way as to meet demand requirements while seeking to minimize the production cost and the cost associated with reducing risk of system failure. The spot price set by CAMMESA compensated generators according to the cost of the next unit to be dispatched as measured at the Ezeiza 500 kV substation, which is the system’s load center and is in close proximity to the City of Buenos Aires. Dispatch order was determined by plant efficiency and the marginal cost of providing energy. In determining the spot price, CAMMESA also would consider the different costs incurred by generators outside the province of Buenos Aires.
In addition to energy payments for actual output at the prevailing spot market prices, generators would receive compensation for capacity placed at the disposal of the spot market, including stand-by capacity, additional stand-by capacity (for system capacity shortages) and ancillary services (such as frequency regulation and voltage control).
In October 2019, through SEERRYM No. 38/19, the spot price at the WEM was established at 720 Ps./MWh. In May 2021, the spot price at the WEM was raised to 930 Ps./MWh (SE Res. No. 748/21).
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With respect to the remuneration for legacy generation capacity, the remuneration scheme established by SEE Res. No. 19/17 remained in force until February 28, 2019. From March 1, 2019 to January 31, 2020 SRRYME Res. No. 1/19 was in effect, and, as from February 1, 2020, SE Res. No. 31/20 has come into in effect. As of February 2021, SE Resolution No. 440/21 increased the values defined in SE Res. No. 31/20 by 29%. It also repealed the automatic adjustment mechanism included in SE Resolution No. 31/20.
On April 21, 2022, the remuneration scheme was modified by SE Resolution No. 238/22 that established a 30% increase in remuneration retroactive to February 2022 and a new 10% increase to be applied as from June 2022. It also eliminates the use factor used to calculate generators remuneration and the temporary energy export’s remuneration. For more information, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.Upon the entry into force of Plan Gas.Ar, Resolution SE No. 354/2020 established that the thermal power plants should cover the costs related to the supply of the natural gas volumes under such scheme and other associated costs including the costs of the “take or pay” obligations under natural gas supply contracts, import costs and duties, and transport costs, among others.
Power plants dispatch
Upon the entry into force of Plan Gas.Ar, Resolution SE No. 354/2020 changed the dispatch of thermal power plants establishing five categories according to the source of the natural gas supply. This scheme modifies the previous cost-based dispatch. It also defined a “unified dispatch” by CAMMESA taking into account the following categories: (1) Generators whose natural gas supply comes from the contract that IEASA has in force with Bolivia up to the “take or pay” volumes; (2) Generators whose natural gas supply is assigned by CAMMESA from the natural gas contracts executed under the Plan GasAr regime up to the “take or pay” volumes; (3) Generators whose natural gas supply is assigned by CAMMESA from the natural gas contracts executed under the Plan GasAr regime over the “take or pay” volumes and up to the maximum daily volume; (4) Generators whose natural gas supply is assigned by CAMMESA from LNG contracts or other firm contracts executed by CAMMESA; and (5) Generators whose natural gas supply comes from contracts with natural gas producers not assigned to CAMMESA, spot natural gas supply or other. Within each category the dispatch shall follow the production costs declared by each generator.
The generators excluded from the centralized fuel supply by CAMMESA (i.e. power plants under the Energy Plus Program or with PPAs under SEE Resolution 287/17) may operatively assign the volumes and transport capacity that they have contracted. If they proceed with such assignment, they will enter in the third category, on the contrary if they don’t execute the assignment, they will enter in the fifth category.
Seasonal prices
The emergency regulations also made significant changes to the seasonal prices charged to distributors in the WEM, including the implementation of a cap (which varies depending on the category of customer) on the cost of electricity charged by CAMMESA to distributors at a price significantly below the spot price charged by generators. These prices did not change from January 2005 until November 2008. See “Item 5. Operating and Financial Review and Prospects—Electricity Prices and Tariffs.”
Prior to implementation of the emergency regulations, seasonal prices were regulated by CAMMESA as follows:
| · | prices charged by CAMMESA to distributors changed only twice per year (in summer and winter), with interim quarterly revisions in case of significant changes in the spot energy price, despite prices charged by generators in the WEM fluctuating constantly; |
| · | prices were determined by CAMMESA based on the average cost of providing one MWh of additional energy (its marginal cost), as well as the costs associated with the failure of the system and several other factors; and |
| · | CAMMESA would use seasonal database and optimization models in determining the seasonal prices and would consider both anticipated energy supplies and demand as follows: (i) in determining supply, CAMMESA would consider energy supplies provided by generators based on their expected availability, committed imports of electricity and the availability declared by generators; and (ii) in determining demand, CAMMESA included the requirements of distributors and large users purchasing in the WEM as well as committed exports. |
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On January 25, 2016, the ME&M issued Resolution No.6/2016, approving the seasonal WEM prices for each category of users for the period from February 2016 through April 2016. Such resolution readjusted the seasonal prices set forth in the regulatory framework. Energy prices in the spot market had been set by CAMMESA, which determined the price charged by generators for energy sold in the spot market of the WEM on an hourly basis. The WEM prices resulted in the elimination of most energy subsidies and a substantial increase in electricity rates for individuals. Resolution No. 6/2016 introduced different prices according to the customers’ categories. Such resolution also contemplated a social tariff for residential customers who comply with certain consumption requirements, which includes a full exemption for monthly consumptions below or equal to 150 kWh and preferential tariffs for customers who exceed such consumption level but achieve a monthly consumption lower than that of the same period in the immediately preceding year. This resolution also established tariff benefits addressed to residential customers for reducing their consumption. SEE Resolution No. 41/16 approved the winter seasonal prices in line with the prices included in SEE Resolution No. 6/16. During the Macri administration, the SGE issued various resolutions by means of which increased the portion of the generation cost to be paid by end users. However, there is still a portion of the generation costs, of approximately 40% for the quarter Feb/20- Apr/20 according to CAMMESA estimates, that it is not transferred to the end users and it is covered by the Argentine Government. This situation led to a delay in CAMMESA’s payments to generators which together with delayed payments from distributors have a negative impact in generator’s operations.
Moreover, SEE Resolution 20/17 allowed the Provinces to collect the royalties to be paid by hydroelectric generators in kind in order to compensate for the debt of provincial distributors.
Resolution SEE 1085/17 established a new scheme for the distribution of the energy transport cost to the final user and generators. Moreover, SRRYME, through Resolutions No. 2/19 and No.7/19, defined the methodology for such distribution and its inclusion in the seasonal price. As of the date of this annual report, seasonal prices approved by the SE do not cover all sector costs.
During 2021, the SE approved both winter and summer seasonal prices through different resolutions (Res. SE No. 408/21; 748/2; 1029/21 and 40/22). The main changes included the division of each distributor’s users into different categories in order to fix the reference prices to be applied to such users. For example, different reference prices were set to GUDIs which are health and education public institutions; general consumers (non-residential), residential users, and GUDIs whose activity is crypto mining. The SE defined un-subsidized prices and required distributors (mainly EDENOR and EDESUR) to calculate the subsidy for each invoice and include such amount in the respective invoice.
Even though the SE approved higher prices than those applicable to residential end users, such prices do not cover the production cost. According to CAMMESA estimates, on average seasonal prices cover around 40% of the cost of production.
In January 2022, the SE instructed the ENRE to include the discussion of the latest seasonal prices in the public hearing held on February 17, 2022 in relation to the transport and distribution tariffs. For more information see “Item 5. Operating and Financial Review and Prospects—Electricity Prices and Tariffs.”. After such hearing, on February 24, 2022, the SE issued its Resolution No. 105/22 which included an increase in the WEM seasonal prices for certain users such as public authorities, commercial and general demand, and households, to be applied from March to April 2022. The increases went from 34% to 50% for the WEM and from 10% to 20% for the WEMTF. It also approved an increase in transport fees,
On April 18, 2022, the SE issued Resolutions No. 235/22 and 236/22 which called for public hearing to address a tariff segmentation scheme for 2022 and 2023 and to analyze the WEM seasonal prices as from June 1, 2022. The public hearing will take place on May 11 and 12, 2022.
Term market
Generators may also enter into agreements in the term market to supply energy and capacity to distributors and large users. Distributors are able to purchase energy through agreements in the term market instead of purchasing energy in the spot market. Term agreements typically stipulate a price based on the spot price plus a margin. Prices in the term market have sometimes been lower than the seasonal price that distributors are required to pay in the spot market. However, as a result of the emergency regulations, prices in the term market are currently higher than seasonal prices, particularly with respect to residential tariffs, making it unattractive to distributors to purchase energy under term contracts while prices remain at their current levels.
The term market was suspended by SE Resolution No. 95/2013 which, in this aspect, remains in effect except for the Energy Plus Program and, as of 2017, renewable energy supply contracts.
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Situation at TMB and TJSM
The PPAs entered into between CAMMESA and the Bice Fideicomisos S.A. (“BICE”), in its capacity as trustee and acting on behalf of the Trusts, for the purchase and sale of energy produced by TMB and TJSM, terminated on January 6 and February 2, 2020, respectively. Consequently, as from these dates, the remuneration collectable by such power plants are those stipulated for capacity without contracts.
Simultaneously, the respective Trust agreements were terminated. As a consequence, this triggered the process for the incorporation of the Government as a shareholder of TMB and TJSM and the transfer the trust assets —including such power plants— to the beneficiary of the Trust, which are the managing companies, including Pampa. As mentioned above, the Argentine Government became a shareholder of TMB and TSJM. By decree No. 389/21 the shares were transferred to IEASA. The transfer of the assets is still pending.
As TMB and TJSM’s operating and maintenance contracts also terminated on the above-mentioned dates, on January 3, 2020, the applicable amendments to the management contracts were executed extending their validity until the actual transfer of each Trust’s liquidation assets, setting a new remuneration for such management.
Revenues from the Electric Power Generation Activity
Our revenues from the electric power generation activity come from: (i) sales to the Spot market pursuant to the provisions applicable within the WEM administered by CAMMESA (SEE Resolution No. 19/17, from February 2017, SRRYME Resolution No. 1/19 from March 2019 and SE Resolution No. 31/20 from February 2020, and SE Resolution No. 440/21 from February 2021); (ii) sales contracts with large users within the MAT (Resolutions No. 1,281/06 and No. 281/17); and (iii) supply agreements with CAMMESA (Resolutions No. 220/07, No. 21/16, No. 287/17 and RenovAr Programs). Furthermore, energy not committed under sales contracts with large users within the MAT and with CAMMESA are remunerated at the Spot market.
Remuneration Scheme for Generation Not Covered by Contracts
SE Res. No. 31/20: February 2020- January 2021
SE Res. No. 31/20 was published on February 27, 2020, modifying certain aspects of the remuneration scheme set forth by SRRYME Res. No. 1/19, effective as from February 1, 2020. The new resolution converts the entire remuneration scheme into local currency at an exchange rate of Ps.60/US$ and establishes an update factor as from the second month of its application, which follows a formula consisting of 60% CPI and 40% IPIM. However, on April 8, 2020, the SE instructed CAMMESA to postpone the automatic application of the above-mentioned adjustment formula until further notice.
Thermal Power Generators
SE Res. No. 31/20 reduces the power capacity remuneration, whether base or guaranteed, depending on the technology used. However, for thermal generation plants with a total installed power capacity lower than or equal to 42 MW, the base power capacity values set out by SRRYME Res. No. 1/19 remain in effect:
| Technology / Scale |
Capacity’s Base Price (Ps./MW-month) |
Variation vs. SRRYME Res. No. 1/19* |
| Large CC Capacity > 150 MW | 100,650 | -45% |
| Small CC Capacity ≤ 150 MW | 112,200 | -45% |
| Large ST Capacity > 100 MW | 143,550 | -45% |
| Small ST Capacity ≤ 100 MW, Internal Combustion Engines Capacity (“ICE”) > 42 MW |
171,600 | -45% |
| Large GT Capacity > 50 MW | 117,150 | -45% |
| Small GT Capacity ≤ 50 MW | 151,800 | -45% |
| Small CC Capacity ≤ 15MW | 204,000 | - |
| Small ST Capacity ≤ 15MW | 312,000 | - |
| Small GT Capacity ≤ 15MW | 276,000 | - |
| ICE ≤ 42 MW | 312,000 | - |
Note: * Assumes an exchange rate of Ps.60/US$.
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With regards to the remuneration for the offered guaranteed power capacity, the following scheme remains in effect:
| Period |
Capacity’s Base Price (Ps-/MW-month) |
Variation vs. SRRYME Res. No. 1/19* |
| Summer (December - February) and Winter (June - August) | 360,000 | -14% |
| Other (March - May and September - November) | 270,000 | -18% |
| Internal Combustion Engines ≤ 42 MW, summer/winter | 420,000 | - |
| Internal Combustion Engines ≤ 42 MW, other | 330,000 | - |
Note: * Assumes an exchange rate of Ps. 60/US$.
As is the case for the SRRYME Res. No. 1/19, the SE Res. No. 31/20 provides for the application of a coefficient which results from the unit’s average utilization factor during the last twelve months to the power capacity remuneration. Although the formula remained unchanged for internal combustion engines ≤ 42 MW, in all other cases, if the usage factor is lower than 30%, then 60% of the power capacity payment is collected.
With respect to the additional remuneration in the hours with a HMRT, which consists of the 50 recorded hours with the highest thermal generation dispatch each month, grouped in two-25 hours blocks each, the following will be applied to the average generated capacity during such hours:
| Period, in Ps./MW-HMRT | First 25 HMRT hours | Second 25 HMRT hours |
| Summer (December - February) and Winter (June - August) | 45,000 | 22,500 |
| Other (March - May and September - November) | 7,500 | - |
With respect to the remuneration for generated and operated energy, they remained unchanged in US$ at an exchange rate of Ps.60/US$, but had been set at Ps.240/MWh with natural gas, Ps.420/MWh with fuel oil, Ps.600 with biofuels (except for internal combustion engines, Ps.720/MWh) and Ps.720/MWh with mineral coal. The remuneration for operated energy was set at Ps.84/MWh.
Hydrological Generators
SE Res. No. 31/20 adjusted the power capacity remuneration and added a new HMRT remuneration. The 1.05 factor over the power capacity is maintained to compensate the impact of programmed maintenance, as well as the 1.20 factor for units maintaining control structures on river courses and not having an associated power plant.
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| Scale | Capacity’s Base Price (Ps./MW-month) | Variation vs. SRRYME Res. No. 1/19* |
| Large HI Capacity > 300 MW | 99,000 | -45% |
| Medium HI Capacity > 120 ≤ 300 MW | 132,000 | -45% |
| Small HI Capacity > 50 ≤ 120 MW | 181,500 | -45% |
| Renewable HI Capacity ≤ 50 MW | 297,000 | -45% |
| Large Pumped HI Capacity > 300 MW | 99,000 | +10% |
| Medium Pumped HI Capacity > 120 ≤ 300 MW | 132,000 | -12% |
Note: * Assumes an exchange rate of Ps. 60/US$.
With respect to the HMRT additional remuneration, the following will be applied to the average operated power capacity:
| Scale |
Capacity’s HMRT Price Ps./MW-HMRT |
| Large HI Capacity > 300 MW | 27,500 |
| Medium HI Capacity > 120 ≤ 300 MW | 32,500 |
| Small HI Capacity >50 ≤ 120 MW | 32,500 |
| Renewable HI Capacity ≤ 50 MW | 32,500 |
| Large Pumped HI Capacity > 300 MW | 27,500 |
| Medium Pumped HI Capacity > 120 ≤ 300 | 32,500 |
Weighted by the following coefficients:
| HMRT | December - February, June - August | Other |
| First 25 HMRT hours | 1.2 | 0.2 |
| Second 25 HMRT hours | 0.6 | - |
The prices for generated and operated energy have remained unchanged in US$ at an exchange rate of Ps.60/US$ but have been set at Ps.210/MWh and Ps.84/MWh, respectively. The remuneration for operated energy should correspond to the grid’s optimal dispatch. The provision does not indicate, as it does for thermal generators, which would be the consequence for failing to do so.
Other Considerations
For energy generated from any unconventional source, SE Res. No. 31/20 provides for a single remuneration value of Ps.1,680/MWh, which equals the previous remuneration at an exchange rate of Ps.60/US$, or 50% of this value if it is generated prior to commercial commissioning.
Furthermore, SE Res. No. 31/2020 provides for the application of all receivables accrued in favor of generators for settlement to the repayment of loans for the execution of overhauls, and sets a discount scheme in the generator’s revenues equivalent to Ps.60/MWh, or Ps.42,000/MW-month for the unit’s actual availability, whichever is higher. It is worth highlighting that all overhauls financing owed by Pampa were canceled under the CAMMESA Agreement for the Regularization and Settlement of Receivables with the WEM.
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SE Res. No. 440/21 amended by SE Res. No. 238/22. Current Remuneration Scheme as from February 2021 and 2022.
On May 21, 2021, SE Res. No. 440/21 was published in the Official Gazette increasing the remuneration scheme on average 29% under SE Res. No. 31/20. The resolution was retroactive as of February 2021 and rendered ineffective the update factor. The resolution further provided that generators could apply this increase provided they waived and/or dismissed all administrative and/or judicial claims filed due to the non-application of the automatic adjustment formula set by SE Res. No. 31/20. Pampa adhered to this scheme.
The remuneration scheme approved in Resolution No. 440/21 was modified on April 21, 2022, by SE Resolution No. 238/22. The latter established a 30% increase in remuneration retroactive to February 2022 and a new 10% increase to be applied from June 2022 onwards. It also eliminates the use factor used to calculate generators remuneration and the temporary energy export remuneration.
Thermal Power Generators
The remuneration comprises a fixed remuneration for the monthly available power capacity, with or without DIGO (Guaranteed Availability Commitment), a variable remuneration for generated and operated energy, and an additional monthly remuneration for the average capacity actually delivered during each month’s HMRT (hours of maximum thermal demand).
The prices for power capacity, in Ps./MW-month, for generators not offering DIGO, are as follows:
| Technology / scale | Until Jan-21 | As from Feb-21 | As from Feb-22 | As from Jun-22 |
| Large CC > 150 MW | 100,650 | 129,839 | 168,791 | 185,760 |
| Small CC ≤ 150 MW | 112,200 | 144,738 | 188,159 | 206,975 |
| Large ST > 100 MW | 143,550 | 185,180 | 240,734 | 264,807 |
| Small ST ≤ 100 MW & ICE > 42 MW | 171,600 | 221,364 | 287,773 | 316,551 |
| Large GT > 50 MW | 117,150 | 151,124 | 196,461 | 216,107 |
| Small GT ≤ 50 MW | 151,800 | 195,822 | 254,569 | 280,025 |
| Small CC ≤ 15MW | 204,000 | 263,160 | 342,108 | 376,319 |
| Small ST ≤ 15MW & ICE ≤ 42 MW | 312,000 | 402,480 | 523,224 | 575,546 |
| Small GT ≤ 15MW | 276,000 | 356,040 | 462,852 | 509,137 |
The prices for power capacity, in Ps./MW-month, for generators offering DIGO, are as follows:
| Period | Until Jan-21 | As from Feb-21 | As from Feb-22 | As from Jun-22 |
| Summer (Dec-Feb) and winter (Jun-Aug) in general | 360,000 | 464,400 | 603,720 | 664,092 |
| Others (Mar-May & Sep-Nov) in general | 270,000 | 348,300 | 452,790 | 498,069 |
| Summer and winter for ICE ≤ 42 MW | 420,000 | 541,800 | 704,340 | 774,774 |
| Others for ICE ≤ 42 MW | 330,000 | 425,700 | 553,410 | 608,751 |
Until February 2022, whether the agent offers DIGO or not, the following calculations apply to power capacity prices based on the load factor (dispatch during the rolling year prior to the calculation month). This load factor was repealed by SE Resolution No. 238/22:
| Load factor | In general | For ICE ≤ 42 MW |
| <30% | Price x 60% | Price x 70% |
| ≥ 30% & <70% | Price x (load factor + 30%) | Price x (load factor x 75% + 47.5%) |
| ≥70% | Price x 100% | Price x 100% |
Prices for generated energy according to the fuel used, in Ps./MWh, are as follows:
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| Fuel | Until Jan-21 | As from Feb-21 | As from Feb-22 | As from Jun-22 |
| Natural gas | 240 | 310 | 403 | 443 |
| FO or GO | 420 | 542 | 705 | 775 |
| Biofuels in general | 600 | 774 | 1,006 | 1,107 |
| Biofuels for ICE | 720 | 774 | 1,006 | 1,107 |
| Mineral coal | 720 | 929 | 1,208 | 1,328 |
The price for operated energy was set at Ps.84/MWh until January 2021, Ps.108/MWh as from February 2021, , Ps. 140/MWh from February 2022 and Ps. 154/MWh from June 2022, irrespective of the fuel type.
Finally, the additional remuneration applies to the average capacity actually delivered in the first and second 25 HMRT (hours of maximum thermal demand) of each month. It was set at Ps. 37,500/MW-HMRT until January 2021, Ps. 48,375/MW-HMRT from February 2021, Ps. 62,888 from February 2022 and Ps. 69,176 from June 2022 applying the following factors according to the period:
| Period | First 25 HMRT hours | Second 25 HMRT hours |
| Summer (Dec-Feb) and Winter (Jun-Aug) | 1.2 | 0.6 |
| Others (Mar-May & Sep-Nov) | 0.2 | - |
Hydrological Generators
The remuneration is comprised of a fixed remuneration for the monthly available power capacity, a variable remuneration for the generated energy and the operated energy, and an additional monthly remuneration for the average operated capacity available during each month’s HMRT. In addition, a 1.05 factor was set over the power capacity to compensate for programmed maintenance’s impacts, and a 1.20 factor for units maintaining control structures on river courses and not having an associated power plant.
The following chart shows power capacity prices in Ps./MW-month:
| Scale | Until Jan-21 | As from Feb-21 | As from Feb-22 | As from Jun-22 |
| Large HI > 300 MW | 99,000 | 127,710 | 166,023 | 182,625 |
| Medium HI > 120 MW & ≤ 300 MW | 132,000 | 170,280 | 221,364 | 243,500 |
| Small HI > 50 MW & ≤ 120 MW | 181,500 | 234,135 | 304,376 | 334,813 |
| Renewable HI ≤ 50 MW | 297,000 | 383,130 | 498,069 | 547,876 |
| Large pumped HI > 300 MW | 99,000 | 127,710 | 166,023 | 182,625 |
| Medium pumped HI > 120 MW & ≤ 300 MW | 132,000 | 170,280 | 221,364 | 243,500 |
The price for generated energy was set at Ps. 210/MWh until January 2021 and Ps. 271/MWh from February 2021, and the price for operated energy at Ps. 84/MWh until January 2021, Ps. 108/MWh from February 2021, Ps. 140/MWh from February 2022 and Ps. 154/MWh from June 2022. The remuneration for operated energy is according to the grid’s optimal dispatch. The provision does not indicate, as it does for thermal generators, what would be the consequence otherwise.
The additional remuneration for the average operated energy available in each month’s HMRT, in Ps./MW-HMRT, are as follows:
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| Scale | Until Jan-21 | as from Feb-21 | As from Feb-22 | As from Jun-22 |
| Large HI > 300 MW | 27,500 | 35,475 | 46,118 | 50,729 |
| Medium HI > 120 MW & ≤ 300 MW | 32,500 | 41,925 | 54,503 | 59,953 |
| Small HI > 50 MW & ≤ 120 MW | 32,500 | 41,925 | 54,503 | 59,953 |
| Renewable HI ≤ 50 MW | 35,000 | 45,150 | 58,695 | 64,565 |
| Large pumped HI > 300 MW | 27,500 | 35,475 | 46,118 | 50,729 |
| Medium pumped HI > 120 MW & ≤ 300 MW | 32,500 | 41,925 | 54,503 | 59,953 |
In addition, the following factors apply to the additional remuneration, according to the period:
| Period | First 25 HMRT hours | Second 25 HMRT hours |
| Summer (Dec-Feb) and Winter (Jun-Aug) | 1.2 | 0.6 |
| Others (Mar-May & Sep-Nov) | 0.2 | - |
Additionally, in the case of pumped hydroelectric units, both the generated energy and that consumed for pumping are considered. Furthermore, for hydropower plants that work as synchronous condensers, Ps. 60/MVAr were recognized until January 2021, Ps. 77/MVAr from February 2021, Ps. 100/MVAr from February 2022 and Ps. 110/MVAr from June 2022 for the megavolt-amperes (MVAr) exchanged with the grid when required, in addition to the prices for operated energy.
Other Considerations
For energy generated from an unconventional source, a single remuneration was set, of Ps. 1,680/MWh until January 2021, Ps. 2,167/MWh from February 2021, Ps. 2,817 $/MWh form February 2022 and PS. 3,099 $/MWh from June 2022, which is reduced by 50% for energy generated before commissioning.
Concerning the repayment of loans for overhauls, the application of all receivables accrued in favor of generators is established. A discount scheme is also set in the generator’s revenues for the unit’s actual availability, equivalent to the greater of Ps. 60/MWh and Ps. 42,000/MW-month until January 2021, between Ps. 77/MWh and Ps. 54,180/MW-month from February 2021, between Ps. 100/MWh and Ps. 70,434/MW-month from February 2022 and between Ps. 110/MWh and Ps. 77,477/MW-month from February 2021. It is worth highlighting that overhauls financing owed by Pampa was settled under the Agreement for the Regularization and Settlement of Receivables with the WEM, executed with CAMMESA in August 2019.
Temporary Additional Remuneration
On November 2, 2021, Resolution SE No. 1.037/21 established: (i) a WEM stabilization fund in which the income from CAMMESA’s electricity export operations will be transferred to finance energy infrastructure works; and (ii) an additional and transitory remuneration for spot market generators in consideration of CAMMESA’s electricity exports between September 1, 2021 and February 28, 2022.
On November 9, 2021, the SE, through Note NO-2021-108163338-APN-SE#ME, instructed CAMMESA to assume that the generators included under the abovementioned scheme have a use factor of 70%, for which 100% of the power remuneration would be settled and an additional amount equivalent to Ps. 1,000/MWh of exported energy will be paid in proportion to the energy generated by each generator in such month. This remuneration was repealed by SE Resolution 238/22 as from February 2022.
Differential Remuneration for Conventional Energy
SE Resolution No. 1,281/06: Energy Plus Program
In September 2006, the SEE issued Resolution No. 1281/2006 in an effort to respond to the sustained increase in energy demand following Argentina’s economic recovery after the crisis. This resolution sought to create incentives for energy generation plants in order to meet increasing energy needs. The resolution’s principal objective is to ensure that energy available in the market is used primarily to service residential users and industrial and commercial users whose energy demand is equal to or below 300 kW and who do not have access to other viable energy alternatives. To achieve this, the resolution provided that:
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| · | large users in the wholesale electricity market and large customers of distribution companies (in both cases above 300 kilowatts), will be authorized to secure energy supply up to their “base demand” (equal to their demand in 2005) by entering into term contracts; and |
| · | large users in the wholesale electricity market and large customers of distribution companies (in both cases above 300 kilowatts) must satisfy any consumption in excess of their base demand with energy from the Energía Plus system at prices that had to be approved by the ME&M. The Energía Plus system consists of the supply of additional energy generation from new generation and/or generating agents, co-generators or auto-generators that are not agents of the electricity market or who as of the date of the resolution were not part of the WEM. |
The resolution also established the price large users were required to pay for excess demand, if not previously contracted under Energía Plus, a price closer to the marginal cost of operations. This marginal cost is equal to the generation cost of the last generation unit transmitted to supply the incremental demand for electricity at any given time. The SEE established certain temporary price caps to be paid by large users for any excess demand (as of the date of this annual report, Ps.1200 for GUMEs and GUMAs and Ps.0 per MWh for GUDIs).
For information about our projects aimed at taking advantage of Energía Plus Program. See “—Our Business—Our Generation Business.”
WEM Supply Agreements under SE Resolution No. 220/2007
Aiming to modify the market conditions to encourage new investments and increase the generation supply, the SE passed Res. No. 220/07, which empowers CAMMESA to enter into ‘WEM Supply Commitment Agreements’ with WEM Generating Agents for the energy produced with new generation equipment. These are long-term U.S. Dollar-denominated PPAs, and the price payable by CAMMESA should compensate the investment made by the agent at a rate of return to be accepted by the SE. CTLL, CTP and CTEB have entered into agreements with CAMMESA under this Resolution, which account for a gross power capacity of 856 MW. Furthermore, CTEB has an ongoing expansion project to add 280 MW.
It is worth highlighting that the 10-year term of the PPA for CTP (30 MW) and CTLL’s TV01 (180 MW) expires in July and November 2021, respectively. On the other hand, CTEB has an expansion project underway to add 280 MW under this scheme, for which commissioning is estimated for the first quarter of 2022.
WEM Supply Agreements under SEE Res. No. 21/16
As a result of the state of emergency in the national electricity sector declared by Decree No. 134/15, on March 22, 2016 the SEE issued Res. No. 21/16 launching a call for bids for new thermal power generation capacity with the commitment to making it available through the WEM for the 2016/2017 summer, 2017 winter, and 2017/2018 summer periods. Awarded bidders entered into PPAs for a fixed price (in US$/MW-month) and a variable price excluding fuels (in US$/MWh) with CAMMESA, which acted on behalf of distributors and WEM’s GU.
We were awarded the installation of GT05 in CTLL for 105 MW and the construction of CTIW for a 100 MW capacity, both of which have been in service since August and December 2017, respectively. Furthermore, we acquired and developed CTPP for a 100 MW capacity, which was commissioned for service in August 2017.
SEE Resolution No. 287/17: Co-generation and CC Projects
On May 10, 2017 the SEE issued Res. No. 287/17 launching a call for bids for co-generation projects and the closing to CC over existing equipment. The projects should have low specific consumption (lower than 1,680 kcal/kWh operating on natural gas and 1,820 kcal/kWh operating with alternative liquid fuels), and the new capacity should not increase electricity transmission needs beyond the existing capacity; otherwise, the cost of the necessary extensions would be borne by the bidder.
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Awarded projects were remunerated under a PPA for a term of 15 years. The remuneration is made up of the available power capacity price plus the variable non-fuel cost for the delivered energy and the fuel cost (if offered), less penalties and fuel surpluses. Power capacity surpluses would be remunerated as legacy capacity.
Within this framework, in September 2017, the SEE issued Res. No. 820/17 awarding only three co-generation projects for a 506 MW power capacity, and, in October 2017, pursuant to Res. No. 926/17, it awarded projects for a total 1,304 MW power capacity, where Pampa was awarded with Genelba Plus’ closing to CC for a 383 MW capacity. Commercial operations at open cycle started in June 2019, and its commissioning at closed cycle started in July 2020.
Thereafter, SRRYME Resolution No. 25/19 authorized awardees of projects under SEE Resolution No. 287/17 to submit a new scheduled commissioning date, which will operate as the new committed commissioning date under the PPAs, with a limit of 180 days as from the originally committed commissioning date. However, Pampa ratified Genelba Plus CC's commercial commissioning date.
As described above, SE Resolution No. 354/2020 allows generators with PPAs under SEE Resolution 287/17 to assign the operation of the natural gas volumes and transport capacity of their contracts for the supply of the power plants with contracts under the latter resolution. The Company proceeded with such assignment, and an amendment to the PPA must therefore be executed.
Differential Remuneration for Renewable Energy
Measures for the Promotion of Renewable Energy Projects
In October 2015, Law No. 27,191 (regulated by Decree No. 531/16) was passed, which amends Law No. 26,190 on the promotion of renewable sources of energy. Among others, it provided that by December 31, 2025, 20% of the total demand for energy in Argentina should be covered with renewable sources of energy. To meet such objective, WEM’s GU and CAMMESA should cover 8% of their demand with such sources by December 31, 2017, the percentage rising every two years until the objective is met. The agreements entered into with GU and GUDI may not have an average price exceeding US$113/MWh.
Additionally, the Law provides for several incentives to encourage the construction of renewable energy projects, including tax benefits (advance VAT return, accelerated depreciation on the income tax return, import duty exemptions, etc.) and the creation of the FODER, which is destined, among other objectives, to the granting of loans, capital contributions, etc. for the financing of these projects.
RenovAr Program
ME&M Resolution No. 71/16 issued in May 2016 launched the RenovAr (Round 1) Program’s open call for tenders. In October 2016 and pursuant to Resolution No. 213/16, the ME&M awarded 29 projects for a total 1,142 MW (97% of which were wind and solar energy projects), including our 100 MW PEMC project in the Province of Buenos Aires, which was commissioned for service in June 2018. Additionally, in October 2016 ME&M Resolution No. 252/16 was issued launching the RenovAr (Round 1.5) Program’s call for tenders, and the following month ME&M Resolution No. 281/16 was issued, whereby 30 projects for a total 1,281.5 MW (100% which use wind and solar energy projects) were awarded.
Furthermore, in August 2017 ME&M Resolution No. 275/17 was issued launching the RenovAr (Round 2) Program’s call for tenders, and in December 2017 ME&M Resolutions No. 473/17 and 488/17 were issued, whereby 88 projects for a total 2,043 MW (89% of them wind and solar energy projects) were awarded. Finally, in November 2018, SGE Resolution No. 100/18 launched the RenovAr MiniRen (Round 3) Program’s call for tenders for smaller-scope renewable projects (between 0.5 and 10 MW) contemplating its connection to the facilities of the distribution company corresponding to the location, with a maximum 400 MW facility, of which 350 MW are wind and solar energy projects. SSEERR Resolution No. 91/19 awarded projects for a total capacity of 246MW under RenovAr round 3.
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In all projects under the RenovAr rounds, any and all reductions of greenhouse-gas emissions resulting from the power capacity installed throughout the national territory, including that resulting from any other project accounted for to reach the WEM’s renewable power capacity goals set in Law No. 27,191, will be recognized by the Argentine Government towards the fulfillment of the contribution goal under the United Nations Framework Convention on Climate Change and the Paris Agreement.
During 2021, several changes were introduced to the Renovar regime by the SE Resolution No. 742/21 that modified the penalties scheme. Under such modifications the penalties for breach of supply commitments may be cancelled in installments.
Additionally, an extra term was granted to the projects that experienced a delay in the entry into commercial operations committed date. Depending on the term granted to the project the term of the PPA with CAMMESA and the penalties to be paid during such extra term vary.
Moreover, in order to increase transport capacity, SE Resolution No. 1260/21 approved a scheme that allowed the owners of the projects that did not meet the entry into commercial operations committed date to terminate their commitments with CAMMESA by means of payment of a penalty (equivalent to 17,500 US$/MW for wind and solar projects and 12,500 US$/MW for other technologies) and the fulfillment of other conditions.
Alternatively, the owners of such projects could: (i) request an extension of the entry into commercial operations committed date in which case the term and price of the relevant PPA would be reduced; or (ii) reduce the project capacity (Renovar 3 projects are not eligible for this option).
In each case, the owner of the project must present a waiver to file any and all claims against the SE, CAMMESA, etc. for damages derived from the chosen alternative.
MAT ER
ME&M Resolution No. 281/17 issued on August 18, 2017 regulated the MAT ER regime, which set the conditions for WEM GU and GUDI to meet their demand supply obligation from renewable sources through the individual purchase within the MAT ER or through self-generation from renewable sources. Furthermore, this Resolution regulates the conditions applicable to renewable power generation projects. Specifically, it created the RENPER, where such projects will be registered.
Projects destined to supply the MAT ER may not be committed under other remuneration mechanisms (e.g., the Renovar program). Surplus energy exceeding commitments with CAMMESA are remunerated until 10% of the generation at the minimum price for the technology covered by the RenovAr Program, and the balance, at the remuneration value for that type of technology set in SEE Resolution No. 19/17.
Furthermore, agreements executed under the MAT ER regime will be administered and managed in accordance with the WEM procedures. The contractual terms term, allocation priorities, prices and other conditions, notwithstanding the maximum price set forth in Section 9 of Law No. 27,191, may be freely agreed between the parties, although the committed electricity volumes will be limited by the power from renewable sources produced by the generator or supplied by other generators or suppliers with which it has purchase agreements in place.
We registered the PEPE II, III and IV projects with the RENPER. We also requested the corresponding priority dispatch under ME&M Resolution No. 281/17, which was granted for the whole 160 MW installed capacity of the three projects.
Regarding the PEPE IV project, even though it was announced on May 23, 2018, the volatility of the economy and changes in the applicable legislation adversely affected the project (for more information, please see “Our Generation Business”).
In October 2021, Pampa obtained dispatch priority for PEPE III’s expansion project for 36 MW out of the total 81MW. The Company estimates to obtain dispatch priority for the remaining capacity in future rounds.
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However, it is worth highlighting that SE Resolution No.14/22, issued in January 2022, modified the tie-breaking criteria when there is more than one project requesting dispatch priority and the relevant corridor does not have enough transport capacity. The new scheme replaced the original criteria (term, use factor and draw), and instead requires a multiplying factor to be applied on the amounts to be paid to reserve such dispatch priority as established in SE Resolution No. 551/21.
SE Resolution No. 551/21 replaced the guarantee grant to reserve dispatch priority for a scheme in which payments are be made according to the extension of time and the completion of the work. During the committed term a 500 US$/MW quarterly payment applies. In case of an extension for an additional 180 calendar days with work completed by least 60% the payments will continue to be quarterly and for a 500 US$/MW amount. If the work is completed by less than 60% the payments will be on a monthly basis. For an extra extension of 360 calendar days the payments will raise to 1500 US/MW monthly.
WEM Agents payments to CAMMESA
SRRYME Resolution No. 29/19 relaxed the charges and interest rates applicable to WEM agent in default with CAMMESA.
i. Punitive charges: to those WEM agents with no outstanding balance against CAMMESA in the last three months, the charge for default will be equal to 1% of the debt for each day with a cap.
ii. Default Interests rates: If the WEM agent have duly paid the last three payments to CAMMESA prior to the month in default, no punitive charges shall apply and the interest rate shall be equal to that fixed by Banco de la Nación Argentina for its 30 day discount operations, provided that the payment is made within 15 days from its due date.
iii. Compensations: in the case of delays not exceeding 5 days in a certain month, compensations without the application of compensatory interest are allowed by advancing the payment of the following invoice by 2 days per each day of delay.
iv. Charges reduction extension: SRRYME Resolution No. 29/19 extended the 50% reduction in the charges applicable to WEM agents with outstanding debt against CAMMESA until April 30, 2020. SE Resolution No. 148/2020 extended the application of SRRYME Resolution No. 29/19 until December 31, 2020.
Additionally, on April 8, 2020, the Secretariat of Energy instructed CAMMESA to implement an extraordinary payment mechanism for WEM Agents affected by the Covid-19 related quarantine. According to such mechanisms, WEM Agents may partially cancel their energy supply according to the impact on their sales and postpone the payment of the remaining balance for a period between 15 days to 6 months. Such amounts shall not accrue charges nor interest. This mechanism applies to the energy supplies due from April 1, 2020 to 60 days after the abrogation of the Covid-19 isolation. During 2020, there was no adjustment to the prices set forth in Resolution No. 31/2020. For more information, please see (“—The emergence and spread of a pandemic-level disease or threat to public health, such as Covid-19, may have a material adverse impact on the Argentine and global economy, our business operations, financial condition or results of operation”).
Moreover, Law No. 27,591 and SE Resolution No. 40/2020 defined a scheme according to which the Argentine Government will cover up to 66% of the distributors’ debt to CAMMESA. The remaining amounts will be cancelled in 60 monthly installments with a 6-months grace period and a reduced interest rate (50% of the WEM’s interest rate). In order to apply for such scheme, the distributor, together with its relevant regulatory body, shall execute an agreement with the SE in which, among other obligations, it shall guarantee a scheme that allows the distributor to regularly pay the amounts due to CAMMESA in 2021 and provide adequate guarantees (e.g. assignment of the amounts owed to the distributor by its clients).
In case the distributor has no debt, or if it is “reasonable”, then credits will be recognized. Such credits might be designated for infrastructure investments or widening the distribution network, among other examples. These distributors shall regularly pay the amounts due to CAMMESA.
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The credits to be recognized under both schemes will be funded by loans from the Unified Fund to the Stabilization Fund, but given that such fund is deficient, it is expected to be covered by transfers from the Argentine Government. However, these schemes tend to regularize the energy sector cash flow.
Oil & Gas Regulatory Framework
The Argentine Hydrocarbons Law
On October 29, 2014, the National Congress enacted Law No. 27,007 amending Hydrocarbons Law No. 17,319, which considered new drilling techniques in the industry and mainly introduced changes to terms and extensions of exploration permits and exploitation concessions, levies and royalty rates, the incorporation of concepts for on and off-shore unconventional exploration and exploitation, and a promotion regime pursuant to Decree No. 929/13, among others. The main changes introduced by Law No. 27,007 are detailed below:
Unconventional Hydrocarbons Exploitation
The Law conferred legal status to the concept of “Unconventional Hydrocarbon Exploitation Concession” created by Decree No. 929/13. The term unconventional hydrocarbon exploitation is defined as the extraction of liquid and/or gaseous hydrocarbons by unconventional stimulation techniques applied in reservoirs situated in geological formations of schist rock or slate (shale gas or shale oil), tight sandstone (tight sands, tight gas, tight oil), coal bed methane and/or deposits characterized, in general, by the presence of low permeability rocks.
Holders of exploration permits and/or hydrocarbon exploitation concessions will be entitled to request an unconventional hydrocarbon exploitation concession to the enforcement authority pursuant to the following terms:
| · | The exploitation concessionaire may request, within its block, the subdivision of the existing block into new unconventional hydrocarbon exploitation blocks and the granting of an unconventional hydrocarbon exploitation concession. Such request will be based on the development of a pilot plan aiming at the commercial exploitation of the discovered reservoir pursuant to acceptable technical and economic criteria. |
| · | Holders of an unconventional hydrocarbon exploitation concession that are also holders of a preexisting and adjacent exploitation concession may request the unification of both blocks as a single unconventional hydrocarbon exploitation concession, provided they duly demonstrate the geological continuity of these blocks. Such request should be based on the development of a pilot plan. |
Terms for Exploitation Concessions and Permits
The terms for the exploration permits will be established in each tender issued by the enforcement authority according to the exploration’s purpose (conventional or unconventional):
| i. | Conventional exploration: the basic term is divided into two periods of up to three years each, plus an optional extension of up to five years. In this way, the maximum extension for exploration permits is reduced from fourteen to eleven years; |
| ii. | Unconventional exploration: the basic term is divided into two periods of four years each, plus an optional extension of up to five years, that is, up to a maximum of 13 years; and |
| iii. | On and off-shore exploration: the basic term is divided into two periods of three years each, plus an optional extension of one year each. |
Upon the expiration of the first period of the basic term, the d permit holder will decide whether to continue exploring the block or to transfer it back in whole to the Government. The whole originally-granted block may be kept provided the obligations arising from the permit have been appropriately met. Upon the expiration of the basic term, the holder of the exploration permit will revert the whole block, unless it exercises its right to extend the period, in which case the reversion will be limited to 50% of the remaining block.
Exploitation concessions will be granted for the following terms, which will be computed as from the granting resolution’s date:
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| i. | Conventional exploitation concession: 25 years; |
| ii. | Unconventional exploitation concession: 35 years; and |
| iii. | Continental shelf and off-shore exploitation concession: 30 years. |
Moreover, the holder of an exploitation concession may, with a minimum one-year notice before the concession’s expiration, request indefinite extensions for a 10-year term each, provided that it has adequately met its obligations as exploitation concessionaire, hydrocarbons are produced in said block and files an investment plan consistent with the development of the concession.
Awarding of Areas
Law No. 27,007 proposes drafting of a standard bid form that will be jointly prepared by the SE and the provincial authorities, to which all calls for tenders launched by law enforcement authorities should adjust, and introduces specific criteria for the awarding of permits and concessions by incorporating the specific parameter of “greater investment or exploitation activity” as a tie-breaker, at the PEN or the Provincial Executive Branch’s duly justified discretion, as applicable.
| · | Levies and Royalties |
The amended Hydrocarbons Law updated the values related to the exploration and exploitation levy established by Decree No. 1,454/07; such values may, in turn, be generally updated by the PEN. The current values for each levy and royalty are detailed below.
| - | Levy |
Law No. 27,007 set the levy values per km2 or fraction to be paid annually and in advance by the permit holder. The exploitation permit will amount to Ps.4,500. In contrast, for the exploration permit, the following values will apply: Ps.250 in the first period and Ps.1,000 in the second period of the basic term; and Ps.17,500 during the first year of the extension, with a 25% annual cumulative increase.
The amount payable for the second period of the basic term and the extension period may be readjusted by offsetting it with exploration investments made until reaching 10% of the levy per km2 applicable for the period.
On September 26, 2019, the Province of Neuquén published new levy values per km2 or fraction effective for the said province as from 2020. The exploitation levy was set at Ps.22,410, and the exploration levy at Ps.1,245 for the first period, Ps.4,980 for the second period, Ps.7,470 for the third period, and Ps.87,150 for the extension period (Decree No. 2032/19).
As of 2021, Decree No. 771/20 set a maximum levy in Ps. equivalent to a certain volume of oil at the average domestic market price, at the Banco Nación’s FX rate effective last business day before payment. This scheme is applicable nationwide (including the Province of Neuquén). The exploitation concession amounts to 8.28 barrels. The exploration permit applies 0.46 barrels in the first period and 1.84 barrels in the second period of the basic term; and 32.22 barrels during the extension period.
Royalties
Royalties are defined as the only revenue the jurisdictions holding title to the hydrocarbons will collect, in their capacity as grantors, from the production of hydrocarbons.
The percentage that the exploitation concessionaire should pay on a monthly basis to the grantor as royalties remains at 12% of the proceeds derived from liquid hydrocarbons production extracted at the wellhead. The production of natural gas will bear a similar percentage of the value of extracted and actually used volumes and will be payable on a monthly basis. In the case of extension, up to 3% additional royalties’ payment is applicable upon the first extension but limited to an 18% rate.
For the conduction of hydrocarbon conventional exploitation complementary activities, as from the granted concession’s expiration and within the unconventional hydrocarbons’ exploitation concession, the enforcement authority may fix additional royalties of up to 3% above the current royalties, up to a maximum of 18%, as applicable.
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The PEN or the Provincial Executive Branch, as applicable, acting in its capacity as granting authority, may reduce by up to 25% the amount corresponding to royalties applicable to the production of hydrocarbons during a term of 10 years after the conclusion of the pilot project in favor of companies requesting a hydrocarbon unconventional exploitation concession within a period of 36 months as from Law No. 27,007’s effective date.
| - | Extension Bond |
For exploitation concession extensions, Law No. 27,007 empowers the enforcement authority to establish the payment of an extension bond, capped by the amount resulting from multiplying the remaining proven reserves at the expiration of the concession by 2% of the average basin price applicable to the specific hydrocarbon during a term of two years before the granting of the extension.
| - | Exploitation Bond |
The enforcement authority may establish the payment of an exploitation bond, capped by the amount resulting from multiplying the remaining proven reserves associated with the exploitation of conventional hydrocarbons at the expiration of the granted concession by 2% of the average basin price applicable to the specific hydrocarbons for the two years prior to the granting of the hydrocarbon unconventional exploitation concession.
| - | Transportation Concessions |
Transportation concessions (so far granted for 35 years) will be granted for the same term granted for the originating exploitation concession, with the possibility of receiving subsequent extensions of up to 10 years each. Thus, transportation concessions originating in a conventional exploitation concession will have a basic 25-year term. In contrast, an unconventional exploitation concession will have a basic 35-year term, each in addition to any granted extension term. After these terms expire, title to the facilities will be transferred back to the Federal or Provincial Government, as applicable, by operation of law and without any charges or encumbrances.
| - | Uniform Legislation |
Law No. 27,007 provides for two types of non-binding commitments between the Federal Government and the provinces regarding tax and environmental issues:
| i. | Environmental Legislation: Provides that the Federal Government and the provinces will seek to establish a uniform environmental legislation primarily aiming to apply the best environmental management practices to hydrocarbon exploration, exploitation and/or transportation with the purpose of furthering the development of the activity while properly protecting the environment. |
| ii. | Tax System: Provides that the Federal Government and the provinces will seek to adopt a uniform fiscal treatment encouraging the development of hydrocarbon activities in their corresponding territories in adherence with the following guidelines: |
| · | The gross receipts tax rate applicable to the extraction of hydrocarbons will not exceed 3%; |
| · | The freezing of the current stamp tax rate and the commitment not to charge with it any financial contracts executed in order to structure investment projects, guarantee and/or warrant investments; and |
| · | The commitment by the provinces and its municipalities not to impose new taxes —or increase the existing ones— on permit and concession holders, except for service compensation rates, improvement contributions and general tax increases. |
Restrictions on the Reservation of Blocks to National or Provincial Government-Controlled Companies
The amendment to the Hydrocarbons Law restricts the Federal Government and the provinces from reserving new blocks in the future in favor of public or mixed-capital companies or entities, irrespective of their legal form. However, contracts entered by local companies for the exploration and development of reserved blocks before this amendment are safeguarded.
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Regarding blocks that have already been reserved in favor of public companies and that have not yet been awarded under joint venture agreements with third parties, associative schemes may be used, in which case the participation of such companies during the development stage will be proportional to their investments. Thus, the “carry” system during the blocks’ development or exploitation stage has been eliminated. Such system has not been prohibited for the exploration stage.
Conventional and Unconventional Hydrocarbon Investment Promotion Regime
On July 11, 2013, the PEN issued Decree No. 929/13, which created the Investment Promotion Regime for the Exploitation of Hydrocarbons —both conventional and unconventional— to encourage investments and the concept of unconventional exploitation concession.
Law No. 27,007 extended the benefits of the Promotion Regime to hydrocarbon projects involving a minimum US$250 million foreign currency direct investment, assessed at the time the hydrocarbon exploitation investment project is presented, to be invested during its first three years. Before the amendment, the Promotion Regime benefits reached investment projects denominated in foreign currency for a minimum of US$1,000 million amount during a term of five years.
Holders of exploration permits and/or hydrocarbon exploitation concessions, and/or third parties associated and registered with the National Registry of Hydrocarbon Investments submitting this kind of projects will enjoy, as from the third year of execution, the right to freely sell abroad 20% and 60% of the liquid and gaseous hydrocarbon production in the case of conventional and unconventional exploitation projects and offshore projects, respectively, with a 0% export duty, if applicable. Moreover, they will have free availability of 100% of the foreign currency derived from the exportation of these hydrocarbons, provided the applicable projects have involved a minimum of US$250 million of foreign currency entering into the Argentine financial market.
During periods in which the national production of hydrocarbons is insufficient to meet domestic needs pursuant to Section 6 of the Hydrocarbons Law, those covered by the Promotion Regime will have, as from the third year following the execution of their respective investment projects, the right to obtain a price which shall not be lower than the reference export price (without computing the incidence of any applicable withholdings) from the exportable liquid and gaseous hydrocarbon percentage produced under such projects.
According to these investment projects, Law No. 27,007 provides for two contributions payable to the producing provinces, where the investment project is developed: (i) 2.5% of the investment amount paid by the project holder, destined to corporate social responsibility projects; and (ii) an amount determined by the Hydrocarbon Investments Committee paid by the Federal Government, based on the size and scope of the investment project, destined to infrastructure projects.
Regulations Specifically Applicable to the Gas Market
Plan Gas.Ar
According to Decree No. 892/20, on November 16, 2020, Plan Gas.Ar program was created to promote Argentine natural gas production, reduce and replace LNG and liquid fuels imports, provide supply chain predictability, and manage the impact of the cost of gas on the tariff of the priority demand. The on-shore production term is four years, with an additional four years for offshore production, as from January 2021. Beneficiaries of the Unconventional Plan Gas opting to participate in this program should first file their waiver.
Tender methodology and purchasing conditions
The SE instrumented a tender between producers as sellers, and CAMMESA, gas distributors and IEASA (in the case of Patagonia, Malargüe and the Puna), as purchasers, for a total base volume of 70 million m3/day (67% for the Neuquina Basin), extendable for the winter period (May – September), with 100% daily DoP and 75% monthly ToP condition for CAMMESA and quarterly for gas distributors and IEASA. The maximum base price for the Neuquina Basin to tender was US$3.7/MBTU. Moreover, the awarded price will be adjusted by a 0.82 factor for the non-winter period, 1.25 for the winter period, and 1.30 for the additional volume during winter.
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The producer commits a minimum production per basin and per month as from January 2021 equivalent to the base injection (average between May and July 2020), and a maximum production lower than or equal to 70% of the production committed for the May – July 2021 period in the case of onshore production, and May - July 2020 for offshore production. Additionally, producers must submit an investment plan to maintain the committed production and a national added-value commitment providing the development of direct local, regional and national suppliers.
If the injection in the months of June, July and/or August is lower than that committed, the producer may offset the shortfall with: (i) own production from another basin or acquired from another signatory producer, as long as there is available transportation capacity; (ii) imports on its own account; (iii) a payment equivalent to 2 times the shortfall volume at the tendered price with a 1.25 adjustment factor.
Moreover, participating producers may export on a firm basis, with a preferential order for those tendering lower prices, up to the aggregate volume of 11 million m3/day (64% Neuquina Basin) during the non-winter period, extendable to the winter period provided there is an oversupply in a specific basin.
Regarding the price payable, purchasers CAMMESA and IEASA will make the payment at the price awarded under the Plan Gas.Ar call for tenders, whereas gas producers will pay the amount established in the tariff scheme in force, and the difference in the awarded price will be compensated by the Argentine Government. According to the concession, this compensation will be subject to withholding according to the province and/or the Argentine Government’s royalties rate. As long as the producer submits the production’s affidavit within 30 days after the closing of the injection month, they will receive a provisional payment of 75% of the compensation net of royalties within the following 30 days, and the adjusted payment for the balance within 60 days as from the presentation of the affidavit certified by independent auditors, considering Banco Nación’s selling exchange rate on the last business day of the injection month.
Additionally, according to the Plan Gas.Ar framework, the Argentine Government created a guarantee system to secure compensation, notwithstanding other mechanisms, based on the recognition of fiscal credits, in accordance with the applicable legislation and as regulated by the enforcement authority and/or AFIP. Such mechanism was regulated by SE Resolution No. 125/2021, which instrumented electronic certifications in foreign currency that producers may directly apply to fulfill fiscal liabilities in Plan Gas.Ar default by the Argentine Government. Moreover, the SE will be empowered to make the awardees’ guarantee enforceable before the AFIP. The AFIP instruments said system on March 4, 2021.
Finally, the BCRA should establish appropriate mechanisms to facilitate access to the MLC, as long as the funds have been admitted by the MLC and subsequently to the coming into effect of the DNU, and destined to the financing of projects under the Plan Gas.Ar.
Tender award
On December 15 and 29, 2020, the SE awarded 67.4 million m3/day of natural gas (55% of which was destined to power plants) at an average annual base price of US$3.5/MBTU, as well as an additional volume of 3.6 million m3/day during the winter period at a price of US$4.7/MBTU. Pampa was awarded a base volume of 4.9 million m3/day at US$3.6 per million BTU and an additional volume of 1.0 million m3/day during the winter period at a price of US$4.7 per million BTU.
Moreover, Pampa was one of the three producers tendering additional volume during the winter period, being awarded 1 million m3/day for US$4.68 per million BTU. Out of the 4.9 million m3/day of the base tender, 56% will be destined to power plants and the balance to gas distributors or IEASA. In contrast, the additional winter volume will be destined to gas distributors or IEASA.
Hence, Pampa achieved the highest growth in tendered production, with the winter peak injection 20% higher than average output between May and July 2020, with an approximate investment of US$250 million during the four years of Plan Gas.Ar. This winter volume is critical to support the highly seasonal gas demand, reduce gas imports and alternative fuels consumption, and moderate foreign currency reserves.
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On February 22, 2021, pursuant to Resolution No. 129/2021, the SE called for a second round to award additional winter gas volumes at Neuquina and Austral Basins, with a daily DoP between 75% and 100% for 2021 and 100% for 2022-2024, and 75% monthly ToP. The maximum bidding price was equivalent to the awarded price on the first round. Through SE Resolution No. 169/21, a total average volume of 3.3 million m3/day at US$4.7 per MBTU, is to be delivered as of June 2021. Pampa participated in said round, being awarded 0.8 million m3/day at US$4.7 per MBTU. Additionally, the awarded companies will have to enter into a contract with IEASA.
Finally, on October 19, 2021, through Resolution No. 984/2021, the SE launched the third round to award a total amount of 6 million m3/day of natural gas corresponding, 3 million m3/day at maximum price of US$3.66/MBTU for the Neuquina Basin, 2 million m3/day at maximum price of US$3.52/MBTU for the Austral Basin and 1 million m3/day at maximum price of US$3.577 MBTU for the Northwest Basin. This round is valid from May 1, 2022, to December 31, 2024.
On November 12, 2021, the SE awarded a total of 3 million m3/day, corresponding to the Neuquén Basin at US$3.43/MTBU and the volumes of the Northwest and Austral Basins were declared void. Pampa was awarded a volume of 2 million m3/day at US$3.347/MTBU. Additionally, the awarded companies are required to execute the contracts with IEASA for the period of May to September and with CAMMESA for the period of October to April.
Natural Gas for the Residential and CNG Segment
| - | Priority Demand and CEE |
In June 2016, criteria were established to guarantee the Priority Demand's meeting through the CEE in case of operational emergencies that may affect its regular operation (MEyM Res. No. 89/16, as amended). In June 2017, the procedure for the administration of dispatch in the CEE was approved (ENARGAS Res. No. 4502/17). If the CEE did not reach an agreement, ENARGAS defines the required supply considering each producer’s available quantities, deducting the amounts previously contracted to meet the Priority Demand, with a progressive allocation until matching the proportional quota of each producer/importer in the Priority Demand.
| - | Natural Gas Price within the PIST |
In December 2017, the extension period set forth by Law No. 27,200 to the public emergency declared in 2002 terminated. Therefore, Law No. 24,076 was reinstated, which provides that the price of natural gas supply should be determined by the free interaction of supply and demand.
In mid-February 2019, a call for tenders was launched for the supply of natural gas to distribution companies on a firm basis to ToP and DoP up to 70% of the maximum daily volume and for a term of 12 months starting April 2019. For the Noroeste Basin, 9.4 and 3.8 million m3 per day were assigned for the winter (April-2 September 2019) and summer (October 2019-April 2020), respectively, at an average tender price of US$4.35/MBTU. For the rest of basins, 36.1 and 14.4 million m3 per day were assigned for the winter and the summer, respectively, at an average tender price of US$4.62/MBTU. Pampa participated and was awarded in this tender.
Producers billed to distribution companies in Pesos considering Banco Nación’s average exchange rate for the first 15 days of the month immediately preceding the beginning of each seasonal period or, if lower, the exchange rate stipulated in the agreements (ENARGAS Res. No. 72/19). However, the exchange rate update which should have been implemented on October 1, 2019, applicable to the October 2019 - April 2020 summer seasonal period, was deferred on several occasions. These agreements expired on March 31, 2020. Given the devaluation of the Ps. added to the tariff freeze (Social Solidarity and Productive Reactivation Law), as from April 2020 pricing agreements began to be based on the range recognized by ENARGAS in the tariff schemes.
In December 2020 the tender under Plan Gas.Ar was conducted, agreeing on the supply to gas distributors and power plants for the 2021-2024 period for a total of 67.4 million m3/day, 35% of which will be destined to distributors. The average tendered annual base price was US$3.5/MBTU, and an additional winter volume of 3.6 million m3/day was awarded at an average annual base price of US$4.7/MBTU to be exclusively destined to the Priority Demand. Pampa participated and was awarded in this tender.
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Further, Decree No. 1053/18 provided that the Federal Government would bear the difference between the price of gas purchased by distributors and that recognized in final tariffs between April 2018 and March 2019. As of the date of this annual report, Pampa has collected the first installment of Ps. 41 million. However, on December 14, 2020 Law No. 27,591 was published, which abrogated this Decree. Pampa is evaluating the courses of action to take.
It is worth highlighting that as from 2021 and pursuant to SE Res. No. 354/20, the new reference price at the PIST was set for natural gas production out of Plan Gas.Ar, at US$2.30/MBTU in the summer (October – April) and US$3.50/MBTU in the winter (May – September) for the Neuquina Basin.
| · | Natural Gas for Power Generation |
From December 30, 2019, the fuel supply for power plants was again centralized in CAMMESA (except for generators under Energía Plus and SEE Res. No. 287/17 contracts). Since then, CAMMESA has launched successive calls for tenders to cover its monthly consumption. Moreover, from 2021, most gas supplies to CAMMESA are channeled through Plan Gas.Ar for the volumes committed under this program over a term of 4 years. Generators covered by Energía Plus and SEE Res. No. 287/17 contracts have the option to assign the natural gas operation and transportation to CAMMESA. Pampa acceded to this scheme.
It is worth mentioning that from 2021 new reference PIST prices were set for production outside Plan Gas.Ar (SE Res. No. 354/20), of US$2.3/MBTU in the summer (October – April) and US$3.5/MBTU in the winter period (May – September) for the Neuquina Basin.
Therefore, in addition to Plan Gas.Ar, in 2021 CAMMESA continued calling for tenders monthly, at the maximum prices stated above, on an interruptible basis for Plan Gas.Ar’s awardees and under a 30% DoP clause for the rest. However, from September 2021, these calls were declared unawarded.
Moreover, from mid-July 2021, CAMMESA launched, on average, fortnightly calls for Plan Gas.Ar’s awardees to offer surplus volumes on an interruptible basis, with a maximum price equivalent to that awarded in the first round. In 2021, an average of 25.2 million m3/day were awarded at US$3.4/MBTU (US$4.4/MBTU until September and US$2.9/MBTU onwards). After the closing of 2021, an average of 22.1 million m3/day was awarded at US$2.9/MBTU.
| · | Natural Gas Export |
The procedure for the authorization of natural gas exports established by SGE Res. No. 417/19 —with the security of supply to the Argentine domestic market being a condition in all cases— was in effect until the end of April 2021. It is worth mentioning that the exported volume did not qualify for calculating the incentive for domestic production increase encouragement programs.
In November 2020, Pampa was granted permits to export gas, on an interruptible basis, to different customers in Chile; these permits expired between April 2021 and January 2022.
On April 27, 2021, a new procedure to authorize natural gas exports was implemented (SE Res. No. 360/21). New permissions contemplate exports on a firm and preferential basis for Plan Gas.Ar’s awardees and set a minimum sales price equivalent to the off-peak price awarded in round 1. The Company, as an awardee under Plan Gas.Ar, may make firm exports during the summer period, extendable to the winter period when there is an oversupply in a specific basin and with the prior approval of the applicable authority.
In May and December 2021, Pampa was granted permits to export gas to Chile on a firm basis for a maximum volume of 1.5 million m3/day and 1.22 million m3/day for the October 2021 – April 2022 and January – April 2022 periods, respectively. In addition, between September and December 2021, new interruptible permits to Chile, Brazil, and Uruguay were added, with expirations between November 2022 and December 2024.
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It is worth highlighting that a natural gas export duty has been in effect since May 2020. PEN Executive Order No. 488/20, issued on May 19, 2020, established an export duty exemption as long as the international Brent price was equal to or below US$45/bbl. The rate would rise gradually in line with the international reference price until reaching 8%, the cap to be recognized when Brent equals or exceeds US$60/bbl. In 2021, the rate remained at 8%, except for January (3.1%) and February (5.7%).
Regulations Specifically Applicable to the Crude Oil Market
| · | Crude Oil Commercialization in the Domestic Market |
As of the date of this annual report, there is no reference price for trading crude oil in the domestic market. However, considering the fuel price netback at the pump, local refiners are accepting prices below export parity.
| · | Liquid Hydrocarbons Export Duty |
The Decree No. 488/20, issued on May 19, 2020, provided for an export duty exemption as long as the international Brent price was equal to or below US$45/bbl, rising gradually as the international reference price increased until reaching 8%, the cap to be recognized when the reference price equals or exceeds US$60/bbl. As of the date of this annual report, the rate amounts to 8%.
Midstream
| · | Regulations Specifically Applicable to the LPG Business |
| - | Household Gas Bottles’ Program and Propane for Grids Agreement |
The program for the supply of butane for gas bottles at subsidized prices, created by Decree No. 470/15 and encompassed under the Household Gas Bottles’ Program (SRH Resolution No. 56/17, as amended), is currently in force, and provides for the supply of a defined quota of LPG to fractionation companies, under a maximum reference price, to benefit low-income residential users. The sales price for butane and propane sold under the Household Gas Bottles’ Program is determined by the SRH, which set a price of Ps. 9,895/ton for butane and Ps. 9,656/ton for propane as from July 1, 2019 (SHC Provisions No. 104/19). Later, prices were updated to Ps. 10,885/ton for both products effective as from October 19, 2020 (SE Resolution No. 30/20). Consequently, the participation in this program forces TGS and Refinor to produce and sell LPG at prices ostensibly lower than market prices, which entails adopting the necessary mechanisms to minimize its negative impact.
With respect to the Agreement for the Supply of Propane Gas for Undiluted Propane Gas Distribution Grids, on May 30, 2018, TGS executed the 16th extension to the agreement, which set a new methodology for the determination of the price and volumes to be sold under this program for the April 1, 2018 -December 31, 2019 period. On January 14, 2020 TGS received the SE’s instruction to proceed with the deliveries pursuant to such extension. On August 25, 2020, TGS executed the seventeenth extension to the Propane for Grids Agreement, effective until December 31, 2020. As of the date of release of this Annual Report, this program has not been postponed.
Both the Household Gas Bottles’ Program and the Propane for Grids Agreement provide for a compensation payable by the Federal Government to participants, which is calculated as the difference between the sale price under such agreement and the export parity published by the SRH on a monthly basis, although with significant delays in collection terms.
| - | Natural Gas Import Financing Charges |
Regarding Res. I-1,982/11 and I-1,991/11 issued by ENARGAS, which at the time provided for an approximate 700% increase in the natural gas import financing charge (created by Decree No. 2,067/08), on March 26, 2019, TGS was served notice of the first-instance ruling upholding its claim for unconstitutionality and nullity of the above-mentioned provisions. The Federal Government appealed this ruling on March 29, 2019; the appeal was granted on April 3, 2019, and has not been resolved as of the date hereof.
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On December 1, 2020, the Court hearing the case resolved, taking into consideration the ruling and in view of the reasons alleged by TGS, to extend the validity of the granted injunction for a term of six months in such ordinary proceeding and/or until a final and conclusive ruling is issued.
| - | Export Duty |
As for hydrocarbon exports, as from September 2018 there was an export duty of Ps. 4 per exported US$ for propane, butane and LPG, with a maximum 12% rate (Decrees No. 793/18 and 865/18). The Social Solidarity and Productive Reactivation Law provided that, effective as from December 23, 2019, this rate may not exceed 8% of the taxable value or the FOB price. However, until its regulation, Decrees No. 793/18 and 865/18 continued to apply. Decree No. 488/20, issued on May 19, 2020, provided for an export duty exemption as long as the international Brent price was equal to or below US$45/bbl, rising gradually as the reference price increases up to 8%, the cap to be recognized when the Brent equals or exceeds US$60/bbl. As of the date of this annual report, the rate amounts to 8%.
| · | Regulations Specifically Applicable to Crude Oil Transportation |
In June 2016, Oldelval requested the performance of the RTI to the MEyM as tariffs were insufficient to develop a maintenance and investment plan that may guarantee the integrity, efficiency and reliability of the facilities and transportation service. Consequently, on March 10, 2017, a new US$-denominated tariff scheme was published, providing for an average 34% increase, effective for a term of 5 years as from March 2017 (MEyM Res. No. 49/17). In November 2018 Pampa divested 21% of Oldelval’s capital stock to ExxonMobil Exploration Argentina S.R.L., keeping a 2.1% equity interest in Oldelval.
| Item 4A. | Unresolved Staff Comments |
Not applicable.
| Item 5. | Operating and Financial Review and Prospects |
This section contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including, without limitation, those set forth in “Note 6.1 - Critical accounting estimates and judgments” of our Consolidated Financial Statements “Forward-Looking Statements” and “Item 3. Key Information—Risk Factors” and the matters set forth in this annual report generally.
The following discussion is based on, and should be read in conjunction with our Consolidated Financial Statements and related notes contained in this annual report.
Sources of Revenues
Generation
Our generation operations derive revenues from the sale of electricity sales contracts with large users within the MAT, supply agreements with CAMMESA and sales to the spot market. Revenues are recognized when power plants are available and the delivery of energy is effective.
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Distribution of Energy
On account of the sale of our 51% interest in Edenor (see detail in Note 5. 1 to our Consolidated Financial Statements and Item 4. “Relevant Events—Sale of Controlling Stake in Edenor.”), Edenor’s revenues, until June 30, 2021, mainly from electricity sales to users in the distribution service area (on the basis of applicable tariffs), were disclosed within discontinued operations.
Oil & Gas
Our oil and gas operations derive revenues from the sale of natural gas to CAMMESA, gas distributors and industrial clients, mostly in the domestic market. Regarding crude oil, we sell our production in the domestic and foreign market. Revenues are recognized when the control of these products is transferred.
Petrochemicals
Our petrochemicals operations generate revenues from the sale of styrene, polystyrene and elastomers, and plastics derived from oil production. We produce a wide array of products, such as intermediate gasoline, aromatic solvents, hexane and other hydrogenated paraffinic solvents, propellants for the cosmetic industry, monomer styrene, as well as rubber and polymers for the domestic and foreign markets from natural gas, virgin naphtha, propane and other supplies. Revenues are recognized when the control of these products is transferred.
Holding and others segment
Our holding and others segment generate revenues from contracts with customers in relation to advisory services to related companies.
Factors Affecting Our Results of Operations
Our results of operations are principally affected by economic conditions and inflation in Argentina, changes in local and international crude oil prices, natural gas prices and international petrochemical product’s prices, fluctuations in demand for oil related products, natural gas and electricity in Argentina, costs of sales, operating expenses and climate change (for further information, please see "Risk Factors—Risks Relating to our Company—Climate change, energy transition and regulatory framework promoted for such purposes could affect our business, our results of operations and financial condition").
The measures implemented by the Federal Government to contain the spread of Covid-19 have impacted the power industry, mainly in the second and third quarters of 2020, especially the decrease in the demand for electricity, the drop in gas production, the decline in the demand for fuels, the suspension of the spot remuneration adjustment, and the decrease in the price of gas at wellhead and the oil price (see detail in Note 1.2 to our Consolidated Financial Statements).
Argentine Economic Conditions and Inflation
Because most of our operations, facilities and customers are located in Argentina, we are affected by general economic conditions in the country. In particular, the general performance of the Argentine economy affects demand for energy, and inflation and fluctuations in currency exchange rates affect our costs and our margins. Inflation primarily affects our business by increasing operating costs, while reducing our revenues in real terms.
In December 2001, Argentina experienced an unprecedented crisis that virtually paralyzed the country’s economy through most of 2002 and led to radical changes in the Argentine Government’s policies. The crisis and the Argentine Government’s policies during this period severely affected the energy sector, as described below. Although over the following years the Argentine economy recovered significantly from the crisis, and the business and political environment was largely stabilized, the Argentine Government has only recently begun to address the difficulties experienced by the Argentine electricity sector as a result of the crisis and its aftermath.
The following table sets forth key economic indicators in Argentina during the years indicated:
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| Year ended December 31, | |||||
| 2021 | 2020 | 2019 | |||
| Real GDP (% change) | 10.8% | -9.9% | -2.1% | ||
| Nominal GDP (in millions of Pesos) | 43,952,340 | 27,021,238 | 21,447,250 | ||
| Real Consumption (% change) | 9.8% | -13.1% | -6.6% | ||
| Real Investment (% change) | 41.9% | -13.0% | -16.0% | ||
| Industrial Production (% change) | 16.3% | -7.6% | -6.3% | ||
| Consumer Price Index | 50.9% | 36.1% | 53.8% | ||
| Nominal Exchange Rate (in Ps. /US$ at year end) | 102.75 | 84.15 | 59.90 | ||
| Exports (in millions of US$) | 77,934 | 54,884 | 65,115 | ||
| Imports (in millions of US$) | 63,184 | 42,356 | 49,125 | ||
| Trade Balance (in millions of US$) | 14,750 | 12,528 | 15,990 | ||
| Current Account (% of GDP) | 1,3% | 0.8% | -0.9% | ||
| Reserves (in millions of US$) | 39.7 | 39.4 | 44.8 | ||
| Tax Collection (in millions of Pesos) | 11,906,731 | 7,237,410 | 5,473,538 | ||
| Primary Surplus (in millions of Pesos) | -980,241 | -1,749,957 | -95 | ||
| Public Debt (% of GDP at December 31) * | 77.0% | 104.5% | 90.2% | ||
| Public Debt Service (% of GDP) | 1.6% | 2.0% | 3.4% | ||
| External Debt (% of GDP at December 31) | 62.7% | 84.5% | 77.8% | ||
Sources: INDEC; Central Bank; Ministry of Treasury.
*Includes hold-outs
Economic Recovery
As of the third quarter of 2019, the economic activity recorded an accumulated 2.5% decrease compared to the same period of the previous year, mainly as a result of the 7.8%, 1.1% and 17.8% decreases in private and public consumption, and investment, respectively. The activity contraction affected 10 out of 16 identified sectors of the Argentine economy, the most affected being financial intermediation (-12.4%), wholesale and retail business and repairs (-9.4%) and manufacturing industry (-7.6%). These declines were partially offset by increases in agriculture, livestock, hunting and forestry (+26.3%), private households with domestic service (+5.8%) and mining and quarrying (+1.1%), among others. These declines were also partially offset by a 77.1% year-on-year increase in exports net of imports.
With regards to the evolution of prices, the National Cost of Living Index published by the INDEC showed a 53.8% variation in 2019. The most important variations were recorded in health (+72.1%), communications (+63.9%) and household equipment and maintenance (+63.7%). The sectors affected to a lower extent were housing, water, electricity and other fuels (+39.4%), education (+47.1%) and leisure and culture (+48.5%). Furthermore, salaries, as measured by the registry of the Stable Workers’ Average Taxable Remuneration (RIPTE) experienced a 44.4% year-on-year increase between December 2019 and the same month of the previous year.
Moreover, as of December 2019 the non-financial public sector’s fiscal accounts accumulated a 0.5% and 4.0% primary and total deficit to GDP, respectively. The annual variation in aggregated tax revenues, measured in Pesos based on figures published by the Federal Administration of Public Revenue, ended 2019 with a 47.4% increase compared to 2018. Besides, in 2019 primary expenditures by the National Treasury showed a 37.2% year-on year variation.
With respect to the financial situation, the Central Bank’s U.S. Dollar currency wholesale exchange rate (Res. A3500) closed at Ps.59.90/US$ on December 31, 2019, showing a cumulative 58.4% increase compared to the end of 2018 and a 71.7% average year-on-year variation. The Central Bank’s international reserves amounted to US$44.8 billion at year-end, which represents a US$20.9 billion decrease compared to the previous year. Moreover, the monetary base reached Ps.1,895 billion, showing a 34.5% increase at the closing of 2019 compared to the previous year. Furthermore, the Central Bank’s debt stock in issued bonds totaled an equivalent amount expressed in dollars of US$17.8 billion as of the closing of 2019, which represents a 9% year-on-year contraction.
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Finally, at the external level, as of the third quarter of 2019 the cumulative current account deficit amounted to US$6.5 billion according to INDEC’s data, which represents 1.4% of the GDP. However, in the first three quarters of 2019, the trade balance recorded a surplus of US$1.5 billion, whereas Free on-Board value exports reached US$48.0 billion, and Cost, Insurance and Freight value imports amounted to US$38.5 billion. Primary exports increased by 26.3% during this period, as well as agricultural manufactures exports, which experienced a 2.6% increase, while industrial manufactures exports experienced a 7.1% contraction. Fuel and energy exports experienced a 5.9% increase, reaching US$3.2 billion. Imports showed a contraction compared to the same period of 2018 in the automotive (-56.5%), capital goods (-34.3%), fuels and lubricants (-33.2%), consumables goods (-28.6%), parts and accessories (-19.1%) and intermediate goods (-13.5%).
As of the fourth quarter of 2020, the economic activity recorded an accumulated 9.9% decrease compared to the same period of the previous year, mainly as a result of the 13.1%, 4.7% and 13.0% decreases in private and public consumption, and investment, respectively. The activity contraction affected 14 out of 16 identified sectors of the Argentine economy, the most affected being hotels and restaurants (-49.2%), other community, social and personal activities (-39.9%), construction (-22.6%) and phishing (-20.9%), while financial brokerage and electricity, gas and water experienced a 2.1% and 0.9% increase, respectively. These declines were also partially offset by an increase in exports net of imports of 27.9%.
With regards to the evolution of prices, the National Cost of Living Index published by the INDEC showed a 36.1% variation in 2020. The most important variations were recorded in clothes and footwear (+60%), leisure and culture (+48.0%) and food and beverage (+42.1%). The sectors affected to a lower extent were communications (+7.6%), housing, water, electricity and other fuels (+17.6%) and education (+20.1%). Furthermore, salaries, as measured by the registry of the Stable Workers’ Average Taxable Remuneration (RIPTE) experienced a 34.9% year-on-year increase between December 2020 and the same month of the previous year.
Moreover, as of December 2020 the non-financial public sector’s fiscal accounts accumulated a 6.5% and 8.5% primary and total deficit to GDP, respectively. The annual variation in aggregated tax revenues, measured in Pesos based on figures published by the Federal Administration of Public Revenue, ended 2020 with a 32.2%. Besides, in 2020 primary expenditures by the National Treasury showed a 63.5% year-on year variation.
With respect to the financial situation, the Central Bank’s U.S. Dollar currency wholesale exchange rate (Res. A3500) closed at Ps.84.15/US$ on December 31, 2020, showing a cumulative 40.5% increase compared to the end of 2019 and a 46.3% average year-on-year variation. The Central Bank’s international reserves amounted to US$39.4 billion at year-end, which represents a US$5.5 billion decrease compared to the previous year. Moreover, the monetary base reached Ps.2,470 billion, showing an increase of 30.3% compared to the previous year. Furthermore, the Central Bank’s debt stock in issued bonds totaled an equivalent amount expressed in dollars of US$35.0 billion as of the closing of 2020, which represents a 97% year-on-year variation.
Finally, at the external level, as of the fourth quarter of 2020 the cumulative current account deficit amounted to US$12.5 billion according to INDEC’s data, which represents 1.5% of the GDP. During this period Free on Board value exports reached US$54.9 billion, and Cost, Insurance and Freight value imports amounted to US$42.4 billion. Primary exports and agricultural exports decreased by 7.5% and 9.1% respectively during this period, while industrial manufactures exports experienced a 30.7% contraction. Fuel and energy exports experienced a decrease of 19.7%. Imports showed a contraction compared to the same period of 2019 in the automotive (-31.7%), capital goods (-13.0%), fuels and lubricants (-40.7%), consumables goods (-4.7%), parts and accessories (-25.0%) and intermediate goods (-2.1%).
As of the third quarter of 2021, economic activity recorded an accumulated 10.8% increase compared to the same period of the previous year, mainly due to the recovery to pre-pandemic levels, with an increase in private and public consumption and investments of 9.8%, 6.7%, and 41.9%, respectively. 15 out of 16 identified sectors of the economy recovered, the most dynamic ones being construction (+37.1%), manufacturing industry (+18.6%), wholesale and retail business and repairs (+15.5%), and real estate, business, and rental activities (+9.3%). These increases were partially offset by net imports of goods and services, against net exports for the same period in 2020.
Regarding the evolution of prices, the National Cost of Living Index published by the INDEC showed a 50.9% variation in 2021. The most important variations were recorded in restaurants and hotels (+65.4%), clothing and footwear (+64.6%), and transport (+57,6%). The sectors affected to a lower extent were housing, water, electricity utilities, and other fuels (+28.3%), communication (+35.8%), and general goods and services (+38.8%). Furthermore, salaries, as measured by the Stable Workers’ Average Taxable Remuneration (Remuneración Imponible Promedio de los Trabajadores Estables, RIPTE) registry, experienced a 53.4% year-on-year increase as of December 2021, compared to the same month of 2020.
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Moreover, as of December 2021, non-financial public sector’s fiscal accounts accumulated a 3.2% and 4.8% primary and financial deficit to GDP, respectively. The annual variation in aggregated tax revenues, measured in Ps. based on figures published by the AFIP, ended with a 64.5% year-on-year increase. In addition, in 2021 primary expenditures recorded by the National Treasury showed a 49.6% year-on-year increase.
Regarding the financial situation, the BCRA’s US$ currency wholesale foreign exchange rate (Res. A3500) closed at Ps. 102.75/US$ on December 31, 2021, showing a cumulative 22.1% increase compared to the end of 2020 and an average 34.8% year-on-year increase. BCRA’s international reserves amounted to US$39.7 billion at year-end, which represents a US$0.3 billion increase compared to the previous year. Moreover, the monetary base reached Ps. 3,654 billion at the end of 2021, showing a 47.9% year-on-year increase. Furthermore, the BCRA’s debt stock in issued bonds totaled an equivalent amount expressed in dollars of US$49.1 billion as of the closing of 2021, which represents a 40.4% year-on-year increase.
Finally, on the external front, according to INDEC’s data, the cumulative current account surplus amounted to US$6.3 billion as of the third quarter of 2021, which represents 1.3% of the GDP. The trade balance surplus mainly accounts for this phenomenon: the Free on Board value of exports totaled US$58.3 billion, while the Cost, Insurance and Freight value of imports reached US$46.0 billion. Industrial and agricultural manufactures’ exports experienced a substantial 48.1% and 44.6% increase, respectively, followed by fuel and energy exports (+37.4%) and primary exports (+23.9%). Imports increased compared to the same period of 2020, explained by rises in fuels and lubricants (+92.5%), parts and accessories (+66.7%), intermediate goods (+55.6%), capital goods (+41.7%), automotive (+23.0%), and consumables (+18.7%).
Electricity prices and tariffs
Our revenues and margins in our electricity generation businesses are substantially dependent on the prices we are able to charge for the electricity sold by our generation plants, as well as the composition of our transmission tariffs. For more information about the electricity prices, please see “Item 4. The Argentine Energy Sector—Electricity Regulatory Framework”.
Electricity demand and supply
Electricity demand depends to a significant extent on economic and political conditions prevailing from time to time in Argentina, as well as seasonal factors. In general, the demand for electricity varies depending on the performance of the Argentine economy, as businesses and individuals generally consume more energy and are better able to pay their bills during periods of economic stability or growth. As a result, energy demand is affected by Argentine Governmental actions concerning the economy, including with respect to inflation, interest rates, price controls, foreign exchange controls, taxes and energy tariffs.
During 2021, the electricity consumption increased by 5.2% compared to 2020 due to the post-lockdown recovery, with a total electricity demand volume of 133,872 GWh and 127,307 GWh for 2021 and 2020, respectively. The following chart shows the breakdown of electricity consumption in 2021 by type of customer:
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Peak Demand Records
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
| Capacity (MW) | 23,794 | 24,034 | 23,949 | 25,380 | 25,628 | 26,320 | 26,113 | 25,791 | 27,088 |
| Date | 23-Dec | 20-Jan | 27-Jan | 12-Feb | 24-Feb | 8-Feb | 29-Jan | 4-Feb | 29-Dec |
| Temperature (°C) | 35.4 | 29.6 | 35.6 | 35.1 | 27.7 | 30.2 | 34.0 | 29.5 | 31.7 |
| Hour | 14:20 | 15:05 | 14:13 | 14:35 | 14:25 | 15:35 | 14:25 | 14:57 | 14:28 |
Source: CAMMESA.
In 2021, there was a 6% increase in power generation, with 141,257 GWh and 133,589 GWh volumes for 2021 and 2020, respectively, mainly due to the demand recovery and higher net exports.
Thermal power generation remained the main source of electricity demand, fired with GO and FO and mineral coal. It supplied an electricity volume of 90,073 GWh (64%), followed by hydroelectric power generation, which contributed 23,580 GWh net of pumping (17%), renewable power generation with 17,435 GWh (12%), and nuclear power generation, with 10,170 GWh (7%). Additionally, there were imports for 819 GWh (-32% vs. 2020), exports for 3,850 GWh (+25% vs. 2020), and losses for 4,355 GWh (-1% vs. 2020).
Hydroelectric power generation net of pumping decreased its contribution volume by 17% compared to 2020, mainly due to the droughts that affected the main basins (Comahue, Paraná, and Uruguay). This decrease was partially offset by the increase in renewable (+37%), thermal (+9%), and nuclear (+2%) generation compared to 2020, mainly on account of the commissioning of the PPA under RenovAr, MAT ER, and SEE Res. No. 287/17.
The following chart shows the development of electricity generation by type of generation (thermal, hydro, nuclear and renewable):
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Generation by Type of Power Plant
In %, 2011 – 2021
During 2021 generation facilities recorded an increase in their installed capacity compared to the previous year, totaling 42,989 MW (+1,038 MW compared to 2020). This increase was mainly due to the commissioning of renewable units under the RenovAr and MAT ER programs for 1,001 MW. In addition, 127 MW were commissioned in the thermal area: mostly under SEE Res. No. 287/17 and 15 MW from CTLL’s MAN engines.
The chart below shows the composition of installed capacity in Argentina (43.0 GW) as of December 31, 2021:
Regarding fuel supply for power generation, as from December 30, 2019 and pursuant to MDP Resolution No. 12/19, fuel commercial management and supply was again centralized in CAMMESA, except for generators with contracts under Energía Plus and SEE Resolution No. 287/17. Additionally, following the implementation of Plan Gas.Ar, on December 2, 2020 SE Resolution No. 354/20 was published, which, among other measures, established an optional scheme for the operating assignment of natural gas and its transportation to CAMMESA effective as from January 2021 for such exempted generators. Pampa acceded to this scheme. This new scheme set a new thermal dispatch order centralized in CAMMESA, which prioritizes units supplied with gas imported from Bolivia under a ToP condition, followed by those supplied under Plan Gas.Ar and, lastly, those with gas assigned to CAMMESA.
As regards fuel consumption, in 2021 the use of natural gas for power plants amounted to 54.4 million m3/day of gas, a 10% higher than in 2020. In 2021, the use of natural gas for power plants amounted to 44.8 million m3/day, similar to 2020, with 75% local gas and 25% imported gas. However, alternative fuels (fuel oil, gasoil, and mineral coal) were used in volumes significantly higher than in 2020, especially in the winter, to meet higher thermal energy demands. FO demand grew by 29%, to 2.4 million m3/day of gas equivalent, whereas the demand for gasoil and mineral coal doubled to 5.7 and 1.5 million m3/day of gas equivalent, respectively.
The chart below shows the fuel consumption by type:
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On November 2019, the approved maximum spot price for energy was Ps.720/MWh (SEE Resolution No. 38/19), later updated to Ps.930/MWh from August 2021 (SE Resolution No. 748/21). However, the following chart shows the average monthly price all electricity system users should pay so that the power grid would not run on a deficit. In addition to the price of energy, this cost includes the power capacity fee, the generation cost, fuels such as natural gas, FO, GO, and mineral coal, and other minor items.
.
Cost of sales
Our most significant costs of sales include purchases of inventory, energy and gas, personnel costs and property, plant and equipment depreciation.
Operating expenses
Our most significant operating expenses are administrative and selling expenses, which include related personnel costs, fees and compensations for services and taxes.
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Reserves and Production of oil and gas
Natural gas and oil constitute the main energy sources in the national primary energy mix. The following chart illustrates their share as of December 31, 2020:
Source: SGE. There is no available information for the year 2021.
The chart does not include other primary sources accounting for 5.5%
Natural Gas
In 2021, total gross natural gas production amounted to 124 million m3 per day, slightly higher than the volumes produced in 2020.This variation is mainly due to the launch of Plan Gas.Ar in the Neuquina Basin (+4 million m3/day), partially offset by the decline in the Austral, Golfo de San Jorge, and Noroeste Basins (-3 million m3/day). It is worth highlighting that in December 2021, production reached 129 million m3/day, 13% higher than in the same month in 2020.
Although total demand recorded a 2% year-on-year increase due to the gradual post-lockdown recovery, domestic gas production could not meet the demand, a deficit evidenced since 2003; therefore, the Federal Government resorted to natural gas imports and alternative fuels. In 2021, Bolivia’s supply averaged 13 million m3 per day (-14% vs. 2020), and seaborne LNG at the ports of Escobar and Bahía Blanca recorded 10 million m3 per day (+94% vs. 2020). Moreover, in 2021, there were marginal regasified LNG imports from Chile, purely for logistic reasons (the last time this occurred was in 2018). On the other hand, natural gas and LNG exports decreased by 34% compared to 2020, to a total of 2 million m3 per day, representing 2% of the total domestic production in 2021.
Based on the last annual information published by the SE, as of December 31, 2020, the country’s total natural gas reserves and resources amounted to 1,102,535 million m3, of which 36% were proven reserves. Moreover, 61% of the total reserves and resources were unconventional. In a year-on-year comparison, total reserves and resources have experienced a slight 3% decrease, especially for resources, which have decreased by 13%, totaling 360,068 million m3.
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Source: SEG. * There is no available information on reserves for the year 2021. Production is gross.
Crude Oil
In 2021, total oil production amounted to 82 thousand m3/day, 7% higher than the volumes produced in 2020 (76 thousand m3 /day), mainly due to the post-lockdown recovery. It is worth highlighting that in December 2021, production reached 87 thousand m3/day (+14% vs. 2020).
Based on the last annual information published by the SE, as in 2020, no oil imports were recorded in 2021. On the other hand, due to the recovery in domestic demand, in 2021 oil exports decreased to 9 thousand m3/ day, 24% lower than in 2020. This volume represented 12% of the total domestic production in 2021.
As of December 31, 2020, the country’s total oil reserves and resources totaled 832,186 thousand m3, of which 46% were proven reserves. Moreover, 40% of the total reserves and resources were unconventional. In a year-on-year comparison, total reserves and resources have remained at similar levels. Furthermore, resources totaled 155,374 thousand m3, 5% lower than the levels recorded as of December 31, 2019.
Source: SGE. * There is no available information on reserves for the year 2021.
For information about the regulatory framework of our oil and gas business, please see “Item 4. The Argentine Energy Sector— Oil & Gas Regulatory Framework”.
Results of Operations
The table below provides a summary of our results of operations for the years ended December 31, 2021, 2020, and 2019.
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Results of operations related to (i) maintained as held for sale assets of distribution of energy segment and (ii) divested assets of refining and distribution and oil and gas segments, were disclosed within discontinued operations.
| For the year ended December 31, | |||||
| 2021 | 2020 | 2019 | |||
| Revenue | 1,508 | 1,073 | 1,340 | ||
| Cost of sales | (955) | (663) | (811) | ||
| Gross profit | 553 | 410 | 529 | ||
| Selling expenses | (33) | (26) | (28) | ||
| Administrative expenses | (99) | (93) | (105) | ||
| Exploration expenses | - | - | (9) | ||
| Other operating income | 105 | 51 | 77 | ||
| Other operating expenses | (58) | (36) | (43) | ||
| Impairment of property, plant and equipment, intangible assets and inventories | (4) | (139) | (62) | ||
| Impairment of financial assets | (2) | (9) | 2 | ||
| Share of profit from associates and joint ventures | 117 | 85 | 101 | ||
| Operating income | 579 | 243 | 462 | ||
| Finance income | 10 | 9 | 23 | ||
| Finance costs | (185) | (177) | (187) | ||
| Other financial results | (14) | 84 | 175 | ||
| Financial results, net | (189) | (84) | 11 | ||
| Profit before income tax | 390 | 159 | 473 | ||
| Income tax | (77) | (35) | 130 | ||
| Profit for the year from continuing operations | 313 | 124 | 603 | ||
| (Loss) Profit for the year from discontinued operations | (75) | (592) | 197 | ||
| Profit (Loss) of the year | 238 | (468) | 800 | ||
| Total Profit (Loss) of the year attributable to: | |||||
| Owners of the Company | 273 | (367) | 692 | ||
| Non - controlling interest | (35) | (101) | 108 | ||
| For the year ended December 31, | |||||
| 2021 | 2020 | 2019 | |||
| Revenue | |||||
| Generation | 656 | 559 | 819 | ||
| Oil and gas | 453 | 294 | 448 | ||
| Petrochemical | 490 | 267 | 323 | ||
| Holding and others | 22 | 20 | 20 | ||
| Eliminations | (113) | (67) | (270) | ||
| Total Revenue | 1,508 | 1,073 | 1,340 | ||
| Gross profit | |||||
| Generation | 301 | 305 | 349 | ||
| Oil and gas | 164 | 51 | 135 | ||
| Petrochemical | 66 | 34 | 25 | ||
| Holding and others | 22 | 20 | 20 | ||
| Eliminations | - | - | - | ||
| Total Gross profit | 553 | 410 | 529 | ||
| Operating income | |||||
| Generation | 350 | 241 | 322 | ||
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The Company is a fully integrated power company in Argentina that participates in the electricity, oil and gas value chains.
Through our own activities, subsidiaries and shareholdings in joint ventures and based on the business nature, customer portfolio and risks involved, we were able to identify the following reportable business segments:
| · | Generation, consisting of our direct and indirect interests in HINISA, HIDISA, Greenwind, CTB, TMB, TJSM and through our own electricity generation activities through thermal plants Güemes, Piedra Buena, Piquirenda, Loma de la Lata, Genelba and Ecoenergía, Pilar, I. White, the Pichi Picun Leufu hydroelectric complex and Pampa Energía I and II wind farms; |
| · | Oil and Gas, consisting of our own interests in oil and gas areas and through our direct interests in CISA; |
| · | Petrochemicals, comprised of our own styrene operations and the catalytic reformer plant operations conducted in Argentine plants; |
| · | Holding and Other Business, principally consisting of our interests in joint businesses CITELEC and CIESA and their respective subsidiaries, which hold the concession over the high-voltage electricity transmission nationwide and over gas transportation in the south of the country, respectively, our interest in associates OCP and Refinor, holding activities and financial investment transactions; and |
| · | Distribution of Energy, consisting of our direct interest in Edenor through June 30, 2021. As a result of the sale of our controlling interest in Edenor, related results of operations were classified within discontinued operations (see Item 4. “Relevant Events—Sale of Controlling Stake in Edenor”). |
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The Company manages its operating segments based on its individual net profit.
Year ended December 31, 2021 compared to the fiscal year ended December 31, 2020
Generation Segment
| Fiscal Year Ended | ||||||||
| December 31, 2021 | December 31, 2020 | Variation | % | |||||
| Revenue | 656 | 559 | 97 | 17% | ||||
| Cost of sales | (355) | (254) | (101) | 40% | ||||
| Gross profit | 301 | 305 | (4) | (1%) | ||||
| Selling expenses | (2) | (2) | - | - | ||||
| Administrative expenses | (31) | (30) | (1) | 3% | ||||
| Other operating income and expenses, net | 37 | 29 | 8 | 28% | ||||
| Share of profit from joint ventures | 47 | 67 | (20) | (30%) | ||||
| Impairment of property, plant and equipment and intangible assets | (2) | (128) | 126 | (98%) | ||||
| Operating income | 350 | 241 | 109 | 45% | ||||
| Finance income | 4 | 3 | 1 | 33% | ||||
| Finance costs | (46) | (73) | 27 | (37%) | ||||
| Other financial results | (14) | 1 | (15) | (1,500%) | ||||
| Financial results, net | (56) | (69) | 13 | (19%) | ||||
| Profit before income tax | 294 | 172 | 122 | 71% | ||||
| Income tax | (75) | (33) | (42) | 127% | ||||
| Profit of the year | 219 | 139 | 80 | 58% | ||||
| Owners of the company | 218 | 147 | 71 | (48%) | ||||
| Non - controlling interest | 1 | (8) | 9 | (113%) | ||||
Revenues
Net revenues from our generation segment increased 17%, to US$656 million in the fiscal year ended December 31, 2021, compared to US$559 million in the previous fiscal year. This variation is mainly explained by an increase in revenues upon the commercial commissioning of CTGEBA’s second CC as of July, 2020, remunerated under a wholesale power purchase agreement executed with CAMMESA (SE Resolution No. 287/17) and an increase in volumes due to the recovery in the Energy Plus market demand. Consequently, revenues from the recognition of own fuel in the variable production cost increased by US$51 million, along with the higher cost of gas under Plan Gas.Ar. These effects were partially offset by the expiration of wholesale power purchase agreement executed with CAMMESA for CTLL’s vapor turbine and CTP in October and mid-July 2021, respectively.
Power generation sales during the fiscal year ended December 31, 2021 increased by 11% (1,895 GWh) compared to the fiscal year ended December 31, 2020, due to thermal units’ higher dispatch, mainly attributable to CTGEBA’s new combined cycle, which was partially offset by lower hydro and wind generation.
The following table shows net power generation and sales (in GWh) for our power generation plants:
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| Fiscal year ended | ||||
| December 31, 2021 | December 31, 2020 | |||
| In GWh | Net generation | Total sales | Net generation | Total sales |
| Hydroelectric | ||||
| HINISA | 467 | 467 | 481 | 482 |
| HIDISA | 325 | 325 | 323 | 323 |
| HPPL | 550 | 550 | 742 | 737 |
| Wind | ||||
| PEMC | 367 | 367 | 409 | 409 |
| PEPE II | 215 | 247 | 207 | 207 |
| PEPE III | 256 | 256 | 243 | 246 |
| Thermal | ||||
| CTLL | 4,682 | 4,692 | 4,406 | 4,399 |
| CTG | 392 | 624 | 368 | 418 |
| CTP | 53 | 53 | 55 | 55 |
| CPB | 312 | 313 | 576 | 575 |
| CTPP | 299 | 299 | 193 | 193 |
| CTIW | 301 | 300 | 229 | 229 |
| CTGEBA | 8,594 | 9,266 | 7,912 | 7,946 |
| EcoEnergía | 75 | 153 | 72 | 89 |
| CTEB | 546 | 546 | 255 | 255 |
| Total | 17,433 | 18,458 | 16,470 | 16,563 |
Cost of Sales
Cost of sales increased by 40%, to US$355 million for the fiscal year ended December 31, 2021, compared to US$254 million for the fiscal year ended December 31, 2020, primarily due to higher gas purchases, a higher volume of energy purchases to cover Energy Plus contracts, and higher expenses for seasonal maintenance works and repairs on account of forced outages, partially offset by lower depreciation considering impairments recorded in the fiscal year 2020.
Gross Profit
Gross profit from our generation segment did not vary significantly amounting to US$301 million for the fiscal year ended December 31, 2021, compared to US$305 million for the fiscal year ended December 31, 2020.
Moreover, in the fiscal year ended December 31, 2021, the gross margin in relation to sales decreased to 46%, compared to 55% for the fiscal year ended December 31, 2020.
Selling Expenses
Selling expenses from our generation segment did not vary significantly recording US$2 million for both fiscal years ended December 31, 2021 and 2020.
Administrative Expenses
Administrative expenses from our generation segment did not vary significantly, amounting to US$31 million for the fiscal year ended December 31, 2021, compared to US$30 million for the fiscal year ended December 31, 2020.
Other Operating Income and Expenses Net
Other operating income and expenses, net for our generation segment increased to a US$37 million gain for the fiscal year ended December 31, 2021, compared to a US$29 million gain for the fiscal year ended December 31, 2020. This variation is mainly due to the recovery, in the second quarter of 2021, of the security provided in relation to the waiver of the granted dispatch priority for the PEPE IV wind farm, partially offset by the compensation for damages suffered in PEPE II and PEPE III wind farms received in the third quarter of 2020.
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Share of profit from associates and joint ventures
The profit from joint ventures from our generation segment decreased to US$47 million for the fiscal year ended December 31, 2021, 30% lower than the US$67 million registered for the fiscal year ended December 31, 2020. This variation is mainly due to lower profits in CTB in the fiscal year ended December 31, 2021.
Impairment of property, plant and equipment and intangible assets
A US$ 2 million impairment of property, plant and equipment and intangible assets was registered for the fiscal year ended December 31, 2021, compared to a US$128 million impairment for the fiscal year ended December 31, 2020. In December 31, 2020, the recoverability assessment, determined through the value in use of CTG and CPB power plants and HPPL and HINISA hydroelectric plants, with revenues fully generated in the spot market, and CTLL and CTP, with revenues mostly generated in the spot market as from the termination of the supply agreements in 2021, resulted in the recognition of impairment losses.
Operating Income
Operating income from our generation segment increased by US$109 million (an increase of 45%), recording a gain of US$350 million for the fiscal year ended December 31, 2021, compared to a gain of US$241 million for the fiscal year ended December 31, 2020. This variation was mainly attributable to: (i) a lower impairment of property, plant and equipment and intangible assets in the fiscal year 2021; (ii) higher revenues from the commissioning of CTGEBA’s second combined cycle as from July 2020; and (iii) higher income from provisions recovery. These effects were partially offset by: (i) lower income due to the termination of wholesale power purchase agreements at CTLL’s vapor turbine and CTP; (ii) lower income from energy due to the impact of real devaluation on regulated prices; (iii) higher expenses for seasonal maintenance works and repairs on account of forced outages; and (iv) a lower share of profit from associates and joint ventures.
The operating margin in relation to sales for the fiscal year ended December 31, 2021, increased to 53% compared to a 43% operating margin for the fiscal year ended December 31, 2020.
Financial Results, net
Financial results, net, amounted to a US$56 million loss for the fiscal year ended December 31, 2021, compared to a US$69 million loss for the fiscal year ended December 31, 2020. This variation is mainly due to lower financial debt interests on account of loan cancellations, partially offset by a lower interest capitalization in property, plant and equipment (US$32 million), a US$16 million profit on the repurchase of financial debt, in 2020 and lower income from changes in the fair value of financial instruments (US$3 million).
Income Tax
The generation segment recorded an income tax charge of US$75 million for the fiscal year ended December 31, 2021, compared to a charge of US$33 million for the prior period, mainly as a result of the increase in profits before taxes and the increase in the applicable tax rate.
Total Profit
The generation segment recorded a US$219 million profit for the fiscal year ended December 31, 2021, of which US$218 million was attributable to the owners of the Company, compared to a US$139 million profit for the fiscal year ended December 31, 2020, of which US$147 million was attributable to the owners of the Company.
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Oil and Gas Segment
| Fiscal year ended | |||||
| December 31, 2021 | December 31, 2020 | Variation | % | ||
| Revenue | 453 | 294 | 159 | 54% | |
| Cost of sales | (289) | (243) | (46) | 19% | |
| Gross profit | 164 | 51 | 113 | 222% | |
| Selling expenses | (18) | (15) | (3) | 20% | |
| Administrative expenses | (46) | (42) | (4) | 10% | |
| Other operating income and expenses, net | 30 | (8) | 38 | (475%) | |
| Impairment of financial assets | - | (13) | 13 | (100%) | |
| Operating income | 130 | (27) | 157 | (581%) | |
| Finance income | 3 | 7 | (4) | (57%) | |
| Finance costs | (103) | (100) | (3) | 3% | |
| Other financial results | (16) | 44 | (60) | (136%) | |
| Financial results, net | (116) | (49) | (67) | 137% | |
| Profit (Loss) before income tax | 14 | (76) | 90 | (118%) | |
| Income tax | 8 | 23 | (15) | (65%) | |
| Profit (Loss) of the year | 22 | (53) | 75 | (142%) | |
Revenues
Revenues from our oil and gas segment amounted to US$453 million for the fiscal year ended December 31, 2021, which was 54% higher than the US$294 million for the fiscal year ended December 31, 2020. This variation is mainly explained by the increase in gas and oil prices and, to a lesser extent, by the increase in gas sale volumes.
The average sales price for gas, including the effect of subsidiaries, was US$3.6/MBTU for the fiscal year ended December 31, 2021, 61% higher than US$2.2/MBTU recorded in the fiscal year ended December 31, 2020. This variation is mainly explained by the effect of Plan Gas.Ar effective as from January 1, 2021, and increased prices for exports and industrial clients. The average sales price for oil was US$58.8/bbl for the fiscal year ended December 31, 2021, 51% higher than average sales price for the fiscal year ended December 31, 2020, mainly explained by an increase in international reference prices, mitigated by local prices related to export parity.
The following table shows our production for the oil and gas segment for the periods shown:
Cost of Sales
The cost of sales from our oil and gas segment increased by 19%, from US$243 million for the fiscal year ended December 31, 2020 to US$289 million for the fiscal year ended December 31, 2021. The variation is mainly due to: (i) higher royalty charges (US$24 million) as a result of the increase in sales prices and volumes, (ii) higher work contracts and maintenance costs (US$12 million), (iii) higher property, plant and equipment depreciation (US$6 million) and (iv) higher transportation costs (US$3 million).
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Gross Profit
Gross profit from our oil and gas segment increased by 222%, from US$51 million in the fiscal year ended December 31, 2020, to US$164 million for the fiscal year ended December 31, 2021. This variation is explained by the increase in average sale prices and higher sale volumes. These effects were partially offset by increased costs, mainly royalties, work contracts, maintenance, depreciation, and transportation costs.
Additionally, the gross margin on sales increased to 36% in the fiscal year ended December 31, 2021, compared to 17% for the fiscal year ended December 31, 2020.
Selling Expenses
Selling expenses from our oil and gas segment increased to US$18 million for the fiscal year ended December 31, 2021, compared to US$15 million for the same period in 2020 mainly due to the increase in export gas transportation costs (US$3 million).
Administrative Expenses
Administrative expenses from our oil and gas segment increased by 10%, amounting to US$46 million for the fiscal year ended December 31, 2021, compared to US$42 million for the fiscal year ended December 31, 2020, mainly due to higher salaries and social security charges above the devaluation rate.
Other Operating Income and Expenses, net
Other operating incomes and expenses, net from our oil and gas segment recorded a net gain of US$30 million for the fiscal year ended December 31, 2021, compared to a net loss of US$8 million for the fiscal year ended December 31, 2020. The variation is mainly due to Plan Gas.Ar government grants (US$51 million) partially offset by the recognition of environmental remediation expenses on reverted oil areas (US$15 million).
Impairment of financial assets
There was no impairment of financial assets charges in our oil and gas segment for the fiscal year ended December 31, 2021, compared to a US$13 million impairment loss recorded in the fiscal year ended December 31, 2020 related to the Executive Order N° 1,053/20 on gas distributors receivables.
Operating Income
The operating income from our oil and gas segment increased to a US$130 million gain for the fiscal year ended December 31, 2021, compared to a US$27 million loss for the fiscal year ended December 31, 2020. The variation is mainly explained by higher prices and sale volumes, higher income from Plan Gas.Ar and the impairment of financial assets recorded for the fiscal year ended December 31, 2020. These effects were partially offset by higher costs and operating expenses, mainly royalties, work contracts and maintenance charges, property, plant and equipment depreciations, and transportation costs.
Financial Results, Net
Financial results, net from our oil and gas segment amounted to US$116 million loss for the fiscal year ended December 31, 2021, compared to a US$49 million loss for the fiscal year ended December 31, 2020, mainly due to higher losses from changes in the fair value of financial instruments (US$36 million), lower gains from the repurchase of corporate bonds (US$23 million) and higher financial interest expenses (US$6 million).
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Income Tax
Our oil and gas segment recorded an income tax benefit of US$8 million for the fiscal year ended December 31, 2021, compared to an income tax benefit of US$23 million for the same period in 2020, mainly due to the increase in profit before income tax and, to a lower extent, to the tax inflation effect on the income tax determination.
Total Profit (Loss)
Our oil and gas segment recorded a profit of US$22 million for the fiscal year ended December 31, 2021, compared to a loss of US$53 million for the prior fiscal year, both of which are entirely attributable to the owners of the Company.
Petrochemicals Segment
| Fiscal year ended | ||||
| December 31, 2021 | December 31, 2020 | Variation | % | |
| Revenue | 490 | 267 | 223 | 84% |
| Cost of sales | (424) | (233) | (191) | 82% |
| Gross profit | 66 | 34 | 32 | 94% |
| Selling expenses | (13) | (9) | (4) | 44% |
| Administrative expenses | (4) | (3) | (1) | 33% |
| Other operating income and expenses, net | (2) | (6) | 4 | (67%) |
| Impairment of inventories | (2) | (11) | 9 | (82%) |
| Impairment of financial assets | - | 1 | (1) | (100%) |
| Operating income | 45 | 6 | 39 | 650% |
| Finance costs | (3) | (3) | - | - |
| Other financial results | (2) | 5 | (7) | (140%) |
| Financial results, net | (5) | 2 | (7) | (350%) |
| Profit before income tax | 40 | 8 | 32 | 400% |
| Income tax | (12) | (2) | (10) | 500% |
| Profit of the year | 28 | 6 | 22 | 367% |
Revenues
Revenues from our petrochemicals segment amounted to US$490 million for the fiscal year ended December 31, 2021, 84% higher than the US$267 million reported for the fiscal year ended December 31, 2020. This variation is mainly due to a substantial improvement in domestic and international reference prices and a demand recovery, mainly in the domestic market.
Total sold volumes during the fiscal year ended December 31, 2021, experienced a 24% increase compared to the fiscal year ended December 31, 2020. This variation is explained by a higher sale volume of polystyrene and styrene, in the domestic market related to a higher demand in the construction, polyester resin, refrigeration and packaging industries, in addition to greater exports of reforming plant’s derived products, synthetic rubber and polystyrene.
The following table shows sales volumes in the petrochemicals segment during the specified periods:
| Volume sold in k ton | For the fiscal year ended | |
| December 31, 2020 | December 31, 2020 | |
| Styrene & polystyrene | 114 | 94 |
| SBR | 49 | 37 |
| Reforming | 254 | 205 |
| Total | 417 | 337 |
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Cost of Sales
Cost of sales from our petrochemicals segment increased by 82%, to US$424 million for the fiscal year ended December 31, 2021, compared to US$233 million for the fiscal year ended December 31, 2020. This variation is mainly due to higher raw material costs, explained by an increase in international reference prices and higher sale volumes for all products, higher cost of gas (US$178 million), and, to a lower extent, higher salary costs (US$7 million).
Gross Profit
Our petrochemical segment recorded a profit of US$66 million for the fiscal year ended December 31, 2021, compared to a US$34 million profit for the same period in 2020, mainly due to the increase in international reference prices and higher sale volumes.
The gross margin on sales reached 13% for both fiscal years ended December 31, 2021 and 2020.
Selling Expenses
Selling expenses from our petrochemicals segment amounted to US$13 million for the fiscal year ended December 31, 2021, compared to US$9 million for the fiscal year ended December 31, 2020, mainly due to higher tax charges (US$2 million) and higher transportation charges (US$2 million).
Administrative Expenses
Administrative expenses from our petrochemicals segment did not vary significantly, amounting to US$4 million for the fiscal year ended December 31, 2021, compared to US$3 million for the fiscal year ended December 31, 2020.
Other Operating Income and Expenses, Net
Other operating income and expenses, net from our petrochemicals segment recorded a US$2 million loss for the fiscal year ended December 31, 2021, compared to a US$6 million loss for the fiscal year ended December 31, 2020. The decrease was mainly due to lower idle capacity losses related to plant shutdowns during the fiscal year 2020.
Operating Income
The operating income from our petrochemicals segment increased to US$45 million for the fiscal year ended December 31, 2021, compared to US$6 million for the fiscal year ended December 31, 2020. This variation is mainly due to a higher gross profit and lower inventory impairment losses (US$9 million).
Financial Results, Net
Financial results, net from our petrochemicals segment amounted to US$5 million loss for the fiscal year ended December 31, 2021, compared to US$2 million profit for the fiscal year ended December 31, 2020. The variation is mainly due to losses from changes in the fair value of financial instruments recorded in 2021 (US$4 million) and lower net exchange difference profits (US$3 million).
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Income Tax
Our petrochemicals segment recorded an income tax charge of US$12 million for the fiscal year ended December 31, 2021, compared to US$2 million for the fiscal year ended December 31, 2020 mainly as a result of the increase in profits before tax.
Total profit
The petrochemicals segment recorded a profit of US$28 million for the fiscal year ended December 31, 2021, compared to US$6 million for the fiscal year ended December 31, 2020, both of which are entirely attributable to the owners of the Company.
Holding and Others Segment
| Fiscal year ended | ||||
| December 31, 2021 | December 31, 2020 | Variation | % | |
| Revenue | 22 | 20 | 2 | 10% |
| Gross profit | 22 | 20 | 2 | 10% |
| Administrative expenses | (18) | (18) | - | - |
| Other operating income and expenses, net | (18) | - | (18) | (100%) |
| Share of profit from associates and joint ventures | 70 | 18 | 52 | 289% |
| Impairment of financial assets | (2) | 3 | (5) | (167%) |
| Operating income | 54 | 23 | 31 | 135% |
| Finance income | 4 | 1 | 3 | 300% |
| Finance costs | (34) | (3) | (31) | 1,033% |
| Other financial results | 18 | 34 | (16) | (47%) |
| Financial results, net | (12) | 32 | (44) | (138%) |
| Loss before income tax | 42 | 55 | (13) | (24%) |
| Income tax | 2 | (23) | 25 | (109%) |
| Profit for the year | 44 | 32 | 12 | 38% |
Revenues
Revenues from our holding and others segment experienced no significant variations, recording US$22 million and US$20 million in the fiscal years ended on December 31, 2021 and 2020, respectively.
Gross Profit
Gross profits from this segment did not suffer any significant variations, recording US$22 million and US$20 million for fiscal years 2021 and 2020, respectively.
Administrative Expenses
Administrative expenses did not experience variations, remaining at US$18 million in both fiscal years ended December 31, 2021, and 2020.
Other Operating Income and Expenses, Net
Other operating income and expenses, net from our holding and others segment recorded an US$18 million loss for the fiscal year ended December 31, 2021, while no charges were recorded for the fiscal year ended December 31, 2020. The variation is mainly due to provisions for contingencies (US$14 million).
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Impairment of financial assets
The impairment of financial assets from our holding and others segment registered a US$2 million loss for the fiscal year ended December 31, 2021, compared to US$3 million gain for the fiscal year ended December 31, 2020, mainly due to a gain from the recovery of doubtful accounts (Petrominera) recorded in the fiscal year 2020.
Share of profit from associates and joint ventures
The profit from associates and joint ventures from our holding and others segment amounted to US$70 million for the fiscal year ended December 31, 2021, compared to US$18 million for the fiscal year ended December 31, 2020. This variation is mainly explained by higher profits in CIESA, TGS, and OCP recorded in the fiscal year ended December 31, 2021, partially offset by lower profits in CITELEC.
Operating Income
Operating income from our holding and others segment amounted to US$54 million for the fiscal year ended December 31, 2021, against US$23 million for the fiscal year ended December 31, 2020. This variation is due to higher share of profit from associates and joint ventures (US$52 million), partially offset by higher contingency provision (US$14 million) and higher financial assets impairment losses (US$5 million).
Financial Results, Net
Financial results, net from our holding and others segment represented a loss of US$12 million for the fiscal year ended December 31, 2021, compared to US$32 million gain for the fiscal year ended December 31, 2020. This variation is mainly due to higher tax interest losses on minimum notional income tax computable as an income tax advance payment (US$33 million) and lower net exchange difference gains (US$14 million) due to a lower devaluation on the net liability monetary position.
Income Tax
Our holding and others segment recorded an income tax benefit of US$2 million for the fiscal year ended December 31, 2021, compared to a tax charge of US$23 million for the fiscal year ended December 31, 2020.
Total Profit
Our holding and others segment recorded a profit of US$44 million profit for the fiscal year ended December 31, 2021, compared to a total profit of US$32 million for the fiscal year ended December 31, 2020, both of which are entirely attributable to the owners of the Company.
Distribution of Energy Segment
The results corresponding to the distribution of energy segment have been classified as discontinued operations as a result of the sale of our controlling stake in Edenor. See Item 4. “Relevant Events—Sale of Controlling Stake in Edenor” and note 5.1 to our Consolidated Financial Statements.
The distribution of energy segment recorded a total loss of US$75 million for discontinued operations during the fiscal year ended December 31, 2021, of which US$39 million was attributable to the owners of the Company, compared to a loss of US$592 million in 2020, of which US$499 million was attributable to the owners of the Company. This variation is mainly due to the divestment of our participation in Edenor.
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Year ended December 31, 2020 compared to the fiscal year ended December 31, 2019
Generation Segment
| Fiscal Year Ended | ||||||||
| December 31, 2020 | December 31, 2019 | Variation | % | |||||
| Revenue | 559 | 819 | (260) | (32%) | ||||
| Cost of sales | (254) | (470) | 216 | (46%) | ||||
| Gross profit | 305 | 349 | (44) | (13%) | ||||
| Selling expenses | (2) | (3) | 1 | (33%) | ||||
| Administrative expenses | (30) | (32) | 2 | (6%) | ||||
| Other operating income and expenses, net | 29 | 47 | (18) | (38%) | ||||
| Share of profit from joint ventures | 67 | 13 | 54 | 415% | ||||
| Impairment of property, plant and equipment and intangible assets | (128) | (52) | (76) | 146% | ||||
| Operating income | 241 | 322 | (81) | (25%) | ||||
| Finance income | 3 | 2 | 1 | 50% | ||||
| Finance costs | (73) | (82) | 9 | (11%) | ||||
| Other financial results | 1 | 86 | (85) | (99%) | ||||
| Financial results, net | (69) | 6 | (75) | (1,250%) | ||||
| Profit before income tax | 172 | 328 | (156) | (48%) | ||||
| Income tax | (33) | (80) | 47 | (59%) | ||||
| Profit of the year | 139 | 248 | (109) | (44%) | ||||
| Owners of the company | 147 | 239 | (92) | (38%) | ||||
| Non - controlling interest | (8) | 9 | (17) | (189%) | ||||
Revenues
Net revenues from our generation segment decreased 32%, to US$559 million in the fiscal year ended December 31, 2020, compared to US$819 million in the previous fiscal year. This variation is mainly explained by (i) a decrease in revenues caused by the discontinuation of fuel self-supply for electric power generation following the centralization of fuel purchases by CAMMESA beginning in December 2019, and (ii) a decrease in energy prices in the spot market following the effectiveness of SE Resolution N° 31/20, and the temporary suspension of the automatic inflation adjustment mechanism. These effects were partially offset by an increase in revenues upon the commercial commissioning of CTGEBA’s second CC as from July 2, 2020, which enabled the entry into the wholesale power purchase agreement executed with CAMMESA for a maximum committed capacity of 377 MW.
The amount of electricity sold during the fiscal year ended December 31, 2020 increased slightly primarily due to the commissioning of new projects and acquisitions, which was partially offset by a decrease in generation from older and therefore less efficient thermal machines and lower hydro generation due to weather conditions.
The following table shows net electricity sales (in GWh) for our power generation plants:
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| Fiscal year ended | ||||
| December 31, 2020 | December 31, 2019 | |||
| In GWh | Net generation | Total sales | Net generation | Total sales |
| Hydroelectric | ||||
| HINISA | 481 | 482 | 499 | 500 |
| HIDISA | 323 | 323 | 334 | 334 |
| HPPL | 742 | 737 | 823 | 822 |
| Wind | ||||
| PEMC | 409 | 409 | 383 | 383 |
| PEPE II | 207 | 207 | 122 | 130 |
| PEPE III | 243 | 246 | 148 | 159 |
| Thermal | ||||
| CTLL | 4,406 | 4,399 | 5,096 | 5,307 |
| CTG | 368 | 418 | 755 | 893 |
| CTP | 55 | 55 | 53 | 53 |
| CPB | 576 | 575 | 1,106 | 1,107 |
| CTPP | 193 | 193 | 168 | 168 |
| CTIW | 229 | 229 | 312 | 312 |
| CTGEBA | 7,912 | 7,946 | 5,550 | 5,891 |
| EcoEnergía | 72 | 89 | 105 | 83 |
| CTEB | 255 | 255 | 128 | 125 |
| Total | 16,470 | 16,563 | 15,582 | 16,266 |
Cost of Sales
Cost of sales decreased by 46%, to US$254 million for the fiscal year ended December 31, 2020, compared to US$470 million for the fiscal year ended December 31, 2019, primarily due to a decrease in gas purchases and transportation volumes (US$226 million) and a decrease in electricity purchase volumes (US$11 million), partially offset by higher depreciation in property, plant and equipment due to (i) the commercial commissioning of the PEPE II and III wind farms during the second quarter of 2019, and (ii) the expansion of the Genelba thermal plant in the third quarter of 2020 (collectively, US$26 million).
Gross Profit
Gross profit from our generation segment decreased by US$44 million (13%), recording a gain of US$305 million for the fiscal year ended December 31, 2020, compared to a gain of US$349 million for the fiscal year ended December 31, 2019. This variation is mainly explained by a decrease in the spot market energy price and higher depreciation of property, plant and equipment, partially offset by higher revenues from the commercial activation of the aforementioned projects.
In addition, in the fiscal year ended December 31, 2020, the gross margin in relation to sales increased to 55% compared to 43% for the fiscal year ended December 31, 2019.
Selling Expenses
Selling expenses from our generation segment did not vary significantly, amounting to US$2 million for the fiscal year ended December 31, 2020, compared to US$3 million for the fiscal year ended December 31, 2019.
Administrative Expenses
Administrative expenses in our generation segment decreased 6%, from US$32 million for the fiscal year ended December 31, 2019 to US$30 million for the fiscal year ended December 31, 2020. This variation is explained by lower charges related to salaries and social security.
Other Operating Income and Expenses Net
Other operating income and expenses, net decreased to a US$29 million gain for the fiscal year ended December 31, 2020, compared to a US$47 million gain for the fiscal year ended December 31, 2019. This variation corresponds to a US$26 million decrease in commercial interests gains, mainly as a result of the gain recorded in 2019 derived from the Agreement for the Regularization and Settlement of Receivables with WEM, minus higher interests gains from delayed monthly transaction payments from CAMMESA during 2020, all of which was offset by a contractual gain of US$7 million as compensation for damages suffered in certain wind power generation units.
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Share of profit from joint ventures
The profit from joint ventures from our generation segment increased to US$67 million for the fiscal year ended December 31, 2020, from US$13 million for the fiscal year ended December 31, 2019. This variation is mainly due to higher profits in CTB in the fiscal year ended December 31, 2020.
Operating Income
Operating income decreased by US$81 million (25%), recording a gain of US$241 million for the fiscal year ended December 31, 2020, compared to a gain of US$322 million for the fiscal year ended December 31, 2019. This variation is mainly explained by: (i) higher impairment of property, plant and equipment and intangible assets that mainly supply the spot market (US$76 million); (ii) lower income due to a decrease in spot market prices (as a result of the conversion of foreign currency remuneration at the Spot market to Peso denominations) and (iii) a decrease in commercial interest gains as a result of the Agreement for the Regularization and Settlement of Receivables with WEM in 2019, partially offset by (i) an increase in generation capacity through the aforementioned expansion projects, and (ii) an increase in share of profit from associates and joint ventures due to the acquisition of CTB in June 2019.
The operating margin in relation to sales for the fiscal year ended December 31, 2020, increased to 43% compared to a 39% margin for the fiscal year ended December 31, 2019.
Financial Results, Net
Financial results, net, from the generation segment represented a loss of US$69 million for the fiscal year ended December 31, 2020, compared to a gain of US$6 million for the fiscal year ended December 31, 2019. The variation is mainly due to: (i) lower present value measurement gains derived from the Agreement for the Regularization and Settlement of Receivables with WEM in 2019 (US$50 million); (ii) lower income from changes in the fair value of financial instruments (US$28 million), and (iii) higher net foreign exchange losses (US$16 million). These effects were partially offset by a decrease in interest losses (US$10 million), and higher profits derived from the repurchase of corporate bonds (US$10 million).
Income Tax
Generation activities recorded an income tax charge of US$33 million for the fiscal year ended December 31, 2020, compared to a charge of US$80 million for the fiscal year ended December 31, 2019, mainly due to a decrease in profits subject to income tax.
Profit
The generation segment recorded a US$139 million profit for the fiscal year ended December 31, 2020, of which US$147 million are attributable to the owners of the Company, compared to a US$248 million profit for the fiscal year ended December 31, 2019, of which US$239 million are attributable to the owners of the Company.
Oil and Gas Segment
| Fiscal year ended | |||||
| December 31, 2020 | December 31, 2019 | Variation | % | ||
| Revenue | 294 | 448 | (154) | (34%) | |
| Cost of sales | (243) | (313) | 70 | (22%) | |
| Gross profit | 51 | 135 | (84) | (62%) | |
| Selling expenses | (15) | (14) | (1) | 7% | |
| Administrative expenses | (42) | (47) | 5 | (11%) | |
| Exploration expenses | - | (9) | 9 | (100%) | |
| Other operating income and expenses, net | (8) | (7) | (1) | 14% | |
| Share of profit from associates | - | 21 | (21) | (100%) | |
| Impairment of property, plant and equipment | - | (10) | 10 | (100%) | |
| Impairment of financial assets | (13) | 3 | (16) | (533%) | |
| Operating income | (27) | 72 | (99) | (138%) | |
| Finance income | 7 | 17 | (10) | (59%) | |
| Finance costs | (100) | (94) | (6) | 6% | |
| Other financial results | 44 | 89 | (45) | (51%) | |
| Financial results, net | (49) | 12 | (61) | (508%) | |
| Loss before income tax | (76) | 84 | (160) | (190%) | |
| Income tax | 23 | (16) | 39 | (244%) | |
| (Loss) Profit of the year | (53) | 68 | (121) | (178%) | |
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Revenues
Net revenues in our oil and gas segment amounted to US$294 million for the fiscal year ended December 31, 2020, which was 34% lower than the US$448 million for the fiscal year ended December 31, 2019. This decrease is mainly due to a decrease in the prices tendered at CAMMESA’s monthly calls, a decrease in industrial activity, and the diluting effect of inflation on the price of gas sold to gas distributors, and a decrease in gas volumes sold to thermal power plants due to the discontinuation of the self-supply of fuel for electricity generation purposes. The oil sector was impacted by a decrease of domestic prices that use international prices as benchmarks, which experienced a strong decline due to the collapse in demand caused by Covid-19.
The following table shows our production for the oil and gas segment for the periods shown:
Cost of Sales
The cost of sales from our oil and gas segment decreased by 22%, from US$313 million for the fiscal year ended December 31, 2019 to US$243 million for the fiscal year ended December 31, 2020. The variation is primarily due to: (i) decreases in gas purchases for resale (US$41 million); (ii) decreases in royalty charges as a result of the decrease in sales prices (US$17 million) and (iii) decrease in fees and compensation for services as a result of the decrease in the level of activity experienced during the period (US$6 million).
Gross Profit
Gross profit from our oil and gas segment decreased by 62%, from US$135 million in the fiscal year ended December 31, 2019, to US$51 million for the fiscal year ended December 31, 2020. This variation is primarily explained by a decline in sales prices, partially offset by lower purchases of gas for resale and lower royalty charges.
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The gross margin in relation to sales for the fiscal year ended December 31, 2020 amounted to 17%, compared to 30% for the fiscal year ended December 31, 2019.
Selling Expenses
The selling expenses of oil and gas increased to US$15 million for the fiscal year ended December 31, 2020, compared to US$14 million for the same period in 2019.
Administrative Expenses
Administrative expenses from our oil and gas segment decreased to US$42 million (11%) for the fiscal year ended December 31, 2020, compared to US$47 million for the fiscal year ended December 31, 2019. The variation is mainly due to decreases in salaries and social security charges (US$2 million), as well as fees and compensation for services (US$2 million).
Exploration Expenses
Exploration expenses from our oil and gas segment did not record any charge during the fiscal year ended December 31, 2020, compared to a loss of US$9 million during the fiscal year ended December 31, 2019. The 2019 charge corresponds to expenses associated with abandoned and unproductive wells (US$5 million) and a decrease in geological and geophysical expenses (US$4 million).
Other Operating Income and Expenses, net
Other operating income and expenses, net of our oil and gas segment recorded a higher net loss of US$8 million, for the fiscal year ended December 31, 2020, compared to a loss of US$7 million for the fiscal year ended December 31, 2019. The variation is mainly due to an increase in provisions allocated to contingencies.
Operating Income
The operating income from our oil and gas segment decreased to a loss of US$27 million for the fiscal year ended December 31, 2020, 138% lower than the gain of US$72 million for the fiscal year ended December 31, 2019. This variation is mainly explained by: (i) a lower gross profit (US$84 million) mainly due to a decline in sales prices; (ii) a decrease in profit from investment in associates (US$21 million) in relation to our participation in OCP; and (iii) impairment of financial assets (US$13 million) recognized in 2020 of receivables with gas distributors under Decree No. 1,053/2018 (subsequently abrogated in 2020), by virtue of which the differences in exchange rates between the gas price purchased by gas distributors and the gas tariffs charged to consumers for the period between April 2018 – March 2019 were borne by the Federal Government. These effects were partially offset by the loss recorded in 2019 derived from impairment of property, plant and equipment (US$10 million).
Financial Results, Net
Financial results, net from the oil and gas segment represented a loss of US$49 million for the fiscal year ended December 31, 2020, compared to a profit of US$12 million for the fiscal year ended December 31, 2019, primarily due to: (i) lower income from changes in the fair value of financial instruments (US$34 million); (ii) higher net foreign exchange losses (US$17 million) and (iii) higher financial interest expense (US$13 million) due to debt issuance. These effects were partially offset by a gain on the repurchase of corporate bonds (US$5 million) and a higher present value measurement gains (US$5 million).
Income Tax
Our oil and gas segment recorded an income tax benefit of US$23 million for the fiscal year ended December 31, 2020, compared to an income tax charge of US$16 million for the same period in 2019. This variation relates mainly to a decrease in profits subject to income tax.
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Total (Loss) Profit
Our oil and gas segment recorded a loss of US$53 million for the fiscal year ended December 31, 2020, compared to a profit of US$68 million for the prior fiscal year, both of which are entirely attributable to the owners of the Company.
Petrochemicals Segment
| Fiscal year ended | ||||
| December 31, 2020 | December 31, 2019 | Variation | % | |
| Revenue | 267 | 323 | (56) | (17%) |
| Cost of sales | (233) | (298) | 65 | (22%) |
| Gross profit | 34 | 25 | 9 | 36% |
| Selling expenses | (9) | (9) | - | - |
| Administrative expenses | (3) | (4) | 1 | (25%) |
| Other operating income and expenses, net | (6) | (6) | - | - |
| Impairment of inventories | (11) | - | (11) | (100%) |
| Impairment of financial assets | 1 | - | 1 | 100% |
| Operating income | 6 | 6 | - | - |
| Finance costs | (3) | (8) | 5 | (63%) |
| Other financial results | 5 | 18 | (13) | (72%) |
| Financial results, net | 2 | 10 | (8) | (80%) |
| Profit before income tax | 8 | 16 | (8) | (50%) |
| Income tax | (2) | (5) | 3 | (60%) |
| Profit of the year | 6 | 11 | (5) | (45%) |
Revenues
Net revenues from our petrochemicals segment totaled US$267 million for the fiscal year ended December 31, 2020, 17% lower than the US$323 million reported for the fiscal year ended December 31, 2019. The variation is mainly due to lower sales prices resulting from the decrease in international reference prices.
The following table shows sales volumes in the petrochemicals segment during the specified periods:
| Volume sold in k ton | For the fiscal year ended | |
| December 31, 2020 | December 31, 2019 | |
| Styrene & polystyrene | 94 | 99 |
| SBR | 37 | 27 |
| Reforming | 205 | 217 |
| Total | 337 | 343 |
Cost of Sales
The petrochemicals segment’s cost of sales decreased by 22%, to US$233 million for the fiscal year ended December 31, 2020, compared to US$298 million for the fiscal year ended December 31, 2019, mainly due to (i) decreases in prices of raw material resulting from the decrease in international reference prices (US$60 million), and (ii) decreases in salaries and social security charges (US$5 million).
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Gross Profit
Gross profit from our petrochemicals segment increased by 36%, recording a profit of US$34 million for the fiscal year ended December 31, 2020, compared to a US$25 million profit for the same period in 2019.
The gross margin in relation to sales for the fiscal year ended December 31, 2020 amounted to 13%, compared to 8% for the fiscal year ended December 31, 2019.
Selling Expenses
Selling expenses from the petrochemicals segment did not vary significantly, amounting to US$9 million for both fiscal years ended December 31, 2020 and 2019.
Other Operating Income and Expenses, Net
Other operating income and expenses, net remained unchanged, amounting US$6 million loss for both fiscal years ended December 31, 2019 and 2020.
Operating Income
The petrochemicals segment’s operating income did not vary, recording a US$6 million profit for both fiscal years ended December 31, 2019 and 2020. The increase in gross profit for the year ended December 31, 2020, was offset by an impairment in inventories of US$11 million recognized in 2020.
Financial Results, Net
Financial results, net from the petrochemicals segment, represented a gain of US$2 million for the fiscal year ended December 31, 2020, compared to a US$10 million profit for the fiscal year ended December 31, 2019. This variation is mainly due to a decrease in provisions allocated to contingencies (US$8 million).
Income Tax
Our petrochemicals segment recorded an income tax charge of US$2 million for the fiscal year ended December 31, 2020, compared to an income tax charge of US$5 million for the fiscal year ended December 31, 2019. This variation is mainly due to a decrease in profits before income tax.
Total profit
The petrochemicals segment recorded a net profit of US$6 million for the fiscal year ended December 31, 2020, compared to a net profit of US$11 million for the prior fiscal year, in both cases fully attributable to the company’s owners.
Holding and Others Segment
| Fiscal year ended | ||||
| December 31, 2020 | December 31, 2019 | Variation | % | |
| Revenue | 20 | 20 | - | - |
| Gross profit | 20 | 20 | - | - |
| Selling expenses | - | (2) | 2 | (100%) |
| Administrative expenses | (18) | (22) | 4 | (18%) |
| Share of profit from associates and joint ventures | 18 | 67 | (49) | (73%) |
| Impairment of financial assets | 3 | (1) | 4 | (400%) |
| Operating income | 23 | 62 | (39) | (63%) |
| Finance income | 1 | 5 | (4) | (80%) |
| Finance costs | (3) | (4) | 1 | (25%) |
| Other financial results | 34 | (18) | 52 | (289%) |
| Financial results, net | 32 | (17) | 49 | (288%) |
| Profit before income tax | 55 | 45 | 10 | 22% |
| Income tax | (23) | 231 | (254) | (110%) |
| Profit for the year | 32 | 276 | (244) | (88%) |
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Revenues
Net revenues from our holding and others segment remained unchanged, amounting to a US$20 million loss in both fiscal years ending 31 December 2020 and 2019.
Gross Profit
Gross profit from our holding and others segment net remained unchanged, amounting to a US$20 million loss for both fiscal years ending 31 December 2020 and 2019.
Selling Expenses
Selling expenses from our holding and others segment did not record charges for the fiscal year ended December 31, 2020 compared to US$2 million for the fiscal year ended December 31,2019.
Administrative Expenses
Administrative expenses decreased to US$18 million for the fiscal year ended December 31, 2020, 18% less than the US$22 million spent during the fiscal year ended December 31, 2019. This decrease was due to a decrease in fees (US$4 million).
Operating Income
Our holding and others segment’s operating income amounted to US$23 million for the fiscal year ended December 31, 2020, 63% lower than for the fiscal year ended December 31, 2019, which amounted to US$62 million. This variation is mainly explained by a decrease in profit from investment in associates and joint ventures (US$49 million), mainly in relation to our participation in CIESA.
Financial Results, Net
Financial results, net, from our holding and others segment represented a profit of US$32 million for the fiscal year ended December 31, 2020 compared to a loss of US$17 million for the fiscal year ended December 31, 2019, mainly due to a higher profit from net foreign exchange difference as a result of our shifting to a net passive position in Argentine Pesos (US$62 million). These effects were partially offset by a higher present value measurement loss of certain tax credits (US$8 million) and lower financial interests, net (US$6 million).
Income Tax
Our holding and others segment recorded an income tax charge of US$23 million for the fiscal year ended December 31, 2020, compared to a gain of US$231 million for the fiscal year ended December 31, 2019.
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Total Profit
Our holding and others segment registered a net profit of US$32 million for the fiscal year ended December 31, 2020 attributable to the owners of the company, compared to a net profit of US$276 million recorded in the fiscal year ended December 31, 2019, also attributable to the owners of the company.
Distribution of Energy Segment
The results corresponding to the distribution of energy segment have been classified as discontinued operations as a result of the sale of our controlling stake in Edenor. See Item 4. “Relevant Events—Sale of Controlling Stake in Edenor” and note 5.1 to our Consolidated Financial Statements.
The distribution of energy segment recorded a total loss of US$592 million for discontinued operations during the fiscal year ended December 31, 2020, of which US$499 million are attributable to the owners of the Company, compared to a profit of US$197 million in 2019, of which US$98 million are attributable to the owners of the Company. This variation is mainly due to the divestment of our participation in Edenor.
Liquidity and Capital Resources
Analysis of our Financial Condition
Our ability to execute and carry out our strategic business plan depends upon our ability to obtain financing at a reasonable cost and on reasonable terms. Along these lines, and as a guiding principle, financial solvency is the foundation on which the sustainable development of our businesses is built. Pursuant to these strategic guidelines, we seek to: (a) Design a capital structure consistent with industry standards adaptable to the financial markets in which we operate; (b) Maintain a liquidity level—invested in financial assets with high credit quality—that allows us to meet our obligations; (c) Maintain a debt maturity profile consistent with projected cash generation; and (d) Efficiently manage borrowing costs.
Adhering to these guidelines enables us to treat financial management as a key element in the value creation process.
Our business activities are focused on the development and value-enhancement of our energy assets, while continuing to identify, evaluate and invest in other opportunities in the Argentine energy industry that offer significant growth potential and/or synergies.
Total consolidated borrowings as of December 31, 2021, 2020 and 2019 were US$1,438 million, US$1,614 million and US$1,947 million, respectively. As of December 31, 2021, 2020 and 2019, 99%, 88% and 92% of our borrowings were denominated in U.S. Dollars, respectively.
As of December 31, 2021, 2020 and 2019, cash and cash equivalents were US$110 million, US$141 million and US$225 million, respectively. We maintain our cash and cash equivalents in Pesos, and in U.S. Dollars depending on medium term requirements and availability, at all levels of operations. We and our subsidiaries conducted financings at both variable and fixed rates.
The table below reflects our cash position at the dates indicated and the net cash provided by (used in) operating, investing and financing activities during the years indicated:
| As of December 31, | ||||||
| 2021 | 2020 | 2019 | ||||
| Cash and cash equivalents at the beginning of the year | 141 | 225 | 241 | |||
| Net cash generated by operating activities | 729 | 693 | 802 | |||
| Net cash used in investing activities | (474) | (255) | (369) | |||
| Net cash used in financing activities | (342) | (445) | (390) | |||
| Exchange difference generated by cash and cash equivalents | 4 | (25) | (59) | |||
| Cash and cash equivalents reclassified to assets classified as held for sale | 52 | (52) | - | |||
| Cash and cash equivalents at the end of the year | 110 | 141 | 225 | |||
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Net cash generated by operating activities
Net cash generated by operating activities amounted to US$729 million for the year ended December 31, 2021, attributable to cash flow generated by net income from continuing operations without considering (i) non-cash losses (mainly related to US$205 million for depreciation and amortization of assets, US$141 million for interest accrual and US$24 million for financial instruments fair value’s changes), and (ii) non-cash profits (mainly related to US$117 million for share of profit from joint ventures and associates), but considering (iii) changes in operating assets and liabilities (mainly related to US$41 million increase in trade and other receivables and US$ 40 million increase in inventories, partially offset by US$43 million increase in trade and other payables); (iv) US$116 million cash generated by discontinued operations; and (v) US$13 million in income tax payments.
Net cash generated by operating activities amounted to US$693 million for the year ended December 31, 2020, attributable to cash flow generated by net income from continuing operations without considering (i) non-cash losses (mainly related to US$205 million for depreciation and amortization of assets, US$132 million for interest accrual, and US$139 million for property, plant and equipment, intangible assets and inventories’ impairment), and (ii) non-cash profits (mainly related to US$85 million for share of profit from joint ventures and associates), but considering (iii) changes in operating assets and liabilities (mainly related to US$20 million decrease in tax payables and US$6 million increase in inventories, partially offset by US$19 million decrease in trade and other receivables); (iv) US$211 million cash generated by discontinued operations; and (v) US$5 million in income tax payments.
Net cash generated by operating activities amounted to US$802 million for the year ended December 31, 2019, attributable to cash flow generated by net income from continuing operations without considering (i) non-cash losses (mainly related to US$186 million for depreciation and amortization of assets and US$110 million for interest accrual), and (ii) non-cash profits (mainly related to US$101 million for share of profit from joint ventures and associates, US$130 million for income tax accrual and US$88 million for financial instruments fair value’s changes), but considering (iii) changes in operating assets and liabilities (mainly related to US$65 million decrease in trade and other receivables, US$46 million increase in trade and other payables, partially offset by US$20 million increase in inventories); (iv) US$170 million cash generated by discontinued operations; and (v) US$42 million in income tax payments.
Net cash used in or generated by investing activities
Net cash used in investing activities amounted to US$474 million for the year ended December 31, 2021, including payments of US$206 million for purchases of property, plant and equipment, US$234 million for public securities and shares acquisitions and US$166 million used in discontinued operations, partially offset by US$52 million proceeds from investment funds recoveries.
Net cash used in investing activities amounted to US$255 million for the year ended December 31, 2020, including payments of US$124 million for purchases of property, plant and equipment, US$151 million for public securities and shares acquisitions and US$86 million used in discontinued operations, partially offset by US$93 million proceeds from investment funds recoveries.
Net cash used in investing activities amounted to US$369 million for the year ended December 31, 2019, including payments of US$426 million for purchases of property, plant and equipment, US$108 million for capital integration in associates and joint ventures, US$74 million for investment funds subscriptions and US$86 million used in discontinued operations, partially offset by US$190 million proceeds from the sale of public securities and shares and US$87 million proceeds from received dividends.
Net cash used in financing activities
Net cash used in our financing activities amounted to US$342 million for the year ended December 31, 2021, principally due to payments of US$476 million made in connection with bank and financial borrowings (including principal and interest), US$39 million related to the acquisition of our own shares and US$7 million used in discontinued operations, partially offset by US$188 million proceeds from borrowings.
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Net cash used in our financing activities amounted to US$445 million for the year ended December 31, 2020, principally due to payments of US$481 million made in connection with bank and financial borrowings (including principal and interest), US$104 million related to the acquisition of our own shares, US$110 million related to repurchase and redemption of corporate bonds and US$73 million used in discontinued operations, partially offset by US$353 million proceeds from borrowings.
Net cash used in our financing activities amounted to US$390 million for the year ended December 31, 2019, principally due to payments of US$652 million made in connection with bank and financial borrowings (including principal and interest), US$141 million related to the acquisition of our own shares, US$66 million related to repurchase and redemption of corporate bonds and US$85 million used in discontinued operations, partially offset by US$556 million proceeds from borrowings.
Capital Expenditures
The following table sets forth our capital expenditures for the years ended December 31, 2021, 2020 and 2019:
| At December 31, | ||||||||
| 2021 | 2020 | 2019 | ||||||
| Generation | 39 | 61 | 240 | |||||
| Distribution of energy | - | 135 | 173 | |||||
| Oil and gas | 213 | 41 | 191 | |||||
| Petrochemical | 6 | 3 | 4 | |||||
| Holding and others | 6 | 2 | 3 | |||||
| 264 | 242 | 611 | ||||||
In 2021, our capital expenditures in our generation segment amounted to US$39 million mainly advances to suppliers and work in progress related to the expansion of the PEPE III wind farm by 81 MW.
Our capital expenditures in our oil and gas segment amounted to US$213 million in 2021, mainly to develop gas reserves, through well drilling and facilities construction, in order to reach the committed gas production under the Plan GasAr.
In 2020, our capital expenditures in our generation segment amounted to US$61 million mostly related to work in progress (US$54 million) in order to increase thermal generation capacity mainly through the completion of the closing of Genelba’s second CC.
In our distribution of energy segment, we invested US$135 million in 2020, mainly related to work in progress (US$101 million) and substations, high, medium and low voltage lines, meters, transforming chamber and platforms (US$20 million). A substantial portion was dedicated to increasing the capacity of our grid in line with the growth of our customer base. In addition, we made investments in order to meet our quality standards levels.
Our capital expenditures in our oil and gas segment amounted to US$41 million in 2020, mostly in order to develop gas reserves (US$18 million) and exploratory wells (US$23 million).
In 2019, our capital expenditures in our generation segment amounted to US$240 million mostly related to work in progress (US$217 million) in order to increase thermal generation capacity mainly through the closing of Genelba’s CC project and the completion of wind farm projects.
In our distribution of energy segment, we invested US$173 million in 2019, mainly related to work in progress (US$139 million) and substations, high, medium and low voltage lines, meters, transforming chamber and platforms (US$9 million). A substantial portion was dedicated to increasing the capacity of our grid in line with the growth of our customer base. In addition, we made investments in order to meet our quality standards levels. Edenor complied with the investment plan for a five-year period agreed upon with the ENRE in the context of the RTI process.
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Our capital expenditures in our oil and gas segment amounted to US$191 million in 2019, mostly related to work in progress (US$148 million) in order to develop gas reserves and exploratory wells (US$24 million).
Future Capital Requirements
For the year of 2022, our Board of Directors has approved a capital expenditure program in an amount of US$ 379 million, which will be mainly focused in our gas segment and in PEPE III’s Expansion Project. Because of this, we expect to improve our operating cash flow, driven by an increase in our natural gas production related to the commitments we made under the Plan Gas.Ar tenders.
We estimate that our capital expenditure requirements, debt payment obligations, dividend payments and working capital will be financed mainly from our cash from operations, new debt financings and possible divestments.
We prioritize financial discipline with an adequate liquidity position consistent with our cash flow generation and financial requirements. Our level of investments will depend on a variety of factors, many of which are beyond our control. These include the future evolution of the price of commodities we sell, the behavior of electricity demand in Argentina, the existence and competitive impact of alternative projects, the enforcement of regulations and changes in applicable regulations, taxes and royalties, and the political, economic and social situation prevailing in Argentina.
In our generation segment, future capital expenditures will mainly focus on the completion of expansion of thermal generation capacity projects through the execution of the closing to CC at CTEB power plant.
Finally, in our oil and gas segment, the investment plan will continue with a strong focus on our unconventional gas fields, including commitments assumed within the Plan Gas.Ar, in addition to investments agreed in the concession permits, totaling US$ 478 million for the 2021-2024 period. In order to achieve the incremental injection commitments for the 2021 winter, a relevant portion of the commitments were already fulfilled. Remaining capital expenditures will focus (i) on developing unconventional gas reserves (shale and tight gas) through well drilling, as well as, exploration studies aimed at making new discoveries at unconventional gas reservoirs; and (ii) on increasing our gas treatment and transport facilities in order to be able to inject the new gas we develop. The aforementioned does not include investment commitments for the Sierra Chata Block, currently being renegotiated with the authorities.
For further information on our investment commitments in oil and gas areas and our generation projects, please see Note 17 to our Consolidated Financial Statements.
Description of Indebtedness
Our total consolidated financial indebtedness as of December 31, 2021 was US$1,438 million, of which 95% was long-term debt, 99% of which was denominated in U.S. Dollars. The amount of our total consolidated financial debt does not include Edenor, Transener, TGS, Greenwind and CTB given that our stake in those companies constitutes an interest in a joint venture, and as such is not consolidated and is valued according to the equity method of accounting in the Consolidated Financial Statements.
The below is a description of the main characteristics of the indebtedness of our group companies:
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| 2021 | 2020 | 2019 | |
| (in millions of US$) | |||
| Short-Term Debt | |||
| Corporate Bonds | 39 | 117 | 32 |
| Financial borrowings | 29 | 88 | 137 |
| Bank overdrafts | 11 | 37 | - |
| Related parties | - | - | 14 |
| 79 | 242 | 183 | |
| Long-Term Debt | |||
| Corporate Bonds(1) | 1,301 | 1,297 | 1,603 |
| Financial borrowings | 58 | 75 | 161 |
| Total | 1,359 | 1,372 | 1,764 |
| Total Indebtedness | 1,438 | 1,614 | 1,947 |
(1) Net of repurchase of Corporate Bonds of Pampa
Financings
In 2021, we had short term debt maturities for approximately US$196 million. During 2021, the Company cancelled at maturity and pre-cancelled short term financings with banks and additionally cancelled Class 6 notes at maturity, improving its short term debt profile while keeping a solid cash position. As of December 31, 2021, our short-term maturities amounted to US$79 million.
Additionally, after the end of the 2021 fiscal year, we obtained new bank overdrafts denominated in Argentine Pesos, net of cancelations, in the amount of Ps. 126 million.
The following table describes our debt maturity profile for the periods indicated, including principal amount plus the corresponding accrued interest as of December 31, 2021:
| < 1 year | 1-5 years | > 5 years | Total | |
| (in millions of US$) | ||||
| Total Indebtedness | 79 | 430 | 929 | 1,438 |
Corporate Bonds
On August 27, 2021 we cancelled at maturity the Class 6 notes for Ps 6.355 million.
During January 2022, we issued the Class 8 green bonds for a total amount of Ps. 3,107 million. The Class 8 notes accrue interest at a floating rate based on a Private Badlar plus an applicable margin of 2% and are due at a single installment upon their maturity on July 18, 2023.
Credit Ratings
Between June and July 2021 FitchRatings upgraded Pampa’s ratings on a global scale from “CCC” to “B-” and on a local scale from “AA-” to “AA” for the long term due to the resilience of the Company despite of the challenging macroeconomic and regulatory environment, added to the decrease in regulatory risk due to the sale of control in Edenor.
In September 2021, S&P raised Pampa’s stand-alone rating on the global scale from “CCC+” to “B-”, above the sovereign, due to adequate liquidity and comfortable debt profile.
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| Company | Agency | Rating | |
| Global | Local | ||
| Pampa | S&P | B-(1) | - |
| Moody’s | Caa3 | - | |
| FitchRatings | B- |
AA (long term) A1+ (short term) | |
| TGS | S&P | CCC+ | - |
| Moody’s | Caa3 | - | |
| Transener | S&P | - | A+ |
(1) Pampa Stand Alone Rating
Repurchase of debt securities
During 2021 there were no corporate bonds’ buyback transactions. At the end of March 2022, outstanding 2023, 2027, and 2029 corporate bonds amounted to US$389.6 million, US$636.0 million, and US$292.5 million, respectively.
Covenants of our Indebtedness
Under the terms of the respective outstanding debt, we and certain of our subsidiaries are subject to a number of restrictive covenants, including limitations on incurrence of new indebtedness, capital expenditures and dividend payments, among others. As of December 31, 2021, we and our subsidiaries were in compliance with the covenants under our respective outstanding indebtedness.
| Item 6. | Directors, Senior Management and Employees |
General
We are managed by our board of directors, which is composed of ten directors and an equal or smaller number of alternate directors subject to the Annual Shareholders’ Meeting decision. Five of our ten directors are independent according to the criteria and requirements for independent directors under applicable Argentine law. Five of our alternate directors are independent. The directors are elected on a staggered basis each year (three directors at a time in each of the first two years of a three-year cycle, and four in the third year). Our directors are elected for a three-fiscal-year term and can be reelected.
Pursuant to section 12 of our by-laws, any shareholder or group of shareholders who holds more than 3% of our capital stock (each, a “Proposing Shareholder”) may require our board of directors to give notice to our other shareholders of the candidate or candidates to be nominated by such shareholder or group of shareholders at our shareholders’ meeting for election of our board of directors. To such end, the relevant slate executed by the Proposing Shareholder or its representatives, as applicable, will be sent to the chairman of our board of directors, no less than five business days prior to the date of the relevant shareholders’ meeting, to be published in the Bulletin of the BASE at least two days prior to the date of our shareholders’ meeting. To facilitate the formation of the slates and the record of the candidates’ names, as of the date of the first notice calling for the relevant meeting, a special book will be made available to our shareholders at our registered office in which the names of the candidates proposed by any proposing shareholder shall be recorded. Similarly, our board of directors will propose to the shareholders’ meeting the candidates for election by slate or, if election by slate is objected to, individually. The names of the candidates proposed by the board will be made known to all our shareholders together with the slates proposed by the Proposing Shareholder. In addition, no proposal for the election of directors may be made, either before or during the shareholders’ meeting, unless written evidence of acceptance of office by the proposed candidates is submitted to us. Such slate or person, as the case may be, who obtains the vote of a majority of the shares present at the meeting will be declared elected. If no slate obtains such majority, a new vote will be taken in which the two slates or persons that obtained the largest number of votes will take part, and the slate or person who obtains the largest number of votes will be declared elected. The preceding rules will not prevent a shareholder who is present at the shareholders’ meeting from proposing candidates not included in the proposals from our board of directors.
Duties and Liabilities of Directors
Pursuant to section 59 of the BCL, directors have the obligation to perform their duties with the loyalty and the diligence of a prudent businessperson. Directors are jointly and severally liable to the company, the shareholders and third parties for the improper performance of their duties, for violating the law, the company’s by-laws or regulations, if any, and for any damage caused by fraud, abuse of authority or negligence, as provided for in Section 274 of the BCL. The following are considered integral to a director’s duty of loyalty: (1) the prohibition on using corporate assets and confidential information for private purposes; (2) the prohibition on taking advantage, or to allow another to take advantage, by action or omission, of the business opportunities of the company; (3) the obligation to exercise board powers only for the purposes for which the law, the company’s by-laws or the shareholders’ or the board of directors’ resolution have intended; and (4) the obligation to take strict care so that acts of the board are not contrary, directly or indirectly, to the company’s interests. A director must inform the board of directors and the supervisory committee of any conflicting interest he or she may have in a proposed transaction and must abstain from voting thereon.
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A director shall not be responsible for the decisions taken in a board of directors’ meeting as long as he or she states his or her opposition in writing and informs the supervisory committee before any claim arises. A director’s decision approved by the company’s shareholders releases that director of any responsibility for his decision, unless shareholders representing 5% or more of the company’s capital stock object to that approval, or the decision was taken in violation of applicable law or the company’s by-laws. The company is entitled to file judicial actions against a director if a majority of the company’s shareholders at a shareholders’ meeting request that action.
Under the BCL, the board of directors is in charge of the administration of the company and, therefore, makes any and all decisions in connection therewith, as well as those decisions expressly provided for in the BCL, the company’s by-laws and other applicable regulations. Furthermore, the board is generally responsible for the execution of the resolutions passed by shareholders’ meetings and for the performance of any particular task expressly delegated by the shareholders. In general, our board of directors may be more involved in operating decision-making than might be customary in other jurisdictions. Under the BCL, the duties and responsibilities of an alternate director, when acting in the place of a director on a temporary or permanent basis, are the same as those discussed above for directors. They have no other duties or responsibilities as alternate directors.
Board of Directors
The following table sets forth information about the members and alternate members of our board of directors, five of whom have terms that will expire in December 2022, while six have terms that will expire in December 2023 and the remaining nine have terms that will expire in December 2024. In accordance with Argentine law, each member maintains his or her position on the board until a new shareholders’ meeting elects new directors.
|
Full Name
|
Age | Position | Appointment Date | Termination Date |
| Marcos Marcelo Mindlin | 58 | Chairman | 04/29/2021 | 12/31/2023 |
| Gustavo Mariani | 51 | Vice Chairman | 05/11/2020 | 12/31/2022 |
| Ricardo Alejandro Torres | 64 | Director | 05/11/2020 | 12/31/2022 |
| Damián Miguel Mindlin | 56 | Director | 04/29/2021 | 12/31/2023 |
| Carolina Zang(1)(2) | 49 | Director | 04/27/2022 | 12/31/2024 |
| Carlos Correa Urquiza(1) (2) | 52 | Director | 04/27/2022 | 12/31/2024 |
| Juan Santiago Fraschina (1) (2) | 45 | Director | 04/27/2022 | 12/31/2024 |
| Dario Epstein(1) (2) | 58 | Director | 04/27/2022 | 12/31/2024 |
| María Carolina Sigwald | 54 | Director | 04/29/2021 | 12/31/2023 |
| Silvana Wasersztrom(1) (2) | 54 | Director | 05/11/2020 | 12/31/2022 |
| Clarisa Lifsic(1)(2) | 59 | Alternate Director | 04/27/2022 | 12/31/2024 |
| Mariana de la Fuente | 53 | Alternate Director | 04/27/2022 | 12/31/2024 |
| Diana Mondino (1) (2) | 63 | Alternate Director | 04/27/2022 | 12/31/2023 |
| Clarisa Vittone (1) (2) | 54 | Alternate Director | 04/27/2022 | 12/31/2023 |
| Diego Martín Salaverri | 57 | Alternate Director | 04/27/2022 | 12/31/2024 |
| María Agustina Montes | 40 | Alternate Director | 09/30/2021 | 12/31/2022 |
| Mauricio Penta | 45 | Alternate Director | 04/29/2021 | 12/31/2023 |
| Horacio Jorge Tomás Turri | 61 | Alternate Director | 05/11/2020 | 12/31/2022 |
| Paula Eugenia Platini (1) (2) | 34 | Alternate Director | 04/27/2022 | 12/31/2024 |
| Lorena Rappaport (1) (2) | 50 | Alternate Director | 04/27/2022 | 12/31/2024 |
| (1) | Independent Directors under CML and CNV’s regulations. |
| (2) | Independent Directors under Rule 10A-3 under the Securities Exchange Act of 1934, as amended. |
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Marcos Marcelo Mindlin and Damián Miguel Mindlin are brothers. There are no other family relationships between the other members of our board of directors.
Nomination Policy and Nomination Committee
The Company’s board of directors approved a Nomination Policy in order to establish the principles governing the nomination and appointment of members of the Board of Directors.
Within the Nomination Policy framework, the Board of Directors created a Nomination Committee that provides assistance to the Board of Directors and the shareholders in the nomination and appointment of the members of the Board, according to the requirements and procedures set forth in the applicable rules and regulations in force in Argentina, Pampa’s bylaws and the rules of the committee.
The Nomination Committee reports to Pampa’s Board of Directors and consists of three regular members and an equal or lower number of alternate members.
The President of the committee must be independent, as determined by the guidelines set forth by the national securities commission. At present, Pampa’s Nomination Committee is composed as follows:
| Name | Position | |
|
Silvina Wasersztrom
|
President | |
| Gustavo Mariani | Regular Member | |
| Clarisa Vittone | Regular Member | |
| Mariana de la Fuente | Alternate Member | |
| Diana Mondino |
Alternate Member
| |
| María Carolina Sigwald | Alternate Member |
Senior Management
The table below sets forth certain information concerning our senior management:
| 152 |
| Name | Position | Age | ||
| Marcos Marcelo Mindlin | Chairman | 58 | ||
| Gustavo Mariani | Executive Vice president - Chief Executive Officer (CEO) | 51 | ||
| Ricardo Alejandro Torres | Executive Vice president | 64 | ||
| Damián Miguel Mindlin | Executive Vice president | 56 | ||
| Horacio Jorge Tomás Turri | Executive Director of Exploration and Production | 61 | ||
| Nicolás Mindlin | Executive director of finances (CFO) and M&A | 32 | ||
| María Carolina Sigwald | Executive Director of Legal Affairs | 54 | ||
| Mauricio Penta | Executive Director of Administration, IT and Supply | 45 |
The business address of each of our current directors and executive officers is Maipú 1, City of Buenos Aires, Argentina (C1084ABA).
Set forth below are brief biographical descriptions of the members of our board of directors and our senior management.
Marcos Marcelo Mindlin was born on January 19, 1964. He has been a member of our board of directors since 2006 and serves as Chairman of Pampa. Mr. Mindlin received a Master of Science in Business Administration from the Universidad del CEMA (Center of Macroeconomic Studies). He also holds a degree in Economics from the Universidad de Buenos Aires. From 1989 to 2004, Mr. Mindlin served as the founder, Senior Portfolio Manager and a shareholder of Grupo Dolphin. From 1991 to 2003, Mr. Mindlin was also a shareholder, Vice-Chairman and Chief Financial Officer of Inversiones y Representaciones S.A. (IRSA), a leading Argentine real estate company listed on the New York Stock Exchange. In November 2003, Mr. Mindlin resigned from IRSA to focus his work on Grupo Dolphin. Mr. Mindlin has extensive expertise in Latin America through his role as Chairman of the board of directors of Grupo Dolphin and several of its affiliates. From 1999 to 2004, Mr. Mindlin also served as Vice Chairman of Alto Palermo S.A. (a leading owner and operator of shopping centers in Buenos Aires), Vice Chairman at Cresud S.A.I.C. (one of the largest listed agricultural companies in Argentina) and ODS S.A. He also served as Director and member of the Executive Committee of Banco Hipotecario, the leading mortgage bank in Argentina. In 2008, Mr. Mindlin founded, and since that time has directed, the Foundation whose purpose is to improve childhood development and education. Mr. Mindlin is also a member and was Chairman of the Board of the Executive Committee of Tzedaká, a leading Jewish-Argentine foundation, and a member of the Council of the Americas. Mr. Mindlin is currently Chairman of Grupo Dolphin Holding S.A., Grupo Emes S.A. and Emes Inversora S.A. Mr. Mindlin also serves as director of Orígenes Seguros de Retiro S.A., Orígenes Seguros de Vida S.A. and Consultores Fund Management.
Gustavo Mariani was born on September 9, 1970. He has been a member of our board of directors since November 2005 and serves as Vice-Chairman and CEO. Mr. Mariani holds a degree in Economics from the Universidad de Belgrano and a master’s degree in Finance from the Universidad del CEMA (Center of Macroeconomic Studies) and also is a Chartered Financial Analyst (CFA) since 1998. Mr. Mariani joined Grupo Dolphin in 1993 as an analyst and also served as an investment portfolio manager. Mr. Mariani is currently Chairman of HIDISA, HINISA, CISA, and Generación Argentina SAU. He is also Vice Chairman of SACDE. He also serves as Director of Inversiones QRP S.A.U., ODS S.A., Dolphin Créditos Holding S.A., Emes Inversora S.A., Transba, Grupo Emes S.A., Emes Finance S.A, Grupo Dolphin Holding S.A., Orígenes Seguros de Vida S.A., Orígenes Seguros de Retiro S.A., Sitios Argentinos S.A, and TGS . In addition, Mr. Mariani is a member of the management board of the Foundation.
Ricardo Alejandro Torres was born on March 26, 1958. He has been a member of our board of directors since November 2005 and serves as Executive Vice president. Mr. Torres holds a degree in accounting from the Universidad de Buenos Aires and a Master’s degree in Business Administration from the Instituto de Altos Estudios Empresariales-Escuela de Negocios de la Universidad Austral and was a professor of Tax and Finance at the school of Economics of the Universidad de Buenos Aires. He currently serves as Chairman of PISA, Inversiones FPK S.A.U, Pop Argentina S.R.L. (Partner), Todos Capital S.R.L. (Partner). Also, Mr. Torres is Vice Chairman of the Foundation and Chairman of La Fundación Observatorio Argentinos por la Educación. He also serves as director of HIDISA, HINISA, CISA and CITELEC.
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Damián Miguel Mindlin was born on January 3, 1966. He has been a member of our board of directors since November 2005. Mr. Mindlin joined Grupo Dolphin in 1991 as a shareholder and a director. Since November 2003, Mr. Mindlin has served as Investment Portfolio Manager of Grupo Dolphin. Additionally, he is currently the Chairman of PP, Latina de Infraestructura Ferrocarriles e Inversiones S.L., ODS S.A., SACDE, Creaurban S.A., IECSA Chile S.A., Constructora Incolur IECSA S.A LTDA (Chile), Inversora Andina S.A. (Chile), Profingas S.A., Líneas del Norte S.A., Minera Geometales S.A., FIDUS S.G.R, Compañía Americana de Trasnmisión Eléctrica S.A. (CATESA), Corpus Energía S.A., Posadas Encarnación S.A., and ARPHC S.A. Also, Mr. Mindlin is the Vice Chairman of HIDISA, HINISA, PISA, , Sitios Argentinos S.A, Dolphin Créditos Holding S.A., Emes Inversora S.A., Grupo Emes S.A. and Grupo Dolphin Holding S.A. and he is member of the board of directors of CISA, Pampa F&F, Inversiones DM S.A.U, Orígenes Seguros de Vida S.A., Orígenes Seguros de Retiro S.A., Consultores Fund Management Ltd and Emes Air S.A.; and alternate director of ByMA, Transba and CITELEC. Mr. Mindlin is currently the treasurer of the management board of the Foundation.
María Carolina Sigwald was born on November 15, 1967. She has been a member of our board of directors since 2017. She is the Executive Director of Legal Affairs of the Company since November 2017. Ms. Sigwald obtained her law degree from the Universidad de Buenos Aires, where she graduated with honors. She started her professional career as a lawyer in Central Puerto S.A. after its privatization and then joined Chadbourne & Parke in New York and later the IIC in Washington. Carolina returned to Argentina in 1998 as founding partner of Law Firm Díaz Bobillo, Sigwald & Vittone, where she performed as external advisor for energy companies, Pampa Energia among them. Likewise, she took office in Transportadora de Gas del Sur’s and Telefónica de Argentina’s board of directors. She is currently the Chairman of Greenwind, Pampa Bloque18 SA and ENOPSA, and a member of the board of directors of CTB, TGS and CIESA and an alternate member of the board of directors of Transba and CITELEC.
Carlos Correa Urquiza was born on September 17, 1969. He has been a member of our board of directors since 2019. He currently serves as the Trading Desk in the Finance Area Management of Banco Hipotecario SA. Prior to joining BHSA (1999), he held the position of Head of the back-office department of Consultores Asset Management (1994-1999). Carlos holds a Master’s degree in Banking Management from Universidad del Cema and a Bachelor’s Degree in Business Administration from Universidad de Belgrano.
Juan Santiago Fraschina was born on January 14, 1977. He has been a member of our board of directors since 2020. Mr. Fraschina holds a degree in Economics from the Universidad de Buenos Aires and a master in Economic Sociology (UNSAM). Mr. Fraschina was Vice Superintendent at Seguros de la Nación. He currently serves as General Secretary at the Administración Nacional de la Seguridad Social (ANSES). Previously, Mr. Fraschina was a professor at the Universidad de Buenos Aires, Universidad Nacional de Lomas de Zamora and Universidad de Morón. He currently a professor of Economic Social History I, and Director of the Economics career and the Diploma of Economic Structure Argentina at the Universidad Nacional de Avellaneda.
Dario Epstein was born on July 19, 1963. He has been a member of our board of directors since 2019. He currently is a director of Sur Investment, Research for Traders and FinGuru. He is a Public Accountant and has an MBA from the University of Michigan. He was also a director of CNV.
Carolina Zang was born on October 26, 1972. She has been a member of our board of directors since 2022. Ms. Zang holds a law degree in Universidad de Buenos Aires and has a master’s in law from New York University School of Law. She is also a partner of ZBV in the market and finance area. She worked at Chadbourne & Parke LLP and in the National Legal Directorate of the Secretariat of Natural Resources and Human Environment. Ms. Zang also is a Director in the Bar Association of the City of Buenos Aires, member of the Board of Directors of the Adeba Foundation, member of the Cippec Advisory Council and of the Council of Lawyers for Civil and Economic Rights of the Cyrus R. Vance Center for International Justice in New York City. Ms. Zang is also an alternate member of the Board of Directors of Brasilagro Companhia Brasileira de Properties Agricolas.
Silvana Wasersztrom was born on March 18, 1968. She has been a member of our board since 2019. Ms. Wasersztrom is a lawyer and completed postgraduate studies in Tax and Customs Law at the Universidad Austral and Belgrano. Since 2012 she has practiced independently in her firm. Previously, from 1994 to 2002, she worked at Marval, O’Farrell & Mairal Abogados, and did an internship in Tampa, Florida, United States in the year 1992-1993.
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Mariana de la Fuente was born on December 5, 1968. She has been a member of our board of directors since 2022. She has a degree in Psychology from the University of Buenos Aires and completed various specializations and postgraduate courses in business administration in the Instituto de Altos Estudios Empresariales (IAE) and human resources at the University of Michigan, USA. Since November 2021, she is Human Resources Director of Pampa. Previously, since 2014, she served as Human Resources Director of EDENOR and previously at EDEN (Empresa Distribuidora de Energia Norte), both former subsidiaries of Pampa. Since 1990, he has held leadership positions related to human resources for Argentina or Latin American Region in several multinational companies, including Monsanto, Cerveceria Quilmes, Cabot and Abertis.
Clarisa Diana Lifsic was born on July 28, 1962. She has been a member of our board of directors since 2022. She is also Director of La Pionera de Anta, La Morocha del Sur, STAT Research y Biomakers SA, among others. Mrs. Lifstic holds a Bachelor’s in Economics from the University of Buenos Aires, where she graduated with honors and a Master of Science in Management from the Massachusetts Institute of Technology (Summa Cum Laude).
Diana Mondino was born on August 8, 1958. She has been a member of our board of directors since 2022. After completing her master’s in Business Administration; Major in Marketing and Finance at IESE, Spain Ms. Mondino was Director of Studies at CEMA, where she headed the first master’s in business administration to be taught in Argentina in 1987. She was formerly Region Head for LatinAmerica at Standard & Poor´s, after it bought a domestic rating agency she co-founded. Ms. Mondino is currently CEO of Banco Roela and its fintech operation SIRO; and serves as Director of Institutional Affairs and professor at the master’s in finance and MBA programs at CEMA University. She is also a Board member of the Food Bank Foundation. She is currently Board member of Loma Negra and Bodegas Bianchi.
Clarisa Vittone was born on October 6th, 1967. She has been a member of our board of directors since 2022. Mrs. Vittone has a Law degree, with a Specialization in Business Law, from Universidad de Buenos Aires. She also completed a Postgraduate Studies in NGO Management at Universidad de San Andrés. Since 2011 she has been Partner at Amrop Argentina and is member of the Regional Committee of Business Development for Amrop Lationoamerica. She leads in Latin America the practice of diversity and inclusion. Her second area of specialization is in the field of digital talent advising since 2015 companies, promoting digital transformation and the development of digital capabilities for C-level and Boards of Directors. Thirdly, she works in boards consultancy practice. Previously she worked at Valuar, a local prestigious executive search company. Before that, Mrs. Vittone worked for 15 years at Deutsche Bank and EFG Bank in executive roles of corporate, investment and private banking.
Diego Martín Salaverri was born on August 7, 1964. He has been a member of our board of directors since 2021 and a founding partner of the Argentine law firm of Salaverri, Burgio & Wetzler Malbrán. He earned a degree in law in 1988 from the Universidad Católica Argentina, Buenos Aires. Currently, Mr. Salaverri serves as Vice Chairman of PEB, director of Pampa Energía Ecuador Ltd and alternate director of CIESA. He is also a regular member of the supervisory committee of Dolphin Créditos S.A., Dolphin Créditos Holding S.A., Grupo Dolphin Holding S.A., Dolphin Finance S.A., Origen Seguros de Retiro S.A. and Origins Seguros de Vida S.A.; and alternate member of the supervisory committee of GSF S.A. and Partners I S.A. He is also an alternate member of the supervisory committee of Norpatagónica S.A.
Paula Platini was born on December 15, 1987. She has been a member of our board of directors since 2022. She is also Director of Emdersa, among others. Mrs. Platini holds a Bachelor’s in Administration from the National University of La Plata.
Lorena Rappaport was born on October 21, 1971. She has been a member of our board of directors since 2022. Mrs. Rappaport holds a Bachelor in Law from Universidad de Belgrano in 1997, is a Certified Compliance Officer, by the International Federation of Compliance Associations (IFCA) - Universidad del CEMA - Asociación Argentina de Etica y Compliance in 2016; and holds a specialization in Legal Tech and Innovation granted by the George Washington University in 2020.
María Agustina Montes was born on September 28, 1981. She has been a member of our board of directors since 2021. Ms. Montes holds a bachelor’s in law from the Universidad de Buenos Aires. Currently, she serves as Pampa's Corporate Legal and M&A Manager, having joined the company in 2011. She worked at the firm Cleary, Gottlieb, Steen & Hamilton in its New York offices in 2014. Previously, Ms. Montes worked as a lawyer in the firm Bruchou, Fernandez Madero & Lombardi. Currently, Ms. Montes is member of the board of HINISA, CPB, Greenwind, Pampa Energía Bolivia S.A., Enecor and HIDISA, and as member of the Supervisory Committee of Refinor.
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Horacio Turri was born on March 19, 1961. Mr. Turri is an industrial engineer and received his degree from the Instituto Tecnológico Buenos Aires. Mr. Turri served as Chief Executive Officer of Central Puerto S.A., Hidroeléctrica Piedra del Águila and Gener Argentina S.A. He worked as an analyst of investment projects in the oil, gas and electricity sectors at SACEIF Luis Dreyfus from 1990 to 1992. He also worked at Arthur Andersen & Co. and Schlumberger Wireline in 1987-1990 and 1985-1987, respectively. He also serves as a Vice-Chairman of TGS and CIESA.
Mauricio Penta was born on July 23, 1976. He is the Director of Administration IT and Supply of the Company. Mr. Penta graduated in Public Accounting from the Universidad Argentina de la Empresa and he received an MBA from the Altos Estudios Empresariales. Previously, Mr. Penta worked for Deloitte and Grupo Cencosud as Tax Manager. Mr. Penta serves as director of CTB and as alternate director of Generación Argentina SAU.
Nicolás Mindlin was born on November 11, 1989. Mr. Mindlin holds an Industrial Engineer degree from the Technological Institute of Buenos Aires and is currently Executive director of finances (CFO) and M&A.
On April 16, 2018, the CNV issued Resolution No. 730, which modifies the criteria to determine if a director for the board of directors of companies under public regime shall not be considered independent. The Argentine independence standards under CNV rules differ in many ways from the NYSE, National Association of Securities Dealers Automated Quotation (“NASDAQ”) or the U.S. federal securities law standards. See “Item 16G. Corporate Governance.”
The following directors, including alternate directors, do not qualify as independent members of our board of directors in accordance with the CNV criteria: Marcos Marcelo Mindlin, Ricardo Alejandro Torres, Damián Miguel Mindlin, Gustavo Mariani, María Carolina Sigwald, Diego Martín Salaverri, Mauricio Penta, María Agustina Montes, Horacio Jorge Tomás Turri and Mariana de la Fuente.
On the other hand, the following directors, including alternate directors, qualify as independent members of our board of directors according to the above-mentioned criteria: Silvana Wasersztrom, Juan Santiago Fraschina, Carlos Correa Urquiza, Darío Epstein, Carolina Zang, Cecilia Gómez Villanueva, Diana Mondino, Clarisa Lifsic, Lorena Rappaport and Paula Eugenia Platini.
Audit Committee
According to the provisions of Section 109 of the CML, the Company established an audit committee. On February 18 and November 21, 2019, the audit committee approved an amendment of the audit charter, including the possibility of reelection of the members of the audit committee for successive terms.
Composition
Our audit committee is composed of three members of the board and of two alternate member. All the members of our audit committee must be independent according to the audit charter and must have professional experience in finance, accounting, law and/or management.
The following table sets forth certain relevant information of the members of our audit committee:
|
Name |
Position |
Age |
| Darío Epstein |
President |
58 |
|
Carlos Correa Urquiza |
Regular Member |
52 |
|
Silvana Wasersztrom |
Regular Member |
54 |
| Diana Mondino |
Alternate Member |
63 |
| Clarisa Lifsic | Alternate Member | 59 |
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Each of the members of the Audit Committee satisfies the independence requirements of Rule 10A-3 of the Exchange Act. For biographical information on the member of the audit committee, see his biography under “Board of Directors”.
Budget
Our audit committee will have an annual budget approved by the ordinary annual shareholders’ meeting based on available funds from, without limitation, our revenues, investments and cost savings.
Duties and authority
Our audit committee is responsible for the performance of the duties that fall within its scope of authority pursuant to the provisions of the CML. These duties include, among others, the following:
| · | supervising the operation of the internal control systems and the administrative-accounting system of the Company as well as the reliability of the administrative-accounting system and of all the financial information for any other material facts submitted to the consideration of the authorities in compliance with the applicable reporting requirements in force; |
| · | issuing an opinion on the external auditors nominated by the board of directors to be retained by the Company and verifying if they are independent pursuant to the CML; |
| · | reviewing the plans submitted by the external auditors, supervising and assessing their performance and issuing an opinion thereon upon the presentation and publication of the Company’s annual financial statements and overseeing internal audit planning and performance; |
| · | supervising compliance with the risk management information policies in place in the Company; |
| · | issuing an opinion in relation to transactions with related parties in the events set forth in the applicable law and inform the provisions of the applicable law to the extent there is or may be an alleged conflict of interest in the Company; |
| · | providing the market with complete information regarding transactions in connection of which there is a conflicts of interest with the members of our corporate bodies or controlling shareholders; |
| · | verifying compliance with applicable standards of conduct; |
| · | issuing an opinion with respect to the reasonableness of the fees of members of the Board of Directors and stock option plans proposed by the Board of Director; |
| · | issuing an opinion with respect to the compliance with legal requirements and on the reasonableness of proposals to issue shares or securities convertible into shares, in the case of capital increases that exclude or limit preemptive rights; |
| · | Providing any report, opinion or statement required by the current regulations in force, with the scope and frequency required by such regulations, as amended; |
| · | Complying with all obligations provided for in our by-laws, as well as regulations binding for us; and |
| · | preparing an annual working plan to be reported to the Board of Directors and the Supervisory Committee within a term of 60 calendar days as from the beginning of the fiscal year. |
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Independence Criteria
Pursuant to the CML and CNV regulations, we are required to have an audit committee consisting of at least three members of our Board of Directors. Under CNV regulations, at least a majority of the members of the audit committee must be independent directors under CNV standards (see “Item 16G. Corporate Governance. Section 303A.02”).
Pursuant to NYSE Rule 303A.06, we are required to have an audit committee that complies with Rule 10-A3 of the Securities Exchange Act of 1934, as amended. Under rule 10-A3 of the Securities Exchange Act of 1934, as amended, we are required to comply with certain independence standards. Each member of the audit committee must be independent and a member of the board of directors. Pursuant to Rule 10-A3, in order to be considered “independent”, a member of an audit committee of a listed issuer may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee:
| · | accept directly or indirectly any consulting, advisory, or other compensatory fee from the issuer or any subsidiary thereof. Compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the listed issuer (provided that such compensation is not contingent in any way on continued service); or |
| · | be an affiliated person of the issuer or any subsidiary thereof. |
Additionally, as of the date of this annual report, all members of our Audit Committee satisfy the independence requirements of Rule 10A-3 of the Securities Exchange Act of 1934, as amended, applicable NYSE standards to the audit committees of foreign private issuers and CNV requirements.
Supervisory Committee
Our current by-laws set forth a supervisory committee composed of three regular and three alternate members. The members of the supervisory committee shall hold office for a term of three fiscal years. Pursuant to the BCL, only lawyers and accountants admitted to practice in Argentina may serve as members of a supervisory committee of an Argentine sociedad anónima, or limited liability corporation.
The primary responsibilities of the supervisory committee are to monitor the management’s compliance with the BCL, the by-laws, its regulations, if any, and the shareholders’ resolutions, and to perform these duties include, inter alia, the following:
| (1) | attending meetings of the board of directors, audit committee and shareholders; |
| (2) | calling extraordinary shareholders’ meetings when deemed necessary and ordinary and special shareholders’ meetings when not called by the board of directors; and |
| (3) | investigating written complaints of shareholders. |
In performing these functions, the supervisory committee does not control our operations or assess the merits of the decisions made by the directors. The duties and responsibilities of an alternate member, when acting in the place of a regular member on a temporary or permanent basis, are the same as those discussed above for the regular members. They have no other duties or responsibilities as alternate members.
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The following table sets forth certain relevant information of the members of our supervisory committee:
|
Name |
Position |
Age |
| Elena Sozzani |
Regular Member |
45 |
|
José Daniel Abelovich |
Regular Member |
65 |
|
Martín Fernandez Dussaut |
Regular Member |
41 |
| Noemí Cohn |
Alternate Member |
62 |
|
Tomás Arnaude |
Alternate Member |
40 |
| Germán Wetzler Malbrán | Alternate Member | 52 |
Set forth below are brief biographical descriptions of the members of our supervisory committee:
José D. Abelovich. Mr. Abelovich obtained a degree in accounting from Universidad de Buenos Aires. He is a founding member and partner of Abelovich, Polano & Asociados S.R.L., an accounting firm member of Nexia International, a global network of accounting and consulting firms. Formerly, he was a manager of Harteneck, López y Cía/Coopers & Lybrand and served as senior advisor in Argentina for the United Nations and the World Bank. He is a member of the supervisory committees of CISA, HIDISA, Transener, TGS, Cresud, IRSA and certain subsidiaries, Banco Hipotecario and certain subsidiaries, among others.
Martín Fernandez Dussaut was born on January 29, 1981. Mr. Fernández Dussaut received his law degree from the Universidad Católica Argentina. He is a partner of the Argentine law firm Salaverri, Burgio & Wetzler Malbrán. He is a member of the board of directors of AR Partners S.A., CT Mitre Office S.A., Grupo Emes S.A. Also, he is a member of the supervisory committee of ODS S.A., Greenwind, Creaurban S.A., Compañía Americana de Transmisión Eléctrica S.A, Grupo Dolphin Holding S.A., Generación Argentina S.A.U., TAP Billetera S.A., Numera Analytics SAU, Profingas S.A., Minera Geometales S.A., SACDE, Sociedad Argentina de Construcción y Desarrollo Estratégico S.A., CTB. and CINCOVIAL S.A., among others.
Elena Sozzani was born on December 05, 1976. Mrs. Sozzani received her law degree from the Universidad Nacional de La Plata. She is a partner of the Argentine law firm Salaverri, Burgio & Wetzler Malbrán. She is an alternate member of the supervisory committee of CITELEC, CIESA, CISA and Generación Argentina S.A.U., among others.
Tomás Arnaude was born on December 17, 1981. Mr. Arnaude received his law degree from the Universidad Católica Argentina. He is a partner of the Argentine law firm Salaverri, Burgio & Wetzler Malbrán and was a foreign associate of Shearman & Sterling LLP in 2010. He currently serves as member of the Supervisory Committee of SACDE Sociedad Argentina de Construcción y Desarrollo Estratégico S.A., CISA, Generación Argentina S.A.U., Orígenes Seguros S.A., Greenwind, Creaurban S.A., CITELEC, Life Seguros de Personas y Patrimoniales S.A., GG Creaurban S.A and CTB, among others.
Noemí Ivonne Cohn was born on May 20, 1959. Mrs. Cohn obtained a degree in accounting from Universidad de Buenos Aires. She is a partner of Abelovich, Polano & Asociados S.R.L., an accounting firm member of Nexia International, a global network of accounting and consulting firms. Mrs. Cohn worked in the audit area of Harteneck, López y Cía/Copers, Coopers & Lybrand in Argentina and Los Angeles, California. Mrs. Cohn is a member of the supervisory committees of Cresud, IRSA and subsidiaries, Generación Argentina S.A.U., among others.
Germán Wetzler Malbrán was born on April 25, 1970. Mr. Wetzler Malbrán received his law degree from the Universidad Católica Argentina. He is a partner of the Argentine law firm Salaverri, Burgio & Wetzler Malbrán. He is a member of the board of directors of Grupo Emes S.A. He is also member of the supervisory committee of CINCOVIAL S.A, Compañía Americana de Transmisión Eléctrica S.A., Creaurban S.A., CTB, Generación Argentina S.A.U, Greenwind, Grupo Dolphin Holding S.A., Orígenes Seguros S.A., Orígenes Seguros de Retiro S.A., Salta Refrescos S.A., Prestamos y Servicios S.A., Profingas S.A., Minera Geometales S.A., SACDE Sociedad Argentina de Construcción y Desarrollo Estratégico S.A, Genes II Seguros de Retiro S.A., Life Seguros de Personas y Patrimoniales S.A. and CISA, among others.
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Corporate Governance
The Company enacted several policies and practices, including a comprehensive business code of conduct:
| · | Code of Conduct. This code states the ethical principles that constitute the foundation of the relationship between the Company, its employees and suppliers, and offers the means and instruments that guarantee the transparency of issues and problems affecting the management of the Company. |
| · | Ethics Hotline. The Company has implemented the Ethics Hotline, an exclusive channel to report, under strict confidentiality, any suspected misconduct or breach of the Code of Conduct. |
| · | Insider Trading Policy. This Policy seeks to prevent “insider trading” practices by the Company’s employees (i.e., to prevent the use of non-public material information to obtain an advantage for oneself or others, either directly or indirectly), including directors, supervisory committee members, and senior management lines, and it extends to their families or persons who live with them, as well as to certain suppliers. |
| · | Self-Assessment Questionnaire for the Board of Directors. The Company’s Board of Directors passed the implementation of a self-assessment questionnaire to annually examine and assess its own performance and management. The Company’s Corporate Law Department is in charge of examining and filing each questionnaire with the individual answers given by the Board members and, based on the results, it shall submit to the Company’s board of directors all the proposed measures deemed useful to improve the performance of the board of directors’ duties. |
| · | Transactions with Related Parties Policy. According to the provisions of the CML, the Company approved the Transactions with Related Parties Policy. Pursuant to such policy and as stated in the applicable regulations, all high-value transactions (i.e. all exceeding 1% of the equity of the Company) made by the Company with individuals and/or legal entities which are considered to be “related parties” pursuant to the provisions set forth in applicable regulations, must be subject to a specific prior authorization and control procedure that is carried out under the coordination of the Company’s Corporate Law Division and which involves both the Company’s’ board of directors and its Audit Committee, as the case may be. |
| · | Nomination Policy. The Nomination Policy establishes the principles governing the nomination and appointment of members of the Board of Directors of Pampa and is designed pursuant to the rules and regulations in force in Argentina, the bylaws of the Company and the rules of the Nomination Committee that are applicable to the matter. |
| · | Compensation Policy. The Compensation Policy is designed in accordance with the laws and regulations in force in Argentina, the bylaws of the Company and the rules of the Compensation Committee, and provides guidance on the principles pursuant to which compensation is payable to the members of the Board of Directors of Pampa. It will be used by the shareholders, the Board of Directors and the Compensation Committee to guide their practice. |
| · | Pre-approval of Principal Accountant Services. This Policy standardizes the internal process that allows the Audit Committee to comply with its obligation to grant prior approval of the provision by the external auditor of any kind of authorized service to the Company or any of its subsidiaries. |
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| · | Fraud, corruption and other irregularities Policy. In 2020, our Board of Directors approved an update to this Policy, reaffirming transparency and ethics as necessary behaviors to lead the Company’s business and achieve its sustainable growth. In this sense, this Policy prohibits fraud, corruption in any form, or acts of misconduct within Pampa. Moreover, it sets Pampa’s stance on preventing corruption and other acts of misconduct, complementing the principles and values defined in our Code of Conduct; therefore, both documents should be read jointly. Finally, this Policy establishes the obligation to report any actual or suspected violation of laws and/or regulations and/or the Policy, as well as the prohibition of retaliation against any employee or third party for filing a report legitimately and in good faith or for refusing to participate in acts of corruption. |
| · | Policy on Material Information’s Disclosure. This policy was approved with the aim of standardizing the basic principles concerning the way in which Company’s material information disclosure processes operate, in accordance with the regulatory requirements of the securities markets on which the Company’s securities are listed or those in which it is registered to such end. To ensure the duly execution and compliance with the internal dispositions and applicable regulations with respect to this matter, the Company established an Information Disclosure Committee. |
| · | Dividend Policy. The board approved this policy following laws and regulations in force in Argentina and the Company’s bylaws. It establishes a set of guidelines to be observed to keep an adequate balance between distributed amounts and Pampa’s investment plans; aiming at establishing a clear, transparent and consistent practice that enables shareholders to make informed decisions. According to this policy, the decision to distribute a dividend is at the sole discretion of the Shareholders’ Meeting, based upon the board of directors’ recommendation. It expressly sets forth that the Company is under no obligation to distribute profits, and the Shareholders’ Meeting will have sole discretion regarding the determination and timing of a dividend distribution. |
| · | Integrated management policy. This Policy, approved by the Board in 2021, is an evolution of the Quality, Safety, Environment and Labor Health Policy, originally approved in 2017 and readjusted to the current Company and its challenges, fostering the sustainable development of our businesses. It aims to unify QHSE standards in our operations different processes, guaranteeing the maximum possible safety in each activity’s ordinary course of business. Moreover, this Policy strengthens Pampa’s culture and relationship with different stakeholders, makes the commitments required by certifiable international standards visible, and improves their understanding and commitment. Swap Transactions Policy. Our board of directors approved the “Swap Transactions Policy”, which sets forth the framework under which the Company shall manage risks related to any Swap it executes under International Swaps and Derivatives Associations (‘ISDA’) agreements. This policy applies only to activities governed by the Commodity Exchange Act, as amended (the “CEA”), and only with respect to the election of the “End-User Exception” as provided in Section 2(h)(7) of the CEA. |
| · | Anti-Money Laundering and Terrorist Financing Prevention Policy. This Policy was approved in accordance with the provisions set forth in Law No. 25,246, its regulations and related provisions, and UIF. Its main purpose is to establish the procedures aimed at preventing money laundering and financing of terrorism. |
Compensation of Directors and Officers
The BCL provides that the compensation payable to all directors (including those directors who are also members of senior management) in a fiscal year may not exceed 5% of net income for such fiscal year, if the company is not paying dividends in respect of such net income. The BCL increases the annual limitation on director compensation to up to 25% of net income if all the net income for such year is distributed as dividend. The percentage decreases proportionally based on the relation between the net income and the dividends distributed. The BCL also provides that the shareholders’ meeting may approve the remuneration of the directors in excess of the limits set by the BCL in case the company has no net income or the net income is low, if the relevant directors performed during such fiscal year special commitments or technical-administrative functions. The audit committee issues an opinion with respect to the reasonableness of the fees of members of the Board of Directors. Also, the aggregate amount payable to the Board of Directors’ members will be previously submitted to the Compensation Committee (as defined below) for its opinion as to whether the compensation proposed is consistent with compensation received by directors at other comparable local companies. The compensation of all directors and members of the supervisory committee requires shareholders’ approval at an ordinary shareholders’ meeting.
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At the ordinary shareholders’ meeting held on April 27, 2022, the compensation for Pampa’s directors was set for a total amount of Ps. 945,451,476 for the year ended December 31, 2021. This amount includes fees, remunerations, gratifications and benefits of compensation agreements.
Compensation Plans
Stock-based Compensation Plan
With the aim of aligning personnel performance with Pampa’s strategic plan and creating a transparent and direct link between value creation for the shareholders and personnel remuneration, on February 8, 2017, Pampa’s board of directors approved the creation of stock-based compensation plan (the “Plan”). In order to implement the Plan, the Company can create Individual Plans.
In addition, Pampa’s board of directors on February 8, 2017, approved the repurchase of Pampa Shares in accordance with Article 64 of the CML and CNV regulations as a means to implement the Individual Plans 2017-2019 and 2018-2020. Later, on March 8, 2018, the Board of Directors approved a second repurchase of Pampa shares in accordance with Section 64 of the CML and CNV rules that will be destined to cover the Individual Plan 2019-2021.
During fiscal year ended December 31, 2020, the Company delivered 0.7 million of its own shares as payments under the stock compensation plan for officers and other key staff. As of December 31, 2020, the Company acquired 6 million of its own shares, out of which 2 million was allocated to the compensation of senior managers and, as of the closing of the fiscal year, 4 million remained in treasury to be delivered to employees under such plan.
During fiscal year ended December 31, 2021, the Company delivered 0.6 million of its own shares as payments under the stock compensation plan for officers and other key staff.
During 2022, the Company delivered an amount equivalent to 634,000 shares to employees under such plan. As of the date of this annual report, we held in treasury 3,878,939 common shares to be delivered to employees under such plan, which represented 0.3% of our issued capital.
Compensation Agreements – Senior Management
The Company has executed compensation agreements with the Company’s main executives. The objective of these compensation agreements is to align the executives’ interests with the shareholders of the Company, creating value for the executives only if there is also value created for the shareholders. These agreements mainly provide for an annual, variable and contingent compensation equivalent to, in the aggregate, to 3.3% of the Company’s annual market value appreciation, measured in U.S. Dollars, with an annual cap of 50% of the accrued amount and 1.65% of the Company’s operating income before interest, taxes and other non-cash items (adjusted EBITDA provision) for the period to be compensated.
Accrued amounts which have not been paid by the Company may only be collected by their beneficiaries to the extent Pampa’s share market capitalization at the time of realization is higher than the recorded maximum (high water mark provision). Additionally, the annual total amount payable should not exceed 1.65% of the adjusted EBITDA of the year subject to compensation. The payment of the annual compensation will be subject to the prior approval of the Shareholders’ Meeting to be held in each fiscal year.
Furthermore, Pampa will deduct from the variable compensation, if applicable, remunerations that beneficiaries may have collected on account of bonds and/or other similar items from subsidiaries of Pampa, proportionally to the Company’s interests in such companies.
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Compensation Policy and Compensation Committee
The Company’s Board of Directors approved a Compensation Policy to provide guidance on the principles pursuant to which compensation is payable to the members of the Board of Directors of Pampa.
Within the Compensation Policy framework, the Board of Directors created a Compensation Committee that will assist them and the shareholders in matters related to the compensation of the members of Pampa’s Board of Directors, in compliance with the requirements and procedures set forth in the applicable rules and regulations in force in Argentina, Pampa’s bylaws and the rules of the committee. The Compensation Committee reports to the Board of Directors and will consist of three regular members and equal or lower number of alternate members, who shall not serve in executive offices at Pampa.
As of the date of this annual report, Pampa’s Compensation Committee is composed as follows:
|
Name
|
Position
|
| Silvana Wasersztrom |
President |
|
Dario Epstein |
Regular Member |
|
Carlos Correa Urquiza |
Regular Member |
|
Diana Mondino |
Alternate Member |
| Clarisa Lifsic | Alternate Member |
Share Ownership
As of March 31, 2022, the following members of our board of directors and our senior management had an ownership interest in our capital stock of: Marcos Marcelo Mindlin (18.04%), Gustavo Mariani (2.98%), Damian Miguel Mindlin (3.22%), Ricardo Alejandro Torres (2.09%), Horacio Turri (0.69%), Nicolás Mindlin (0.01%), Mauricio Penta (0.01%), Carlos Correa Urquiza (0.003%), María Carolina Sigwald (0.002%) and Diego Salaverri (0.01%). No other member of our board of directors or our senior management beneficially owns any shares of our capital stock. See “Item 7. Major Shareholders and Related Party Transactions.”
Employees
Excluding those employed by us on a temporary basis and including controlled-subsidiaries, as of December 31, 2021, we had 1,937 full time employees. Additionally, we operate CTEB, which is jointly owned with YPF and has 101 full-time employees.
Approximately 53.58% of our workforce is affiliated with a union and/or is a party to a collective bargaining agreement. We have completed salary negotiations for 2021. We maintain a positive relationship with each of the employee unions at the Company and our subsidiaries’ levels.
We offer a variety of benefits beyond those required by the Argentine Labor Contract Law but make no payments to retirees or terminated employees. In accordance with the agreements we have entered with the unions at some of our subsidiaries, we are required to pay certain seniority premiums to retiring employees as a one-time payment upon retirement.
| Item 7. | Major Shareholders and Related Party Transactions |
Major Shareholders
On October 1, 2019, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 151,997,025 common treasury shares of Pampa, which represented 8% of the then-issued capital. The withdrawal of the repurchased shares from the capital stock allows the Company to repurchase shares in the market. Consequently, the IGJ registered the capital reduction, decreasing Pampa’s capital stock to 1,747,873,239 shares.
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As of December 31, 2019, our share capital authorized for public trading was Ps. 1,747,873,239 represented by 1,747,873,239 common shares of par value Ps.1 and with right to one vote per share, of which 70,761,196 are treasury shares under share repurchase programs. Therefore, as of December 31, 2019, excluding treasury shares, the total outstanding common shares amount to 1,677,112,043.
On April 7, 2020, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 151,585,025 common treasury shares of Pampa. The withdrawal of the repurchased shares from the capital stock allows the Company to repurchase shares in the market. Consequently, our capital stock decreased to 1,596,288,214 shares.
On December 10, 2020, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 140,786,959 common treasury shares of Pampa. Consequently, our capital stock decreased to 1,455,501,255 shares.
On April 29, 2021, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 56,581,600 common treasury shares of Pampa. Consequently, our capital stock decreased to 1,398,919,655 shares.
On September 30, 2021, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 12,513,675 common treasury shares of Pampa. Consequently, our capital stock decreased to 1,386,405,980 shares.
Finally, on April 27, 2022, the extraordinary general meeting of shareholders approved a capital stock reduction through the cancellation of 2,761,375 common treasury shares of Pampa. Consequently, our capital stock decreased to 1,383,644,605 shares.
J.P. Morgan informed us that, as of March 31, 2022, there were 28,999,425 outstanding ADSs. As of such date, there was one registered holder of our ADSs in the United States. Since certain of our ADSs are held by brokers or other nominees, the number of direct record holders in the United States may not be fully indicative of the number of direct beneficial owners in the United States of our ADSs, or of where the direct beneficial owners of such ADSs are resident. We have no information concerning holders with registered addresses in the United States that hold our shares, which are not represented by ADSs.
The table below sets forth information concerning the beneficial ownership of our common shares as of March 31, 2022:
| Name of Shareholder | Number of Shares | Percentage of our Capital Stock | Percentage of voting power | |||
| ANSES (¹) | 306,958,364 | 22.14% | 22.14% | |||
| Braslyn HL / Hidden Lake S.A. | 95,652,664 | 6.90% | 6.90% | |||
| Management | ||||||
| Marcos Marcelo Mindlin | 250,140,708 | 18.04% | 18.04% | |||
| Gustavo Mariani | 41,274,659 | 2.98% | 2.98% | |||
| Damián Miguel Mindlin | 44,609,565 | 3.22% | 3.22% | |||
| Ricardo Alejandro Torres | 28,952,864 | 2.09% | 2.09% |
Note: Our major shareholders do not have different voting rights.
(1) On November 20, 2008, the Argentine Congress passed a law unifying the Argentine pension and retirement system into a system publicly administered by the ANSES and eliminating the retirement savings system previously administered by private pension funds under the supervision of a governmental agency. In accordance with the new law, private pension funds transferred all of the assets administered by them under the retirement savings system to the ANSES. These transferred assets included 295,765,953 common shares of the Company, representing 20.50% of our capital stock at that date. The ANSES is subject to the same investment rules, prohibitions and restrictions that were applicable to the Argentine private pension funds under the retirement savings system, except as described in the following sentence. On April 12, 2011, the Executive Power issued Emergency Decree No. 441, which annulled the restrictions under Section 76(f) of Law No. 24,241on the exercise of more than 5% of the voting power in any local or foreign company, such as the Company, in any meeting of shareholders, irrespective of the actual interest held in the relevant company's capital stock. The annulment of the restrictions under Section 76(f) of Law No. 24,241 came into effect on April 14, 2011. As of such date, ANSES may exercise its voting power in any local or foreign company, such as the Company, based on the actual interest held in the relevant company’s capital stock.
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Related Party Transactions
The BCL permits directors of a corporation to enter into transactions with that corporation provided that any such transactions are consistent with prevailing market practice. The CML provides that corporations whose shares are subject to public offerings must submit to their respective audit committees the issuance of a prior opinion of all transactions with a related party involving an amount that exceeds 1% of the corporation’s net worth.
Compensation Plans
See “Item 6. Directors, Senior Management and Employees– Compensation Plans”.
For further information on our related parties’ transactions and our outstanding balances from our transactions with related companies (including companies under joint control), please see Note 17 to our Audited Consolidated Financial Statements.
Except as set forth above and as otherwise permitted under applicable law, we are currently not party to any transactions with, and have not made any significant loans to, any of our directors, key management personnel or other related persons, and have not provided any guarantees for the benefit of such persons, nor are there any such transactions contemplated with any such persons.
Interests of experts and counsel
During the year ended December 31, 2019, 2020 and 2021, we engaged the services of the Argentine law firm Salaverri, Burgio & Wetzler Malbrán. One alternate director, Mr. Diego Martín Salaverri, two members of our Supervisory Committee, Martín Fernandez Dussaut and Elena Sozzani, and two of the alternate members of our Supervisory Committee, Tomás Arnaude and Germán Wetzler Malbrán, are partners of Salaverri, Burgio & Wetzler Malbrán.
| Item 8. | Financial Information |
CONSOLIDATED FINANCIAL STATEMENTS
See “Item 18. Financial Statements” beginning on page F-1.
LEGAL PROCEEDINGS
In the normal course of business, we are a party to lawsuits of various types. Our management evaluates the merit of each claim and assesses the likely outcome, recording an accrual in our financial statements for the related contingent liability when an unfavorable decision is probable and the amount may be reasonably estimated. At December 31, 2021, we had established accruals in the aggregate amount of US$106 million to cover potential losses from such claims and legal proceedings. The above-mentioned amount does not include Transener and TGS given they are not consolidated and are valued according to the equity method of accounting in the Consolidated Financial Statements. Except as disclosed below, we are not a party to any legal proceedings or claims that may have a material adverse effect on our financial position or operational results.
Set forth below is a brief description of significant proceedings for which provisions have been recorded as of December 31, 2021:
| - | Relevant Customs Proceedings - Gasoline Exports: there are an important number of proceedings in process before the National Tax Court in which the tax authority challenges the tariff heading used by Petrobras during 2008-2014. The fiscal authority takes a position of a higher export duty rate. |
Set forth below are brief descriptions of the nature of the significant legal proceedings or claims in which the Company is a party. As of December 31, 2021, the Company, in accordance with the analysis of our internal and external legal advisors, considers that such legal proceedings are not viable.
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Labor Claims - Compensatory Plan
We face several legal proceedings associated with one of our defined benefit plans, the “Compensatory Plan” (see “Item 18. Financial Statements—Note 11.8”). We hereinafter describe the nature of currently-pending labor claims:
| · | Claims by former employees, not covered by the plan, seeking to be included in the plan. One of the claims has resulted in a favorable ruling for the Company, which has been appealed by the plaintiff. |
| · | Claims by former employees who were dismissed as part of scheduled layoffs due to Company’s change of control. |
| · | Claims alleging that the index (IPC) used to update the plan benefits is ineffective to keep the benefits’ “constant value”. In one of the cases, the Company obtained a favorable judgment, which has been appealed by the plaintiff. |
| · | Claims on an alleged underfunding of the plan upon the elimination of the Company’s contributions based on earnings. In one of the cases, the Company obtained a favorable judgment. The plaintiff appealed and the Court upheld the plaintiff’s claim. Against this decision, the Company filed an extraordinary appeal before the CSJN. |
Tax Claims
Tax on Liquid Fuels and Natural Gas
AFIP claims the payment of Ps. 54 million due to an alleged omission in the payment of the tax on liquid fuels and natural gas for the fiscal periods from January 2006 to August 2011, plus compensatory interest and a fine of Ps. 38 million as a result of alleged tax avoidance. AFIP’s claim is based on the existence of misappropriation of a tax benefit that was meant for sales in regions that are considered by tax law as tax relieved. The proceeding is currently being heard before the Federal Tax Court, and the evidentiary period has been completed.
Environmental Claims
| - | The Association of Land Owners of Patagonia (ASSUPA) has brought a complaint for an indefinite amount against the Company and other companies seeking the restoration of the environment to the state prior to the exploration, exploitation, production, storage and transportation of hydrocarbon works conducted by the defendants and the prevention of alleged future environmental impacts on certain areas in the Austral Basin. The National Government and the Provinces of Santa Cruz and Tierra del Fuego have been summoned as third parties. The proceeding is at the complaint answer stage. |
| - | ASSUPA has instituted a complaint before the CSJN against 10 companies, including the Company. The National Government and the Provinces of Buenos Aires, La Pampa, Mendoza, Neuquén and Río Negro have been summoned as third parties. The main claim seeks that the defendants should be ordered to redress the alleged environmental damage caused by the hydrocarbon activity developed in the Neuquina Basin and to set up the environmental restoration fund provided for by section 22 of the General Environmental Law. Alternatively, and in case restoration is not possible, it seeks the redress of the allegedly sustained collective damages for an amount estimated at US$547 million based on a United Nations Development Program report. The proceeding is in the complaint answer stage. |
| - | Beatriz Mendoza and 16 other plaintiffs brought a complaint before the CSJN against the National Government, the Province of Buenos Aires, the Government of the Autonomous City of Buenos Aires and 44 companies, including the Company, conducting industrial activities along the Matanza-Riachuelo River Basin. The plaintiffs seek compensation for alleged damages sustained as a result of an alleged environmental impact, its cessation, and environmental recomposition restoration, for an estimated amount of US$500 million for the financing of the Matanza-Riachuelo River Basin Environmental Management Plan aiming at the restoration of the basin. The proceeding is in the third-party summoning stage. |
| - | Inertis S.A. has filed a complaint against the Company for alleged damage to the environment in a lot owned by this company as a result of the activities conducted by the Dock Sud Plant seeking the redress of alleged damages for a nominal amount estimated at Ps. 1 million and US$1 million, or the difference between the value of the allegedly affected lot and its valuation. The proceeding is in the evidentiary stage. |
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| - | Fundación SurfRider Argentina has requested the performance of preliminary proceedings on account of alleged indications of environmental damage in the City of Mar del Plata. The plaintiff seeks the environmental restoration, or compensation for the alleged damages caused by all companies owning gas stations in the coastal area of the City of Mar del Plata for an alleged fuel leakage from gas stations’ underground storage tanks into the water, soil and marine system. The Foundation estimates damages in the amount of US$200 million. The CSJN ruled in favor of the civil and commercial court of Mar del Plata and sent the claim back to first instance. There, the Court granted the plaintiff’s request for the dismissal of the anticipated evidence, ruled the termination of the pre-judicial mediation proceedings and ordered the Company and other defendant companies to be served with the claim. The latter having been done, the Court partially granted the summons of third parties composed of the National State, the Province of Buenos Aires and the Municipality of Mar del Plata and ordered a precautionary injunction for better provision, related to the merits of the case. |
| - | Some neighbors of the Dock Sud area brought a complaint against 14 oil companies, including the Company, petrochemical companies and waste incineration plants located in the Dock Sud Petrochemical Complex for alleged damage to the environment and alleged individual damage to their goods, health and morale. The CSJN determined it had jurisdiction over the environmental issue, and maintained the civil and commercial jurisdiction regarding the compensation for the alleged damages. |
| - | A neighbor of the Province of Salta owning a lot where a joint venture made up of the defendants (the Company and other companies) conducted hydrocarbon activities seeks environmental protection and restoration for alleged damage caused by hydrocarbon prospecting, exploration and/or exploitation activities or, alternatively, compensation in case such environmental restoration is not possible. The Province of Salta has been summoned as a third party. The proceeding is in the complaint answer stage and Salta’s Court of Justice determined that the Court of First Instance for Contentious Administrative Matters has jurisdiction. |
| - | Owners of a lot in the town of Garín, Province of Buenos Aires, seek the performance of preliminary proceedings for alleged indications of damage to the environment in their place of residence which resulted from an alleged leakage from the adjacent gas station under the Company’s branding. Preliminary measures are being conducted in this proceeding. |
| - | Neighbors of the Province of Neuquén brought a proceeding against the Company for alleged environmental damage resulting from the hydrocarbon exploration, exploitation, transportation and well abandonment activities in which that plaintiff has been taking part. Should this not be feasible, they claim compensation for alleged damages to support the Environmental Restoration Fund. Additionally, they request the redress of alleged moral damages to be allocated to the Environmental Restoration Fund. The presence of all involved parties has been properly verified, and the lawsuit has been referred to the administrative litigation jurisdiction. |
| - | The Company initiated a legal claim against the Province of La Pampa requesting the annulment and revocation of administrative acts through which such Province, through its Undersecretary of Hydrocarbons and Mining and its Undersecretariat of Environment, claims that the Company has definitively abandoned 13 hydrocarbon wells located within the Jagüel de los Machos Area that were inactive by the time the concession belonged to the Company (September 2015), as well as the presentation of a plan for the remediation of certain environmental liabilities. It is worth clarifying that an environmental audit was carried out at the time of the reversal of the hydrocarbon area, and the deviations observed therein are currently corrected. The case is in litigation. The parties have agreed on the suspension of all procedural terms since they are in settlement negotiations. |
| - | Plaintiff Martinez Lidia and other three plaintiffs claim financial compensation for alleged damage to their health and property caused by the alleged environmental affectation sustained as a result of living next to PGSM petrochemical plant (Rosario-Santa Fe). The proceeding is currently pending judgment and pending setting of the hearing date for the drawing of the Public Defender for the heirs of the deceased plaintiff. |
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| - | A neighbor of the Province of Buenos Aires brought a complaint against the Company seeking the removal of three fuel storage tanks and pumps and the remediation and restoration of the soils where such tanks are located on account of an alleged environmental affectation. The proceeding is in the evidentiary stage. |
| - | Neighbors of the Province of Santa Fe have brought a complaint against the Company for alleged environmental damage. The Company obtained a favorable judgment, which has been appealed by the plaintiff. |
Civil and Commercial Claims
| - | The consumers’association named “Consumidores Financieros Asociación Civil Para Su Defensa” claim the nominal amount of US$3,650 million as compensation for damages against Pampa, Petrolera Pampa and certain Pampa directors in office during 2016 who are co-plaintiffs together with Petroleo Brasileiro S.A. A complaint has been brought against Petrobras Brasil for the depreciation of the share quotation value as a result of the “lava jato operation” and the so-called “Petrolao”, and the plaintiffs claim Pampa’s, Petrolera Pampa’s and the directors’ joint and several liability alleging the acquisition of indirect control in Petrobras Argentina S.A. may have thwarted the enforcement of a possible judgment favorable to the plaintiff (for up to the amount of the price paid by Pampa for the acquisition of control over Petrobras Argentina S.A.). The plaintiff appealed the Arbitration Court’s decision declaring the dismissal of the main claim upon the failure to pay the arbitration fee. The Chamber of Appeals in Commercial Matters upheld the filed extraordinary appeal. On its part, Petróleo Brasileiro S.A. filed an appearance, requesting that a lack of substance of the filed appeal should be declared, and, in the alternative, answering such appeal. The Company was notified that the Chamber of Appeals in Commercial Matters had upheld the appeal and filed a motion in this regard |
| - | Petrobras Operaciones S.A. (“POSA”) has filed an international arbitration claim against the Company before the International Chamber of Commerce (“ICC”) on account of alleged breaches to the Assignment Agreement entered into between Petrobras Argentina S.A. (currently Pampa) and POSA in 2016 for the transfer of a 33.6% interest in the “Río Neuquén” Concession. The breaches alleged by POSA in its arbitration claim consist of the failure to transfer certain assets associated with the assigned interest, and differences in the calculation of adjustments in the assignment price. The arbitration will be conducted according to the ICC Rules of Arbitration, the applicable law will be that of the Republic of Argentina, and the seat of arbitration will be Buenos Aires, Argentina On April 30, 2021, POSA filed its statement of claim and on September 15, 2021, the Company filed its statement of defense and its statement of counterclaim. On December 15, 2021, POSA filed its statement of defense to the counterclaim. After the proceedings were suspended by the Court at the request of the parties, the latter decided to continue with the procedure. |
Set forth below are brief descriptions of the nature of the significant legal proceedings or claims brought by the Company. As of December 31, 2021, we consider that such legal proceedings are probable and economic benefits are expected to the Company.
Administrative claims
| - | CTLL (currently Pampa) filed an administrative litigation complaint against the Federal Government for contractual breach during the January 2016-July 2016 period. CTLL claims that CAMMESA’s decision regarding the renewal and recognition of costs associated with natural gas supply agreements should be reversed and that, alternatively, sustained damages should be redressed. The rendering of judgment was requested. Subsequently, CTLL filed a new administrative litigation complaint against the Federal Government for contractual breach during the April 2016-October 2018 period. The Federal Government has answered the complaint. In the claim for the January 2016-March 2016 period, the case was brought for judgment and in the claim for the April 2016-October 2018 period, the evidentiary stage was initiated. |
| - | Upon the determination of the expiration of the Veta Escondida block concession granted by the Province of Neuquén, the Company filed a writ of amparo and, as secondary petition, a declaratory judgment action to achieve certainty under the original jurisdiction of the CSJN pursuant to section 322 of the Federal Code of Civil and Commercial Procedure. The Company requested judgment and the CSJN set a preliminary hearing, which was held. Following the opinion issued by the Attorney General’s Office, the case is currently pending judgment before the CSJN. |
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| - | On March 31, 2021, the Company brought a Preliminary Administrative Claim before Argentina’s Ministry of Economy seeking the amount due, plus interest, which was borne by the National State during the term of the Executive Order 1053/18 for the difference in the exchange rate between the price of gas purchased by gas distributors and the price of gas recognized in the final rates of gas distributors for the April 2018-March 2019 period. On September 1, 2021, a motion for prompt intervention was filed. On December 2, 2021, the Company filed a writ of amparo for late payment seeking the defendant’s compliance, which was later rejected. Against this decision, the Company filed an appeal. |
Civil and Commercial claims
| - | The Company has filed an international arbitration claim against Petrobras International Braspetro B.V. on account of fraudulent representations and omissions associated with certain export transactions under the share purchase agreement executed on May 13, 2016, whereby the Company acquired 67.2% of Petrobras Argentina S.A.’s capital stock. The arbitration will be held pursuant to the ICC’s Arbitration Rules, the applicable law will be that of the State of New York and the seat of arbitration will be New York. Petrobras International Braspetro B.V. timely answered the request for arbitration and also filed a counterclaim seeking the payment of a percentage over the difference between the amount estimated for certain contingencies detected in the purchase process and the amount actually paid for them. On April 29, 2021, the Company filed its statement of claim and PIB BV filed its statement of counterclaim. On July 7, 2021, the Company and PIB BV filed their defense. On November 5, 2021, the Company and PIB BV filed their reply briefs and on December 20, 2021, they filed their rejoinders on the claims. After the proceedings were suspended by the Court at the request of the parties, the latter decided to continue with the procedure. |
| - | Our subsidiary Pampa Bloque18, in its capacity as assignee of the Ecuadorian company Petromanabí S.A., has filed an international arbitration proceeding against the Republic of Ecuador seeking the payment of 12% of the Settlement Value, the latter pursuant to the terms of the Hydrocarbon Exploration and Crude Oil Exploitation Participation Agreement in Block 18 entered into on December 19, 1995 and/or the Hollín Common Field Unified Exploitation Operating Agreement executed on August 7, 2002 —in both cases, as amended. The arbitration will be conducted according to the Arbitration Rules of the United Nations Commission on International Trade Law, the applicable law will be the Ecuadorian law, and the seat of arbitration will be the City of Santiago de Chile. The first stages of the international arbitration process have begun. |
| - | Our subsidiary Pampa Bloque18 is currently filing claims against Petroecuador as a result of certain breaches to the transportation agreement entered into on December 31, 2008 whereby the Ecuadorian Government undertook the crude oil transportation commitment through the OCP, to be charged to the oil transportation capacity hired by Pampa Bloque18. To such effect, a mediation proceeding was brought before the Center for Mediation of the Attorney General’s Office of the Government of Ecuador sitting in the City of Quito, which ended without agreement. Pampa Bloque18 retains its claim rights for the aforementioned breaches. |
| - | The Company has initiated an international arbitration against High Luck Group Limited – Sucursal Argentina for certain breaches of the Farmout Agreement and the Joint Operating Agreement regarding Chirete Block entered into on April 1, 2015. |
DIVIDENDS
In accordance with the provisions of the Argentine Personal Asset Tax Law, we are required to pay the personal asset tax, payable by all of our shareholders who are subject to the tax to the AFIP as of December 31 of each year. Although the law permits companies to recover the amounts paid, recovery can be burdensome. In practice, companies usually bear the cost of this tax, which adversely affects their results and does not generate any income tax deduction.
Notwithstanding, the Company and subsidiaries have applied for an exemption to pay the personal asset tax for the periods 2016 to 2018, in accordance with the benefits of Law 27,260.
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We did not declare any dividends for the fiscal years ended on either December 31, 2017, December 31, 2018, December 31, 2019, December 31, 2020 or December 31, 2021.
We have a formal dividend policy, for more information see “Item 6. Directors, Senior Management and Employees—Corporate Governance—Dividend Policy” and “Item 10. Additional Information—Dividends and Paying Agents.”
SIGNIFICANT CHANGES
There are no significant changes to the financial information included in the most recent audited consolidated financial statements contained in this annual report, other than as otherwise described in this annual report.
| Item 9. | The Offer and Listing |
TRADING HISTORY
Our capital stock consists of common shares, with a par value of Ps.1.00 each. Each share entitles the holder thereof to one vote at shareholders’ meetings. All outstanding shares are fully paid in and our common shares have been listed on the BASE since 1947. Since October 9, 2009, our ADSs have been listed on the NYSE. The ADSs have been issued by the Bank of New York as depositary. Each ADS represents 25 common shares.
Shares
Our common shares are currently traded on the BASE under the symbol “PAMP”, and our ADSs are traded on the NYSE under the symbol “PAM”.
The following table sets forth, for the years indicated, the reported high and low sales prices as well as the average daily trading volume of our shares traded on the BASE, and of our ADSs traded on the NYSE:
| Buenos Aires Stock Exchange | New York Stock Exchange | ||||||||
| Average Daily | Average Daily | ||||||||
| Pesos per Share | Trading Volume | U.S. Dollars per ADS | Trading Volume | ||||||
| High | Low | Pesos | High | Low | U.S. Dollars | ||||
| 2017(1) | 51.25 | 22.15 | 39,518,145 | 71.39 | 35.52 | 16,535,669 | |||
| 2018(1) | 57.60 | 35.05 | 50,765,767 | 72.98 | 24.93 | 18,015,650 | |||
| 2019(1) | 64.50 | 29.15 | 50,179,161 | 39.89 | 12.01 | 16,258,128 | |||
| 2020(1) | 86.25 | 32.00 | 56,576,326 | 16.69 | 8.72 | 4,380,259 | |||
| 2021(1) | 171.50 | 73.20 | 61,971,893 | 21.28 | 12.17 | 2,133,439 | |||
The following table sets forth, for the periods indicated, the reported high and low sales prices as well as the average daily trading volume of our shares traded on the BASE, and of our ADSs traded on the NYSE:
| Buenos Aires Stock Exchange | New York Stock Exchange | ||||||||
| Average Daily | Average Daily | ||||||||
| Pesos per Share | Trading Volume | U.S. Dollars per ADS | Trading Volume | ||||||
| High | Low | Pesos | High | Low | U.S. Dollars | ||||
| 2020(1) | |||||||||
| First Quarter | 50.20 | 32.00 | 37,002,047 | 16.69 | 8.72 | 6,832,201 | |||
| Second Quarter | 58.00 | 35.85 | 65,090,205 | 12.27 | 9.14 | 5,016,437 | |||
| Third Quarter | 64.00 | 42.80 | 62,865,320 | 13.50 | 9.33 | 3,808,367 | |||
| Fourth Quarter | 86.25 | 59.50 | 60,777,057 | 14.78 | 10.23 | 1,950,594 | |||
| 2021(1) | |||||||||
| First Quarter | 90.00 | 73.20 | 36,796,031 | 15.25 | 12.17 | 1,606,836 | |||
| Second Quarter | 120.00 | 82.30 | 46,594,045 | 17.95 | 13.14 | 2,089,367 | |||
| Third Quarter | 138.75 | 101.15 | 74,700,764 | 19.21 | 14.71 | 1,678,155 | |||
| Fourth Quarter | 171.50 | 133.50 | 88,948,139 | 21.28 | 16.35 | 3,134,025 | |||
| 2022(1) | |||||||||
| First Quarter | 198.60 | 152.00 | 66,734,088 | 24.66 | 17.97 | 3,203,112 | |||
| Second Quarter | 192.95 | 173.65 | 84,626,054 | 25.86 | 21.31 | 3,156,225 | |||
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The following table sets forth, for the months indicated, the reported high and low sales prices as well as the average daily trading volume of our shares traded on the BASE, and of our ADSs traded on the NYSE:
| Buenos Aires Stock Exchange | New York Stock Exchange | ||||||||
| Average Daily | Average Daily | ||||||||
| Pesos per Share | Trading Volume | U.S. Dollars per ADS(2) | Trading Volume | ||||||
| High | Low | Pesos | High | Low | U.S. Dollars | ||||
| 2021(1) | |||||||||
| November | 168.95 | 138.70 | 97,331,766 | 19.90 | 16.35 | 4,093,157 | |||
| December | 171.50 | 144.50 | 73,866,787 | 21.28 | 16.74 | 2,487,169 | |||
| 2022(1) | |||||||||
| January | 186.75 | 152.00 | 48,922,913 | 21.38 | 17.97 | 2,256,320 | |||
| February | 184.45 | 163.00 | 53,860,068 | 21.73 | 18.75 | 2,484,034 | |||
| March | 198.60 | 159.00 | 96,193,185 | 24.66 | 20.51 | 4,694,818 | |||
| April(3) | 192.95 | 173.65 | 84,626,054 | 25.86 | 21,31 | 3,156,225 | |||
(1) Values provided by Bloomberg.
(2) Values available for our ADSs from October 9, 2010, the first trading date on the NYSE.
(3) Represents the average of the lowest and highest daily rates from April 1 through April 28, 2022.
Purchases of Pampa’s Shares
On March 27, 2019, the Board of Directors approved a third share repurchase plan for up to US$100 million, or any lower amount resulting in such acquisition reaching 10% of our capital stock. On June 12, 2019, the Board of Directors suspended the Repurchase Program III as the price of our shares and ADRs reached values exceeding the repurchase cap.
On August 12, 2019, the Board of Directors approved a fourth share repurchase plan. On August 30, 2019, an extension of the maximum amount to be disbursed under this program was approved by the Board of Directors, from US$50 million to US$65 million. Moreover, on November 8, 2019 the Board of Directors approved the fifth share repurchase plan for US$50 million or the lower amount resulting from the acquisition until reaching 10% of repurchased treasury shares over the capital stock.
During fiscal year 2020, the Board of Directors approved Programs VI and VII for US$27 million and $3,600 million, with a maximum price of US$13 per ADR, which have been completed and for which all repurchased shares have been canceled.
The Repurchase Program VIII was approved on October 30, 2020 for a maximum amount of US$ 30 million and an initial term of 120 calendar days, with a maximum price of US$ 15 per ADR and Ps. 85.20 per common share, was in effect as of December 31, 2020, and has terminated as of the issuance of this annual report. As of December 31, 2020, there are no own shares held in treasury under the buyback programs.
Finally, during 2021, the Board of Directors approved Programs IX and X for a maximum amount of US$ 30 million each, under which shares could be acquired up to a maximum price of US$16 and US$15,5 per ADR, respectively, which were terminated as of December 31, 2021, with the repurchased shares canceled in full.
As of December 31, 2021, Program XI, approved by the Board of Directors on December 1, 2021 for a maximum amount of US$30 million and an initial term of 120 calendar days; under this Program, shares could be acquired up to a maximum price of US$19 per ADR and $167 per common share. This program ended on March 2022.
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During 2021, the Company indirectly acquired 2.7 million own ADRs for a value of US$38.7 million. After the closing of the fiscal year, the Company indirectly acquired 0.1 million own ADRs for a value of US$ 1.8 million.
For more information, please see “Item 16.E—Purchases of Equity Securities by the Issuer and Affiliated Purchasers” and “Item 7. Major Shareholders and Related Party Transactions”.
American Depositary Shares
Since October 9, 2009, our ADSs have been listed on the NYSE and trade under the ticker PAM. Each ADS represents 25 common shares (or a right to receive 25 common shares). Pursuant to the provisions of the Deposit Agreement, on January 23, 2017, Pampa sent a notice to The Bank of New York Mellon stating that Pampa (i) removed The Bank of New York Mellon as depositary and (ii) appointed J.P. Morgan as successor Depositary thereunder, effective on the later to occur of the close of business New York City time on (a) February 21, 2017 and (b) the date of effectiveness of the Form F-6 filed with respect to the appointment of J.P. Morgan as successor Depositary under the Deposit Agreement. On February 22, 2017, Pampa filed the F-6 and the appointment of J.P. Morgan became effective as of such date.
Furthermore, the Company made certain amendments to the Deposit Agreement by Form of Amendment No. 1 to the Second Amended and Restated Deposit Agreement (previously filed as Exhibit 99.A2 to our Registration Statement on Form F-6 POS (File No. 333-216157) on November 18, 2020).
Each ADS will also represent any other securities, cash or other property, which may be held by the ADS Depositary, J.P. Morgan.
The ADS Depositary’s office at which the ADRs are administered is located at 4 New York Plaza, Floor 12, New York, New York 10004. See “Item 12. Description of Securities Other than Equity Securities—Description of American Depositary Shares.” The Designated Market Maker on the trading floor of the NYSE for our ADSs is Barclays Capital.
The ADS Depositary has informed us that, as of December 31, 2021, there were 16,098,747 outstanding ADSs.
THE ARGENTINE SECURITIES MARKET
Trading in the Argentine securities market
Pursuant to the provisions of the CML, the securities market in Argentina is comprised of several Authorized Markets, including the BYMA, the Mercado Abierto Electrónico S.A., the Mercado de Valores de Córdoba S.A., the Mercado a Término de Rosario S.A., among others. The CML allows the Authorized Markets to delegate certain of its duties and rights as a market to other qualified entities, as previously authorized by the CNV. Securities listed on these exchanges include corporate equity, bonds and government securities.
On December 29, 2016, the CNV authorized BYMA and on January 2, 2017, IGJ and CNV authorized the creation and operation of BYMA. Seventy percent of its capital stock is held by free float and the other 30 percent is owned by BASE.
BYMA is the largest authorized market in Argentina. Pursuant to Resolution No. 18,629, the CNV authorized BYMA to operate as an Authorized Market, and allowed BYMA to delegate certain of its rights and duties as a market in the BASE, including without limitation, the right to authorize the listing of issuers and securities in the BYMA, and the right to publish the daily market gazette.
In Argentina, debt and equity securities traded on an exchange or the over-the-counter market must, unless otherwise instructed by their shareholders, be deposited with Caja de Valores. Caja de Valores is the central securities depositary of Argentina and provides central depositary facilities, as well as acting as a clearing house for securities trading and as a transfer and paying agent for securities transactions. Additionally, Caja de Valores handles the settlement of securities transactions carried out by the BASE and operates the computerized exchange information system mentioned above.
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BYMA incorporated 99.96% of Caja de Valores’ equity, and as a result, the operating cycle of the capital market industry is vertically integrated. At the technological level, BYMA acquired the Millennium Stock Exchange platform belonging to the London Stock Exchange group as a sign of its innovative vocation and with the aim of providing the best attention to its participants and investors. Millennium, a leading global technology provider in trading and post-trading software, currently serves the London, Milan, Oslo and Johannesburg Stock Exchanges, among others.
Although companies may list all of their capital on BYMA or any other Authorized Market, controlling shareholders in Argentina typically retain the majority of a company’s capital stock, resulting in a relatively small percentage of active trading of the companies’ stock by the public on any such Authorized Market.
Securities may also be listed and traded through over-the-counter market brokers who are linked to an electronic reporting system. The activities of such brokers are controlled and regulated by MAE, an electronic over-the-counter market reporting system that functions independently from BYMA. Under an agreement between the BASE and MAE, trading in equity and equity-related securities is conducted exclusively on the BASE (now BYMA) and trading in corporate debt securities is conducted on both the S&P MERVAL/BASE (now BYMA) and the MAE. Trading in Argentine Government securities, which are not covered by the agreement, may be conducted on either or both of the BYMA and the MAE. The agreement does not extend to other Argentine exchanges.
Regulation of the Argentine securities market
The Argentine securities market is regulated and overseen by the CNV, pursuant to the CML, as well as stockbroker transactions, market operations, the public offering of securities, corporate governance matters relating to public companies and the trading of futures and options. Argentine insurance companies are regulated by a government agency, the Superintendencia de Seguros de la Nación, whereas financial institutions are regulated primarily by the Central Bank.
On June 1, 2001, the Argentine Government issued Decree No. 677/2001, which provided certain guidelines and provisions relating to capital markets transparency and best practices. Further improvements to Argentine securities market regulations were introduced in December 2011 when the Argentine Criminal Code was amended to include insider trading as a criminal offense. In addition, on November 29, 2012, the Argentine Government enacted the CML, which revoked law No. 17,811, and Decree No. 677/2001. However, CML incorporated most of the provisions established in those regulations. These provisions were regulated by the CNV through Resolution No. 622/2013 and further modifications.
On May 9, 2018, the Argentine Congress approved the Law No. 27,440, called Ley de Financiamiento Productivo, which introduced significant reforms to the CML, the Mutual Funds Law No. 24,083 and the Argentine Negotiable Obligations Law No. 23,576, among others.
Prior to offering securities to the public in Argentina, an issuer must meet certain requirements established by the CNV (for example, regarding the issuer’s assets, operating history and management, among others), and only securities authorized for public offering by the CNV may be listed on a stock exchange. Although issuers of listed securities are required to file with the CNV and the stock exchange on which their securities are listed several financial documents (such as, unaudited quarterly financial statements, audited annual financial statements, various other periodic reports), as well as to report any event related to the issuer and its shareholders that may materially affect the value or trading volume of the traded securities,- the CNV approval does not imply any kind of certification as to the quality of the securities or the solvency of the issuer.
Money Laundering
The concept of money laundering is commonly used to refer to operations that aim to enter funds from criminal activities into the institutional system and thus convert profits from illegal activities into assets of apparently lawful origin.
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On April 13, 2000, the Argentine Congress passed the Anti-Money Laundering Law which classifies money laundering as a crime. Additionally, such law, which amended several sections of the Argentine Criminal Code, has established sanctions for those incurring in such illicit activity and has created the UIF, a unit of the Ministry of Economy created to prevent money laundering and financing of terrorist activities.
The Argentine Criminal Code defines money laundering as the exchange, transfer, management, sale or any other use of money or other assets obtained through a crime, by a person who did not take part in such original crime, with the potential result that such original assets (or new assets resulting from such original assets) appear as if obtained through legitimate means, provided that the aggregate value of the assets involved exceed in the aggregate (through one or more related transactions) Ps.300,000. As previously mentioned, the Anti-Money Laundering Law created the UIF, which is in charge of the analysis, supervision and conveyance of information in order to prevent (A) the laundering of assets obtained from: (i) Crimes related to illegal traffic and commercialization of narcotics (Law No. 23,737); (ii) Crimes related to arms trafficking (Law No. 22,415); (iii) Crimes related to the activities of an illegal association as defined in Article 210 bis of the Argentine Criminal Code; (iv) Illegal acts committed by illegal associations (Article 210 of the Argentine Criminal Code) organized to commit crimes with political or racial motivation; (v) Crimes of fraud against the Public Administration (Article 174, Section 5 of the Argentine Criminal Code); (vi) Crime against the Public Administration under Chapters VI, VII, IX and IX bis of Title XI of Book Two of the Argentine Criminal Code; (vii) Crimes of underage prostitution and child pornography under Articles 125, 125 bis, 127 bis and 128 of the Argentine Criminal Code; (viii) Crimes related to financing terrorism (Articles 41quinquies and 306 of the Argentine Criminal Code); (ix) Crimes of extortion (Article 168 of the Argentine Criminal Code); (x) Tax crimes, related to social security and fiscal resources (pursuant to law 24,769) and (xi) Crimes related to human trafficking; and (B) Crimes related to financing terrorism.
The Anti-Money Laundering Law assigns information and control duties to certain private sector entities, such as banks, agents, stock exchanges and insurance companies, according to the regulations of the UIF, and for financial entities, the Central Bank.
Financial entities must inform the UIF about any suspicious or unusual transaction, or transactions lacking economic or legal justification, or that are unnecessarily complex. In addition, guidelines and internal procedures were created to detect unusual or suspicious transactions, which must be implemented by financial institutions and other entities.
Pursuant to the same criteria that underlies the aforementioned law, in 2012, the office of the Attorney General issued Resolution No. 914/12, which created the PROCELAC. As PROCELAC has no competence to apply sanctions, its main role is to collaborate with the Federal Prosecutors in the investigation of crimes and in receiving complaints in order to initiate preliminary investigations.
The UIF issued Resolution No. 229/2011, which was replaced by Resolution UIF No. 21/2018 and, subsequently amended by Resolutions No. 156/2018, No. 18/2019 and No. 117/2019 (“AML in the Capital Market Sector”). The AML in the Capital Market Sector establishes certain procedures that must be followed by the authorized agents of the CNV involved in the placement, intermediation and public offering of securities (the “Obliged Subjects in the Capital Market Sector”) in order to prevent, detect and report (within the deadlines established) the acts, transactions or omissions that may arise from committing money laundering and terrorist financing crimes in the capital market sector. Additionally, the AML in the Capital Market Sector introduced general guidelines to identify different types of customers (including a distinction between frequent, casual and inactive customers), the requested information, the documentation to be kept and the procedure to detect and report all suspicious transactions within the established deadlines.
The main obligations pursuant to the AML in the Capital Market Sector are the following: (i) to prepare manuals providing the mechanisms and procedures for the prevention of money laundering and financing of terrorism; (ii) to appoint a compliance officer; (iii) to audit regularly; (iv) to provide training programs to the employees; (v) to enforce measures that would allow the Obliged Subjects in the Capital Market Sector to compile the transactions performed by the customers using a computerized method, as well as technological tools which would enable the analysis and supervision of different transactions to identify behaviors and detect potential suspicious operations; (vi) the implementation of technological tools that would result in effective control and prevention procedures against money laundering and financing of terrorism; and (vii) to record the analysis and risk management of the suspicious transactions that were detected and those that, for having been considered suspicious, have been reported.
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The Central Bank and the CNV should also comply with provisions of the Anti-Money Laundering Law. In this respect, the CNV regulations provide that entities involved in the public offering of securities (other than issuers), including, among others, underwriters of any primary issuance of securities, must comply with the standards set forth by the UIF. In particular, they must comply with the obligation regarding customer identification and required information, record-keeping, precautions to be taken to report suspicious transactions, policies and procedures to prevent money laundering and terrorist financing. Whilst, the acquirers of notes will provide the information and documentation required regarding the origin and legality of the funds used for the subscription.
On the other hand, pursuant to Resolution No. 21/2018, as amended subsequently, the Obliged Subjects in the Capital Market Sector shall identify and evaluate the risks that they are exposed to and, as a result, to adopt administrative measures for mitigating them, in order to more effectively prevent money laundering. In accordance with this standard, the Obliged Subjects in the Capital Market Sector must have policies and procedures to know their client (“KYC”), which must be applied according to the risk rating resulting from the implemented risk model. Within this framework, individuals are enabled to implement reputable technological platforms, which allow long-distance procedures without the need to present documentation in person, without prejudice to the fulfillment of due diligence duties.
In accordance with Annex I of the UIF Resolution No. 154/2018 (which established the supervision and inspection mechanism of the UIF), both the Central Bank and the CNV are considered “Specific Controllers”. Therefore, they must collaborate with the UIF in complying with the procedures for the prevention of money laundering and finance of terrorism implemented by the obligated subjects subject to its control. For these purposes, they are empowered to supervise, monitor and inspect such entities. The refusal to cooperate or obstruction of inspections by the obliged subjects may result in penalties by the UIF, CNV or the Central Bank. Both UIF Resolution No. 30/2017, as amended, as well as the Central Bank regulations require banks to take certain minimum precautions to prevent money laundering.
With respect to issuers (such as the company), CNV regulations provide that any person (either individuals or legal entities) performing significant capital contributions or loans must be identified, whether a shareholder or not at the time of the contributions, and must meet the requirements for general participants in the public offering of securities, set forth in the CNV regulations and the UIF regulations, especially with respect to the identification of such persons and to the origin and legality of the funds and loans provided.
On October 14, 2016, the UIF issued Resolution No. 135/2016, which strengthened the regulations regarding the international exchange of information between similar authorities which may enter into agreements or memoranda of understanding as well as to the foreign public bodies that are members of the Egmont Group of Financial Information Unit or the Asset Recovery Network of the Financial Action Task Force of Latin American (GAFILAT).
On January 11, 2017, the UIF published Resolution No. 4/2017, which established that special due diligence measures must be applied for identifying foreign and domestic investors (who shall comply with the requirements therein set forth to qualify as such) in the Republic of Argentina upon requesting the opening of special investment accounts.
In addition, the Argentine tax amnesty law (Law 27,260 and its regulatory decree No. 895/16, as amended) (the “Tax Amnesty Law”) provided that the information that has been voluntarily disclosed may be used for investigating and sanctioning crimes of money laundering and finance of terrorism. To this end, the UIF is authorized to inform other public intelligence agencies about investigations, based on a previous resolution of the president of the UIF and provide those agencies with information that evidences crimes of money laundering and/or financing of terrorism. In the same way, the AFIP is obliged to report to the UIF any suspicious transactions detected in the context of the Tax Amnesty Law and to provide all the information that the UIF requires, not being able to invoke fiscal confidentiality.
In November 2018, the UIF passed Resolution No. 134/2018, which updates the list of persons considered to be “politically exposed persons” (“PEP”) in Argentina, taking into account any positions occupied by them in the present or in the past, and their relationship by closeness or affinity with third parties who occupy or have occupied such positions. Also, during 2019, the UIF issued Resolution No. 15/2019, which modified the PEP list and Resolution 128/19 established that foreign PEPs will be considered high risk and therefore subject to reinforced due diligence measures, with some exceptions.
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On December 26, 2018, the UIF published UIF Resolution No. 154/2018, which amended the supervision procedures then in effect providing for new procedures consistent with and conforming to the international standards promoted by the Financial Action Task Force (“FATF”), which shall be applied in accordance with a risk-based approach.
In July 2019, by Decree No. 489/2019, the Executive Branch created the Public Registry of Persons and Entities Linked to Acts of Terrorism and its Financing (Registro Público de Personas y Entidades Vinculadas a Actos de Terrorismo y su Financiamiento) (the "RePET"), to centralize and manage all information related to the administrative freezing of assets linked to acts of terrorism and its financing. RePET is empowered to provide public access and guarantee the exchange of information with the agencies with competence in the field and with third countries, and the reporting parties must provide all information related to transactions carried out or attempted by individuals or legal entities included in RePET.
In turn, on November 14, 2019, by means of General Resolution No. 816, the CNV adapted the regulations related to the prevention of money laundering and financing of terrorism, in order to include the new obliged subjects contemplated in the Law on Prevention of Money Laundering and in the Regulations on Money Laundering in the Capital Market Scope. Among the new obligated subjects were included crowdfunding platforms, global investment advisory agents and human or legal persons acting in the placement of mutual funds or other collective investment products.
On November 17, 2019, through Resolution No. 117/2019, the UIF updated the minimum thresholds above which reporting entities must carry out the enhanced control and due diligence requirements established by the applicable anti-money laundering and anti-terrorist financing regulations. This measure aims to "contribute to an efficient prevention of money laundering and terrorist financing" from a risk-based approach, in accordance with international standards promoted by the FATF.
On October 21, 2021, the UIF issued Resolution 112/2021, whereby it establishes the measures and procedures that the regulated entities listed in Article 20 of the Money Laundering Prevention Law must observe to identify the beneficial owner of the customer in question. In this sense, such Resolution 112/2021 established that the beneficial owner shall be considered the human person who owns at least 10% of the capital or voting rights of a legal person, a trust, an investment fund, an affectation patrimony and/or any other legal structure; and/or the human person who by other means exercises the final control of the same.
For more information, you should seek advice from your legal counsel and read the applicable rules mentioned herein, including their amendments, which can be found at the following websites: www.infoleg.gov.ar, the UIF’s website: www.uif.gov.ar and the Central Bank’s website: www.bcra.gov.ar. The information contained on these websites is not part and shall not be deemed incorporated into this annual report.
Corporate Criminal Liability Law
On March 1, 2018, the Corporate Criminal Liability Law came into effect, after having been enacted by the Argentine Congress on November 8, 2017, providing for the criminal liability of corporate entities for offenses against the public administration and cross-border bribery committed by, among others, of their shareholders, attorneys-in-fact, directors, managers, employees, or representatives. A company found liable under this law may be subject to various sanctions, including, among others, fines from two to five times the undue benefit obtained or that could have been obtained and the partial or total suspension of their activities for up to ten years. In addition, this law extended the criminal liability under the Argentine Criminal Code to actions committed outside Argentina by Argentine citizens or companies domiciled in Argentina.
On April 6, 2018, the executive branch of the Argentine Government issued Decree No. 277/18, which regulates the Corporate Criminal Liability Law, providing that the Anticorruption Office of the Ministry of Justice and Human Rights will establish the guidelines to comply with the Corporate Criminal Liability Law’s provisions related to the Integrity Program. On October 4, 2018, the Anticorruption Office issued Resolution No. 27/2018, which approved the “Integrity’s Guidelines for the best compliance of sections 22 and 23 of the Corporate Criminal Liability Law”.
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Upon the enactment and entry into force of the Corporate Criminal Liability Law, our Board of Directors assessed the level of compliance with the Integrity Program set forth in sections 22 and 23 of such law, which seeks to implement a set of internal procedures, mechanisms and actions for integrity, supervision and control, geared at preventing, detecting and correcting the irregularities and acts covered by such law.
The Integrity Program set forth by law has mandatory and optional requirements, and we have defined the need to comply with all of them.
Furthermore, the Integrity Program is periodically monitored by our Board of Directors to identify the existence of improvement opportunities or necessary updates. Our Board of Directors has defined that our internal audit department will be responsible for the implementation of the Integrity Program.
| Item 10. | Additional Information |
MEMORANDUM AND ARTICLES OF ASSOCIATION
Corporate Purpose
Pursuant to Article 4 of our by-laws, our corporate purpose is to carry out the following activities: (a) Industrial: 1) Operations for the generation, transformation, transmission and distribution of electric power; 2) To explore, exploit, prospect, detect, probe and drill hydrocarbon and any other fields, areas and/or wells, and to develop mining activities generally; 3) to purchase, sell, lease and exploit drilling equipment, any spare parts and accessories thereof, and enter into any contracts and perform any acts and transactions related to mining extraction; 4) to manufacture, process, industrialize, purchase, sell, import, export and transport hydrocarbons and any byproducts thereof belonging to the Company or to third parties, either liquid, solid or gaseous; 5) to enter into any kind of contracts for the performance of works and/or services related to the foregoing activities; 6) Exploitation in any manner of agriculture, livestock-farming, fruit-growing, winemaking, olive grove, forestry growth and/or farming establishments; and 7) Production through any form of industrial process of agricultural or winemaking products or by-products. (b) Commercial: Commercial transactions by importing, exporting, selling and purchasing, transporting, storing and distributing products, subproducts and goods related to electric power, mining production, including the exercise or performance of activities as representative or commission, consignment and other agents. (c) Financial: Financial transactions generally; to extend loans and/or make capital contributions to individuals and companies in connection with business operations performed or to be performed; to provide guarantees, collateral and surety in favor of third parties; to sell, purchase and manage shares, governmental securities, debentures and other securities on any of the systems and in any form created or to be created, other than transactions falling within the scope of the Financial Entities Law. (d) Investment: Investing activities in undertakings and companies of any nature, in accordance with and subject to the limitations established by applicable laws and regulations; the Company may organize or take part in the organization of companies or purchase and hold equity interests in companies now existing or to be created in the future in Argentina or abroad, be a party to temporary business associations, cooperative associations, joint ventures and business associations. The Company may also, for investment purposes, purchase, develop and dispose of real and personal property of any kind, encumber and convey and receive such property under a lease, a concession or a financial lease. (e) Services: To provide services or act as an agent in its own name or for the benefit of third parties. To such end, we have full legal capacity to acquire rights and incur obligations and to carry out any such acts as are not prohibited by the laws or our bylaws, including, without limitation, guaranteeing any obligations of our company or any third party.
Year-End Date
Our fiscal year-end date is December 31 each year.
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Redemption and Withdrawal Rights
Our shares are subject to a proportional redemption in connection with a capital reduction by the vote of a majority of shareholders at an extraordinary shareholders’ meeting based on a favorable report of a statutory auditor. Any shares so redeemed must be cancelled by us.
If such were the case, we would be required to reimburse the value of the shares to the shareholders exercising such right in the cases described below.
Whenever our shareholders approve a spin-off or merger in which we are not the surviving corporation and the shares our shareholders receive as a result of such spin-off or merger are not publicly traded, the change of our corporate legal status, a fundamental change in our corporate purpose, change of our domicile outside of Argentina, voluntary withdrawal from public offering or delisting, our continuation in the case of mandatory delisting or cancellation of the public offering authorization, or a total or partial recapitalization following a mandatory reduction of our capital or liquidation, any shareholder that voted against such action or did not attend the meeting at which the decision was taken, may withdraw and receive the book value of its shares, determined on the basis of our latest balance sheet prepared or that should have been prepared in accordance with Argentine laws and regulations, provided that such shareholder exercises its appraisal rights within a determined period. However, because of the absence of legal precedent directly on point, there is doubt as to whether holders of ADSs will be able to exercise their appraisal rights either directly or through the depositary with respect to the shares represented by the ADSs. The appraisal rights must be exercised within the five days following the adjournment of the meeting at which the resolution was adopted, in the event that the dissenting shareholder voted against such resolution, or within 15 days following such adjournment if the dissenting shareholder did not attend such meeting and can prove that it was a shareholder on the date of such meeting. In the case of merger or spin-off, appraisal rights may not be exercised if the shares to be received as a result of such transaction are authorized for public offering or listed. Appraisal rights are extinguished if the resolution giving rise to such rights is revoked at another shareholders’ meeting held within 60 days of the meeting at which the resolution was adopted.
Payment on the appraisal rights must be made within one year of the date of the shareholders’ meeting at which the resolution was adopted, except when the resolution was to delist our shares or to continue following a mandatory delisting, in which case the payment period is reduced to 60 days from the resolution date.
Preemptive and Accretion Rights
Pursuant to section 194 of the BCL, holders of common shares have preemptive rights proportionate to the number of shares held by each holder, to subscribe for shares of capital of the same class owned by the shareholder, and accretion rights to subscribe additional common shares not subscribed by other shareholders on a pro rata basis. Preemptive rights and accretion rights may be waived only by each shareholder on a case-by-case basis. In accordance with section 194 of the BCL, our by-laws provide that the holders of common shares have preemptive rights to subscribe additional common shares in any amount sufficient to maintain their pro rata share of capital.
In this way, pursuant to the BCL, in exceptional cases and on a case by case basis when required for the best interest of the company, the shareholders at an extraordinary meeting with a special majority may decide to limit or suspend shareholders’ preemptive rights, provided that the resolution is included in the agenda of the meeting and the shares to be issued are paid in kind or are issued to cancel preexisting obligations.
Pursuant to Section 6 of our by-laws, Shareholders shall be entitled to first-refusal and accretion rights for the subscription of any newly issued shares, pro rata to their respective shareholding, and the relevant notices shall be published to this effect as legally required. First-refusal and accretion rights may be exercised within the legally established periods and shall be solely limited or suspended by resolution of an Extraordinary Meeting of Shareholders in compliance with the conditions established by section 197 of the BCL.
According to our by-laws, (a) first-refusal and accretion rights shall be solely limited or suspended (i) in accordance with the Section 6 of the Bylaws or (ii) when an Extraordinary Meeting of Shareholders approving an issuance of shares and convertible notes has resolved that first-refusal rights shall not be applicable both under section 194 of BCL and under the CML, and in such an event any shareholders wishing to take part in the capital increase shall not be entitled to first-refusal rights and compliance with the conditions for first-refusal rights to be suspended under section 197 of BCL shall not be required; (b) in case of a capital increase through the issuance of shares or convertible notes offered by means of a public offering under the CML and subject to the approval of the meeting of shareholders approving the respective issuance of shares and convertible notes, the first-refusal right contemplated in section 194 of BCL and section 11 of Law No. 23,576 and any other statutory rules that may replace them in the future shall be exercised by means of the placement procedure determined in the respective public offering prospectus; and the holders of shares and convertible notes, as the beneficiaries of such preemptive right, shall be acknowledged priority in the awarding of shares up to the amount they may be entitled to, based on their respective shareholding percentage. This shall be so provided that any purchase orders submitted by the shareholders or holders of convertible notes, as the beneficiaries of such first-refusal right, are placed at the price resulting from the placement procedure or at an established price either equal to or higher than the subscription price determined in the public offering, and accretion rights shall not be applicable. Until the new applicable law permits the foregoing provisions, section 6 of these Bylaws shall be applied.
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Pursuant to Argentine Law, if authorized by an extraordinary shareholders’ meeting, companies authorized to make public offerings of their shares may shorten the period during which preemptive rights may be exercised from 30 to up to ten days following the publication of the offering to the shareholders to exercise preemptive rights in the Official Gazette and a newspaper of wide circulation in Argentina. Preemptive rights are exercisable following the described publication (which has to be made for three days) for a period of 30 days, provided such period is not reduced as described above.
Shareholders who have exercised their preemptive rights have the right to exercise accretion rights at the same time, on a pro rata basis, with respect to any unsubscribed common shares. Shares not subscribed by shareholders by virtue of preemptive or accretion rights may be offered to third parties.
Holders of ADSs may be restricted in their ability to exercise preemptive rights if a prospectus under the Securities Act relating thereto has not been filed or is not effective or an exemption from registration is not available.
Voting Rights
Under our by-laws, our common shares entitle the holder thereof to one vote per share at any meeting of our shareholders.
Dividends
In accordance with section 36 of our by-laws, our yearly net income (as adjusted to reflect changes in prior results) is allocated in the following order:
(1) to comply with our legal reserve policy requirement of 5% of our realized and liquid earnings until such reserve equals up to 20% of the capital (pursuant to section 70 of the BCL);
(2) to pay the accrued fees of the members of the Board of Directors and the Supervisory Committee;
(3) for voluntary or contingent reserves, as may be resolved from time to time by our shareholders at the annual ordinary shareholders’ meeting; and
(4) the remainder of the net income for the year may be distributed as dividends on common shares or as otherwise decided by our shareholders at the annual ordinary shareholders’ meeting.
Registration Requirements of Foreign Companies
Under the BCL, foreign companies that hold shares in an Argentine company must register with the public registry of commerce to exercise certain shareholder rights, including voting rights. The registration with the public registry of commerce in certain jurisdictions, such as in the City of Buenos Aires, requires the filing of corporate and accounting documents in order to demonstrate that the foreign shareholder: (1) is not a special purpose vehicle created solely to conduct business in Argentina, (2) owns non-current assets outside of Argentina that are significant compared to its assets owned or to be owned in Argentina and (3) is entitled to conduct business in its place of organization.
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Under the CNV provisions, foreign companies could attend a Shareholders meeting only with a dully authorized official, with no additional formal registration needed. Is considered to be duly authorized: (i) the legal representative of the company in Argentina, (ii) an attorney with enough power to represent the company in Argentina. The power could be granted in Argentina or abroad, complying with all legal and formal requirements (duly legalized and apostilled).
Liquidation Rights
Pursuant to section 109 of the BCL, in the case of our liquidation or dissolution, our assets will be applied to satisfy our outstanding liabilities and then proportionally distributed among holders of our shares.
Ordinary and Extraordinary Shareholders’ Meetings
Shareholders’ meetings may be ordinary meetings or extraordinary meetings. We are required to convene and hold an ordinary meeting of shareholders within four months of the close of each fiscal year to consider the matters specified in the first two paragraphs of Section 234 of the BCL, such as the approval of our financial statements, allocation of net income for such fiscal year, approval of the reports of the board of directors and the audit committee and election, performance and remuneration of directors and members of the supervisory committee. In addition, pursuant to the CML, at an ordinary shareholders’ meetings, our shareholders must consider (1) the disposition of, or creation of any lien over, our assets as long as such decision has not been performed under the ordinary course of business and (2) the execution of administration or management agreements and whether to approve any agreement by virtue of which the assets or services provided to us are paid partial or totally with a percentage of our income, results or earnings, if the payment is material when measured against the volume of the ordinary course of business and our shareholders’ equity. Other matters that may be considered at an ordinary shareholders’ meeting convened and held at any time include the responsibility of directors and members of the supervisory committee, capital increases and the issuance of certain notes. Extraordinary shareholders’ meetings may be called at any time to consider matters beyond the authority of an ordinary meeting including, without limitations, the amendment of our by-laws, issuance of debentures, early dissolution, merger, spin off, reduction of capital stock and redemption of shares, transformation from one type of entity to another, appointment, removal and retribution of the liquidators and limitation or suspension of shareholders’ preemptive rights.
In accordance with Article 21 g) of our by-laws, our board of directors has broad borrowing powers, and may incur any indebtedness without the approval of the shareholders, unless the indebtedness consists of the issuance of notes (pursuant to Law No. 23,576) or debentures (pursuant to the BCL), in which cases, the decision must be approved by our shareholders as described above, except for such bonds that are not convertible into stocks.
On February 17, 2021, the Company’s General Ordinary and Extraordinary Shareholders’ Meeting approved the amendment of Section 30 of the Company’s by-laws in order to allow to virtually hold Shareholder’s meetings in the following way: Article 30: To be validly assembled, an Ordinary Meeting of Shareholders held on first call shall require the presence of shareholders representing a majority of voting shares, and on second call a Meeting shall be validly assembled with any number of such shares present. Extraordinary Meetings of Shareholders shall be validly held on first call with the presence of shareholders representing not less than 60% of voting shares, and on second call the presence of not less than 30% of such shares shall be required. The Shareholder’s Meetings may be held with its members present or communicated between them by other means allowing for the simultaneous transmission of sound, images and words, and Shareholders both physically present and attending remotely shall be computed for purposes of quorum and majority requirements. The minutes of these meetings shall be prepared and signed within five (5) days after the relevant meeting has been held by the President and the appointed Shareholders. If a Shareholders’ Meeting cannot be validly held due to the absence of the required number of attendants, and if an Ordinary Shareholders’ Meeting has not been convened on first and second call at the same time, the Meeting must be convened again within the following 30 days.
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Notices of Meetings
Notices of shareholders’ meetings are governed by the provisions of the BCL. Furthermore, notice of shareholders’ meetings must be published for five days in the Official Gazette, in an Argentine newspaper of wide circulation and at the markets’ means of publications, at least 20 but not more than 45 days prior to the date on which the meeting is to be held. Such notice must include information regarding the type of meeting to be held, the date, time and place of such meeting and the agenda. If a quorum is not available at such meeting, a notice for a meeting on second call, which must be held within 30 days of the date on which the first meeting was called, must be published for three days at least eight days before the date of the meeting on second call. The above described notices of shareholders’ meetings may be effected simultaneously for the meeting on second call to be held on the same day as the first meeting, only in the case of ordinary meetings and special shareholders’ meetings of a relevant class of shares. Shareholders’ meetings may be validly held without notice if all the shares of our outstanding share capital are present and resolutions are adopted by unanimous vote of shares entitled to vote.
Quorum and Voting Requirements
The quorum for ordinary meetings of shareholders on first call is a majority of the shares entitled to vote, and action may be taken by the affirmative vote of an absolute majority of the shares present that are entitled to vote on such action. If a quorum is not available at the first meeting a meeting on second call may be held at which action may be taken by the holders of an absolute majority of the shares present, regardless of the number of such shares. The quorum for an extraordinary shareholders’ meeting on first call is 60% of the shares entitled to vote, and if such quorum is not available, a meeting on second call may be held, for which the quorum is 30% of the shares entitled to vote.
Action may be taken at extraordinary shareholders’ meetings by the affirmative vote of an absolute majority of shares present that are entitled to vote on such action, except that: the approval of a majority of shares with voting rights (for these purposes, non-voting preferred shares shall have voting rights and multiple votes shares shall have one vote per share), is required at both the meetings on first and second call for: (1) the transfer of our domicile outside Argentina, (2) a fundamental change of the corporate purpose set forth in our by-laws, (3) total or partial recapitalization, (4) limitation or suspension of the shareholders’ preemptive and accretion rights, (5) the creation of voluntary reserves with the company’s net profits, if such funds together with the existing voluntary reserves exceeds the amount of capital stock and legal reserves, (6) continuation of the company upon delisting or cancellation of our public offering authorization or (7) merger or spin-off (except if we are the absorbing company), and (8) our anticipated dissolution.
Pursuant to Article 33 of our by-laws: (1) any amendment to the regime of Mandatory Public Tender Offer upon acquisition of a controlling interest in our capital stock, as described below under “—Mandatory Public Tender Offer Upon Acquisition of 50% of our Voting Shares,” requires for approval the favorable vote of shares representing at least 66.6% of the capital stock issued and outstanding, (2) any amendment to the rules of the Audit Committee as well as any amendment to the regime of Mandatory Public Tender Offer upon acquisition of a significant interest in our capital stock as described below under “—Mandatory Public Tender Offer upon Acquisition of 35% of our Voting Shares,” shall require for approval the favorable vote of at least 66.6% of the shareholders in attendance at the meeting to the extent that they represent at least 35% of the capital stock issued and (3) any amendment to the special majority regime as established above which shall require for approval the same special majority intended to be amended.
Shareholders’ meetings may be called by the board of directors or the members of the supervisory committee whenever required by law or whenever they deem it necessary. Also, the board or the members of the supervisory committee are required to call shareholders’ meetings upon the request of shareholders representing an aggregate of at least five percent of our outstanding share capital in which case the meeting must take place within 40 days of such shareholders’ request. If the board of directors or the supervisory committee fails to call a meeting following such a request, a meeting may be ordered by the CNV or by the courts. In order to attend a meeting, a shareholder must also deposit with us a certificate of book entry shares registered in its name and issued by Caja de Valores at least three business days prior to the date on which the meeting is to be held. If so entitled to attend a meeting, a shareholder may be represented by proxy. Proxies may not be granted to our board, members of the supervisory committee, officers or employees.
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Election of Directors
In accordance with Article 12 of our by-laws, our Board of Directors is composed of nine regular members appointed by the Ordinary Meeting of Shareholders. Our directors will be elected for a three-year term, which terms shall be in force until a replacement director is appointed. The election of our directors will be on a staggered basis, so that one third of the board membership is renewed each year. The directors will be elected by slate, always provided that no shareholder or group of shareholders holding more than 3% of our capital stock objects to such election method. In the event of such an objection, their election will be made individually. Any shareholder or group of shareholders who holds more than 3% of our capital stock (each, a Proposer) may require our Board to give notice to the other shareholders of the candidate slate or individual candidates to be proposed by such shareholder or group of shareholders to the shareholders’ meeting for election. In the case of depositary banks that are holders of shares of our common stock registered in their name, this rule will be applicable to the beneficiaries. To such end, the relevant slate executed by the Proposer or its representatives, as applicable, will be sent to the chairman of our board or whoever replaces him, no less than five business days prior to the date of the relevant shareholders’ meeting, so as to be officially notified by publication in the Bulletin of the BASE at least two days prior to the meeting’s date. In order to facilitate the formation of the slates and the record of the candidates’ names, as from the date of the first notice calling for the relevant meeting, a special book will be made available to the shareholders at the registered office in which the names of the slates or candidates proposed by any shareholders shall be recorded. Similarly, our Board of Directors will propose to the shareholders’ meeting a slate of candidates for election by slate or individually, if the former election method were objected to, whose names will be made known to all the shareholders together with the slates proposed by the Proposer. In addition, no proposal for the election of directors may be made, either before or during the shareholders’ meeting, unless written evidence of acceptance of office by the proposed candidates is submitted to us. Such slate or person, as the case may be, who obtains the vote of a majority of the shares present at the meeting will be declared elected. If no slate obtains such majority, a new voting will be taken in which the two slates or persons that obtained the largest number of votes will take part, and the slate or person who obtains the largest number of votes will be declared elected. The preceding rules will not prevent a shareholder who is present at the shareholders’ meeting from proposing candidates not included in the proposals from our Board of Directors. All proposed directors must comply with our Nomination Policy rules prior to their designation.
There are no provisions under Argentine law or in our by-laws providing for the retirement of directors under an age limit requirement.
Directors’ compensation
In accordance with Article 31 of our by-laws, our director’s compensation is considered and approved by our shareholders in an ordinary meeting held in compliance with such law. Additionally, pursuant to our audit committee charter, our audit committee is responsible for approving, by a vote of only its independent members, any proposal related to the remuneration and compensation of our directors and executive officers, before any proposal, which is always non-binding, is submitted by our Board of Directors to the shareholders for their consideration. Any proposal for remuneration or compensation that is not approved by our audit committee cannot be submitted by the Board of Directors to our shareholders. Annual compensations must comply with our Compensation Policy prior to its approval by the board.
Mandatory Public Tender Offer Upon Acquisition of 35% of Our Voting Shares
Our by-laws provide in Article 38 that in the event that any person, directly or indirectly, individually or in agreement with other persons, by any means or title (pursuant to a sale, an assignment, pursuant to foreclosure proceedings either at court or out of court, or pursuant to any other means of disposal or transfer), acquires or becomes the beneficial owner of shares of our common stock, options, warrants or securities of the company convertible into shares, convertible notes, GDRs or ADRs and options to acquire shares (together, our Securities) representing, or entitling in the event of conversion, when added to such person’s prior holding, if any, to 35% or more of our voting stock, even though such interest does not confer control over us, such person or group of persons shall be required to publicly tender for 100% of our outstanding capital stock and Securities at a price no less than the highest of: (1) the share price of the company in U.S. Dollars determined based on a valuation of our net worth prepared by an independent, internationally-recognized investment bank, the valuation must take into account an increase in the company’s capital stock as a result of the exercise of conversion rights as contained in the Securities and must be performed on the basis of the most recent balance sheet approved by the company; (2) 135% of the subscription price (denominated in U.S. Dollars, as of the date of subscription of any shares issued as a result of a capital increase during the 24-month period immediately preceding the date of the notice of such person or group of persons announcing the commencement of the mandatory tender offer for the acquisition of a significant interest herein established, adjusted to reflect any stock split, stock dividends, par value variation, capital reduction, earning capitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby bonus shares of our common stock and/or Securities are delivered; and (3) 135% of the weighted average listing price in U.S. Dollars (at closing of trading) of our shares of common stock and/or GDRs during the 120-day period immediately preceding the notice announcing the commencement of the mandatory tender offer due to acquisition of a significant interest, in the BASE and in New York and at any other exchange or market in which our shares and Securities are listed, adjusted to reflect any stock split, stock dividend, par value variation, capital reduction, earning capitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby bonus shares of our common stock and/or Securities are delivered.
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Mandatory Public Tender Offer Upon Acquisition of 50% of Our Voting Shares
Our by-laws provide in Article 38 that in the event that any person, directly or indirectly, individually or in agreement with other persons, by any means or title (pursuant to a sale, an assignment, foreclosure proceedings either at court or out of court, or to any other means of disposal or transfer), acquires or becomes the beneficial owner of shares of our common stock and/or Securities, representing or entitling in the event of conversion, when added to such person’s prior holding, if any, more than 50% of our voting stock or in any other way entitling the purchaser to exercise the power to remove a majority of our directors (each, a Controlling Interest), prior to acquiring such Controlling Interest, such person or group of persons shall make a public tender offer to purchase shares of our common stock and Securities held by all other shareholders at a price no less than the highest of: (1) the share price of the company in U.S. Dollars, determined based on a valuation of our net worth prepared by an independent, internationally-recognized investment bank, the valuation must take into account an increase in the company’s capital stock as a result of the exercise of conversion rights as contained in the Securities of the company and must be performed on the basis of the most recent balance sheet approved by the company; (2) 135% of the subscription price denominated in U.S. Dollars, as of the date of subscription of any shares issued as a result of a capital increase during the 24-month period immediately preceding the date of the notice announcing the commencement of the mandatory tender offer for the acquisition of a significant interest herein established, adjusted to reflect any stock split, stock dividends, par value variation, capital reduction, earning capitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby bonus shares of our common stock and/or Securities are delivered; (3) 135% of the weighted average listing price in U.S. Dollars (at closing of trading) of our shares of common stock and/or GDRs or ADRs during the 120-day period immediately preceding the notice announcing the commencement of the mandatory tender offer due to acquisition of a significant interest, in the BASE and in New York and at any other exchange or market in which our shares and Securities are listed adjusted to reflect any stock split, stock dividends, par value variation, capital reduction, earning capitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby bonus shares of our common stock and/or Securities are delivered; and (4) the highest price per share or Securities paid by such person or on behalf of such person, in relation to any acquisition of shares and/or Securities within a period of two years immediately prior to the announcement of Acquisition of a Controlling Interest, adjusted to reflect any stock split, stock dividend, par value variation, capital reduction, earning recapitalization, reserves, accounting adjustments or any other special item of our balance sheet or corporate transactions whereby shares of our common stock or other securities are delivered.
Duty to Inform
Our by-laws provide in Article 38 that any person, whether acting directly or indirectly through other persons or legal entities, as well as any group of people acting in agreement with other persons, who (1) acquires or sells our shares of common stock or Securities by any means or title, (2) alters the configuration or composition of its direct or indirect interest in our capital stock, (3) converts notes into shares of common stock, (4) exercises options to purchase any convertible securities mentioned or (5) changes its intention with respect to its interest in our capital stock, in existence at the time any of the assumptions provided for in preceding (1) to (4), as long as, in each case, the purchase made in each of such assumptions grants control over 5% or more of our capital stock or voting rights, shall, immediately upon consummation of the transaction or change in intentions, inform us of such circumstances, irrespective of compliance with any additional duty that applicable securities rules and regulations may require if such were the case. Future transactions for an amount equivalent to a multiple of 5% of our capital stock or voting rights must also be communicated to us.
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Form and Transfer
Our current share capital is represented by book-entry shares. Our shareholders are required to hold their shares through book-entries directly made by Caja de Valores in the shares registry of the company carried by Caja de Valores or through book-entries with brokers, banks and other entities approved by the CNV that have accounts with Caja de Valores, or with the participants of Caja de Valores. Caja de Valores is in charge of maintaining a shares registry on our behalf based on information received from shareholders that choose to hold their shares directly by registration on the shares registry of the company and from participants of Caja de Valores, and in accordance with Argentine Law only those holders listed in the shares registry either directly or through participants of Caja de Valores will be recognized as shareholders. Shares held by participants of the Caja de Valores have the same rights as shares recorded in our shareholders’ register.
MATERIAL CONTRACTS
Not Applicable.
EXCHANGE CONTROLS
The following is a summary of the main measures taken by the BCRA with the purpose of regulating inflows and outflows in the MLC to maintain the exchange rate stability and protect international reserves in view of the high degree of uncertainty and volatility in the exchange rate by tightening exchange controls and restrictions on the inflow and outflow of foreign exchange. In this regard, the BCRA issued a series of communications which introduced restrictions associated, among other factors, with transactions with stock market assets by companies and the disposal of liquid foreign assets, thus imposing further restrictions on access to the MLC. The latest consolidated text of the applicable foreign exchange regulations as of the date of this annual report can be found in Communication “A” 7422 (as amended, the "FX Regulations”).
Among the most important provisions regarding income from the MLC contained in the FX Regulations, the following may be highlighted: (i) the obligation to enter and settle foreign currency transactions in the foreign exchange market within certain specified terms resulting from the export of goods and services by residents and from the receipt of amounts in foreign currency from the disposal to non-residents of non-produced non-financial assets, (ii) the obligation to enter and settle in the MLC disbursements resulting from foreign financial indebtedness of residents after September 1, 2019 and the amounts resulting from the issuance of securities denominated and subscribed in foreign currency with public registration in the country as from November 29, 2019, as a requirement -together with the declaration in the BCRA's survey of foreign assets and liabilities- for the subsequent access to the MLC in order to meet the payment of the principal sum and its interest, and (iii) the possibility for entities to carry out swaps and arbitration transactions with customers to the extent that they do not correspond to transactions covered by the obligation to settle in the MLC, among others.
The most important provisions concerning the specific outflow requirements of the MLC are:
| (i) | the imposition of certain restrictions for access to the MLC for the payment of imports -and import debts, including interest of goods and services by residents abroad; |
| (ii) | the need to comply with the requirements under which the foreign exchange regulations allow access to the MLC for the transfer abroad of foreign currency from profits and dividends, |
| (iii) | the obligation to comply with certain requirements for those who intend to access the MLC for the repayment of the principal sum and interest of financial indebtedness abroad, such as (a) to demonstrate the entry and liquidation of foreign currency in the MLC for an amount equivalent to the nominal value of the financial indebtedness abroad, except in certain cases in which it is considered to be complied with, (b) to contain the declaration corresponding to the indebtedness in question in the last due presentation of the survey of foreign assets and liabilities, (c) the access to the MLC must take place no more than three (3) business days prior to maturity date of the principal sum or interest to be paid, unless the BCRA previously agrees or under the fulfillment of certain requirements and conditions, (d) the need for BCRA's prior authorization to access the MLC for the cancellation at maturity date of the principal amount of the financial indebtedness of the non-financial private sector abroad when the creditor is a counterparty related to the debtor, except for certain cases, (e) the lack of BCRA's prior approval to access the MLC for the payment at maturity date of the principal amount and interest of foreign financial indebtedness, when certain conditions are met, including that the funds have been used to finance projects within the "Plan for the Promotion of Argentine Natural Gas Production - Supply and Demand Scheme 2020-2024" established in Article 2 of Decree No. 892/20 (as detailed below), (f) the possibility that financial indebtedness with foreign countries may be cancelled -including its principal sum and interest services- as from its maturity through the application of collections of exports of goods and services, to the extent that certain requirements are met, allowing for said collections to be accumulated, for the amounts required in the indebtedness contracts, in accounts abroad and/or in the country in order to guarantee the cancellation of services of the financial indebtedness with foreign countries; |
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| (iv) | the prohibition of access to the MLC for the payment of debts and other obligations in foreign currency between residents entered into as from September 1, 2019, except for the cancellation as from the maturity of the principal amount and interest of (a) financing in foreign currency granted by local financial entities, including payments for consumption in foreign currency made through credit or purchase cards, (b) the issuance of debt securities made as from September 1, 2019 with the purpose of refinancing debts included in item 3.6.2. of the FX Regulations and that entail an increase of the average duration of the obligations (c) issues made as from November 29, 2019 of debt securities with public registration in the country, denominated and subscribed in foreign currency and whose services are payable in foreign currency in the country, to the extent that the total of the funds obtained have been settled in the MLC, (d) issues made as from October 9, 2020 of debt securities with public registration in the country, denominated in foreign currency and whose services are payable in foreign currency in the country, to the extent that their average life is not less than 2 (two) years and their delivery to creditors has allowed reaching the refinancing parameters set forth in point 3. 17. of the FX Regulations, (e) issues made as from January 7, 2021 of debt securities with public registration in the country denominated in foreign currency and whose services are payable in foreign currency in the country, as long as that they were delivered to creditors to refinance pre-existing debts with an extension of the average life, when it corresponds to the amount of capital refinanced, the interest accrued up to the refinancing date and, to the extent that the new debt securities do not mature before January 1, 2023, the amount equivalent to the interest that would accrue up to December 31, 2022 on the indebtedness that is refinanced early and/or on the deferral of the refinanced principal and/or on the interest that would accrue on the amounts refinanced in that way; |
| (v) | the possibility of accessing the MLC for the cancellation, upon maturity, of (A) foreign currency obligations between residents instrumented through public registries or deeds as of August 30, 2019, and (B) foreign currency financing granted by local financial institutions outstanding as of August 30, 2019; |
| (vi) | the need for BCRA's prior authorization to access the MLC prior to maturity for debts between residents, unless the transaction falls under any of the situations and all the conditions stipulated in section 3.6.4. and concordant provisions of the FX Regulations, such as (a) financing from local entities for consumption in foreign currency through credit or purchase cards, (b) other financing in foreign currency from local financial entities payed with the income from financial indebtedness abroad, (c) pre-cancellation of interest within the framework of a debt security exchange process, (d) pre-cancellation within the framework of a refinancing process under the terms set forth in item 3.17. of the FX Regulations; |
| (vii) | the computation of the amount of purchases of foreign currency made by individuals in order to cancel debts between residents, including the cancellation of financing granted by local financial entities for the consumption in foreign currency made through credit or purchase cards, as from the following calendar month and for the subsequent months that may be necessary to fulfill the amount acquired as from September 1, 2020, shall be deducted from the limit set forth in item 3.8. of the FX Regulations. FX Regulations for the purchase of foreign currency by individuals for the formation of foreign assets, the remittance of family assistance and for operations with derivatives; |
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| (viii) | the authorization for the payment of capital and interest services as from their maturity through the application of collections of exports of goods and services, to the extent that the requirements set forth in section 7.9. of the FX Regulations, of the issuance of debt securities with public registry in the country, denominated in foreign currency and whose services be payable in foreign currency in the country, are complied with, |
| (ix) | the possibility for entities to grant access to the MLC to make payments of principal amount and/or interest to trusts constituted in the country by a resident to guarantee the payment of principal amount and interest services of its obligation, to the extent that it verifies that the debtor would have had access to make the payment on its behalf by complying with the applicable regulatory provisions, |
| (x) | the need for BCRA’s prior authorization to access to the MLC by legal entities for the constitution of external assets and for the constitution of all kinds of guarantees related to the arrangement of derivative transactions; likewise, the same restriction was established for resident individuals when it exceeds the equivalent of US$200 per month under certain conditions and limitations; certain exceptions were included, such as the purchase of foreign currency by resident individuals to be applied simultaneously to the purchase of real estate in the country with mortgage loans or the purchase of foreign currency by residents with specific application; and the need for non-residents to obtain the prior approval of the BCRA for access to the foreign exchange market, except for certain cases; |
| (xi) | in connection with the purchase of foreign currency for transactions with financial derivatives (a) entities may grant access to the MLC for the payment of premiums, constitution of guarantees and payments corresponding to interest rate hedging contract transactions for the obligations of residents abroad declared and validated, if applicable, in the survey of external assets and liabilities, as long as higher risks are not covered in foreign liabilities that the debtor actually registers in the interest rate which risk is being covered with the execution (b) the remaining financial derivative transactions to be carried out with access to the MLC by residents that are not entities authorized to operate in foreign exchange shall be governed by the provisions of points 3. 8. and 3.10. of the FX Regulations, as applicable, and (c) all settlements of futures transactions in regulated markets, forwards, options and any other type of derivatives arranged in the country carried out by entities as from September 11, 2019 must be made in local currency; |
| (xii) | regarding to swaps and arbitrages with clients not associated with an inflow of foreign currency from abroad, entities may carry out with their clients swap and arbitrage transactions not associated with an inflow of foreign currency from abroad in the following cases (a) transfer of foreign currency abroad of human persons from their local accounts in foreign currency to their own bank accounts abroad, (b) transfer of foreign currency abroad by local central securities depositories for funds received in foreign currency for capital services and income from National Treasury securities, whose operation is part of the payment process at the request of the foreign central securities depositories, (c) transfer of foreign currency abroad by individuals from their local accounts in foreign currency to remittance accounts abroad for up to the equivalent of US$ 500 (five hundred Dollars) in the calendar month and in the group of entities, provided that the entities have a sworn statement from the customer that the purpose of the transfer is to collaborate with the maintenance of Argentine residents who have had to stay abroad due to the measures adopted within the framework of the Covid-19 pandemic, (d) arbitrage transactions not involving transfers abroad may be carried out without restrictions as long as the funds are debited from a foreign currency account of the customer in a local financial entity, and (e) the remaining swap and arbitrage transactions may be carried out with customers without the prior approval of the BCRA to the extent that, if implemented as individual transactions passing through Pesos, they may be carried out without such approval in accordance with the exchange regulations in force, being this applicable to local central securities depositories for the funds received in foreign currency for the services of capital and income of foreign currency securities paid in the country; and |
| (xiii) | as regards the cancellation of foreign commercial lines of credit by financial entities, such entities will have access to the MLC for the cancellation as from the maturity date of commercial lines of credit granted by foreign financial entities and applied to the financing of export or import operations of residents; however, the cancellation of lines of credit for the financing of import operations of goods will be additionally subject to the specific conditions set forth in item 10. 7. of FX Regulations; likewise, they may also have access to precancel such credit lines to the extent that the financing granted by the local entity has been precanceled by the debtor, while the access to the MLC by the customers for the precancellation of such financing shall require the prior approval of the BCRA. |
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In turn, Section 3.16. of FX Regulations established complementary requirements in connection with outflows through the MLC, the most important provisions include:
| (i) | the informative regime of "Advance of Exchange Transaction" by means of which the entities must submit to the BCRA, at the close of each day and 2 business days in advance, the information on transactions to be carried out at the request of customers or own transactions of the entity as a customer, which imply an access to the MLC for a daily amount equal to or greater than the equivalent of US$ 10.000 (ten thousand Dollars) for each of the three business days counted as from the first reported day (without taking into account the accesses for the cancellation of financing from local entities for consumption in foreign currency by means of credit or purchase cards); |
| (ii) | the prior authorization of BCRA is required to access the MLC, unless the entity has a sworn statement from the customer regarding its holdings of liquid foreign assets -with a few exceptions-, stating that (a) all of its foreign currency holdings in the country are deposited in accounts in financial institutions and that it did not have liquid foreign assets available at the beginning of the day on which it requests access to the market for an amount greater than US$ 100,000 (one hundred thousand dollars), being considered liquid external assets, among others: holdings of banknotes and coins in foreign currency, cash in gold coins or bars of good delivery, demand deposits in financial institutions abroad and other investments that allow obtaining immediate availability of foreign currency (for example, investments in external public securities with custody in the country or abroad, funds in investment accounts in investment managers located abroad, crypto-assets, funds in accounts of payment service providers, etc.), and excluding those investments that allow obtaining immediate availability of foreign currency (for example, investments in external public securities with custody in the country or abroad, funds in investment accounts in investment managers located abroad, crypto-assets, funds in accounts of payment service providers, etc.), and excluding those investments in accounts in financial institutions located abroad), and excluding those funds deposited abroad that could not be used by the client because they are reserve or guarantee funds constituted by virtue of the requirements set forth in foreign debt contracts or funds constituted as guarantee for derivative transactions arranged abroad; provided that in the event that the client has liquid foreign assets available for an amount greater than the aforementioned amount, the entity may also accept a sworn statement from the client stating that such amount is not exceeded when considering that, partially or totally, such assets were used during that day to make payments that would have had access to the MLC, were transferred in favor of the client to a correspondent account of a local entity authorized to operate in foreign exchange, are funds deposited in foreign bank accounts originating from collections of exports of goods and/or services or advances, pre-financing or post-financing of exports of goods granted by non-residents, or from the sale of non-produced non-financial assets for which the period of 5 business days has not elapsed since their receipt, and/or are funds deposited in foreign bank accounts originated in financial indebtedness abroad and their amount does not exceed the equivalent to be paid for principal and interest in the next 365 calendar days, and the client must expressly state in this last affidavit the value of its liquid foreign assets available at the beginning of the day and the amounts assigned to each of the situations described above and that are applicable, and (b) it undertakes to settle in the MLC, within 5 business days of making them available, those funds it receives abroad originated from the collection of loans granted to third parties, the collection of a time deposit or the sale of any type of asset, when the asset has been acquired, the deposit constituted or the loan granted after May 28, 2020; |
| (iii) | the need for BCRA´s prior authorization to access the MLC, unless the entity has a sworn statement from the customer -with a few exceptions- stating that (a) on the day it requests access and in the previous 90 calendar days it has not entered into sales in the country of securities issued by residents for foreign assets with settlement in foreign currency or transfers thereof to depository institutions abroad or the acquisition in the country with settlement in pesos of securities issued by non-residents (settled as from October 29, 2021), and (b) undertakes not to arrange sales in the country with settlement in foreign currency of securities issued by residents or exchange of securities issued by residents for foreign assets or transfers thereof to depository institutions abroad or the acquisition in the country with settlement in pesos of securities issued by non-residents as from the time access is required and for 90 days thereafter. Also, in cases where the client is a legal entity, it requires the submission of an additional sworn statement stating: (1) the detail of the human or legal persons exercising direct control over the client, according to the Large Exposures to Credit Risk rules of the BCRA; and (2) that on the day on which access to the MLC is required and in the previous 90 running days no funds in local currency or other liquid local assets were delivered in Argentina, to any human or legal person exercising direct control, except those directly associated with habitual transactions for the acquisition of goods and/or services. The requirement indicated in item (2) may be deemed to be complied with if the customer submits a sworn statement regarding transactions with securities of each of those human or legal persons, pursuant to the exchange regulations in force; |
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| (iv) | the need for BCRA´s prior authorization in the event that the customer is a person or legal entity included by the AFIP in the base of invoices or equivalent documents qualified as apocryphal, this requirement not being applicable for the access to the MLC related to the cancellations of financing in foreign currency granted by local financial entities, including payments for consumption in foreign currency made through credit or purchase cards; and |
| (v) | the obligation of individuals and legal entities considered obligated parties to complete the "Register of foreign exchange information of exporters and importers of goods" through the application established for such purpose, and the need for the entity to have the prior approval of the BCRA to grant access to the MLC to those obligated parties to complete the "Register of foreign exchange information of exporters and importers of goods" whose process is recorded as "NOT REGISTERED", This requirement does not apply to access to the MLC for the cancellation of foreign currency financing granted by local financial entities, including payments for foreign currency consumption made through credit or purchase cards. The Company has been declared by the BCRA as an obliged subject and as of the date of this annual report it has already completed its registration in such registry. |
Likewise, in the FX Regulations, the BCRA established certain provisions regarding the refinancing of principal maturities of foreign currency liabilities until June 30, 2022. In this regard, and except for certain cases, (i) debtors that have scheduled principal maturities until June 30, 2022 for foreign financial indebtedness of the non-financial private sector with a creditor that is not a related counterparty of the debtor, foreign financial indebtedness for own operations of the entities, and issuances of debt securities with registration of the debtor, must submit to the BCRA a detail of a refinancing plan, (ii) the refinancing plan to be submitted must be based on certain criteria, which establish that the net amount for which the foreign exchange market will be accessed in the original terms shall not exceed 40% of the principal amount maturing, and that the remaining principal has been, at least, refinanced with a new foreign indebtedness with an average life of 2 years; (iii) the customer must select an entity authorized to carry out this type of transactions in the MLC to submit the refinancing plan in its name to the BCRA's front desk, stating that it is addressed to the Foreign Exchange and Foreign Exchange Main Management, (iv) the refinancing plan must be submitted to the BCRA at least 30 calendar days before the maturity of the principal to be refinanced, (v) the settlement requirement for the cancellation of principal and interest with access to the MLC will be considered fulfilled for the issuance of debt securities with public registration in the country, denominated in foreign currency and whose services are payable in foreign currency in the country, or with public registration abroad, to the extent that they have been issued as from October 9, 2020, with an average life of not less than 2 years and their delivery to the creditors has allowed reaching the refinancing parameters described herein, and (vi) to the extent that the parameters and conditions set forth in the applicable regulations have been met, the application of foreign currency collections for exports of goods and services of the following transactions will be allowed (a) issuances of debt securities with public registration in the country denominated in foreign currency and whose services are payable in foreign currency in the country or issuances of debt securities with public registration abroad, made as from October 9, 2020 with an average life of not less than 2 years and that were delivered to creditors of refinanced debts, (b) financial indebtedness abroad, whose funds have been paid in and settled through the foreign exchange market as from October 16, 2020, (c) issues of debt securities with public registration in the country denominated in foreign currency that comply with the conditions set forth in point 3. 6.1.3. of the FX Regulations and whose funds have been settled in the MLC as of October 16, 2020, and (c) repatriation of direct investments of non-residents in companies that are not controlling companies of local financial entities whose funds have been deposited and settled in the MLC as of October 16, 2020.
On the other hand, the FX Regulations establishes other specific provisions related to (i) transactions with credit, purchase, debit and prepaid cards, (ii) transactions made through the Local Currency System (SML), and (iii) transactions with securities. In particular, with respect to item (iii) above, it establishes (a) that securities transactions arranged abroad may not be settled in Pesos in the country, and only those transactions arranged in the country may be settled in Pesos in the country, and (b) that the beneficiaries of refinancing of certain credits granted within the framework of the pandemic may not arrange sales in the country with settlement in foreign currency of securities issued by residents or exchanges of securities issued by residents for foreign assets or transfer them to depository institutions abroad or the acquisition in the country with settlement in Pesos of securities issued by non-residents, as well as beneficiaries of “Créditos a Tasa Cero”, “Créditos a Tasa Cero Cultura” or “Créditos a Tasa Subsidiada para Empresas” ( “Zero Rate Loans”, “Zero Rate Loans for Culture” or “Subsidized Rate Loans for Businesses”), or beneficiaries of financing in Pesos included in Communication “A” 6937, “A” 7006 and complementary rules, among others; until their total cancellation. The foregoing is not applicable to transfers of securities to foreign depositary entities made by the client in order to participate in an exchange of debt securities issued by the Argentine Government, local governments or resident issuers of the private sector.
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In line with the provisions of Decree No. 892/2020 with respect to transactions intended to finance projects under the Plan Gas.Ar, the BCRA issued Communication “A” 7168, which is currently part of the Official Gazette. The BCRA issued Communication "A" 7168, which is currently part of the FX Regulations, providing that entities may access the MLC to (i) remit foreign currency abroad as profits and dividends to non-resident shareholders as from the second year of the investment and when they correspond to closed and audited balance sheets, and for an amount not exceeding the amount corresponding to them according to the distribution determined by the shareholders' meeting; (ii) to pay the maturity of principal and interest services of indebtedness abroad, provided that the indebtedness has an average life of not less than 2 years; (iii) in case of repatriation of direct investments of non-residents, as from the second year, up to the amount of the direct investment contributions settled in the foreign exchange market in the case of capital reduction and/or return of irrevocable contributions made by the local company, when the documentation proving that the applicable legal requirements have been complied with and it has been verified that it has been declared, if applicable, in the last due presentation of the “Relevamiento de activos y pasivos externos” (Survey of Foreign Assets and Liabilities). The transactions covered will be the transactions that have been entered and settled by the MLC as from 11/16/2020 and destined to the financing of projects within the framework of the Plan Gas.Ar. In all cases, the entity must have the documentation that allows it to verify the genuine nature of the operation to be carried out and that the funds were destined to finance projects included in the Plan Gas.Ar.
Additionally, the FX Regulations establishes that until June 30, 2022, access to the MLC for the payment of imports of certain goods will require the prior authorization of the BCRA, unless certain situations are verified, such as the presentation of a sworn statement from the client that the total amount of payments associated to imports of goods processed through the MLC does not exceed US$ 250.000; or it is a deferred payment of imports of goods that correspond to operations that have been shipped as of July 1, 2020 or that having been shipped previously had not arrived in the country before that date; or it corresponds to a payment at sight of or of commercial debt without registration of customs entry for the import of inputs to be used in the manufacture of goods in the country.
The FX Regulations establishes that as from January 3, 2022 the certifications issued for liquidations of new financial indebtedness from abroad may be used to access the foreign exchange market for the payments of:
| i. | imports of goods without the prior approval of the BCRA; |
| ii. | services provided to related counterparties without the prior approval of the BCRA, in cases in which the payment shall be made due to the maturity date of an obligation for a service given at least 180 calendar days before the access to MLC or derived from a contract signed with a similar anticipation. |
For more information regarding Argentina’s foreign exchange policies, you should seek advice from your legal counsel and read the applicable rules mentioned herein, including their amendments, which can be found at the following websites: www.infoleg.gov.ar and the Central Bank’s website: www.bcra.gov.ar. The information contained on these websites is not part and shall not be deemed incorporated into this annual report.
TAXATION
The following summary contains a description of the principal Argentine and U.S. federal income tax consequences of the acquisition, ownership and disposition of common shares or ADSs, but it does not purport to be a comprehensive description of all the tax considerations that may be relevant to a decision to purchase common shares or ADSs. The summary is based upon the tax laws of Argentina and regulations thereunder and on the tax laws of the United States and regulations thereunder as in effect on the date hereof, which are subject to change. Investors should consult their own tax advisors as to the tax consequences of the Acquisition, ownership and disposition of common shares or ADSs.
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Although there is at present no income tax treaty between Argentina and the United States, the tax authorities of the two countries have had discussions that may culminate in such a treaty. No assurance can be given, however, as to whether or when a treaty will enter into force or how it will affect the U.S. holders of common shares or ADSs.
Argentine Tax Considerations Capital gains tax
Resident individuals
The Law No. 27,430 provides for the taxation of Argentine resident individuals’ income from the sale, exchange or other disposition of shares will be subject to income tax rate of 15%.
The Tax Reform establishes an exemption for individuals tax residents on the sale of shares that are publicly traded in stock exchanges under the supervision of the Argentine Securities and Exchange Commission (CNV).
Foreign beneficiaries
Pursuant to the Law No. 27,430, all income resulting from the purchase and sale, exchange or other disposition of shares and other securities earned by foreign beneficiaries will be exempt of the Income Tax, if they are (i) listed on stock exchanges or securities markets and/or have an authorization for public offering under the supervision of the CNV and (ii) the foreign beneficiaries do not reside in or the funds do not arise from “non-cooperating jurisdictions” (the “publicly traded exemption”). In case the disposition does not meet the requirement mentioned in (i) above and the foreign beneficiaries do not reside in or the funds do not arise from “non-cooperating jurisdictions”, the income obtained will be taxable at a 13,5% rate on the gross price or 15% rate on the net capital gain (with the possibility of adjusting the value of acquisitions from January 1, 2018 and onwards for the purpose of determining the net capital gain, taking into account the variation of the Internal Wholesale Price Index).
In case the foreign beneficiaries reside in or the funds arise from “non-cooperating jurisdictions”, the tax rate applicable for the sale, exchange or other disposition of shares and/or ADSs amounts to 35%. The presumed net basis on which the 35% rate should apply is assessed at 90% (being the effective rate 31,5% on the gross sale price). The non-cooperating jurisdictions list is prepared and published by the executive branch. The U.S. is currently not a non-cooperating jurisdiction.
The Tax Reform, effective as of January 1, 2018, specifies that in case of share certificates issued abroad that represent shares issued by Argentine companies (i.e., ADSs), the “source” is defined by the location of the original issuer of the shares. However, the tax will not be due if the publicly traded exemption, described above, applies in respect of the underlying shares.
Local entities
Capital gains obtained by Argentine entities in general, entities organized or incorporated under Argentine law, certain traders and intermediaries, local branches of non-Argentine entities, sole proprietorships and individuals carrying on certain commercial activities in Argentina derived from the sale, exchange or other disposition of our common shares or ADSs are subject to income tax at the rate of 30% for fiscal periods starting on January 1, 2018 until January 1, 2021, and 25% for the fiscal periods starting thereafter. Losses arising from the sale of our common shares or ADSs can be applied to offset such income.
Additionally, a withholding of 7% or 13% is established for the periods mentioned above, on the dividends distributed by the capital companies in favor of their shareholders, when they are legal persons or undivided successions resident in the country, or are foreign beneficiaries.
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Law No. 27,630 established a tiered marginal tax rate structure with three segments depending on the level of accumulated taxable net income: (i) a first tier with a 25% rate for accumulated net income up to $5 million; (ii) the second tier of 30% for accumulated net income over $5,000,000 and up to $50,000,000, plus a a fixed amount of $1,250,000; and (iii) a third tier of 35% for accumulated net income over $50,000,000, plus a fixed amount of $14,750,000. Dividends distributed will pay in all cases the 7% rate, in line with the current schedular tax. The new tax rate structure is aplicable for the fiscal year starting on January 1, 2021.
Dividends tax
Pursuant to Law No. 26,893, dividends and other profits paid in cash or in kind —except for stock dividends—by companies and other entities incorporated in Argentina referred to in the Argentine Income Tax Law (the “Income Tax Law”), Sections 73 (a)(1), (2), (3), (6) and (7), and Section 69(b), were subject to income tax at a 10% rate except for those beneficiaries that were domestic corporate taxpayers. Law No. 27,260 repealed this withholding tax as of July 23, 2016. Consequently, no withholding tax is to levied on dividends distributed to either Argentine or non-Argentine resident shareholders since then. This treatment applies only to dividends to be distributed at any time out of retained earnings accumulated until the end of the last fiscal year starting before January 1, 2018.
Likewise, the portion of those dividends exceeding the company’s accumulated net taxable income (as determined by application of the Argentine Income Tax Law), if any, is subject to a 35% withholding tax on such excess (the “Equalization Tax”). For purpose of the Equalization Tax, the amount of accumulated net taxable income to be considered shall be determined by (1) deducting the income tax paid by the company, and (2) adding the dividends and profits not subject to tax received as distributions from other corporations. If the distribution is in-kind, then the corporation must pay the tax to the Argentine tax authorities and will be entitled to seek reimbursement from the shareholders.
Dividends to be distributed out of earnings accrued in fiscal years starting on or after January 1, 2018, are to be subject to a tax treatment different from the one previously described, based on the recent enactment of a comprehensive tax reform -Law No. 27,430-, published in the Official Gazette on December 29, 2017, and generally effective since January 1, 2018.
Pursuant to Law No. 27,430, dividends and other profits paid in cash or in kind —except for stock dividends—by companies and other entities incorporated in Argentina referred to in the Argentine Income Tax Law, Sections 73 (a)(1), (2), (3), (6), (7) and (8), and Section 73(b) out of retained earnings accumulated in fiscal years starting on or after January 1, 2018, will be subject to withholding tax at a 7% rate (on profits accrued during fiscal years starting January 1, 2018 until January 1, 2021), and at a 13% rate (on profits accrued for the fiscal years starting thereafter), provided that they are distributed to Argentine resident individuals and foreign shareholders (including holders of common shares or ADSs).
Nevertheless, Law No. 27,630 modified the above mentioned 13% rate to 7% rate for fiscal year starting on January 1, 2021.
With respect to dividends paid to shareholders residing abroad, such withholding may be reduced by a tax treaty between Argentina and their country of residence. See “Tax Treaties” below.
Capital reductions and other distributions
Capital reductions and redemptions of our common shares and ADSs are not subject to income tax up to an amount equivalent to the contributed capital corresponding to the common shares and ADSs to be redeemed. Any distribution exceeding this amount, however, will be considered as a dividend for tax purposes and subject to withholding tax as described above.
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Other Income Tax provisions
Transfer pricing
The Transfer Pricing regime includes import and export controls of any product with the intervention of an international intermediary, that is not the importer at destination or exporter at origin, respectively.
In addition, for exports of goods with known prices and with the intervention of an intermediary (either related, or located in “non-cooperating” or low or no tax jurisdictions), the Law requires the Argentine exporter to file with AFIP the agreements supporting the transactions.
Equalization income tax
Equalization income tax -established by Income Law, art. 74- will not be applicable on profits generated on or after January 1, 2018.
Upgrade
The Tax Reform re-establishes the adjustment for inflation procedures in the Income Tax Law with the following rules: (i) inflation adjustment of new acquisitions and investments carried out from January 1, 2018 and onwards, considering the variation of the Internal Wholesale Price Index (in Spanish, Indice de Precios Internos al Consumidor Nivel General or IPC) supplied by the INDEC; and (ii) the application of an integral inflation adjustment mechanism when, the variation of the IPC is higher than 100% for the 36-month period before the end of the fiscal period or else, with respect to the first, second and third fiscal year of effectiveness, this procedure will be applicable in case the accumulated variation of the IPC, calculated from the beginning of the first of them and until the end of each year, exceeds fifty-five percent (55%), thirty percent (30%) and fifteen percent (15%) for the first, second and third year of application, respectively. The inflation adjustment that must be calculated in the first three fiscal years beginning on January 1, 2018 must be charged in equal quotas (1/3 in fiscal period 2018 and the remaining 2/3 in equal parts in the remaining fiscal periods, and 1/6 in fiscal periods 2019 and 2020, and the remaining 2/6 in equal parts in the remaining fiscal periods)
Tax and accounting revaluation
Tax Reform established the possibility of upgrading certain assets that are part of the assets of taxpayers, in order to update their value, since the period of acquisition until December 31, 2017.
This revaluation was optional, and the amount of revaluation was taxable at special rate 8% to 15%, depending on the type of property to be revalued. We paid an special revaluation tax of Ps. 1.495 million and have updated the value of certain assets for an amount of Ps.15,311 million.
Personal assets tax
Argentine entities, such as us, are required to pay the personal assets tax corresponding to Argentine and foreign individuals and foreign entities for the holding of our shares at December 31 of each year. The applicable tax rate is 0.5% and is levied on the equity value, or the book value, of the shares arising from the last balance sheet. Pursuant to the Personal Assets Tax Law, the Argentine company is entitled to seek reimbursement of such paid tax from the applicable Argentine individuals and/or foreign shareholders or by withholding dividend payments.
Gross Income Tax
The gross income tax is a local tax; therefore, the rules of the relevant provincial jurisdiction should be considered, which may levy this tax on the customary purchase and sale, exchange or other disposition of common shares and ADSs, and/or the collection of dividends at an average rate between 6% and 10%, unless an exemption is applicable. In the particular case of the City of Buenos Aires, any transaction involving common shares and/or the collection of dividends and revaluations is exempt from this tax. To date, there is no withholding regime provided for foreign holders of common shares and ADSs.
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Value added tax
The sale, exchange or other disposition of our common shares or ADSs and the distribution of dividends are exempted from the value added tax.
Transfer taxes
The sale, exchange or other disposition of our common shares or ADSs is not subject to transfer taxes.
Stamp taxes
Stamp taxes may apply in the City of Buenos Aires and in certain Argentine provinces in case transfer of our common shares or ADSs is performed or executed in such jurisdictions by means of written agreements.
Other taxes
Commissions paid on brokerage transactions for the sale of our common shares on the BCBA are subject to VAT at a rate of 21%.
There is no inheritance, gift, succession or VAT applicable to the ownership, transfer, exchange or disposition of our common shares or ADSs, except for the inheritance tax applicable only to corporations or individuals with tax domicile in the Province of Buenos Aires with a fixed amount tax plus a tax rate between 1% and 9% depending on the relationship and the amount of inheritance).
Tax for an inclusive and caring Argentina (Impuesto Para una Argentina Inclusiva y Solidaria “PAIS”)
The Social Solidarity and Productive Reactivation Law, established on an emergency basis and for the term of five fiscal periods as of the entry into force, a 30% tax on the purchase of foreign currency and other foreign exchange operations carried out by individuals and legal entities resident in Argentina.
The potential investors of the ADs should consult their own tax advisers about the effects of the aforementioned tax according to their particular circumstances.
Solidarity and Extraordinary Contribution to help mitigate the effects of the pandemic
On an emergency basis and for only one time, the Argentine Government imposed an extraordinary, obligatory contribution which falls on the assets of certain individuals and undivided estates in existence at the date of entry into force of Law No. 27,605 (i.e. December 18, 2020) (the “Extraordinary Contribution”).
The aforementioned Extraordinary Contribution applies to:
a) Argentine resident individuals and undivided estates, for the totality of their assets located in the country and abroad. Also included are those individuals of Argentine nationality whose domicile or residence is in “non-cooperative jurisdictions” or “no tax-or-low-tax jurisdictions” according to the terms of the ITL (Income Tax Law)
b) Individuals and undivided estates residing abroad (except those mentioned in the previous point) for the totality of their assets located in the country.
For the purposes of this Extraordinary Contribution, the applicable residence is the subject’s residence as of December 31, 2019 according to the provisions of the ITL.
In both cases, these subjects will be exempted from this Extraordinary Contribution when the total value of their assets, included and valued according to the Personal Assets Tax Law terms, regardless of the treatment they have against such tax and without any non-taxable minimum threshold deduction, does not exceed Ps. 200,000,000, inclusive.
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For those mentioned in point a), the taxable base of this Extraordinary Contribution will be determined considering the total value of their assets in the country and abroad, including contributions to trusts or foundations of private interest and other similar structures, participations in companies or other entities of any type without fiscal personality and direct or indirect participations in companies or other entities of any type, existing at the date of entry into force of this law.
The Extraordinary Contribution to be paid will be determined on the basis of a scale and rates varying from 2 to 5.25%, depending on (i) the total value of the assets and (ii) their location. The differential rate between assets located abroad and those located in the country shall be eliminated if part of these assets are repatriated within a certain period of time and to the extent those funds remain until December 31st, 2021 deposited in a bank account under the name of the holder or are affected, once this deposit is made, to one of the destinations established by the National Executive Branch.
Individuals, sole proprietorships or estates established in the country that possess, use, dispose, own, custody or keep assets subject to the Extraordinary Contribution pertaining to individuals and undivided states that reside abroad, must act as surrogate taxpayers for purposes of such contribution.
Holders of ADSs should consult with their own tax advisers on the Extraordinary Contribution considering their particular circumstances.
Tax treaties
Argentina has signed tax treaties for the avoidance of double taxation with Australia, Belgium, Bolivia, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Italy, Mexico, Norway, Qatar, Russia, Spain, Sweden, Switzerland, The Netherlands, United Arab Emirates, United Kingdom, and Uruguay (through an information exchange treaty that contains clauses for avoidance of double taxation). In addition, Argentina has signed tax treaties with Turkey, Luxembourg, Japan, Austria and China, but they are still pending approval by the Argentine Congress. In turn, tax treaties are being negotiated with Colombia and Israel, and amendments to the current tax treaty with Germany. There is currently an agreement between Argentina and the United States on the exchange of Country-by-Country Reports, but there is no tax treaty or convention in effect between both countries. It is not clear when, if ever, a treaty will be ratified or entered into effect. As a result, the Argentine tax consequences described in this section will apply, without modification, to a holder of our common shares or ADSs that is a U.S. resident. Foreign shareholders located in certain jurisdictions with a tax treaty in force with Argentina may be exempted from the payment of the personal asset tax.
Value Added Tax (VAT)
Investments Tax Returns
The return of tax credits originated in investments in fixed assets will be given, in cases that, six months after their payment, have not been absorbed by fiscal debits generated by the activity.
Tax on Fuels
The Fuel tax scheme is modified, incorporating a tax on carbon dioxide emissions. The same tax pressure existing before the reform will be maintained.
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United States Federal Income Tax Considerations
This summary describes certain U.S. federal income tax consequences for a U.S. holder (as defined below) of acquiring, owning, and disposing of ADSs. This summary applies to a holder only if such holder holds the ADSs as capital assets for tax purposes. This summary does not address the Medicare tax on net investment income or the alternative minimum tax and does not apply to investors that are members of a class of holders subject to special rules, such as:
| · | a dealer in securities or currencies; |
| · | a trader in securities that elects to use a mark-to-market method of accounting for securities holdings; |
| · | a bank; |
| · | a life insurance company; |
| · | a tax-exempt organization; |
| · | an entity treated as a partnership for U.S. federal income tax purposes, or a partner therein; |
| · | a person that holds ADSs that are a hedge or that are hedged against interest rate or currency risks; |
| · | a person that holds ADSs as part of a straddle or conversion transaction for tax purposes; |
| · | a person whose functional currency for U.S. tax purposes is not the U.S. Dollar; or |
| · | a person that owns or is deemed to own 10% or more of any class of our stock. |
This summary is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations promulgated thereunder, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis. Investors should consult their own tax advisors concerning the consequences of purchasing, owning, and disposing of ADSs in their particular circumstances, including the possible application of state, local, non-U.S. or other tax laws. For purposes of this summary, an investor is a “U.S. holder” if such investor is a beneficial owner of an ADS and is:
| · | a citizen or resident of the United States; |
| · | a U.S. domestic corporation; or |
| · | otherwise subject to U.S. federal income tax on a net income basis with respect to income from the ADS. |
In general, if a U.S. holder is the beneficial owner of ADSs, such U.S. holder will be treated as the beneficial owner of the common shares represented by those ADSs for U.S. federal income tax purposes, and no gain or loss will be recognized if such U.S. holder exchanges an ADS for the common shares represented by that ADS.
Passive Foreign Investment Company Rules
Special U.S. federal income tax rules apply to companies that are passive foreign investment companies (“PFICs”). We will be classified as a PFIC in a particular taxable year if either
| • | 75% or more of our gross income for the taxable year is passive income; or |
| • | 50% or more of the value of our assets (generally determined on the basis of a quarterly average) is attributable to assets that produce or are held for the production of passive income. |
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For this purpose, passive income generally includes dividends, interest, gains from certain commodities transactions, rents, royalties and the excess of gains over losses from the disposition of assets that produce passive income.
Based on our financial statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2021 taxable year. In addition, based on our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not expect to become a PFIC for our 2022 taxable year. However, the determination of whether we are a PFIC must be made annually based on the facts and circumstances at that time, some of which may be beyond our control, including the valuation of our assets as implied by the market price for our common shares or ADSs. Accordingly, it is possible that we could become a PFIC in the current or a future year.
If we are classified as a PFIC in any taxable year during which a U.S. holder holds our ADSs, such U.S. holder could be subject to a special tax at ordinary income rates on “excess distributions,” including certain distributions by us and gain recognized on the sale of the ADSs. The amount of income tax on any excess distributions will be increased by an interest charge to compensate for tax deferral, calculated as if the excess distributions were earned ratably over the period the U.S. holder held the ADSs. Classification as a PFIC may also have other adverse consequences, including, in the case of individuals, the denial of a step-up in the basis of the ADSs at death. In addition, if we are a PFIC for any year during which a U.S. Holder holds our common shares or ADSs, we will generally continue to be treated as a PFIC for all subsequent years during which such U.S. Holder holds our common shares or ADSs, unless we cease to be a PFIC and the U.S. Holder makes a special “purging” election.
Except where otherwise noted, the remainder of this summary assumes that we were not a PFIC for our 2021 taxable year and that we will not become a PFIC in the current or any future year. U.S. holders should consult their own tax advisers as to our status as a PFIC and the potential tax consequences to them of such status.
Dividends
The gross amount of distributions that U.S. holders receive (prior to deduction of Argentine taxes) generally will be subject to U.S. federal income taxation as foreign source dividend income, to the extent paid out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. We do not expect to maintain calculations of our earnings and profits in accordance with U.S. federal income tax principles. U.S. Holders therefore should expect that distributions generally will be treated as dividends for U.S. federal income tax purposes. Dividends paid in Argentine Pesos will be included in a U.S. holder’s income in a U.S. Dollars amount calculated by reference to the exchange rate in effect on the date of the depositary’s receipt of the dividend, regardless of whether the payment is in fact converted into U.S. Dollars. A U.S. holder will have a tax basis in such Pesos for U.S. federal income tax purposes equal to the U.S. Dollars value on the date of such receipt. Any subsequent gain or loss in respect of such Pesos arising from exchange rate fluctuations will be ordinary income or loss and will be treated as income from U.S. sources for foreign tax credit purposes. If such a dividend is converted into U.S. Dollars on the date of receipt, investors generally should not be required to recognize foreign currency gain or loss in respect of the dividend income. Subject to certain exceptions for short-term (60 days or less) positions, the U.S. Dollars amount of dividends received by an individual U.S. holder in respect of ADSs generally will be subject to taxation at a maximum rate of 20% if the dividends are “qualified dividends.” Dividends paid on the ADSs will be treated as qualified dividends if (1) the ADSs are readily tradable on an established securities market in the United States and (2) we were not, in the year prior to the year in which the dividend was paid, and are not, in the year in which the dividend is paid, a passive foreign investment company (a “PFIC”). The ADSs are listed on the New York Stock Exchange and will qualify as readily tradable on an established securities market in the United States so long as they are so listed. Based on our Consolidated Financial Statements and relevant market and shareholder data, we believe that we were not treated as a PFIC for U.S. federal income tax purposes with respect to our 2020 and 2021 taxable years. In addition, based on our current expectations regarding the value and nature of our assets, the sources and nature of our income, and relevant market and shareholder data, we do not anticipate becoming a PFIC for our 2022 taxable year. See “—Passive Foreign Investment Company Rules,” above.
Because the common shares are not themselves listed on a U.S. exchange, dividends received with respect to the common shares may not be treated as qualified dividends. U.S. holders of should consult their own tax advisors regarding the availability of the reduced dividend tax rate in the light of their own particular circumstances.
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Distributions of additional shares in respect of ADSs that are made as part of a pro-rata distribution to all of our shareholders generally will not be subject to U.S. federal income tax, unless a U.S. Holder that receives the distribution has the right to receive cash or property, in which case the U.S. Holder will be treated as if it received cash equal to the fair market value of the distribution.
Sale or other disposition
Upon a sale or other disposition of ADSs, a U.S. holder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the U.S. Dollars value of the amount realized and such U.S. holder’s tax basis, determined in U.S. Dollars, in the ADSs. Generally, such gain or loss realized on the sale or other disposition of ADSs will be treated as U.S. source capital gain or loss, and will be long-term capital gain or loss if the ADSs were held for more than one year. The ability to offset capital losses against ordinary income is limited. Long-term capital gain recognized by an individual U.S. holder, generally is subject to taxation at a reduced rate.
Foreign tax credit considerations
Investors should consult their own tax advisors to determine whether they are subject to any special rules that limit their ability to make effective use of foreign tax credits. If no such rules apply, a U.S. holder may be able to claim a credit against its U.S. federal income tax liability for Argentine income taxes withheld at the appropriate rate applicable to the U.S. holder from cash dividends on the ADSs, if the tax is treated for U.S. federal income tax purposes as imposed on the U.S. holder, so long as the U.S. holders has owned the ADSs (and not entered into specified kind of hedging transactions) for at least a 16-day period that includes the ex-dividend date. Dividend distributions with respect to the ADSs generally will be treated as “passive category” income from sources outside the United States for purposes of determining a U.S. Holder’s U.S. foreign tax credit limitation. If a gain realized on the sale or other disposition of ADSs is subject to withholding tax, a U.S. holder may not be able to credit the tax against its U.S. federal income tax liability unless such credit can be applied (subject to applicable conditions and limitations) against tax due on other income treated as derived from foreign sources. It is unclear whether the Argentine personal assets tax (as described in “—Argentine Tax Considerations”) is treated as an income tax for U.S. federal income tax purposes. If the Argentine personal assets tax is not treated as an income tax for U.S. federal income tax purposes, a U.S. holder would be unable to claim a foreign tax credit for any Argentine personal assets tax withheld. A U.S. holder may be able to deduct such tax in computing its U.S. federal income tax liability, subject to applicable limitations. Gain, if any, realized by a U.S. holder on the sale or other disposition of the ADSs generally will be treated as U.S. source income for U.S. foreign tax credit purposes. Accordingly, a U.S. holder may not be able to make effective use of any credit in respect of Argentine taxes imposed on such gain unless the credit can be applied (subject to applicable conditions and limitations) against U.S. federal income taxes due on other foreign source income. Moreover, as a result of recent changes to the foreign tax credit rules, any Argentine tax imposed on the sale, exchange or other taxable disposition of the shares by a U.S. holder is unlikely to be treated as a creditable tax for the U.S. holder for taxable years beginning after December 28, 2021.
U.S. information reporting and backup withholding rules
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries are subject to information reporting unless the holder is an exempt recipient and may also be subject to backup withholding unless the holder (1) provides its taxpayer identification number and certifies that it is not subject to backup withholding or (2) otherwise establishes an exemption from backup withholding. Investors may obtain a refund of any excess amounts withheld under the backup withholding rules by timely filing the appropriate claim or refund with the Internal Revenue Service and filing any required information.
A holder that is a foreign corporation or a non-resident alien individual may be required to comply with certification and identification procedures in order to establish its exemption from information reporting and backup withholding.
Specified Foreign Financial Assets
Certain U.S. holders that own “specified foreign financial assets” with an aggregate value in excess of US$50,000 on the last day of the taxable year or US$75,000 at any time during the taxable year are generally required to file an information statement along with their tax returns, currently on Form 8938, with respect to such assets. “Specified foreign financial assets” include any financial accounts held at a non-U.S. financial institution, as well as securities issued by a non-U.S. issuer that are not held in accounts maintained by financial institutions. Higher reporting thresholds apply to certain individuals living abroad and to certain married individuals. Regulations extend this reporting requirement to certain entities that are treated as formed or availed of to hold direct or indirect interests in specified foreign financial assets based on certain objective criteria. U.S. holders who fail to report the required information could be subject to substantial penalties. In addition, the statute of limitations for assessment of tax would be suspended, in whole or part. Investors should consult their own tax advisors concerning the application of these rules to their particular circumstances.
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DOCUMENTS ON DISPLAY
The materials included in this annual report on Form F-20, and exhibits therein, may be inspected and copied at the Securities and Exchange Commission’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Any SEC filings we make are also available to the public over the Internet at the SEC’s website: www.sec.gov.
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| Item 11. | Quantitative and Qualitative Disclosures about Market Risk |
Our activities are exposed to market risk, including the exchange rate risk, the interest rate risk and the price risk. Financial risks are those derived from financial instruments we are exposed to during or at the closing of each fiscal year. Risk management systems and policies are reviewed on a regular basis to reflect changes in market conditions and our activities, with a focus not placed on the individual risks of the business units’ operations, but with a wider perspective focused on monitoring risks affecting the whole portfolio. Financial risk management is controlled by the Financial Department, which identifies, evaluates and covers financial risks. Our risk management strategy seeks to achieve a balance between profitability targets and risk exposure levels.
For further information on our market risks, please see Note 6.2 to our Consolidated Financial Statements.
| Item 12. | Description of Securities Other than Equity Securities |
DESCRIPTION OF AMERICAN DEPOSITARY SHARES
Payment of Taxes
The holders of ADSs will be responsible for any taxes or other governmental charges payable on their ADSs or on the deposited securities represented by any of their ADSs. The depositary may refuse to register any transfer of the ADSs or allow the holders to withdraw the deposited securities represented by their ADSs until such taxes or other charges are paid. The depositary may apply payments owed to the holders or sell deposited securities represented by their American Depositary Shares to pay any taxes owed and the holder will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any property, remaining after it has paid the taxes.
Fees and Expenses for Holders of ADRs
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| · Registration or transfer fees | · Transfer and registration of shares on our share register to or from the name of the depositary or its agent when the holder deposits or withdraws shares |
| · Expenses of the depositary |
· Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement); and · Converting foreign currency to U.S. Dollars |
| · Taxes and other governmental charges the depositary or the custodian have to pay on any ADS or share underlying an ADS, for example, stock transfer taxes, stamp duty or withholding taxes |
· As necessary
|
| · Any charges incurred by the depositary or its agents for servicing the deposited securities | · As necessary |
Depositary Payments to the Company
J.P. Morgan, as depositary, has agreed to reimburse us for expenses they incur that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse us for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. Federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse us annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse us, but the amount of reimbursement available to us is not necessarily tied to the amount of fees the depositary collects from investors.
The depositary collects fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees related to making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
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